TheStreet.com's DAILY BULLETIN
July 9, 1999
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Market Data as of Close, 7/8/99:
o Dow Jones Industrial Average: 11,126.89 down 60.47, -0.54%
o Nasdaq Composite Index: 2,771.86 up 28.82, 1.05%
o S&P 500: 1,394.42 down 1.44, -0.10%
o TSC Internet: 664.96 up 11.11, 1.70%
o Russell 2000: 454.75 up 2.06, 0.46%
o 30-Year Treasury: 89 24/32 up 23/32, yield 5.998%
Companies in Today's Bulletin:
Abbott Laboratories (ABT:NYSE)
In Today's Bulletin:
o Semiconductors: After Hard Knocks, the SOX Rocks
o Wrong! Rear Echelon Revelations: Sore About ConStores
o Evening Update: Abbott to Buy Perclose; Qualcomm to Replace Transamerica in S&P 500
o Bond Focus: Bonds Recover to 6% as Focus Shifts to Ford
Also on TheStreet.com:
Wrong! Rear Echelon Revelations: Mea Culpa, Yahoo!
The trader was wrong about Yahoo! today. But he still thinks the stock's action during this session was wrong.
Europe: Europe's Four-Star Currency Failing at the Box Office
But even if the euro reaches parity with the dollar, conditions for the single currency have actually improved since January.
Taxes: New Rule Makes Thousands of Stocks, Funds Off-Limits at PricewaterhouseCoopers
The purge of audited companies extends to family members' holdings, college savings and retirement accounts.
The Buysider: Watch for Falling Stars
What does Hollywood have in common with the stock market? A lot more than you think.
Semiconductors: After Hard Knocks, the SOX Rocks
Staff Reporter SAN FRANCISCO -- Investors are loving semiconductor stocks these days. No wonder, considering the
Philadelphia Semiconductor Index
hit an all-time high of 509.98 Thursday. That's a growth of 179% since the index bottomed last October.
But is it headed for a fall? Chip stocks are, after all, cyclical. Just look at the chart: The SOX -- which measures the stocks of 16 leading chipmakers and chip-equipment companies -- peaked in summer 1995, bottomed summer 1996, peaked fall 1997 and bottomed last fall. Follow that pattern, and the index should peak sometime between now and October and not bottom again until next summer.
Hope for Chip Stocks
Long-time SOX watchers say don't bet on it. "The last few years have been a bit anomalous," says
analyst Gunnar Miller, who covers chip-equipment stocks. "The reality is that they tend to be three-year up, three-year down cycles if you go back historically."
The health of chip-equipment makers is a key indicator for the semiconductor industry. For a chipmaker like
to profit, it has to sell the latest and most expensive chips in large volume. It can't do that without the latest manufacturing and testing equipment.
The last true boom cycle started in 1993, when Intel introduced its first Pentium processor, and halted in 1995, says
Banc of America Securities
analyst Brett Hodess, who was one of the
first analysts to alert investors that the cycle was hitting bottom back in October.
Back in '93 and '94, Hodess says, chipmakers raced to build plants to meet rising demand. But once they had plenty of manufacturing capacity, excess equipment flooded the market just as PC demand slowed in '95. Demand for equipment wouldn't heat up again until the plants reached the end of their technology cycle -- generally three years -- and had to be retooled.
In mid-1996, the SOX began to bounce back. But rather than marking a broad-based recovery, the rise was triggered when a changeover in technology from a 0.35 micron process to a 0.25 micron process forced companies to buy lots of equipment, Hodess says.
Any impression that the industry was recovering from its slump was false. The utilization rate at chip factories was still a low 75%. So while chip companies like Intel were buying equipment to produce chips on the new process, consumers still weren't buying enough computers to keep the plants running at full speed.
In reality, the slump wouldn't end until around the end of 1998. Now, strong chip demand is filling the plants. Plant utilization rate is at about 90%. That compares with 70% in July of last year.
Meanwhile, companies are just beginning to buy equipment for another changeover in technology -- this time from 0.25 microns to 0.18 microns. Yet equipment orders are still low: Just $27 billion will likely be spent worldwide this year on equipment, compared with $45 billion during the peak year of 1995. And that's a sign, Miller says, that equipment orders have only started to rise.
