Publish date:

TheStreet.com's DAILY BULLETIN

October 29, 1999


Market Data as of Close, 10/28/99:

o Dow Jones Industrial Average: 10,622.53 up 227.64, 2.19%

o Nasdaq Composite Index: 2,875.22 up 72.70, 2.59%

o S&P 500: 1,342.44 up 45.73, 3.53%

o TSC Internet: 719.82 up 13.33, 1.89%

o Russell 2000: 422.81 up 6.04, 1.45%

o 30-Year Treasury: 98 09/32 up 1 , yield 6.243%

Companies in Today's Bulletin:

Ericsson (ERICY:Nasdaq ADR)

Siemens (SMAWY:Nasdaq ADR)


Amazon.com (AMZN:Nasdaq)

In Today's Bulletin:

o Networking: Ericsson, Siemens Face Currency Quandary as Networking Deals Abound
o Wrong! Dispatches from the Front: Still Room at the Top
o Evening Update: Greenspan Suggests Productivity Acceleration May Be Insufficient, and AOL Announces Stock Split
o Bond Focus: Long Treasury Yield Hits Two-Week Low on Muted Inflation Data

TheStreet.com on Fox News Channel

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Also on TheStreet.com:

Asia/Pacific: Redemption of Daewoo Debt Poses Big Challenge for Korean Economy

Is the recent stock tumble only the beginning, or will government funds save the day?


The Buysider: Why Accounting Rules and the Internet Shouldn't Mix

How to take a perfectly good company, have it expand into the Internet, and immediately ruin its valuation.


Energy: Tightening Supply Picture Has Oil Companies Wondering What OPEC Will Do Next

The timing of a change in production caps could make a big splash in oil-company spending.


The Invisible Mouth: Selected Rantings on the GDP Report

And all the numbers aren't even out yet.


Networking: Ericsson, Siemens Face Currency Quandary as Networking Deals Abound


Kevin Petrie

Staff Reporter

10/28/99 7:22 PM ET

SAN FRANCISCO -- On the Internet, at least, cash isn't always king.

After grabbing a fistful of start-ups in the last year, European telecom suppliers






looked ready to stake out a significant chunk of the fast-consolidating U.S. network-equipment market.

But now currency issues are getting in the way -- acquisition currency, that is.

A winning bet in this sector could pay off handsomely: Recent multibillion-dollar IPOs in the networking sector suggest investors believe the fast-changing Internet-equipment market will be lucrative for years to come. But as swashbuckling dealmakers such as


(CSCO) - Get Report

push up prices for networking properties, the Europeans face a stiff challenge: Find the means to buy fast or risk losing relevance.

Ericsson and Siemens, for their part, say rising prices haven't hampered their acquisition efforts, which they believe to be more measured and deliberate than their North American rivals. But their offers of cash or American depositary receipts, which are shackled in part to the firms' rambling and unfamiliar businesses, have become less appealing to U.S. telecom start-ups. President Bob Emery of

Robertson Stephens

, which has advised deals involving



and Ericsson, says, "It is unquestionable that Cisco's valuation gives it a competitive advantage."

Going to the Sky

Cisco and North American rivals Lucent and



are enticing potential targets with mountains of richly valued stock, which has helped push the average takeout price in the sector as much as 50% higher over 18 months, according to David Schantz, partner with the venture-capital firm

Matrix Partners

. (Matrix has sold companies to all the publicly held networkers mentioned in this story.) Cisco recently agreed to pay a stunning $7 billion in stock for the fledgling fiber-optic supplier


, which has reported sales of just $10 million, in one of 13 acquisitions Cisco has announced this year.

The Cerent deal helped "shut out the competition from the M&A world," by raising the stakes, says Spencer Punter, partner with venture capitalist

Bowman Capital

(an investor in

TheStreet.com Inc.


, publisher of this Web site). To find the right acquisitions, Punter says, Cisco rivals such as Siemens and Ericsson will have to quickly pounce on leading targets -- or shop for leftovers.

Calling It In
Ericsson shares lag behind Cisco, broader market

Source: BigCharts

Ericsson and Siemens run the risk of slipping behind in the "race to pull all the pieces together," according to equity analyst Pete Peterson with

Volpe Brown Whelan

, not a banker for these companies. Peterson rates Ericsson hold, but doesn't officially cover Siemens. His colleague Tim Savageaux says Ericsson and Siemens might need to buy more aggressively if they intend to mount a broad-based attack, as they've planned, rather than competing in a few niche markets.

Out of the Mix?

Earlier this year the Europeans planted themselves in certain niches such as network routers. Ericsson poured roughly $550 million in cash into three acquisitions and a majority investment. While its largest recent acquisition,

Torrent Networking

, still isn't shipping product yet, Ericsson's earlier investment in the high-profile start-up

Juniper Networks

(JNPR) - Get Report

enables Ericsson to deliver routers to carriers. Siemens'


also scarfed down three start-ups, two of which now are shipping product, and made a majority investment for a total of roughly $1 billion cash. Just months ago, that was a lot of money.

"It seemed like it was a huge European invasion," says Savageaux. But in the June quarter the European companies sold far fewer routers and large switches to carriers worldwide than did North American competitors Cisco, Lucent or Nortel, according to recent surveys by market researcher

Dell'Oro Group

. And while the Europeans just need time to bring some acquisitions to fruition, they also need to keep acquiring. But they've shown little urgency.

"The Europeans have a lot of cash, but they're not the ones I worry about beating to the punch," says Nortel CEO John Roth. "They're not in the fray." His company, already entrenched with North American carriers, has been buying at a rate of one company per quarter.

