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daily07-22-99's DAILY BULLETIN

July 23, 1999


Market Data as of Close, 7/22/99:

o Dow Jones Industrial Average: 10,969.22 down 33.56, -0.31%

o Nasdaq Composite Index: 2,684.44 down 77.33, -2.80%

o S&P 500: 1,360.97 down 18.32, -1.33%

o TSC Internet: 593.75 down 21.56, -3.50%

o Russell 2000: 451.49 down 3.14, -0.69%

o 30-Year Treasury: 90 01/32 down 27/32, yield 5.967%

Companies in Today's Bulletin:

Compaq (CPQ:NYSE)

Gateway (GTW:NYSE)

Microsoft (MSFT:Nasdaq)

In Today's Bulletin:

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TheStreet Recommends

o Hardware & PCs: Analysts Not Convinced Capellas Can Fix Compaq
o Microsoft Cries Poverty
o Evening Update: Compaq Names Capellas CEO; Gateway Beats Estimates
o Bond Focus: Alan Cracks Bonds Across the Face

Due to extended coverage of the Kennedy-Bessette tragedy, "" premiere will be shown at 1 p.m. ET Saturday, July 24, on the Fox NewsChannel. The show will be repeated at 1 p.m. ET Sunday, July 25.

"" will return to its regular 10 a.m. Saturday time slot next week.

Don't have the Fox News Channel? Then check out a Web simulcast of the show at (look for the "Fox News Channel Live" box).

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.

o Digital Music Unplugged: Net Retailers Cuddle Up to Digital Distribution

o Digital Music Unplugged: The Play Stations

o Surviving the Digital Music Avalanche, Part 1

Also on

Wrong! Rear Echelon Revelations: Standing Up for Tech

Cramer is perusing the charts for the big broken techs, and thinks he's found a key technical level.

The TaskMaster: Junglee Execs Said To Be Cashing Out of Amazon

Also, Maria's missing? What's up with that?

Asia/Pacific: Taiwan Stocks Trading at Discount After China Fracas

After more verbal fireworks, Taiwanese companies are trading at lower levels. Foreign investors are eyeing electronics stocks.

Europe: Reportedly Flirting With AOL, Deutsche Telekom Still Needs a Telco Partner

But a cash deal with AOL or not, it's almost certain that DT's war chest will be a lot lighter before year's end.

Hardware & PCs: Analysts Not Convinced Capellas Can Fix Compaq


Eric Moskowitz

Senior Writer

Michael Capellas gave one hell of a speech Thursday. It was enough to wow



kingmaker and chairman Ben Rosen to crown him as the company's new CEO.

According to a Compaq board member, when the board met Thursday it was still only 90% sure that it wanted to tap Capellas CEO. "But he gave a brilliant presentation today to us and that convinced us," says the board member, who spoke on the condition of anonymity.

It may also have been desperation. The appointment of Carly Fiorina as



CEO Monday was widely praised by the media and Wall Street. Rosen spent a fruitless three months searching for an external candidate inside and outside the tech industry. There were interested candidates but no takers. While Fiorina brings a new look to H-P, Capellas offers a vision that may offer little new to investors.

Investors may have wanted someone offering radical ideas to a hardware company that is feeling the competitve pressure. Rosen's recent moves such as selling a controlling interest in

Alta Vista

, the company's search engine, to



may have made it impossible for Compaq to attract an external candidate. "Compaq needed a new broom, someone who could recapture the imagination of the company," says a money manager who requested anonymity and is short the stock. "Instead, they are getting another one of Ben Rosen's bozos."

Capellas, who is 44, has much to do and many people to please now that he is the third CEO in Compaq's history after Rod Canion (through 1991) and Eckhard Pfeiffer (through April 1999). Capellas, who came over from


(ORCL) - Get Oracle Corporation Report

last August, was named Compaq's chief operating officer in June.

At a hastily arranged press conference Thursday evening in New York, Capellas stressed how Compaq wanted to add utility to the Internet as the company gets involved in e-commerce. He also aims to sell 25% of its total revenue directly to customers by the end of the year and eventually to realize 40% of revenue through direct sales. Compaq currently sells 15% of its sales direct.

In his first speech to the gathered press, Capellas broke little new ground. "We want to own the customer relations, take more business direct and improve the supply chain," he said.

