daily10-14-99 - TheStreet


Publish date:

TheStreet.com's DAILY BULLETIN

October 15, 1999


Market Data as of Close, 10/14/99:

o Dow Jones Industrial Average: 10,286.61 up 54.45, 0.53%

o Nasdaq Composite Index: 2,806.84 up 5.57, 0.20%

o S&P 500: 1,283.42 down 2.13, -0.17%

o TSC Internet: 696.09 up 3.88, 0.56%

o Russell 2000: 419.31 down 0.01, -0.00%

o 30-Year Treasury: 97 11/32 down 19/32, yield 6.316%

Companies in Today's Bulletin:


First Union (FTU:NYSE)

Unisys (UIS:NYSE)


In Today's Bulletin:

o Hardware & PCs: Quantum Makes a Big Bet on TiVo and the Personal Video Recorder Industry
o Wrong! Dispatches from the Front: Good Signs of Strength
o Evening Update: Greenspan Warning on Risk Knocks S&P Futures; Sun Gains After Hours
o Bond Focus: Treasuries Cheapen, Bracing for the PPI

TheStreet.com on the Fox News Channel

We put ourselves to the test this week on "Stock Drill" as Jeff Bronchickof Reed Conner & Birdwell -- and a TSC contributing editor -- goes over hisfavorite stock picks with Jim Cramer and Herb Greenberg.

Big market drops, big market gains. The market's been manic for months, butstocks aren't really moving that much. Does that mean your investmentsshould tread water? We'll hear what our "Word on TheStreet" panel has tooffer.

Plus, we'll preview our upcoming "Cracking the Books" series. AlexBerenson introduces us to the world of earnings, and why things aren'talways as good as they seem.

"TheStreet.com" on the Fox News Channel airs Saturdays at 10 a.m. and 6p.m. ET and Sundays at 10 a.m. ET.

FNC is Fox's 24-hour cable news channel. To find the Fox News Channel inyour area,call your local cable operator or see our "TSC on Fox" page atwww.thestreet.com/tv (look for the yellow box in the upper right hand corner).

Also on TheStreet.com:

Top Stories: Ghost of Cendant Drives Tyco's Topsy-Turvy Two Days

The stock retreats 10% even in the face of bullish analyst comments.


Wing Tips: Despite Post-Rally Softness, Airline Stocks' Flight Plan Is Still Sound

The sector remains firmly on course, with Southwest (who else?) leading the way.


Mutual Funds: Despite His Faltering Fund, Tice's Tyco Call Resonates

His Prudent Bear fund has never been a very prudent investment. But David Tice's newsletter subscribers swear by his research.


Banking: First Union Meets Estimates, but Some Question Its Method

Observers say that the bank skimped on bad-loss reserves, boosting its earnings figures.


Hardware & PCs: Quantum Makes a Big Bet on TiVo and the Personal Video Recorder Industry


Eric Moskowitz

Senior Writer

10/14/99 8:11 PM ET

Hard-drive maker


has been under the weather recently, but the company could be getting a boost from its early bet on the heavily publicized personal video recorder industry and the industry's IPO star


(TIVO) - Get Report


A PVR is essentially a very smart video recorder; instead of using a removeable tape, like a videocassette recorder, the PVR stores viewing material on a hard disk, similar to the kind found in a personal computer. This way a hard disk can simultaneously play video programming and record other programming; another element of this new technology is that it allows viewers to zap out the commercials. Since its IPO Sept. 30, TiVo has jumped 143% from its offering price.

Analysts say PVRs, with their simple on-screen guides and ability to record programs by relying on keywords such as "Chicago Bulls" or "NYPD Blue," will revolutionize TV viewing habits. But it's the popularity of hard-drive recording technology that could benefit Quantum investors. Apart from TiVo, Quantum also supplies disk drives to another PVR company,

Replay Networks

, which recently secured $57 million in its second round of financing from media big wigs like

Time Warner




(DIS) - Get Report



(VIA) - Get Report

. Despite the high prices and low penetration now, there will be 14 million homes with PVRs by 2004, predicts the tech research firm

Forrester Research


Indeed, Quantum likes to raise consumer awareness of its role in these cool new consumer products, to the same level that


(INTC) - Get Report

achieved with its "Intel Inside" ads.

But will Quantum's investment pay off? Two months ago, Quantum split its stock into two tracking stocks --

Quantum DLT & Storage Systems Group

(DSS) - Get Report


Quantum Hard Disk Drive Group


. Since then, the DLT unit is down 25% while the hard-drive unit has declined about 6%. The rest of the disk-drive industry has also been hit hard of late.