"Most U.S. chip companies are spending below their depreciation levels," he says. "I'm a guy who, in '95 -- when we were at a peak -- felt it was time to sell the stocks. This does not feel like that to me. This feels more like something that's potentially sustainable."
There are other indicators of a continuing recovery. Communications chip companies such as
have been seeing
soaring demand for their products as people worldwide load up on cell phones, network computers and Internet gadgets.
Meanwhile, memory-chip prices are about as low as they can get. They dropped to about $4.10 for a 64-megabit synchronous DRAM chip, and that compares to $7.50 a year ago, when memory makers fretted that prices were too low. "They are the lowest they've ever been," says Steve Cullen, a memory analyst at market research firm
Cahner's In-Stat Group
. Memory makers tend to cut equipment spending when memory prices are low, and to beef up spending when the money pours in.
All that means the SOX stocks still have room to rise. "This summer and the second half of the year you will see improving fundamentals," Hodess says, adding that supply won't outstrip demand again until 2001 or 2002.
Wrong! Rear Echelon Revelations: Sore About ConStores
James J. Cramer
Nobody's buying this
explanation. Not at all. Not one bit. I have read all of your letters, some of which are being published and some of which can't be published because the writers asked that they not be published.
First, just so we are on the same page, ConStores blamed its miserable preannouncement on two main problems: freight costs and a pause in the video game market. The weakness, it seemed, was centered on
Sure enough, there are some surcharges involving higher oil costs that may have played some havoc with goods delivered from the Far East. And a small portion of the video game market has some weakness related to upcoming product rollouts from
But neither the KayBee shoppers nor the ConStores shareholders are buying it. There were two explanations that rang true to me. One is that KayBee is getting its clock cleaned by
Toys R Us
. I didn't read a single letter which said it was fun or interesting or cheaper to shop at KayBee than anywhere else. We are talking about toy shopping; you have to enjoy it or get the best price. One or the other. Not neither.
The second is that there are other problems at other divisions of ConStores that may also be in trouble, and the company tried to minimize them by focusing on KayBee, a recently acquired division. I particularly liked this message I got from several readers, that ConStores' close-out division doesn't have any great merchandise or customer demand because of the strong economy. Historically, ConStores buys merchandise from distressed merchants, but those are few and far between, because even the worst retailers are staying afloat in this business environment. So there is nothing of extraordinary value to sell. And because so many people have good jobs, and good jobs are so attainable, people are trading up out of ConStores and into places like Wal-Mart. A strong economy spells bad news for this investment.
But let's cut to the chase. Do I want to use this price break to buy CNS?
Nope. The problems here seem more structural and deep than just video games and freight surcharges. I would rather own this disappointing dog when the economy is weaker and its best work, liquidation sales, comes more into play. In the meantime, after reading your feedback, I am not attracted to it even at these greatly reduced levels.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. 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
Evening Update: Abbott to Buy Perclose; Qualcomm to Replace Transamerica in S&P 500
agreed to acquire
in a stock swap valued at $680 million. According to the deal, Abbott will issue $54 in shares for each Perclose share.
on a date yet to be announced.
, a Dutch firm, is acquiring Transamerica.
will replace Qualcomm in the
S&P MidCap 400 Index
Ouflow from U.S. equity funds for the week ended yesterday totaled $186 million, with the majority coming from small-cap funds, according to
AMG Data Services
. International equity funds reported outflow, while emerging market sectors recorded inflow. Among other categories, $1.74 billion flowed into taxable bond funds, the largest amount since February. Municipal bond funds posted inflow of $183 million and money markets posted inflow of $30.12 billion.
In other postclose news (earnings estimates from
; earnings reported on a diluted basis unless otherwise specified):
Earnings/revenue reports and previews
said it sees second-quarter earnings of 30 cents a share because of weak sales in Asia and Europe. The four-analyst estimate called for 39 cents vs. the year-earlier 34 cents.
said it expects to post second-quarter results of break-even to earnings of 2 cents a share, below the 20-analyst prediction of 10 cents and the year-ago 16 cents. The company blamed a shortfall in systems revenue.
said it sees a first-quarter loss wider than its fourth-quarter loss of 23 cents a share, citing weak market conditions for hard disks. The four-analyst view called for a loss of 22 cents vs. the year-ago earnings of 3 cents.
