TheStreet.com's DAILY BULLETIN
July 8, 1999
DLJdirect - #1 Rated Online Broker (Barron's 1999) FREE 60-day trial of award-winning stock research from DLJ.
24/7 customer service.
FAST. RELIABLE. SECURE.
Apply Online, invest in minutes!
Market Data as of Close, 7/7/99:
o Dow Jones Industrial Average: 11,187.36, up 52.24, 0.47%
o Nasdaq Composite Index: 2,743.04, up 6.26, 0.23%
o S&P 500: 1,395.86, up 7.74, 0.56%
o TSC Internet: 653.85, down 11.45, -1.72%
o Russell 2000: 452.69, down 3.86, -0.85%
o 30-Year Treasury: 89 01/32, down 4/32, yield 6.058%
Companies in Today's Bulletin:
Friede Goldman (FGI:NYSE)
Philip Morris (MO:NYSE)
In Today's Bulletin:
o Wrong! Tactics and Strategies: Out of the Office, but Not Out of the Loop
o Energy: Another Red Flag Raised on Friede Goldman
o Evening Update: Yahoo! Rises on Earnings; Big Mo Falls on Court Ruling
o Bond Focus: Treasuries Take Another Step Back
Also on TheStreet.com:
The TaskMaster: Deconstructing Dirty Harry
The Dow, the S&P and the Nasdaq set new records. As Detective Callahan might say, a market's got to know its limitations.
Retail: Thorner's Turnaround Talents Have Bradlees Blooming
The ex-Ames chief executive isn't a Wall Street favorite, but he's righted a pair of foundering discounters.
Eye to the Keyhole: Once Great, Kerkorian's MGM Is a Bottomless Money Pit
Find out why a stock that Wall Street values at $18 a share may actually be worth close to zero.
The Invisible Mouth: So Much for Second Chances
Many economic forecasters, it seems, would post more accurate predictions if they relied on telephone psychics.
Wrong! Tactics and Strategies: Out of the Office, but Not Out of the Loop
James J. Cramer
Ten years ago when I had to be on the road, I found myself wishing for a tranquilizer to control the out-of-control feelings I had with no PC, no
and no way of accessing quotes. Now, though, with cell phones and a partner like
, even a day like today, when we were moving from our old Bucks County, Pa., house, I didn't feel out of touch.
Of course, there was nothing momentous about today. Nothing that made me put the whole move on hold and bolt to the office, which I have done many times, or nothing that smacked of a crisis that would have my wife loading a dumpster instead of just handing things off to me.
Still, you have to know how to do it, what to ask, what to relate to, in order to make it a productive day. Many of you are now part-time traders, so I thought it would help to tell you what I look for and ask about on those very rare days when I am not in the office.
My first call, around 6:30 a.m., was to ask about Europe, particularly London and Finland. This morning
was off one-half, and as I was aware of a big contract headed Nokia's way, courtesy of an adept friend in London, I managed to snare off about a point while I checked in.
At 8:20 a.m. I checked to see how the bonds were trading, and because oil was so high, I inquired about that. (If gold were running, or aluminum, I would have liked to have known that, too.) Then I waited about 20 minutes and got an early rundown of the research. Today
pushed the semis, including a couple I was long, so I asked Jeff to see if he could buy more of any of those roughly in line or up one-half on
. Nothing doing. They had already ramped before the market opened.
At 9:15 a.m. I checked again for upgrades and downgrades, and there was nothing major. I then asked again about the bonds. As they were soggy, I immediately eliminated banks and drugs as possible stocks we could buy in my absence.
Jeff informed me about some sort of
nastiness, and -- as I am so used to ERICY trading with Nokia and
-- I braced myself for weakness in both. I urged Jeff to scalp a dollar in Nokia while checking to see if we should buy more MOT down a couple -- we ended up doing so.
At 10:00 a.m. I again asked about the bonds, as well as whether any research calls were impacting the stock market. I wanted to know whether pushes were working or not or whether there was an overriding theme. Jeff said that it looked like there was a program that brought the market down artificially on Tuesday. If that's the case, I said,
and a couple of other big-caps should do well. (If the bonds were solid I would have been itching to buy some
ahead of the quarter.)
