Publish date:

daily07-26-99's DAILY BULLETIN

July 27, 1999


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Market Data as of Close, 7/26/99:

o Dow Jones Industrial Average: 10,863.16, down 47.80, -0.44%

o Nasdaq Composite Index: 2,619.19, down 73.21, -2.72%

o S&P 500: 1,347.76, down 9.18, -0.68%

o TSC Internet: 564.52, down 27.33, -4.62%

o Russell 2000: 442.87, down 5.51, -1.23%

o 30-Year Treasury: 89 08/32, down 3/32, yield 6.034%

Companies in Today's Bulletin:

Seagram (VO:NYSE)

eBay (EBAY:Nasdaq)

Covad (COVD:Nasdaq)

In Today's Bulletin:

o Internet: Executive Steps Down From Universal-BMG Music Site
o Wrong! Rear Echelon Revelations: Cramer's Online Brokerage Speech, Part I
o Evening Update: eBay Meets Estimates, Trades Up, Then Down After Hours
o Bond Focus: Lingering Greenspan Effect Keeps Bonds Underwater

Don't Miss the TSC Series: When Funds Collide

While the mutual fund industry portrays mergers as nonevents, meshing portfolios and investment objectives can increase fees and usher in a period of underperformance. There can be unwelcome tax consequences as well. Be prepared; read TSC's package!

Monday's installments:

o When Funds Collide, Survivors Often Suffer

o When Funds Collide: Mergers Cause Sleepless Nights at SEC

o When Funds Collide: What Happens When Funds Merge

Also on

Consumer Products: P&G Hopes Its Household Helpers Will Also Boost Its Growth

To aid its sales and its stock, Procter & Gamble needs to create whole new product categories and think creatively about building on its existing brands.

Asia/Pacific: Malaysia's Theory: If You Build It, They Will Come

Malaysia is wooing the West with high-tech metropolis Cyberjaya. But has the economic crisis derailed the project?

Tech Savvy: Opportunity Ahead: Donning the Red Hat, Part 1

If you haven't yet heard of Red Hat, consider this your last chance to play catch-up on a major software revolution.

Europe: The Anglo File: Musical Chairs in Cable Industry Leaves TeleWest Standing

With any plans for a merger with Cable & Wireless scrapped, TeleWest, the U.K.'s second-largest cable operator, now finds itself alone.

Internet: Executive Steps Down From Universal-BMG Music Site


Spencer E. Ante

Staff Reporter

SAN FRANCISCO -- In a sign that major music labels are facing problems as they set up a digital-music presence,

, the Web-based joint venture between

Universal Music


BMG Entertainment

, has lost the executive in charge of the site amid concern it wouldn't be ready for downloading music by the holiday shopping season.

Unveiled in April, the music portal and e-commerce hub has been selling CDs from hundreds of artists. But executives from


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-owned Universal and


-owned BMG have said they aim to expand the site into a platform for secure downloadable songs and CDs by the holiday shopping season. Combined, Universal and BMG represent more than 40% of music sales in North America.

Late last week,'s VP and general manager Elizabeth Schimel stepped down amid concern the site wasn't making enough progress to meet the self-imposed deadline, according to three people close to the company. A search is underway to find a full-time replacement for Schimel, but sources say she will be temporarily replaced by BMG Entertainment's chief financial officer Tom McIntyre.

"They're feeling the deadline, and it wasn't moving the way it should have," says one BMG employee who requested anonymity. "They need to staff, get some advertising out and create a brand on TV. If they're going to do something by Christmas, they need to get going."

Both BMG and Universal declined to comment. "Officially we don't comment on rumors," says BMG spokesman Dennis Petroskey. Schimel couldn't be reached for comment.

Some employees speculate that the change in leadership was necessary to prepare the company to be spun off in an IPO, which would help make acquisitions and grow the business. "Employees have been given the speech about stock options down the road," says one BMG employee. "They're not willing to invest $100 million in a venture. It's not their style."

After years of trying to ignore the Internet,

record companies have come to realize it's more than a pet rock for the '90s. Amid exploding use of unsecured


files, they have reluctantly embraced the Net as a vehicle to expand the overall market for music, even music that can be downloaded into PCs from the Net. But many have found it hard to keep up with young, tech-savvy startups.

