Publish date:

daily07-21-99's DAILY BULLETIN

July 22, 1999


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Market Data as of Close, 7/21/99:

o Dow Jones Industrial Average: 11,002.78 up 6.65, 0.06%

o Nasdaq Composite Index: 2,761.77 up 29.59, 1.08%

o S&P 500: 1,379.29 up 2.19, 0.16%

o TSC Internet: 615.31 up 21.58, 3.63%

o Russell 2000: 454.63 up 1.08, 0.24%

o 30-Year Treasury: 90 28/32 down 8/32, yield 5.899%

Companies in Today's Bulletin:

Warner-Lambert (WLA:NYSE)

Biomatrix (BXM:NYSE)

Centocor (CNTO:Nasdaq)

America Online (AOL:NYSE) (AMZN:Nasdaq)

In Today's Bulletin:

o Biotech/Pharmaceuticals: Pharma Notebook: Warner-Lambert's Rezulin Holding Its Own
o Wrong! Rear Echelon Revelations: High Drama
o Evening Update: AOL, Amazon Fall After Hours, Despite Solid Numbers
o Bond Focus: Bring It On, Alan

Don't Miss the TSC Series: Digital Music Unplugged

This three-day package explores investment rewards and risks created by the digitalization of the music industry, examining the impact that this trend will have on the financial world -- as well as those companies that will set the standard for the new medium.

Wednesday's installments:

o Digital Music Unplugged: Investing in the New Music Revolution

o Digital Music Unplugged: MP3 Takes Center Stage

Also on

Europe: The Anglo File: Stock Rides Up With a Little Help From Merrill

Merrill and the market are quite excited about the directory-services company's move to a transaction-based business model.

The TaskMaster: Amazon Is Pokey, but Nails the Numbers

Waiting, and waiting some more, for Amazon's earnings this afternoon. Plus, pulling punches with Net execs.

Taxes: IRS Ruling Takes Some Uncertainty Out of Straddles

Investors can now exercise greater control over the taxes generated by this hedging maneuver.

Eye to the Keyhole: The Primedia Mess: A Big Kravis Gamble Isn't Paying Off

The opposite of synergy exists at the corporate home of

New York


Biotech/Pharmaceuticals: Pharma Notebook: Warner-Lambert's Rezulin Holding Its Own


Jesse Eisinger

Senior Writer



is set to report its quarter on Thursday, and the company will reveal something surprising: Diabetes drug


is holding up much better than Wall Street expected.

That's important because, with Warner trading at a healthy 36 times this year's consensus earnings estimate of $1.92 a share, it needs to be more than a one-product story. Multibillion dollar cholesterol-killer


already is carrying a big load, and the Street figured Rezulin was dead because it has caused liver failure and death in some patients.

In addition, Wall Street thought that doctors would turn to new drugs in the same "glitazone" class as Rezulin, such as the recently launched


sold by

SmithKline Beecham

(SBH) - Get Report


Bristol-Myers Squibb

(BMY) - Get Report

as well as the just-approved



Eli Lilly

(LLY) - Get Report




True enough, Rezulin's growth days are over, but this is no


, the


(PFE) - Get Report

antibiotic that was severely restricted by the FDA and almost immediately went into a nosedive.

According to recent prescription data, Rezulin continues to have about 6.4% of the diabetes market, down just under one percentage point from where it was when Avandia was launched. Avandia has around a 3.2% share of the diabetes market, according to data from

ING Barings Furman Selz

projections using data from

National Data's Direct Rx

tracking service.

Of course, last week's approval of Actos will put more pressure on Rezulin. However,

Credit Suisse First Boston

analyst James Kelly writes in a Tuesday note that if doctors continue to sign new scrips for Rezulin and don't differentiate between the three diabetes drugs when it comes to liver side effects, the most pessimistic forecasts -- which have the drug going to zero in two years or so -- could be too grim. CS First Boston forecasts that Rezulin sales will be $640 million this year, falling to $530 million in 2000. CS First Boston rates Warner a buy; it hasn't performed underwriting for Warner.



says it was baffled when its stock went down Tuesday after "meeting" earnings expectations.

A company spokeswoman, speaking to

Dow Jones News Service

, complained: "Truly it's confounding, because we hit every one of our targets for the quarter."

The report went on to posit that those nefarious short-sellers were at work in sending the stock down. It fell 6 1/4 to close at 23 Tuesday and then dropped another 3 1/4 to 19 3/4 Wednesday. The story said: "The direction of Biomatrix's stock has sometimes been dictated more by investors with short positions than by the company's fundamentals."