Sure enough, Mister Softee was already up a buck and a half and Jeff had sold some of the stock we had bought the day before at the bell, betting that a program had wreaked the havoc. Good call on Mister Softee, but we missed GE, and the stock ramped.
I then asked how the
was. (I did not ask how the
Dow Jones Internet
index was because no one trades that, and I was more interested in how the true Net plays are working.) We like to buy Net stocks when they are down big, but nothing was flashing red that intrigued me except some
, so we grabbed a little of those.
Then I wanted to know what was DOWN the most because that's where opportunity beckons. When I heard about the holocaust that was
New Era Networks
, both Jeff and I wondered whether the momentum funds that had played havoc in 1996 were up to their old tricks, buying things up to ridiculous levels and then trashing them. I also congratulated Jeff on not having bought NEON and he congratulated me on not pushing him on Waste. (Brokers had wanted us in both names right up until today's slaughter.)
Worrisome trend when the mo-mos go nuts as they did on these stocks. I then gave Jeff a break for a couple of hours but came back to ask about specific groups that were weak. When Jeff mentioned oil-service sloppiness, I said we had to buy some
, because with oil at $20 a barrel the analyst community is all over these stocks any time they are down and you can make some quick money. He did.
At this point I asked Jeff about our core portfolio. These are the names I never talk about because they are thin and because I am afraid that if I mention them even in a remotely positive light someone will accuse me of trying to manipulate them. (That is why I always use
, my Dad's company.) I was not so interested in finding out how the stocks were doing as I was about whether we had checked in with any of the companies to see how the fundamentals were. One of our smaller-caps was up nicely and I wanted to know if there was any news. He said he checked in and there was nothing going on. (His check-in consists of calling the company and asking the investor relations person or whoever the point person is for shareholders with questions.)
I also chatted with the movers at lunch, both of whom wanted to know why I haven't been on
lately. I explained that I will be on next Wednesday. Seems like I get that a lot lately. I explained that I wish I were on more, 'cause I love that show, but that's the way it is.
At 2 p.m. I asked about the bonds and buy and sell program activity. I also asked what was going wrong and right. Today was it MOT and GE on the wrong side -- we pulled too much of a trigger in MOT and no trigger at all in GE, and Mister Softee on the right side, as it is our largest position.
We also discussed how the
were. These are three Morgan Stanley indices for cyclicals, consumers and high-tech stocks. They gave me some flavor to see if I needed to sell some
or buy some
on the earnings weakness (no, no and no). I skipped the
because the bonds were not our friends today (bank and drug indices).
I let things go until 3:55 p.m., mostly because my wife wanted to kill me by that time for how many times I had called the office. Then I called again and urged Jeff to buy a little more of a couple of faves that are off, and I suggested that he hold on to
despite the ramp because it sounds like it might be a good quarter.
At 4:08 p.m. he tallied the day, gave me a recap and issued a report card. We talked about our mistakes and our triumphs. We went over what is on tap for tomorrow. Had I been in the office this discussion would have been held at 3:30 p.m.
We made money; heck, that is what it is about, last I looked. So while I feel tired from the move I feel great about the profit and loss. I told him I would be in tomorrow at 4:30 a.m., work out and then listen to a Yahoo! replay of the conference call if one is available.
Since I feel like I let people down today in this unplanned outage -- the move was supposed to take three hours but it took nine -- I wanted to send this off.
: Emotional day. When I worked with my wife we would routinely take off Thursdays and Fridays and trade out of our house in Bucks County. It was so fabulous. We could play with our young daughter, see my dad (who lives nearby) and have a great time while we made some money. But the fund got too big, the job too hard and then, after our second child, my wife stopped trading. For years she held out that I would slow down and we would go back to some sort of day off at Bucks County where I could benignly check in, but I just couldn't do it. Two years ago she remade my office into a bedroom.
No matter, the township we were in changed the zoning laws and poof! our farm, surrounded by other farms, became fortress farm in the midst of a massive suburb. In the end it was barely a retreat and it was time to go. The memories, however, will always be there.
Back to my usual sked tomorrow.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Yahoo!, AlliedSignal, International Paper, Georgia-Pacific, Microsoft, Motorola, Nokia and priceline.com. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at
Energy: Another Red Flag Raised on Friede Goldman
With investors already fretting over
pending merger with
and worrying about project delays, yet another red flag has been hoisted.