Western Digital

(WDC) - Get Report

, shares of which have plummeted to 4 from 15 this year, had to recall 400,000 disk drives last month.

On Thursday, Quantum's DSS unit reported net income of $58 million for the fiscal quarter ended Sept. 26. The Hard Disk Drive unit reported a net loss of $49 million.

Quantum has been hard hit by falling prices for disk drives amid the growing popularity of low-cost PCs. It has been forced to cut staff and look to alternative markets. CEO Michael Brown is placing a big bet on PVR technology and has led Quantum to take a minority stake in TiVo.

"The hard drive has been used as a weapon in a price war that has lowered our market cap by $2 billion," sighs Brown. "We need to rethink the competitive behaviors which are not benefiting any of our businesses. Our reinvestment in technology is one new way of doing this."

It helps that the company is the exclusive provider of PVR-ready


storage drives to TiVo and Replay Networks, and Quantum has deals with the old-guard network of


(SNE) - Get Report



(PHG) - Get Report

and close partner


. "The company needs to find applications that use storage for video, and television is much better at receiving information than a PC," says Josh Bernoff, an analyst for Forrester Research, which has no consulting relationship with Quantum.

"While PVRs are not going to generate a lot of revenue right now for HDD, it's definitely coming," says Dane Lewis, an analyst at

Robertson Stephens

, who has a long-term attractive rating on HDD. (Robertson Stephens has not performed any underwriting for the company.)

PVR's high-capacity storage drives, with 30 hours of capacity, allow for better margins. A PVR retails for about $1,000, and TiVo pays Quantum "a few hundred dollars" per unit, Brown says.

"We took an early lead here that will ensure us a big chunk of this growing industry," says Brown.

The move into consumer electronics will help the QuickView line achieve 100% to 150% annual growth in unit shipments over the next five years, says Brown. The company's HDD unit also expects to receive royalty payments from its PVR partners, giving it a potentially lucrative revenue stream going forward, adds Brown.

Skeptics warn that it is by no means certain that Brown has made the right bet. A number of companies, including





(MSFT) - Get Report

WebTV Networks

, are vying for dominance of the next generation of TV set-top boxes that allow users to access the Internet via the television. Archrival



may already have the inside track. "Seagate may in fact be best situated here because it's more vertically integrated and has a relationship with WebTV," says Shaw Wu, an analyst at

Bear Stearns

, who has a neutral rating on HDD. (His firm has done no Quantum underwriting.)

With a number of high-profile media companies backing TiVo and Replay, Brown has high hopes that his QuickView drives will be a winner. Relay has already bought "several thousand" QuickView drives since April, says Steve Shannon, Replay's vice president of marketing. He notes his company's high-end device (28 hours of storage capacity), which costs $1,499, comes with two 14-gigabyte drives from Quantum.

Wrong! Dispatches from the Front: Good Signs of Strength


James J. Cramer

10/14/99 5:47 PM ET

The preliminary signs for tomorrow are encouraging.

Sun Microsystems

(SUNW) - Get Report

, which I am taking right now, reported an excellent quarter and didn't pull any of that Y2K gobbledygook.



, another long of mine, pulled off huge revs and a whisper hit, which should be good news unless there is some lockup I don't know about.



looked solid, although I have to listen to the conference call. That could sure give a boost to the

Red Hots tomorrow, which, by the way, tried to put in a bottom all day.



, which just blew up, shouldn't counteract DoubleClick, unless I don't know my Nets from my elbow.

So, barring an unforeseen PPI number that's horribly large, I am leaving with the hope that I will get a decent night's sleep. Oh, check that -- I never get a decent night's sleep. Let's not overthink it: I am leaving here not worried about Sun Micro. Thank heavens for the little things.

Off to a panel of media bigs, where I intend to slink meekly into the background and say very little.


James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Conexant, DoubleClick, Juniper Networks, Redback Networks, Sun Microsystems and VeriSign. 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: Greenspan Warning on Risk Knocks S&P Futures; Sun Gains After Hours


Tara Murphy

Staff Reporter

10/14/99 9:57 PM ET

A hawkish

speech by

Federal Reserve


Alan Greenspan

apparently already has rattled some market participants, and the fallout will bear watching Friday morning.

Greenspan referenced asset bubbles from the Dutch tulip craze to more recent Russian speculations and warned risk managers to "stress-test the assumptions underlying their models and set aside somewhat higher contingency resources -- reserves or capital -- to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence."

The chairman noted that he wasn't predicting a market selloff, but he said the "key question is whether the recent decline in equity

risk premiums is permanent or temporary. ...