Amir Ahari, a senior analyst at

International Data

, who listened to the speech, said he isn't convinced that Capellas has the right strategy to improve the company's problematic relationship with its partners and resellers. "He said nothing about simplifying distribution," Ahari said. The last time Compaq tried to increase its direct-to-order business, distributors and resellers rebelled.

Chairman Rosen said he was disbanding the office of the chief executive office, and returning "to my home on Central Park West." Rosen had been working out of Pfeiffer's old office for the past three months. He said Thursday that no other candidate was considered for the CEO position.

For Compaq investors, Aug. 15 will be when Capellas more clearly identifies the company's reorganizational plans. "He talks the talk, but can he walk the walk?" wondered Lou Mazzucchelli, a

Gerard Klauer Mattison

analyst. By all accounts, Capellas has a lot of walking to do. Microsoft Cries Poverty


Adam Lashinsky

Silicon Valley Columnist



(MSFT) - Get Microsoft Corporation Report


The world's most valuable company can't really convey its poverty on an impersonal conference call. And it's an obvious fish out of water on the steps of a Washington, D.C., courthouse, where nobody seems to believe the lawyers' and PR folks' spin control. But in Seattle, at Microsoft's annual schmoozefest for analysts and institutional investors, the boys and girls of Redmond are in their element.

The schizophrenic message is delivered brilliantly. Part One: We're facing competition so ferocious that the growth rates you all have planned for us are a bit silly (are you listening

Judge Jackson?

) Part Two: By the way, we've got all sorts of nifty initiatives under way that will knock your socks off and keep us on top.

How does it play with the friendly audience? Great. Fully 44% of Microsoft's electronically polled guests believe Microsoft's fiscal 2000 revenue growth will be greater than 25%. "I frankly was shocked," cried President Steven Ballmer, known for his understated calm delivery style. "Come on, it's outlandish and crazy."

After all, opined Ballmer,


software alone is the single greatest competitive challenge Microsoft has faced since 1991, when


(IBM) - Get International Business Machines Corporation Report

issued its OS/2 operating system (which Microsoft crushed). "Linux is above all else a serious, albeit crazy, implementation of Unix on the Intel architecture," Ballmer said.

There are other risks too: the Java programming language, the increased interest by software applications developers in Web-based applications (as opposed to Windows), a rejuvenated


(ORCL) - Get Oracle Corporation Report

, and the fearsome "law of big numbers," the fact of life that it's more difficult for a big organization to grow at the same rate it did when it was smaller.

But for every fear raised by Good Cop Ballmer, there quickly came a new triumph trumpeted by Bad Cop Jeffrey Raikes, group vice president of worldwide sales. (CFO Greg Maffei and CEO Bill Gates were scheduled to speak late Thursday.)

Microsoft is besting



NetWare software, Oracle's database software and everyone's Unix-based server software, said Raikes. As an example, Raikes contends that Oracle's database software requires twice the power, three times the memory and 2 1/2 times the cost of Microsoft's SQL Server database software.

So is Microsoft in good shape or bad? Is the outlook rosy or scary?

Depends who's listening.


Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a monthly column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

Evening Update: Compaq Names Capellas CEO; Gateway Beats Estimates


Heather Moore,

John J. Edwards III and

Eric Gillin

Staff Reporters



named Michael Capellas its president and CEO, replacing at last the ousted Eckhard Pfeiffer, who was booted in April. Capellas comes to the position from elsewhere in the building, leaving his current job of chief operating officer. "In the Internet age ... there is no room for a CEO with a learning curve," Chairman Ben Rosen said in a


interview. Capellas said he would have a product rationalization and restructuring plan ready by Aug. 15 and intends to boost Compaq's direct PC sales to 40% from the current 15% and the year-end target of 25%.



posted second-quarter earnings of 56 cents a share, a penny above the 23-analyst

First Call

view and ahead of the year-ago 38 cents. The PC maker said its Internet service provider unit,, doubled its number of subscribers during the quarter. The company also said it's comfortable with earnings estimates of 67 cents a share for the third quarter. Gateway, which has been rumored to be in acquisition talks with ISP



, said it's not in talks with any specific ISP right now.