Schimel's departure comes on the heels of more positive developments. On Monday July 26, parent company Seagram announced an agreement to sell

Universal Concerts


House of Blues Entertainment

for $190 million in cash and assumed debt. As part of the deal, Seagram said will become the exclusive e-commerce provider for House of Blue's online properties.

Wrong! Rear Echelon Revelations: Cramer's Online Brokerage Speech, Part I


James J. Cramer

Editor's note: Today in Reston, Va., Jim Cramer spoke at the Friedman Billings Ramsey 4th Annual Technology Investor Conference. We'll be running the text of the speech in four parts over four days. Here, the first installment.

From my turret as a hedge fund trader and Internet columnist for

I have a fabulous perspective into the havoc the Net is wreaking on corporate America. All day long I hear about people who "get" the Net and "don't get the Net" -- as in


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gets the Net but



doesn't. Or Jack Welch hasn't figured out the Net yet, but John Chambers gets it.

Nobody, however, has ever really put into English what getting the Net or not getting the Net means. Let's change that with this speech. I want to talk about the Net in the world of financial information and brokerage. I have to tell you that when the Net is finished with these businesses, you won't recognize them. And I want to explain to you why it will lead to the destruction of virtually every certain profit stream, when it could lead to precisely the opposite conclusion, if someone would just recognize the changes that the financial industry is undergoing because of technology. You may have heard the phrase "wake up and smell the coffee." Well, with these guys, it is wake up and smell the formaldehyde.

In fact the brokerage industry is like

General Motors

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caught in the cross hairs of the Japanese in the early 1960s. The people who populate these old-line companies know that


-- in the form of Net brokerages -- is about to storm the beaches. They are helpless to stop the charge because they believe they can't afford to alienate their core constituencies and the high-paid minions who broker their stocks. They are doomed, not to extinction (General Motors certainly isn't extinct) but to lose a little bit of share, year after year after year until they are shadows of their former selves. They won't get the Net until they end up working for a Net company. Makes sense; it could happen.

Everybody is familiar with the destruction of the commission system, as we know it through electronic trading. Even those folks who work at old-line brokerages who "don't" get the web understand that commissions will never be the same. The firms that still charge hundreds of dollars of commissions for trades that others execute for 10 bucks are just trying to keep the share loss at a minimum of 10% every six months. Or until the only clients left are those who are too lazy or too stupid to argue or move on. They know they are living off rapidly putrefying cream.

It's what the Net has done to the public's perception of the market that the brokerage houses, with their titanic research departments and their giant paper-generating back offices and mass of research sales people, that the top guys don't understand, or don't "get" at all. And it's the impact of hundreds of millions of ad dollars, given to the online folks by a generous market that hasn't been grasped either.

Do the people who work at these off-line brokerages think no one listens to advertising? These commercials, and we are all familiar with them, make a mockery of the off-line brokerage industry. It reminds me of the days when there would be smoking ads and then right after them anti-smoking ads. It was probably a blessing to that dying industry when they banned advertising for cigarettes. At least it calmed down the anti-smoking campaigns!

First, let's have a little history lesson. Let's look at the traditional model, pre-Net. Brokerage houses generate research product and underwritings that are sold by massive highly paid research firms that rely on high commissions or colossal underwriting fees to make the whole shebang work. The commissions on the individual side can be huge. The fees from underwriting are fabulous. The research departments cover their areas independently and generate proprietary calls designed to make the customer money. Historically, the large institutions get the research call to buy stocks and get first crack at the breaking news because of expensive, sophisticated services and they trade on them.

The individual either piggybacks after or reads about the news the next day, often taking the institutions, especially the fleet-footed ones, out of the stocks. The public is very much second fiddle. But everybody is happy because there is no other way to access timely information, quotes and money-making ideas. You have to play ball with the brokerages.

Now, fast forward to this year. The traditional brokerage is still out there hawking its expensive wares, generated by an incredibly overpriced research team, and, oddly, getting more expensive by the year, as these firms seek desperately to distinguish themselves.