Jones Lang LaSalle
said it sees a second-quarter loss, blaming in part the performance of its U.S. management services businesses. The two-analyst estimate called for earnings of 19 cents a share vs. the year-ago 45 cents.
said it will post second-quarter earnings 3 cents to 4 cents a share below the single-analyst forecast of 27 cents due to weaker-than-expected sales and an unplanned expense of $1.5 million to implement an information system. The company made 27 cents a share in the year-ago period.
said it expects to report third-quarter earnings of 29 cents to 30 cents a share due to a continued slowdown in sales and delays in completing several licensing agreements. The eight-analyst forecast called for 35 cents vs. the year-ago 29 cents.
In other earnings news:
Offerings and stock actions
Ford Motor Credit
increased the size of its bond offering to $7.5 billion from $6.5 billion.
(LQID:Nasdaq) 4.2 million-share IPO above range at $15. The software company's products enable digital delivery of music over the Internet.
said it will merge its TV production unit with its
network's prime time broadcast group into a single unit, ABC Entertainment Television Group.
said it's recalling about 935,000 1996-98 Civic small cars to fix sliding driver-side floor mats that could interfere with the accelerator pedal.
Business Week's Inside Wall Street
column talks up
as a potential takeover target, with a global telecom giant playing the role of acquirer in Gene Marcial's world. The rumor man also works his bullish voodoo on
, arguing it's ripe for
, saying it's a good global-recovery play.
Bond Focus: Bonds Recover to 6% as Focus Shifts to Ford
David A. Gaffen
An early-morning slide turned into afternoon revelry in the Treasury market today, but investors were paying more attention to supply than the sharp turnaround. Hungry investors were fed $3 billion by
today, and they're lining up for
expected $6.5 billion in bonds tomorrow.
The 30-year Treasury bond continued to rise in the late afternoon, and was lately up 22/32 to 89 23/32, and the yield fell 5 basis points to 6%. With no significant economic releases to speak of, the market zoned in on the massive corporate and agency offerings hitting the market.
Well, massive and
. Federal agency Freddie Mac sold a ho-hum $3 billion in five-year notes this morning. But what's really on the market's mind was today's launch of Ford's deal, divided into $1.5 billion in 32-year bonds, $3.5 billion of five-year notes, and $1.5 billion in three-year, floating-rate notes. The latter two tranches will be issued by
Ford Motor Credit
, a financing arm of Ford. The issue, expected to be priced tomorrow, would be the second-largest corporate bond sale in history, trailing only
$8 billion issue sold earlier this year.
The deal's size was actually the source of some relief today. It was widely reported this week the auto manufacturer would sell $7.5 billion, before underwriters confirmed a $6.5 billion deal this morning. Investors tend to avoid buying bonds when they're anticipating a giant corporate deal (especially because these carry higher yields than Treasuries). A smaller deal means they'll have more room in their portfolio -- for all kinds of bonds.
"That's at the lower end of the expected $6 billion to $10 billion range, and less than the whispered $7.5 billion, so there's some relief that it's not going to overswamp the market," said Charles Reinhard, market strategist at
. "Supply in one sector affects the others."
Some of today's positive activity was generated by unwinding of corporate rate-lock trades, two sources said. When underwriters prepare to sell a corporate deal, they'll sell Treasury bonds as a way of offsetting the risk of holding the corporate paper. Once the deal is sold, the dealers can buy back the Treasury bonds.
This reversal typically takes place after the corporate or agency offering is sold (such as Freddie Mac). But two sources linked some of the activity to the Ford offering, though it hasn't been priced yet. Part of the reason for this is the hefty demand for the deal -- sources said this issue has already been oversubscribed, which indicates that there's more than $6.5 billion worth in interest from investors.
"Knowing there's solid demand, they might have
originally hedged for a larger deal," said Reinhard.
Treasuries were actually hit hard in the morning -- at one point the 30-year bond was off by 20/32, just after the release of weekly
initial jobless claims
. Unemployment claims fell another 6,000 to 294,000 for the week ended July 2. "The market's going to chop around for a week or so until we get the
and the CPI (
Consumer Price Index
) reports," said Larry Berman, technical analyst at
CIBC World Markets
. Those reports will be released Wednesday and Thursday.
Weakness in European bond markets cut into the market in the morning, as dealers marked down Treasury bonds in sympathy with the European losers, similar to the last two days. But the German Bund market bounced at the end of its session, and Treasuries moved up in tandem.
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