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  • Publish date:'s DAILY BULLETIN

August 20, 1999

Recent profit taking has opened up a window of opportunity to buy Internet stocks at 25%-42% discounts. Get these "best buys" with your FREE 30-day trial to The Spear Report:

Market Data as of Close, 8/19/99:

o Dow Jones Industrial Average: 10,963.84 down 27.54, -0.25%

o Nasdaq Composite Index: 2,621.43 down 36.30, -1.37%

o S&P 500: 1,323.16 down 9.68, -0.73%

o TSC Internet: 549.14 down 17.29, -3.05%

o Russell 2000: 432.77 down 0.33, -0.08%

o 30-Year Treasury: 10 109/32 down 14/32, yield 6.014%

Companies in Today's Bulletin:

Apple (AAPL:Nasdaq)

American Home Products (AHP:NYSE)

Agile Software (AGIL:Nasdaq)

In Today's Bulletin:

o Trader's Turret: A Steady Hand Playing Web-Gear Stocks
o Truth Serum: Truth Serum: American Home at the Altar? Not So Fast
o Evening Update: Apple Sues Over iMac Lookalike; Agile IPO Prices Above-Range
o Bond Focus: Bonds Fall in Uninspired Trading on the Fox News Channel

TSC readers will be familiar with this week's "Stock Drill" guest, Craig Ellis of the Orbitex Info-tech & Communications Fund. A participant in's Net Stock Summit, Ellis will be sharing his favorite stockpicks with TSC's Herb Greenberg and Jeff Berkowitz, Jim Cramer's partner at Cramer Berkowitz.

And, we'll go back inside the foxhole with Cramer at the trading desk. He'll tell us and show us why the individual investor is better off making most investing decisions instead of paying an expensive broker.

The show airs Saturday 10 a.m. ET and again on Sunday 1 p.m. ET. For more info and how to find Fox News in your area, please see our TSC on Fox page, at Or watch a Web simulcast of the show at (look for the "24 Hour Broadcast" box).

Also on

The Invisible Mouth: Separating the Idiot From the Realist

Plus, the Mouth confesses to being wrong about the broad price measures and calls upon readers to make a choice.

Asia/Pacific: Daewoo Grows Woozy Under Strict Restructuring Plan

Creditors are demanding the South Korean conglomerate shed all but six of its 30 units to prevent the company from collapsing under its own weight.

The TaskMaster: The Tax Guys Duke It Out Over

Responding to a barrage of email, Task (with the help of a tax law professor) searches for the truth. Also, a pair of biotech bulls back Andrx.

View from the North: Molson Tries to Lose Its Gut as Labatt Gets Lean

The older company is reportedly shedding some nonbrew divisions in order to hang on to a narrow advantage over its younger rival.

Trader's Turret: A Steady Hand Playing Web-Gear Stocks


Jeff Berkowitz

8/19/99 1:42 PM ET

I read the web-gear "mania" article in

The Wall Street Journal's

Heard on the Street column this morning with great interest. We have played in this space this year and gotten some nice returns. (Correct me if I am wrong, but the Internet-equipment companies are the best-performing stocks in the market this year.)

Cramer has commented in past on the growth opportunities of some of these companies, their illiquidity, etc. Still, despite the optimism out there, the prospects for these


remain highly questionable.

The bull case: There are no greater growth opportunities in the market today. I certainly understand the attraction to the










Copper Mountains




(JNPR) - Get Free Report

to the go-go, high-beta growth guys. The opportunity to make several hundred percent in a stock in a matter of a few months is absolutely intoxicating! After all, we all know the game: Analyst expectations are set too low, these guys have unbelievable prospects and tiny floats, the value/short guys lean on them and get clobbered. (Funny how these things don't get hit on market selloffs.)

Performance players like myself are often faced with the dilemma of making 15 bucks in


(IBM) - Get Free Report

, 10 in


(PFE) - Get Free Report

, 20 in



or 50 in one of these rocket ships in three days!

The bear case: These things are absurdly overvalued. They are liquidity-driven phenomena. If I may humbly reference Ken Heebner's comments, they can't grow into their valuations. And there is pending competition. On both sides of the debate, I wish I had the brass to play these things big on the long side or to be as bold as the short-sellers.