But now let's look at it from the perspective of the client of the new millennium. First, the institutional client has his own research. He does not rely that much on sell-side research and he is barely paying his bills internally, except for when there are underwritings. To him, the brokerage firm has ceased to play a relevant role -- except as someone to beat up on when getting in or out of a stock.

In the last five years, however, it is the individual who is in ascendancy, the individual who has the marginal dollars.

Look for part two Tuesday morning.


James J. Cramer is manager of a hedge fund and co-founder of 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: eBay Meets Estimates, Trades Up, Then Down After Hours


Heather Moore and

John J. Edwards III

Staff Reporters


(EBAY) - Get eBay Inc. Report

shares rose to as high as 110 1/4 in after-hours trading, according to


, but then fell to as low as 99 following a solid second-quarter earnings report. The online auctioneer earned 3 cents a share, excluding charges, in line with the 15-analyst

First Call

TheStreet Recommends

estimate but behind the year-ago 8 cents. The company also said that since last quarter, its registered users jumped 46% to 5.6 million.

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

Earnings/revenue reports and previews



met analyst estimates as it reported a net loss of $41.9 million, or 61 cents a share, for the second quarter, compared to $8.9 million, or $1.11 a share, one year earlier. The Santa Clara, Calif.-based provider of high-speed data services grew revenue to $10.8 million, up sharply from $809,000 one year earlier.

After slipping 3 5/8 to 52 5/8 during the day, the stock traded slightly higher at 53 after hours, according to


. It has fallen 21% from 67 1/2 on July 15 as investors worry about growth prospects for Covad and its sector.

"I'm pleased with our success to date, and yet in the same breath I would say there's a lot of work to do," said Bob Knowling, CEO of Covad.

That includes jostling for space on rivals' networks. Covad added $1.4 million to its anticipated expenses for the quarter because of sharply increased payments to

Bell Atlantic


for using the Baby Bell's central offices, according to Knowling. Karen Maguire, a network director with Bell Atlantic, said that overall, Bell Atlantic's charges to companies that use its central office space have gone down recently. She could not comment specifically on Covad.

Separately, Covad filed an antitrust suit against Bell Atlantic in federal court this spring. Bell Atlantic will compete with Covad as it deploys its own DSL services. The case is pending. Knowling, himself an alumnus of Baby Bells

U S West




(AIT) - Get Applied Industrial Technologies, Inc. Report

, said a ruling is likely by year-end.


Kevin Petrie

American Financial

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posted second-quarter earnings of 68 cents a share, including special items. The three-analyst outlook called for operating earnings of 72 cents vs. the year-ago 38 cents.

Clear Channel Communications

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reported second-quarter earnings of 33 cents a share vs. the year-ago 11 cents. The company said it earned 57 cents a diluted share in after-tax cash flow. The six-analyst estimate called for earnings of 4 cents.


(GES) - Get Guess?, Inc. Report

reported second-quarter earnings of 16 cents a share, 4 cents ahead of the lone analyst's expectation and up from the year-ago 8 cents. The company, whose same-store sales jumped 30.9%, also agreed to acquire 60% of


, its licensee for wholesale and retail operations in Canada.

Integrated Silicon Solution


reported a third-quarter loss of 5 cents a share, including a charge and an extraordinary gain, compared with the year-ago loss of 61 cents. The company provided no per-share operating figures.


(INGR) - Get Ingredion Incorporated Report

posted a second-quarter loss of 25 cents a share, including a gain on the sale of a subsidiary and a charge for the resizing of its European computer hardware sales group. The three-analyst forecast called for an operating loss of 27 cents vs. the year-ago loss of 60 cents.



reported second-quarter earnings of 23 cents a share, 2 cents better than the three-analyst estimate and up from the year-ago 17 cents. The company also set a 2-for-1 stock split. And CFO Vic Veigas resigned, effective Aug. 1, to join a startup.



recorded second-quarter earnings of 24 cents a share, a penny above the three-analyst view and ahead of the year-ago 16 cents. The company also added CEO to President Lawrence C. Day's title.