On June 22, the
Center for Financial Research and Analysis
, an independent research firm known for detecting misleading accounting practices, issued a five-page analysis of Friede's financials. It concludes that Friede's increased use of aggressive accounting methods may have boosted earnings in recent quarters. Among its issues, CFRA says Friede has falling margins, weakening operating cash flow and a questionable rise in unbilled receivables. It also includes in its backlog a contract it hasn't definitely sealed, CFRA notes.
Friede dismisses the report's conclusions as erroneous. "Our business is comprised of a handful of contracts, all of which are individually significant, so a timing difference
in billing on one contract can make a difference in what the balance sheet looks like," says Jobie Melton, Friede's chief financial officer. "Therefore, it's really difficult to make any valid inferences related to the overall status of the business from simply a change in the balance sheet elements from one period to the next."
In addition, many of the report's assertions are old news, having been disclosed in
Securities and Exchange Commission
filings and conference calls, notes John Alford, a Friede executive vice president. For instance, Friede's decrease in gross profit "is something that everyone knows," Alford says.
Still, the report comes as nervousness among Friede investors is growing.
The concern began last year as industry-wide demand for rigs declined and daily rental rates plunged. However, Friede made several key acquisitions, grew revenue and beat earnings estimates. Bulls still believe in the company. Bo McKenzie, an analyst at
, twice in June reiterated his buy rating, even though he lowered his earnings estimates for this year due to rig construction delays. He reduced his 1999 estimate to $1.45 from $1.60. He's positive on Friede's franchise position in the industry, its growth prospects and the Halter merger, which he says will bring $20 million in savings in the first year. (Jefferies has done underwriting for Friede.)
But investors clearly are troubled. Friede's stock has tumbled almost 20% since the merger announcement on June 2. It closed Wednesday at 13 11/16, off 5/16. And Friede has trailed the sector's 60% rally since March's
production cuts; in the same period, Friede is up 26%.
Friede Shares Underperform
All this uncertainty has led short-sellers to pounce. Short interest jumped to 2.4 million shares as of June 15, a 14.7% increase over the May figures. Shorts argue that there won't be any new rigs ordered for years due to the global oversupply.
Among the concerns highlighted by the CFRA is Friede's backlog, which includes a $143 million contract to build a rig for a Brazilian company that has yet to secure financing. The Brazilian company is applying for a loan guarantee from the
U.S. Maritime Administration
, which should enable it to secure private-sector financing more easily.
However, the company is still finalizing its application, according to Friede, which says it's confident of approval. The loan guarantee determination takes approximately 60 days after the application is filed, so the earliest the financing can be expected is late in the third quarter.
Excluding this contract, Friede's backlog stood at $264 million at March 31, down 40% from a year ago. As a percent of revenue, Friede's backlog has declined dramatically from a year ago, both with and without the Brazilian contract, CFRA notes. This is where the Halter merger comes in handy: The combined company would have had a backlog of $1.1 billion at March 31.
Investors may also be intrigued by the surge in unbilled receivables. CFRA cautions that a sudden jump in revenue that have been booked but which the company cannot turn around and bill the client for can indicate cost overruns or lower project cost estimates. Unbilled receivables at Friede increased by $14.4 million in the fourth quarter from $100,000 in the third quarter, and by an additional $13.7 million in the first quarter.
Friede says the jump was simply a matter of timing. In April, one of the contracts met a milestone that allowed the company to bill the customer, says Friede's Melton. And in the past year, Friede has experienced no cost overruns on any of its fixed-price contracts, which make up the bulk of its business, he says.
Then there's the gross-margin issue. Gross margins slipped to 18% in the first quarter from 27% in the year-ago period. Friede says this is simply due its current business mix. Its higher dollar volume of new construction work carries lower margins than the conversion and retrofit work it did more of in past quarters. Margins were also affected, but to a lesser degree, by Friede's use of higher-cost subcontracted labor, hired to meet delivery deadlines.
But CFRA notes that Friede's March quarter margins would have been even lower had the company not amortized $600,000 related to its acquisition of a Canadian shipyard in early 1998 to offset its cost of revenue, an aggressive move. Melton, the CFO, says it would have been inappropriate to characterize the item in "other income," as CFRA advocates.