Sadly, there's a fundamental flaw in that analysis. For one thing, two hedge fund managers who can go short say that the stock is "hard to borrow." In other words, so much stock is held by investors who won't lend their stock or cannot (because, for instance, they hold it in cash and not in marginable accounts) that short-sellers can't borrow it and sell it, hoping to buy it back later at a lower price.

No, the selling Tuesday seemed to be due to old-fashioned longs not staying that way. And the reason they may have preferred to dump Biomatrix shares apparently was old-fashioned as well -- the company will have a hard time meeting the sales expectations for its knee injection painkiller in the second half of the year, according to three hedge fund managers, one who's short the stock and two who have been short but have covered their positions.

Rory Riggs, the company's president, didn't return a call seeking a comment.

Sure, Biomatrix reported second-quarter product sales of $18.1 million (slightly missing analysts' estimates of $18.5 to $18.7 million) and earned 15 cents a share, excluding a special item, topping the

First Call

consensus by one Lincoln. That was up from the first quarter's $16.5 million in product sales and 13 cents a share.

But longs are looking for two things with the company's knee-pain product,


: They want to see growth each quarter, and they want to see Synvisc on a

sendero luminoso

, or a shining path, to reach the estimates of end-user sales (sales to people like doctors who shoot up their patients) of around $150 million this year.

In the second quarter, Synvisc had end-user sales of $24.3 million domestically, according to

American Home Products


. AHP's drug division


sells Synvisc and pays Biomatrix, which developed the injection. That's only up from $22.6 million in the first quarter. (Wyeth also had $1.6 million in foreign sales, up from $800,000 in the first quarter.) So Wyeth will need sales of around $50 million in the next two quarters to get to $150 million this year.

That's going to be particularly hard, because now Wyeth has a quarter's worth of Synvisc inventory on hand, according to investors who listened to the Biomatrix conference call Tuesday. A big portion of the second-quarter sales to Wyeth went to building the inventory. That building process is over. Now, Wyeth just has to sell more.

"It's hard to believe they'll do that," says a Boston-area health care investor who has been short Biomatrix in the past but currently has no position. "If Wyeth would've sold around $35 million, it wouldn't be such a risk. But the quarter was essentially flat."

Meanwhile, the big bull on the stock, Wade King at

BancBoston Robertson Stephens

, on Wednesday cut his 1999 revenue number to $77.2 million from $87.8 million and reduced his 2000 revenue estimate to $113.1 million from $135.5 million. He also cut earnings estimates to 72 cents a share this year, from 89 cents, and to $1.25 a share in 2000 from $1.58. (Robbie Stephens hasn't performed underwriting for Biomatrix.)

All this means that Biomatrix, despite its two-day price decline, could be still vulnerable.



did it, saying Wednesday that it agreed to sell to

Johnson & Johnson

(JNJ) - Get Report

. Among other things, it means that

was wrong to be

dismissive and to focus chiefly on


So, J&J will pay a lot: around 10 times projected 1999 sales. Hey, that means that


sold itself on the

cheap to Warner when it went at around five times projected sales.

Wrong! Rear Echelon Revelations: High Drama


James J. Cramer

Can't hide it anymore. I like earnings period. I like the excitement, the playoffs-like feel of it. I like trying to make the snap judgment about whether a company made it or blew it.




. Release read great. But those revs? That wasn't what I was looking for. Or



. Tremendous profits, but wouldn't it have been better if they had beaten the 800,000 new subs some people were looking for? Was that


(AMZN) - Get Report

guidance about losses new or old? That


story, does that guy know what he is talking about?

It's a million judgments all rolled up into an incredibly tiny sliver of time. And sometimes I think, gee, it's just great theater, as if we could get

Frank Rich

to review the Amazon conference call, or the


(JNPR) - Get Report

roadshow, or the roadshow of


for that matter. For many companies, this time is like when you brought your report card home to your folks when you were in grade school. You can play up that penmanship, but if you blew the spelling grade, so what. You don't want to let anybody down and you know that the quarter is past already and what matters is current results.

But that doesn't make you any less jittery.

What I like most about it is the imprecise nature, the psychology of it.