Cramer Berkowitz

, we are not high-beta players. We nimbly try to scalp some points in these animals, aiming to make a quick 20 points at opportune times while always fearing the nuclear holocaust on the downside. Honestly, I wish I could play them more aggressively, but I can't. We are not shooting to make 60% annually if it means that every fourth year we are down 20%. Don't get me wrong, I have great respect for these go-go guys. They are much better technology players than I am. I just can't put huge amounts of these stocks into my portfolio. I can't be there when the music stops.

What is my point, besides neurotic ramblings about lost opportunities? It's that both camps are right, and I have to be agnostic. These stocks are ridiculously overvalued. Try to value any of these stocks using traditional metrics, and you can get an LSD high. Short-term trading implemented at the wrong time can ruin you. But some of these stocks will be the next


(MSFT) - Get Free Report



(DELL) - Get Free Report



(CSCO) - Get Free Report

. The Street is lined with the carcasses of their naysayers.

I am a performance manager, and I have to deliver good returns. It doesn't matter how I make my money at the end of the year. All that matters is my returns. The volatility in this sector is too great. I have to play. No religion, but I do my best to make money while balancing the risk and rewards.

Random musings:

My daughter is trading a little bit. She got rid of her


in exchange for some cheap dollars.


Jeff Berkowitz is a partner in hedge fund Cramer Berkowitz with James J. Cramer, co-founder of At time of publication, the fund was long Cisco, Dell, Microsoft, Redback and Juniper. The 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 the fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Berkowitz'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

Truth Serum: Truth Serum: American Home at the Altar? Not So Fast


Jesse Eisinger

Senior Writer

8/19/99 7:02 PM ET

Hey, you're getting killed in your

American Home


and the masses won't listen to your persuasive

arguments about its pretty pipeline of products.

What's left to do but spread a takeover rumor?

And so the rumor was passed and so the stock ran. On Wednesday it rose 2 5/8, or 6%, to 44 1/2, more in reaction to the stock's recent thrashing than to the talk. The options moved -- after the rumor went around. The wires and even the intrepid reporting staff of

The Wall Street Journal

scrambled to put out feelers.

On Thursday, American Home added another 1 1/8, about 2.5%, to close at 45 5/8.

For its part, the company stuck by its policy and declined to comment. Spokesman Lowell Weiner, however, disclosed Wednesday night that he was leaving his office early to catch his daughter's camp play,

Charlie Brown

. Truth Serum hopes she played Lucy and not a tree.

An American Home takeover rumor makes some sense. (They all do, don't they?) But there is one big question mark: American Home's overhanging, unknowable and potentially gargantuan legal liability. The company faces litigation from a pair of drugs that are actually easier to take than that


video and eating five vegetables per day:





The catch: They were associated with heart valve problems before being withdrawn from the market two years ago. Wall Street doesn't know how much money the suits are going to cost, and as each trial unfolds, the stock will be accordingly volatile.

Yet some observers think liability in itself isn't a big hurdle. "It's not as implausible from my standpoint as others might think," one major Boston-area health care money manager says. "My only point is, what's scary for investors is a reasonably quantifiable negotiating point" for two companies in merger talks.

You see, to a financial purchaser, it's all numbers on a ledger. A merger of equals with American Home would create a roughly $100 billion company. Say the liability turns out to be $10 billion. After a merger, that goes from being 20% of American Home's market cap to 10% of NewDrugCo's.

More significantly, a buyer won't have to pay the liability all at once. It's a reasonably easy net present value equation. You figure how much American Home's worth if the liability turns out to be between $5 billion and $15 billion. It turns out it's a small number in relation to a $100 billion transaction. We won't walk you through the calculations, because sleeping at your computer is unhealthy.

The other added bonus of a merger is that the two companies would be able to take a big, one-time charge and increase the liability reserve that American Home has now, which is estimated at around $1 billion to $2 billion. The companies wouldn't want to say how much they have in reserves, because that says to the plaintiffs' lawyers: Here, this is how much we are prepared to give to you sharks.

That said, American Home is cheap. And Sir Richard Sykes, the chairman of

Glaxo Wellcome


, the name bruited about as the acquirer, has his hounds, trumpet and hunting pinks at the ready.