Another item in the report pertains to a plunge in billings in excess of costs, or cash collections made prior to services rendered. CFRA notes that a decline in this figure can indicate depletion of a future revenue source or possibly more aggressive accounting than in prior periods.
Melton says this too is a matter of timing. "If the March financial statement had been done
a few weeks later it would have looked completely different," he says. A $50 million payment Friede received completely turned around CFRA's assertion, he adds.
But for now, it seems investors are buying the view from the outside.
Evening Update: Yahoo! Rises on Earnings; Big Mo Falls on Court Ruling
shares galloped up 6 to 173 in after-hours trading following its strong second-quarter earnings report. The company made 11 cents a share, topping the 21-analyst
estimate by 3 cents and moving ahead of the year-ago 1 cent.
reported on the news in an earlier
stock slipped to 37 7/8 in late composite trading from a New York close of 40 15/16 on news of a Florida court ruling that could cost the tobacco industry billions of dollars in damages. In the first class-action suit brought by smokers ever to go to trial, a jury found that cigarette makers are liable for producing a defective product that causes emphysema, lung cancer and other illnesses.
unit raised their stake in
to 39.9% by exercising warrants to buy $175 million in stock.
In other postclose news (earnings estimates from First Call; earnings reported on a diluted basis unless otherwise specified):
Earnings/revenue reports and previews
said it sees second-quarter earnings of 45 cents to 55 cents a share, lower than both the 12-analyst prediction of 62 cents and the year-ago 66 cents. The company cited a lack of growth in domestic shipments.
American Eagle Outfitters
said its June same-store sales hopped up 26.3%.
posted 50 cents a share, 2 cents ahead of the five-analyst estimate and a repeat of the year-ago figure.
said it expects to report third-quarter earnings of 25 cents to 27 cents a share, below the 14-analyst forecast of 31 cents. The company, which made 27 cents in the year-ago period, attributed the expected shortfall to negative industry trends hurting its PharMerica long-term care unit.
recorded a second-quarter loss of 5 cents a share, 4 cents narrower than the five-analyst estimate but behind the year-ago profit of 11 cents.
reported second-quarter earnings of $1 a share, 2 cents above the 11-analyst forecast and higher than the year-ago 87 cents.
said it will report second-quarter earnings above both the year-ago 33 cents a share and the 13-analyst forecast of 17 cents. The company attributed stronger markets for its wood products and domestic uncoated freesheet papers business.
said it expects to report second-quarter earnings of 23 cents to 25 cents a share, which would be below both the six-analyst forecast of 31 cents and the year-ago 34 cents. The company blamed a greater-than-expected market slowdown.
said it expects to post break-even results or a slight loss in the second quarter, citing continuing merger-related sales performance issues and a general slowdown in demand for resource planning software. The two-analyst view called for earnings of 12 cents a share vs. the year-ago 19 cents.
said it expects to post a second-quarter loss of 20 cents to 25 cents a share and that its quarter revenue will be flat to 2% below year-ago figures. The 13-analyst prediction called for a loss of 2 cents vs. the year-ago loss of 3 cents. The company, which said its June same-store sales fell 33%, also said it will take a $13.5 million charge in the second quarter after revamping its brand and updating its stores.
said it expects to record a second-quarter charge of 8 cents a share to cover costs of settling a lawsuit brought by the estate of its former co-chairman.
said it expects to post first-quarter earnings of 16 cents to 18 cents a share due to flat revenue. The three-analyst view called for 24 cents vs. the year-ago 21 cents.
99 Cents Only
said its second-quarter same-store sales rose 2.4%.
reported second-quarter earnings of 32 cents a share, ahead of the 10-analyst view of 25 cents and the year-ago 15 cents.
Mergers, acquisitions and joint ventures
agreed to acquire privately held
for an undisclosed amount.
said it won't buy a minority stake in
or sell its products through the Internet pharmacy as previously announced.
Offerings and stock actions
(INIT:Nasdaq) 7 million-share IPO mid-range at $10. The company is a Web site management company.
named Scott Leslie CEO, replacing Lee Thurburn.
said it hired nine employees from
for its financial services investment banking team.