Inflow into U.S. equity funds for the week ended yesterday totaled $92 million, according to

AMG Data Services

. Small-cap growth and international equity sectors reported outflow of $483 million and $425 million, respectively. Among other categories, taxable bond funds posted inflow of $814 million, money market funds posted inflow of $3.3 billion and municipal bond funds posted outflow of $63 million.

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

Earnings/revenue reports and previews

American Power Conversion


reported second-quarter earnings of 22 cents a share, 1 cent better than the three-analyst view and up from the year-ago 18 cents. The company said it plans to close its Fort Myers, Fla., plant, which has 200 employees.



reported a second-quarter loss of 10 cents a share, 4 cents better than the three-analyst estimate but wider than the year-ago loss of 6 cents. The company said it expects sequential revenue growth to slow in the third quarter and cease in the fourth quarter, citing year 2000 transitions.



reported second-quarter earnings of 40 cents a share, in line with the seven-analyst outlook and up from the year-ago 36 cents. The company said it expects to meet estimates for 1999; the current estimate calls for earnings of $1.70 vs. 1998's $1.50.



reported a second-quarter loss of 60 cents a share including charges, apparently topping the four-analyst estimate of a 71-cent loss and the year-ago loss of $4.95. The company said it plans to cut 500 jobs from its workforce of about 1,550, incurring a third-quarter restructuring charge.


(MSFT) - Get Microsoft Corporation Report

CFO Greg Maffei told financial analysts at an annual meeting that the company's research and development expenses would rise to about $3.8 billion in fiscal 2000 from $3.1 billion in 1999,



Mothers Work


reported third-quarter earnings of 66 cents a share, 7 cents ahead of the two-analyst view and up from the year-ago 30 cents. The company's same-store sales rose 14.3%.

National Instruments

(NATI) - Get National Instruments Corporation Report

reported second-quarter earnings of 33 cents a share, a penny ahead of the six-analyst estimate and up from the year-ago 27 cents. The company also set a 3-for-2 stock split.

Rainforest Cafe


reported second-quarter earnings of 16 cents a share, in line with the seven-analyst forecast but down from the year-ago 18 cents. The company said its same-store sales fell 11%.

Redback Networks


reported a second-quarter loss of 16 cents a share, 3 cents better than the three-analyst estimate and narrower than the pro forma year-ago loss of 18 cents. The company also set a 2-for-1 stock split.



reported second-quarter earnings of 28 cents a share, 5 cents below the three-analyst forecast and behind the year-ago 41 cents. The company also warned it sees 1999 earnings coming in around 85 cents to 95 cents a share due to a weak agricultural market and soft sales in Europe. The three-analyst view calls for 1999 earnings of 95 cents vs. 1998's $1.06.

Sovereign Bancorp


said it expects to post second-quarter earnings slightly above estimates thanks to strong loan originations and lower deposit costs. The 11-analyst prediction calls for earnings of 29 cents a share vs. the year-ago 27 cents.


(SBUX) - Get Starbucks Corporation Report

reported third-quarter earnings of 13 cents a share, in line with the lowered 19-analyst expectation and up from the year-ago 11 cents. The company said same-store sales rose 6%. Starbucks plans to open 600 stores worldwide in fiscal 2000, including 350 company-owned stores and 100 licensed stores in North America. The company is targeting a 25% earnings-per-share growth rate in fiscal 2000.

Mergers, acquisitions and joint ventures

ReliaStar Financial


agreed to acquire

Pilgrim Capital


for $227 million in cash and stock. ReliaStar, an insurer, will also assume $31 million of asset manager's Pilgrim's debt.



said its acquisition of



received approval from the

Federal Trade Commission


Offerings and stock actions

Goldman Sachs



(INSW:Nasdaq) 5 million-share IPO top-range at $17. The company provides customized insurance quotes over the Internet. Its price range was raised to $16 to $17 from $11 to $13.

Elsewhere in new issues,

Piper Jaffray


BioMarin Pharmaceutical's

(BMRN:Nasdaq) 4.5 million-share IPO top-range at $13. The company develops carbohydrate enzyme therapies for debilitating, life-threatening, chronic genetic disorders and other diseases.


Credit Suisse First Boston


Tanning Technology's

(TANN:Nasdaq) 4 million-share IPO above-range at $15. The company is a technology services provider. Its expected price range was raised to $12 to $14 from $9 to $11.