Was Amazon too cocky? Was AOL definite enough about that sub growth slowdown? Was



too promotional? Did


really say anything new? I guess I like it because it allows those who have remembered previous calls to have the edge on those who are coming in cold. If you remember what cards came up in the previous quarters, you have a better chance to make more money in the future.

Sure beats Black Jack because they never shuffle the shoe.


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long America Online and United Technologies. 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: AOL, Amazon Fall After Hours, Despite Solid Numbers


Heather Moore,

John J. Edwards III and

Eric Gillin

Staff Reporters

America Online


posted fourth-quarter earnings of 13 cents a share, topping both the 30-analyst

First Call

estimate of 11 cents and the year-ago 6 cents. The leading Internet service provider said its total revenue for the quarter came in at $1.38 billion vs. the year-ago $943 million. Shares of AOL slipped 1 3/16 to 115 in after-hours trading.

Elsewhere in earnings (or lack thereof),

(AMZN) - Get Report

shares shed 3 7/16 in after-hours trading to 122 following the company's second-quarter report. The online retailer lost 51 cents a share, meeting the 21-analyst forecast and widening beyond the year-ago loss of 12 cents. Amazon, which also set a 2-for-1 stock split, said its customer accounts rose 2.3 million to 10.7 million in the quarter. And the company said it expects to invest more heavily in the second half. But CFO Joy Covey said the third quarter will bring "somewhat higher" sequential revenue growth.

TheStreet Recommends

In other postclose news (earnings estimates from First Call; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews

Business-to-business e-commerce software provider



reported earnings per share exactly in line with expectations.

In the fiscal third quarter ended June 30, Ariba lost 46 cents a share, or a net loss of $6 million, excluding amortization of stock-based compensation. The loss was 4 cents wider than a year ago. Including the amortization of stock-based compensation, the company lost $11.3 million or 86 cents a share. Revenue jumped to $11.9 million from $9.4 million a year ago.

"The strong revenue growth in the quarter was a result of extending our leading base of blue-chip buyers," said Keith Krach, president and CEO of Ariba.

In the quarter, Ariba made a foray into the mid-market by inking a deal with

J.D. Edwards


, which primarily makes software that automates back-office tasks. Under the agreement, J.D. Edwards would resell Ariba's products.

Credit Suisse First Boston

analyst George Gilbert expects that Ariba and

Aspect Development


will announce a similar reselling deal on Aug. 2. CSFB has not underwritten for Ariba.

Krach declined to comment on whether such a deal is in the works, but said he expected the J.D. Edwards deal to start adding materially to revenue "over the next few quarters."

Ariba went public on June 23 at $23 a share and closed at 90 that day, making it the fifth most successful IPO in history, according to

IPO Monitor

. The stock closed today up 11 1/2, or 10.5%, to 121.

More good news for software makers includes results from



, which makes content management software for Web sites.

The Austin, Tex.-based company reported a narrower-than-expected loss in the second quarter ended June 30. It lost 22 cents a share, or $5.5 million, excluding acquisition-related charges and amortization of deferred compensation. First Call's eight-analyst consensus called for a loss of 26 cents vs. the year-ago loss of 31 cents. The company's revenue soared 409% to $14.9 million from $2.9 million in the same quarter last year.


Medora Lee



reported second-quarter earnings of 13 cents a share, in line with the nine-analyst estimate. The year-ago loss of 92 cents included charges; Atmel did not provide per-share operating figures for the period.

Bright Horizons Family Solutions

(BFAM) - Get Report

reported second-quarter earnings of 16 cents a share, a penny better than the seven-analyst estimate and up from the year-ago 12 cents. The company also set a buyback of up to 500,000 shares.



stock rose to 21 3/8 in after-hours trading from a close of 21 1/8 following the company's second-quarter earnings report. While the company reported operating earnings of 24 cents a share, analysts were apparently comparing their estimates to a profit of 22 cents, according to First Call. The eight-analyst consensus estimate called for 22 cents vs. the year-earlier 19 cents. Cendant also said it plans to sell "several non-strategic" operations in the second half for more than $1 billion.


(CLF) - Get Report

reported second-quarter earnings of 70 cents a share, beating the two-analyst outlook by a penny but trailing the year-ago $1.48. The company also warned that it expects its second-half earnings to fall below expectations. The three-analyst estimate for 1999 calls for $2.52 a share. Cleveland-Cliffs cited an expected shortfall in sales.



posted first-quarter earnings of 24 cents a share, ahead of the 15-analyst prediction of 21 cents and above the year-ago 15 cents. The company's chairman backed a 35% to 40% growth rate in 2000 and said he's "very bullish" on the fiscal year's outlook.