A federal judge denied
motion to dismiss charges the company violated antitrust laws by raising prices up to 3,200% but the judge dismissed some state charges.
Bond Focus: Treasuries Take Another Step Back
Treasury yields rose for the second day in a row, and for the same reasons: The new-issue calendar is heavy in the other bond markets, and European yields rose, forcing sellers of U.S. paper to mark down their prices in sympathy.
With no market-moving economic data on the calendar, the benchmark 30-year Treasury finished the day down 4/32 at 89 2/32, lifting its yield a basis point to 6.05%. Shorter-maturity note yields rose by roughly similar amounts.
With the economic data calendar sparse till next Wednesday, when the
Producer Price Index
data for June will be released, the bond market is casting about for something to react to. Unfortunately, it's finding only reasons to retreat.
"I think it's mostly supply,"
Donaldson Lufkin & Jenrette
Treasury market strategist David Ging said, explaining the market's weakness this week. "You've got agencies coming, TIPS today, the
deal and a whole slew of corporates expected in the next month, or two, or three."
Translation from trader-speak: Agencies are federal agency issues, and a big one was launched today.
started taking orders for a $3 billion five-year deal. TIPS are Treasury Inflation-Protected Securities, and $7 billion of the 10-year variety were auctioned this afternoon. Ford has a three-part deal that could be as large as $7.5 billion waiting in the wings. And loads of other corporations are waiting to tap the market once Ford gets out of the way with what could be the second-largest corporate issue ever.
In the immediate term, Ging said, a heavy new-issue calendar prompts selling of Treasuries as an underwriting hedge: If a rise in Treasury yields jeopardizes the deal, at least there's a profit on the short Treasury position. And in the longer term, "it soaks up all the bullishness from less Treasury supply," Ging said. Last week, a rally in Treasuries was aided by the announcement of a new, larger forecast for the size of the federal budget surplus. A surplus means a diminishing supply of Treasury securities (which finance deficits) boosting their value. "If the shrinking Treasury supply is going to be made up by increasing corporate supply, it mitigates the good Treasury surplus news," Ging said.
To a lesser degree, rising European bond yields are also putting pressure on Treasuries. "If global economies are recovering, it's not going to be good for Treasuries," Ging said.
But market mavens stressed that they're paying attention to the corporate slate and to Europe mostly because there's nothing else to do right now. Traders are waiting for next week's economic data, and to hear what
has to say about it in his semiannual
congressional testimony, which today was slated for July 22 before the
House Banking Committee
. They're trying to determine whether the Fed will raise interest rates a second time when it holds its next meeting on Aug. 24.
"Ultimately, it's going to be a data story," said Tom Connor, head government bond trader at
. "If it's strong, the market's going to be under pressure" regardless of the factors that are moving the market today.
Connor says this week's selloff is also due to reevaluation of what happened on the Fed front last week. When it raised the fed funds rate to 5% from 4.75% and shifted its official bias to neutral from tightening, the market rallied on the assumption that the bias shift meant the Fed wouldn't hike again in August, Connor said. This week, it's rethinking that assumption. As well it should, he says, considering that the Fed's habit has been to revert to neutral following a rate change, and a neutral bias hasn't prevented them from changing rates again at subsequent meetings.
"They've totally confused people," Connor said.
The confusion stems from the fact that the Fed only recently started announcing its bias. And from the fact that historically the bias has applied only to the period leading up to the next meeting.
The Fed has announced its bias twice now, and each time it has hinted that the bias applies more broadly to the future. That was the assumption the market made when it rallied last week. Now traders are wondering whether the bias still applies only to the intermeeting period, as it always has. "We don't know which definition of the bias is now employed,"
High Frequency Economics
chief U.S. economist Ian Shepherdson groused in a research note yesterday. "If the Fed doesn't know what it means, or what it is doing, how can the markets?"
TO VIEW TSC'S ECONOMIC DATABANK, SEE:
Vern Hayden will be appearing on CNBC's Power Lunch beginning at noon EDT, Thursday, July 8.
Get in the trenches with James Cramer... Invest a cool $500,000 without the risk - register for TSC's Investment Challenge and play for prizes, including a trip to NYC and a morning with James Cramer! Pre-registration - June 21. Game begins - June 28.
Copyright 1999, TheStreet.com