The knight you see, has virtually no pipeline of new drugs and has repeatedly said he wants to get big and nasty to compete in the nasty and big worldwide pharmaceutical business. (Glaxo also has a policy not to comment.)

And yet it still ain't gonna happen anytime soon.

Jack Stafford, the CEO and chairman of American Home, screwed up two mergers last year, first with the Brits at

SmithKline Beecham

(SBH) - Get Free Report

and next with


(MTC) - Get Free Report


He'll be pretty careful this time around. What's more, he's sitting on five products about to be launched and is probably thinking the worst is behind the company. Glaxo, even though the net present value calculations are easy to do, probably wouldn't mind some better sense of the liability size.

And in a possible deal of this size, with this kind of liability out there, a little comfort would go a long way.


We're depending on our readers for sources, rumors and ideas. Send any to our Truth Serum hotline at

Evening Update: Apple Sues Over iMac Lookalike; Agile IPO Prices Above-Range


Tara Murphy

Staff Reporter

8/19/99 8:36 PM ET


(AAPL) - Get Free Report

said that it has filed a lawsuit against privately held PC maker


for illegally duplicating its well-known iMac PC design with its new eOne PC. Apple said this is its second lawsuit this month aimed at protecting its computer's translucent design. eMachines disputes the similarity of the machines, claiming that they are a "totally different industrial design."

Morgan Stanley Dean Witter


Agile Software

(AGIL:Nasdaq) above-range at $21 a share. The price range for the 3 million-share IPO was raised to $18 to $20 from $15 to $17.

In other postclose news (earnings estimates from

First Call

; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews



posted break-even results for its second-quarter, better than the three-analyst estimate of a loss of 3 cents a share and the year-ago loss, also 3 cents.

Borders Group


reported a second-quarter loss of 3 cents a share, in line with the 10-analyst estimate and down from the year-ago 3 cents.


(CIEN) - Get Free Report

reported third-quarter earnings of a penny a share, beating the 15-analyst estimate of a penny loss and down from the year-ago 10 cents.



posted second-quarter earnings of 10 cents a share, in line with the four-analyst estimate and down from the year-ago 27 cents.



reported third quarter earnings of 14 cents a share, topping both the nine-analyst estimate of 13 cents and the year-ago 7 cents.

Optical Coating


posted third-quarter earnings of 41 cents a share, beating both the three-analyst estimate of 39 cents and the year-ago 27 cents.

RDO Equipment


reported second-quarter earnings of 29 cents a share, up from the three-analyst estimate of 28 cents but lower than the year-ago 34 cents.

Sharper Image


posted second-quarter earnings of a penny a share, topping analysts estimates of a loss of three cents but down from the year-ago 14 cents.

Software Spectrum


reported first-quarter earnings of 35 cents a share, beating both the two-analyst estimate of 33 cents and the year-ago 30 cents.

System Software


posted a third-quarter loss of 20 cents a share, wider than the two-analyst estimate and narrower than the year-ago loss of 30 cents. The company expects profitability to resume in 2000.



posted second-quarter estimates of 15 cents a share, wider than the two-analyst estimate of 11 cents but narrower than the year-ago 25 cents.

Offerings and stock actions



said it raked in $15 million in equity capital through a private placement offering of common stock and warrants. The company, which supplies payment systems to Internet businesses, said the equity will be used for business expansion, marketing, acquisitions and working capital. The offering was placed with

Rose Glen Capital International Investors


Goldman Sachs



(LOOK:Nasdaq) at $12 a share. The price range for the IPO was $11 to $13. The deal's size was reduced to 9 million shares from 12 million, and then finally to 7.7 million.

Serena Software


said its board gave its stamp of approval to a 400,000-share repurchasing program, representing about 2% of its outstanding shares. The company plans to use the shares in conjunction with employee stock programs and general corporate purposes.


Apria Healthcare Group


said that it has linked with creditors in an involuntary bankruptcy petition against

Coram Resources Network

, a

Coram Healthcare

(CRH) - Get Free Report

subsidiary. The filing is the most recent attempt by Apria to collect on unpaid invoices. The company's subsidiaries had previously initiated a lawsuit in California state court to forced the group to pay up to $1.4 million. Apria said the invoices could end up totaling roughly $2.1 million as additional bills go unpaid.