Exodus Communications


set a 2-for-1 stock split and posted a second-quarter loss of 51 cents a share, a penny narrower than the 15-analyst estimate but wider than the year-ago loss of 36 cents.

General Semiconductor

(SEM) - Get Report

reported second-quarter earnings of 14 cents a share, a penny short of the two-analyst view and down from the year-ago 19 cents. The company warned it expects its 1999 earnings to fall short of 1998's 74 cents, citing additional interest charges from the restructuring of a credit agreement. Estimates call for 1999 earnings of 72 cents.


(KMB) - Get Report

posted second-quarter earnings of 72 cents a share, topping both the 12-analyst estimate of 69 cents and the year-ago 58 cents. The company also said it will restate financial results from 1995 through the first quarter of 1999 following a review by the

Securities & Exchange Commission

. The company said the restatement involves the timing of charges for past restructuring actions and facility closures.

Legato Systems


reported second-quarter earnings of 29 cents a share, 4 cents ahead of the 15-analyst expectation and up from the year-ago 9 cents. The company also set a 2-for-1 stock split.



reported second-quarter earnings of 15 cents a share, in line with the two-analyst view but below the year-ago 16 cents. The company also said it doesn't see profitability for its footwear group for the remainder of the year and that its sees second-half sales growth falling below the first-half's growth.


(OI) - Get Report

posted second-quarter earnings of 61 cents a share, on target with the nine-analyst view but below the year-ago 75 cents. The company also said its third-quarter earnings will be below the year-ago 69 cents due to demand problems overseas. Analysts are calling for 67 cents.

SkyTel Communications


reported second-quarter earnings of 8 cents including items vs. a year-ago 22 cents, also including items. The company didn't provide per-share operating figures. SkyTel also set for Sept. 22 a special shareholder vote on its pending merger with

MCI WorldCom



(STMP) - Get Report

slipped 1/16 in after-hours trading to 45 3/4 following the company's second-quarter report. The company lost 19 cents a share vs. the year-ago loss of 5 cents. There were no estimates.



recorded second-quarter earnings of 14 cents a share, beating both the eight-analyst view of 10 cents and the year-ago penny. The company's CEO also said he backed 1999 earnings of 36 cents a share, that he sees the company's 1999 revenue coming flat with 1998 and that he sees revenue in 2000 rising 10% to 15% from 1999.



reported a second-quarter loss of 35 cents a share vs. the year-ago loss of 10 cents. There were no estimates.



reported a fourth-quarter loss of 18 cents a share, 6 cents worse than the single-analyst view and down from the year-ago profit of 6 cents. The company said it will substantially consolidate its existing operations into its Huntsville, Ala., facilities. Verilink expects to record a restructuring charge of $6 million to $8 million to cover costs associated with the move.

Western Digital

(WDC) - Get Report

reported a fourth-quarter loss of 90 cents a share, 4 cents better than the 13-analyst forecast. The year-ago loss of $1.84 included a charge; the company didn't provide a per-share operating figure for the period.

Mergers, acquisitions and joint ventures

H&R Block

(HRB) - Get Report

said it is considering strategic alternatives for its

Option One Mortgage

wholesale mortgage business, including a sale of the business or a joint venture.

Friedman Billings Ramsey

is advising on the matter.

Offerings and stock actions

Ocean Financial

(OCFC) - Get Report

announced a 1.4 million-share repurchase plan.


ADC Telecom

(ADCT) - Get Report

will replace

Nalco Chemical


in the

S&P 500

on July 30.

Suez Lyonnaise des Eaux

of France is acquiring Nalco in a tender offer that expires that day.

Allied Waste


will replace



in the S&P 500, also on July 30. The

Justice Department

yesterday approved the companies' merger, which creates the second-largest waste-disposal company.

Hollinger International


said it ended talks to acquire

The New York Observer



Bond Focus: Bring It On, Alan


Elizabeth Roy

Senior Writer

Bond prices ended the final session before


somewhat lower on the day. A larger-than-expected drop in

housing starts

and weakness in stocks couldn't entirely undo the early-morning damage done by a


story in the

Washington Post


The benchmark 30-year Treasury ended the day down 7/32 at 90 29/32, lifting its yield a basis point to 5.90%. Shorter-maturity note yields also tacked on a basis point or 2.