If it proves temporary, portfolio risk managers could find that they are underestimating the credit risk of individual loans based on the market value of assets and overestimating the benefits of portfolio diversification."


S&P 500

futures in the off-hours


session lately were off 11.30 to 1278.70, having reportedly dipped as much as 17.00 upon the 7 p.m. EDT Web release of the speech.

Sun Microsystems

(SUNW) - Get Report

was shining after it beat Wall Street forecasts. Sun reported first-quarter earnings of 33 cents a share, edging out the 19-analyst

First Call/Thomson Financial

estimate of 31 cents and up from the year-ago 14 cents a share. In addition to its solid earnings, the company said first-quarter revenues bounced to $3.12 billion, a 25% increase from the year-ago $2.49 billion. CFO Michael Lehman said second-quarter revenues should be above 20%, citing the first quarter's backlog.

Sun turned in a strong performance in after-hours trading (see below).



announced that its energy services division has formed a $1.5 billion energy management pact with

Simon Property Group's

(SPG) - Get Report

Simon Brand Ventures

. According to the deal's terms, Enron will oversee all of the energy commodity requirements within Simon Property Group's portfolio. Enron will assist Simon with electricity and natural gas, energy infrastructure projects and energy related services such as heating, ventilation and air conditioning.

After-Hours Markets

It may be nighttime, but the sun is out. After releasing positive third-quarter earnings, Sun Microsystems traded heavily on

Island ECN

, posting solid gains.

Paging Network


was second, while



, which evidently isn't hooked on spelling, came in fourth.

Over on


, there was no space at the top for a tie, so


(UIS) - Get Report

edged out

Veritas Software

(VRTS) - Get Report

for most-active honors. The pair traded the lead twice in the last 15 minutes. (


covered the aftermath of Unisys' revenue warning in a

Thursday story.)

Island ECN, owned by Datek Online, offers trading, mainly in Nasdaq-listed stocks, from 8 a.m. to 8 p.m. EDT. Prior to Sept. 15 Island offered trading from 8 a.m. to 5:15 p.m. EDT


MarketXT, formerly Eclipse Trading, offers after-hours trading to retail clients of Morgan Stanley Dean Witter's (MWD) Discover Brokerage and Mellon Bank's (MEL) Dreyfus Brokerage Services. Clients can trade 200 of the most actively traded New York Stock Exchange and Nasdaq Stock Market issues, 4:30 p.m. to 8 p.m. EDT Monday through Thursday. Prior to Oct. 11, Market XT traded issues from 6 to 8 p.m.


updates the most active issues on both MarketXT and Island ECN in Got a Minute? and in the Evening Update.


Eric Gillin

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

Mergers, acquisitions and joint ventures

Donna Karan

(DK) - Get Report


Liz Claiborne


unveiled their plans to forge a strategic licensing agreement. According to the deal's terms, Donna Karan would permit Liz Claiborne to use its name to market a new line of women's clothing at department store prices.

Separately, Liz Claiborne set an additional $450 million share buyback.

Mercury Interactive


said it would acquire privately held network management developer


. The transaction, which is to be completed in the fourth quarter, calls for Mercury Interactive to issue 408,000 common shares in exchange for all preferred and common shares of Conduct. Mercury would also taken on all outstanding Conduct options and warrants. Separately, Mercury posted third-quarter earnings of 22 cents a share, beating the 12-analyst estimate of 20 cents and the year-ago 14 cents.


(RAIL) - Get Report

said that it plans to purchase



, in a cash and stock deal worth $208 million.

Earnings/revenue reports and previews

Cardinal Health

(CAH) - Get Report

said it was confident that its first-quarter and fiscal 2000 earnings would match analysts' consensus estimates. The 14-analyst estimate has Cardinal pegged to post earnings of 53 cents a share for the first quarter and $2.53 a share for fiscal 2000.



reported a third-quarter loss of 29 cents a share, including charges and special items. The company, which did not provide an operating per-share figure, lost 6 cents a year earlier. The two-analyst estimate called for an operating loss of 3 cents.



said it sees a decline in its future merchandise orders, which are distributed between October to March. The sneaker maker said its future orders total $113.1 million, down from the year-ago $113.7 million. K-Swiss reported third-quarter earnings of 80 cents a share, beating the two-analyst estimate of 75 cents and the year-ago 26 cents.

PairGain Technologies


reported a third-quarter loss of 6 cents a share, including an accrual of $1.6 million for a tentative settlement with federal agencies related to the company's 1995 investment losses. The company provided no per-share operating figure. PairGain earned 16 cents a share a year ago; the 10-analyst outlook called for a loss of 5 cents in the most recent quarter.