Hard Disk Drive Group


announced its plans to cut nearly 800 jobs and accept a $50 million restructuring charge in the current quarter. The company said it eliminated the jobs to focus on the market for PCs costing less than $700.

Data storage provider



also has restructuring plans in the works which include cut close to 16% of its global workforce by the end of the year. The company said most of the cuts would come from its Boulder headquarters. Exabyte will accept a $2.8 million restructuring charge, which includes severance costs, benefit extensions and outplacement services, in the third quarter. The company says the reductions will save about $12 million annually.

Bond Focus: Bonds Fall in Uninspired Trading


David A. Gaffen

Staff Reporter

8/19/99 4:49 PM ET

It's not inaccurate to describe today's Treasury market as a roller coaster. But it was more like one of those lame, up-and-down, up-and-down, roller coasters that any self-respecting 8-year-old wouldn't get caught dead on.

The Treasury market fell almost a half-point on the release of the

international trade

report and

initial jobless claims

figures, but worked its way back to positive territory before surrendering its gains heading into the day's close. The latter decline was attributed to rumors that a Washington-based consulting firm had released a report suggesting the

Federal Reserve's

about 75% sure it will hike rates next week, according to three sources.

Ken Logan, managing analyst at

Thomson Global Markets

, said the market's vacillation was owed to a lack of activity. "There doesn't seem to be very much depth" to the market, he said.


volume confirms that statement -- the tracker reported only $35 billion in securities changing hands, 22.5% less than the average Thursday in the past month.

Lately the 30-year Treasury bond was down 14/32 to 101 8/32. The yield rose by 3 basis points to 6.03%.

The international trade deficit (how much we import vs. export) rose to $24.6 billion in June, a new record (surpassing May's record of $21.2 billion, revised down from $21.3 billion).

Generally, bond folks have been bullish with each successive record trade deficit release because it cuts into the


report and makes it appear that the economy is slowing. For the second quarter it's estimated that it will shave around a full percentage point off GDP, and ostensibly that means the economy is slowing. (GDP grew at a 2.3% rate in the second quarter, compared with 4.3% in the first quarter.)

Aye, here's the rub: Other economies are continuing to recover, and the U.S., because of consumer demand, is importing more than ever. It indicates that consumers are still spending feverishly on almost anything, and so it begs the question: If the entire economy looks great except the trade deficit, what if that recovers? If demand were to pick up for our exports overseas, it could tax manufacturers' ability to produce goods (ultimately resulting in price or wage inflation).

"It's suggesting that you have a consumer that is still spending at a pretty rapid pace, something the Fed is concerned about," said Logan. "This data release and the earlier payroll

unemployment report mean it's a lock that you're going to see the Fed raise rates this week."

Initial jobless claims fell to 287,000 for last week, and the four-week moving average fell to 281,000, both very low levels historically.

The 30-year bond was down as much as 15/32 before rising on the equity market's weakness and the market's predilection to look on the bright side of life. "The more bearish news is still met with buying," said one trader at a primary dealer.

Traders said the market's ability to bounce back from selling reflects a growing belief that the Fed is going to raise the fed funds target by a quarter point to 5.25% next week, and could be finished after that. The 30-year bond, at its high, was up 5/32 by 1:27 p.m. EDT. "There's a school of thought that believes they will not move again, and that's helping the market," the trader said.

Several sources believe the power of positive thinking will be undone by the power of

Alan Greenspan

Tuesday. If the Fed raises rates, and the accompanying statement is hawkish, this weeklong joviality could be history. But if the Fed releases a statement that's neutral or dovish, like the one that accompanied June's release, happier days could lie ahead for the market.

A rumor about the Fed was central to this afternoon's selling. A Washington consulting firm, which three sources identified as

Johnson Smick

, was said to have released a report stating that a rate hike is not a done deal, but the Fed is 75% sure they'll move rates. It caused a flurry of activity, even if, as

Daiwa Securities'

Vice President Tom Ruff said, "I don't put much credence in what they have to say." Johnson Smick does not reveal to the press whether it has released reports.

"Stocks have come back a little bit from their lows, and we've traded off since all that's come out," he added.


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