The weakness in the market today can certainly be explained, but far more important than any of the factors that explain it was anticipation -- make that paralyzing anticipation -- of Humphrey-Hawkins. Humphrey-Hawkins, Being Fed Chairman

Alan Greenspan's

Semiannual Congressional Testimony on The Economy and Monetary Policy, slated for 11 a.m. EDT tomorrow.

Over the last six years,

Miller Tabak Hirsch

chief bond market strategist Tony Crescenzi pointed out in a research note this morning, the Humphrey-Hawkins address has moved the price of the long bond futures contract traded on the

Chicago Board of Trade

a full point, on average. And in the four sessions after the address, Crescenzi says, the market has typically moved twice as far as it did on the day of the address, in the same direction.

Michael Pianin, vice president at

ING Futures and Options

, summed up traders' unwillingness to do much in these days leading up to Humphrey-Hawkins in the title of his daily missive on futures market technicals. "Bring it on, Alan," he challenged.

The potential for this Humphrey-Hawkins testimony to move the bond market is at least as great as ever. There's a great deal of confusion in the market about what the Fed meant when it announced on June 30 that it had reverted from an official bias in favor of raising interest rates to a neutral bias. Historically, the bias applied only to the period leading up to -- but not including -- the next meeting. But historically the Fed didn't announce its bias. However, since it began doing so this year, the central bank hasn't made clear whether the bias indicates anything about the likely outcomes of subsequent meetings. Bond market mavens hope and expect that Greenspan will shed light on the question in his testimony.

In other words, people want to know: Is the neutral bias an indication that the Fed isn't likely to raise rates again at its next meeting on Aug. 24 (many certainly interpreted it that way, rallying bonds strongly on the June 30 announcement), or is it no such thing? And if it's no such thing, how likely is the Fed to raise rates again at the Aug. 24 meeting, in light of the fact that the hot April

Consumer Price Index

released six weeks before the first rate hike has been followed by two consecutive unchanged readings.

Crescenzi thinks that regardless of how the Fed chairman answers those questions, he'll be careful to use sobering words. "Expect Greenspan to avoid language that would spark a rally in the markets so as to avoid further cannibalization of the Fed's June 30 hike," he wrote. "After all, the Fed's objective is to slow growth, not help it."

On the question of what the neutral bias may mean, the

Washington Post's

veteran Fed reporter,

John Berry

, weighed in this morning with a story reporting that the Fed's monetary policy committee, the

Federal Open Market Committee

, is divided on the question. Some members (

Kansas City Fed


Thomas Hoenig

, for example) think the bias applies only to the intermeeting period, while others (like

Richmond Fed


Alfred Broaddus


Dallas Fed


Robert McTeer

) think the new practice of announcing it changes its character.

The story was the reason the market traded down sharply in the early hours,

Paribas Capital Markets

senior bond strategist Richard Gilhooly said. The long bond traded off as much as 1 4/32 at 7:12 a.m. EDT. "It did lead to some concern that the rally after the neutral bias was a misinterpretation," he said.

Also working against Treasuries today: further weakness in the dollar against both the euro and the yen, which discourages foreign investors from buying dollar-denominated Treasuries.

The drop in housing starts relieved some of the pressure on the market. Starts fell 5.6%, to a seasonally adjusted annual rate of 1.571 million in June, from 1.665 million in May. They peaked in January at a pace of 1.820 million, and bond investors are hopeful that this year's rise in long-term interest rates will continue to rein in consumer spending, slowing the economy to a pace the Fed is more comfortable with.

And while stocks recovered in the final hour of trading, their weakness for much of the session was another source of strength for bonds, Gilhooly said. "Stocks have come off in reaction to what major companies like


(MSFT) - Get Report

have been saying about the fourth quarter," he said. "If

Bill Gates

is saying that PC demand is slowing, then maybe the long-anticipated economic slowdown is upon us. He's better positioned to make that judgment than a lot of other people."


Erin Arvedlund with Thomas DeMark on Yahoo!

Thursday, July 22

TSC Staff reporter Erin Arvedlund will be chatting with Optionswriter Thomas DeMark on Yahoo! at 5 p.m. EDT.

Register for Yahoo! Chat at: It's free! on TV! Each weekend, catch on Fox News Channel for a half hour of the same unique financial journalism and commentary you've come to expect from TSC on the Web. Saturdays at 10 a.m. ET and Sundays at 1:00 p.m. ET.

Copyright 1999,