Sonus Pharmaceuticals


reported third-quarter earnings of 21 cents a share, including certain payments. The company provided no per-share operating figure. Sonus lost 24 cents a year ago, also reflecting payments. The two-analyst projection for the most recent quarter called for an operating loss of 16 cents.



announced that it would post third-quarter earnings in line with the three-analyst estimate of a 34-cent loss. The company added however, that it expects revenue to miss its target estimates because of a holdup in product development.

In other earnings news:

Offerings and stock actions


(VRTS) - Get Report

set a 3-for-2 stock split, payable on Nov. 19 to shareholders of record Nov. 2. Veritas posted third-quarter earnings of 21 cents a share, beating the 20-analyst estimate of 17 cents and the year-ago 12 cents.

Morgan Stanley Dean Witter

priced a 3.75 million-share IPO for

Women.com Networks

(WOMN) - Get Report

at $10 a share, the high-end of its lowered range. Morgan Stanley had said it expected to price the offering at the low end of the $8-to-$10 range, which had been reduced from $10 to $12.

Bond Focus: Treasuries Cheapen, Bracing for the PPI


Elizabeth Roy

Senior Writer

10/14/99 4:48 PM ET


, the bond market is ready for you. Probably.

Treasuries eventually pared the losses they sustained this morning when the September

retail sales

report printed stronger than expected, but only slightly. Yields settled at the highest levels seen this year, also because of the possibility that the September Producer Price Index slated for release tomorrow morning will rise strongly, prompting the


to hike interest rates again next month.

The benchmark 30-year bond ended the day 20/32 lower at 97 11/32, lifting its yield 4 basis points to 6.32%, the highest since Oct. 21, 1997. Shorter-maturity note yields tacked on anywhere from 5 to 6 basis points, also reaching their highest levels in nearly two years.

The vital question is whether the massive losses Treasuries have suffered this week mean that if the PPI is in line with expectations, Treasuries won't flinch, and might even rally. More than a few people think so.

The PPI, which measures inflation at the wholesale level, is forecast to rise 0.5% overall and 0.4% at its core, which excludes food and energy prices. Increases of that size would match or beat the largest increases of the year, and are expected because oil and tobacco prices rose sharply in September. Bond traders' fear that broad-based price increases will push the indices even higher than the average forecast. "The key question is what it's like outside of special factors,"

Morgan Stanley Dean Witter

chief U.S. economist Richard Berner said.

And so, unless the PPI blows the consensus forecast out of the water, the Treasury market may see some positive action for the first time in over a week, some say.

If the PPI rises 0.5% overall and 0.4% at its core, Matt Frymier, a note trader at

Banc of America Securities

in San Francisco, said, "I don't think

the market would go down. If anything it would go up."

Frymier said the Treasury market pared its losses this afternoon because the PPI "has surprised more people by coming in lower than by coming in higher over the last two years." Considering how far prices have fallen this week, "it's hard to stay short for it," he added.

Berner agrees that as-expected PPI numbers shouldn't rattle the market, and might even give it a lift. But in the longer term, the Treasury market is still under a cloud, he says.

"People are continually hoping that the next Fed tightening is the last one, or that the next move up in bond yields is the last one," Berner said. That won't happen, he said, without better-than-expected inflation numbers, an economic slowdown, or a sharper decline in the stock market. "How much longer can the stock market resist higher yields is the question everyone wants to know the answer to," he said.

"There's no good reason to buy the market," Frymier concurred. "Until people have a reason to buy it, they're going to be negative on it. That's been the case not only all week but all year."

Bonds sank today after September retail sales of everything except autos rose 0.6%, twice as much as expected. Overall sales rose 0.1%, vs. an average forecast that they'd be unchanged.

Retail sales were the main event, but simultaneously it was reported that the weekly count of

initial jobless claims

sank back to 285,000 from 300,000, and the

Import Price Index

rose 0.7%.

To the Treasury market, it was a sickening sight: Strong consumer spending, attended by mini-reminders of the tight labor market and rising prices.



Street Sightings

James J. Cramer will be appearing on the Fox News Channel on Friday, Oct. 15. Cramer will be appearing on the following shows, all on the Fox News Channel: 7 a.m. ET - Fox and Friends; 5 p.m. ET - Your World with Neil Cavuto; 7 p.m. ET - Fox Report with Shepard Smith; and 8 p.m. ET - The O'Reilly Factor.

Copyright 1999, TheStreet.com