Bally Gaming

, a subsidiary of

Alliance Gaming

(ALLY) - Get Ally Financial Inc Report

, filed an antitrust suit against

International Game Technology

(IGT) - Get International Game Technology PLC Report

, alleging that IGT's contract with Atlantic City casinos has shut Bally out of a lucrative segment of the gaming world.



, an assisted-living services provider, said it will consider going private through a leveraged recapitalization. Abraham D. Gosman, chairman and CEO, said the company will identify an investment banker in the week ahead.

National Steel

(NS) - Get NuStar Energy L.P. Report

reached a tentative pact with the

United Steelworkers of America

. Terms weren't disclosed.

An advisory panel of the

Food and Drug Administration


Sunrise Technology's


eye laser for farsightedness.

wrote about the company earlier this week.



said its CEO and vice chairman, Louis DiPasqua, will retire Sept. 30.

White Cap


said it entered a $240 million agreement to recapitalize the company.


Bond Focus: Alan Cracks Bonds Across the Face


David A. Gaffen

Staff Reporter

Keep running, bonds, the



It took one sentence from Federal Reserve Chairman

Alan Greenspan's Humphrey-Hawkins

testimony today to cause the market to beat a fast retreat. Referring to its June 30 interest rate hike, the Fed, Greenspan said, "did not believe that its recent modest tightening would put the risks of inflation going forward completely into balance."

Not quite what the market was expecting. The bond market was looking for even-handed remarks from Greenspan, but today's speech caused a broadbased selloff in the anguished bond market. The speech ratchets up the odds that the Fed will raise the 5% fed funds target rate again, at its next meeting Aug. 24 -- something the market had lately all but stopped sweating.

"Greenspan's remarks did include a number of fairly hawkish comments," said Anthony Karydakis, senior financial economist at

Banc One Capital Markets

. "Those warnings didn't go down well with a market that had come to believe that August was done as an issue."

Caught unaware, the bond market trembled, then disassembled. The 30-year Treasury bond's yield was lately higher by 7 basis points to 5.97%, as the price of the bond fell 25/32 to 90 2/32.

"When they say that the move in June is not enough to balance the risks, what else do you need to know?" asked Tom Ruff, vice president in proprietary trading at

Daiwa Securities


According to others, the market didn't even get that far into the speech (that quote was buried on page six, if you're printing on 8x11 paper) before freaking out.

"Here's the way the events unfolded," said one trader at a primary dealer. "They started running headlines on


, and you'd go, 'bearish, bearish, bearish,' and in the whole string, there was only one you could conceivably call neutral to bullish. You could just look and count up the comments. Everybody was so set up for a benign comment that you didn't have to do any interpretation."

Often, the bond market reverses its knee-jerk reaction to news once closer examination is given. But today, according to four sources, judging the book by its cover was just as good as reading the entire testimony. Even though the Fed chairman spent a good chunk of his testimony before the

House Banking and Financial Services Committee

discussing how productivity improvements have increased growth, sources viewed this speech as among his most hawkish in the last few years.

"Clearly, Greenspan was more hawkish than the market expected, as evidenced in the movement in prices and the flattening in the yield curve," Ruff said. The two-year note, which trades on expectations of where monetary policy is going, fell 5/32 to lift its yield 8 basis points to 5.50%. (The 30-year bond trades on the market's view of where inflation is going -- if the Fed's going to be aggressive in fighting inflation, that's a long-term positive for the 30-year bond, but not short-term securities like the two-year note.)

Another indication of the market's expectations for monetary policy, federal funds futures

traded on the

Chicago Board of Trade

, sold off wildly today. The September fed funds contract, which closed yesterday at 94.915 (corresponding to a funds rate of 5.085%), closed down at 94.915 today (or 5.145%). That's discounting a 58% chance of a rate hike by the beginning of September (logically, the Aug. 24 meeting), compared with yesterday's 34% odds.

"We had become a little complacent about August," said Karydakis, who said he's placing the odds of an August rate hike at 45%. "Greenspan caught the market in the midst of complacency and that's why he did such damage."

What tempered the market's worries about an August rate hike were last week's releases of the

Producer Price Index


Consumer Price Index

, two key pieces of inflationary data. The CPI was unchanged in June for the second month in a row, while the PPI fell by 0.1%. In addition, two Fed officials with little tolerance of inflation risk,

Kansas City Fed