Mergers, acquisitions and joint ventures


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agreed to acquire two fabricated aluminum businesses from

Century Aluminum

(CENX) - Get Century Aluminum Company Report

for $248 million.

Offerings and stock actions

1-800 Contacts

(CTAC) - Get ChaSerg Technology Acquisition Corp Class A Report

suspended its share buyback program. The company, which has bought back 170,000 of the 500,000 shares approved for repurchase in October, said it might resume the program some other time.


Atlantic Richfield

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said it would continue to reduce crude runs at its Washington state refinery through the end of the third quarter, citing the partially downed Olympic pipeline.

Southern Energy Homes


announced plans to close its Albemarle, N.C., plant and take a related third-quarter charge of $3.7 million to $4.3 million.


Bond Focus: Lingering Greenspan Effect Keeps Bonds Underwater


David A. Gaffen

Staff Reporter

Maybe the market's crazy from the heat, but Treasury prices fell for the third straight day, a product of a weakened dollar and continued malaise from

Federal Reserve


Alan Greenspan's


words before


on Thursday.

The market held firm in the hours preceding the 8:30 a.m. EDT release of the June

existing homes sales

report, but sold off once the market learned of the 10% increase in sales. Of late, the 30-year Treasury bond was down 6/32 to trade at 89 8/32. The yield rose 1 basis point to 6.04%.

"The dollar is weak, and the tone since Greenspan's message at


remains negative," said Astrid Adolfson, financial economist at

MCM Moneywatch

. "Retail, hedge funds, etc., are sidelined, either waiting for Greenspan to say something different or for the data to turn suddenly soft."

Then those investors better hope other reports don't mirror today's existing homes sales release. The seasonally adjusted annual pace of existing homes sales rose to 5.53 million in July, the highest level ever recorded, according to the

National Association of Realtors

. Sales were adjusted to a rate of 5 million in June from 5.07 million originally estimated. Joel Naroff, economist at

Naroff Economic Advisors

, said the recent rise in mortgage rates might actually be the cause, because it impels consumers to "get off the fence" and buy a home before rates increase even further.

The bond market sold on the news, and at one point the 30-year bond was down 18/32. In bearish times like these, second-tier economic releases have a one-sided effect: if they're good, they're ignored; if they're bad, they cause selling. There are more important economic releases later in the week -- the

Employment Cost Index

, a measure of labor costs, is particularly important for the market, since Greenspan's been most worried about wage-induced inflation. Today's report does underscore the incredible spending abilities of consumers, which the Fed used as justification to raise rates on June 30.

"We would have been higher had we not had this report, but it was still only a short-covering bid," Adolfson said. "The dollar is still weak."

Dollar/yen and dollar/euro actually rose today, but weakened during the last week as investors continued to find value in those two struggling currencies. Dollar/yen rose to 116.6 today from 116.52 overnight, still down from 118.18 last Monday, while the euro traded to 1.0657 against the dollar, compared with 1.051 last Monday. Today's 115.67 low matches the dollar's five-month low against the yen.



Larry Summers

looks like he's already inherited his former boss

Robert Rubin's

penchant for repeating the government's one-sentence approach to currency policies, saying: "As I've said many, many times, a strong dollar is very much in the interest of the United States.''

On the margin, the dollar's strength makes our assets more attractive to foreign investors, including Treasury bonds. Japanese officials have intervened to keep the yen weak several times during the last two months to increase demand in the country's goods -- enabling them to export their way to recovery.

The Treasury market's contending with a lot of supply this week, including


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$5 billion sale of five- and 10-year notes, and a $1 billion sale from

Sun Microsystems

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. The Treasury will sell $15 billion of two-year notes as well. Even after that supply is out of the way, the market gets to look forward to the Treasury's quarterly refunding, which will include the last 30-year bond sale of the year, century, and millennium. (If you're holding onto any


-era bonds, they've matured.)


Street Sightings

Chat with James J. Cramer on AOL at 5 p.m. EDT, Tuesday, July 27.(Keyword: Live)

James J. Cramer will appear on's Wall Street Review hosted byMike Green. The show begins at 6:10 EDT, Tuesday, July 27. 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 p.m. ET.

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