The Virtue of Modesty

Both companies say they intend to keep their expansion plans modest -- and affordable. Ericsson's marketing vice president Laura Howard says the company will keep extending its "string-of-pearls" strategy at a pace that ensures it can digest properly. Siemens' Burlington, Mass.-based networking arm, Unisphere, likely will acquire one or two more companies by the end of 2000, according to Unisphere CEO Martin Clague. He says he doesn't need to shop as aggressively as Cisco, because Siemens already boasts global service operations and phone-based network systems. He sniffs at Cisco's Cerent purchase, saying, "I wouldn't have had Cerent on my radar screen for half that price."

His Parisian peer



, which has spent $7 billion on U.S. acquisitions in 13 months, has filled its suite of Internet technology more extensively than Ericsson or Siemens, according to equity analyst Angela Dean with

Morgan Stanley Dean Witter

. Partly for those reasons, Dean rates Alcatel buy and the other two stocks hold. Her firm has acted as an investment banker for all three companies.

Sealing the Deal

Meanwhile, Cisco plans to seal at least 20 additional acquisitions on both sides of the Atlantic in the next year, largely using its stock. (Cisco officials didn't respond to numerous requests for comment.)

Because Cisco is valued at 90 times operating earnings for the last four quarters, compared to 64 for Ericsson and 30 for Siemens, it is comfortable lavishing lots of stock on acquisition targets.

Analyst Savageaux proposes a solution for the Europeans: Create their own acquisition currency by listing separate shares for their U.S. Internet-gear subsidiaries.

Sycamore Networks'


stunning debut on the


Friday underscores the value of uncorking all that market enthusiasm for futuristic Internet systems.

Siemens' Clague won't comment on the possibility, except to say that right now he's focused on building two or more quarters of revenue growth at Unisphere's acquired units. Ericsson's Laura Howard says that her company needs its U.S. unit to be closely integrated with the global operations and that creating a separate stock has not proven necessary either for recruiting or acquisition efforts.

Meanwhile, Cisco widens its lead.

As originally published this story contained an error. Please see

Corrections and Clarifications.

Wrong! Dispatches from the Front: Still Room at the Top


James J. Cramer

10/28/99 7:40 PM ET

Never thought I would say this, but I am hoping


hits the market so I can get in there and do more buying.

Cramer's Latest: Join the discussion on


Message Boards.


(INTC) - Get Report

was super. And why not? Nothing has changed from when the company said it was bullish. What's the symbol for Intel tomorrow? Try SQZE!


(AMZN) - Get Report

can be contained to that daffy world where Jeffrey dollars rule, and the financials continued the parade. I had to step out to be on a panel with my friend

Andy Kessler

at a


presentation, and I will fill you in over the weekend about the consensus we formed there.

It was tough to hold on to stock in that last half-hour, still another good sign that there is room at the top.

And most important, October is almost through and we can see November -- and a November with the

Federal Reserve

out of the picture is a good November indeed.

Random musings:

Don't forget to watch "Fox & Friends" on

Fox News Channel

tomorrow morning at 7 a.m. EDT. I'll do a lightning round of buy, sell and hold recommendations -- and the producers don't tell me in advance which stocks they're going ask about. In my business, that's a high-wire act with no net. But I, of course, love it.

And we will wrap up this wild week by hashing out things on our show, "TheStreet.com." Remember, if you don't watch the show on Saturday morning, I'll be disappointed. Plus, if you don't watch, you won't enjoy the discussion about the show on the message boards over the weekend. Like always, I will be haunting the boards!


James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Intel. 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 Suggests Productivity Acceleration May Be Insufficient, and AOL Announces Stock Split


Tara Murphy

Staff Reporter

10/28/99 9:07 PM ET


Chairman Alan Greenspan tonight praised the productivity-enhancing virtues of technology, but devolved into a discussion of the possibility that productivity growth is not accelerating fast enough to keep the economy from overheating.

Even so, Greenspan did not clearly suggest in his

speech to

The Business Council

in Boca Raton, Fla. that the Fed will hike interest rates again at its next meeting on Nov. 16.

Sounding a theme he has voiced often in recent years, Greenspan said: "

Consumer demand can accelerate so much that total demand could rise above even the productivity-augmented overall growth of potential. This seems to have been happening in recent years, owing to an expanding net worth of households relative to income and perhaps a perception that the recent acceleration in real incomes will continue."

"This extra demand," he continued, "can be met only with increased imports or with new domestic output produced by employing additional workers."

With the rising trade deficit threatening import growth and with the labor supply drying up (the unemployment rate, at 4.2%, is at a 29-year low), Greenspan said, "Market pressures must eventually emerge that work to contain such unsustainable growth."

Rising long term interest rates may be sufficient to get the job done, Greenspan implied. "The process of containment may already be significantly advanced," he said.

But he left room for the possibility that additional interest rate hikes will be necessary, saying: "We do not have enough experience with technology-driven gains in productivity growth to have a useful sense of the time frame in which market pressures contain demand. Moreover, it is not clear as yet how much cumulative impact the rise in real long-term rates over the past two years will have on future demand."

America Online


said it set a 2-for-1 stock split, its seventh such split in seven years. AOL reported that more than two million individual investors will get one share for every share they own on Nov. 8, with the remaining shares up for grabs starting Nov. 22. After the split's effective date, the company will have 2.2 billion outstanding shares. According to AOL, a stockholder who purchased 1,000 shares for $11,500 at its IPO and held his position, would now own 128,000 shares worth roughly $7.8 million. In post-market activity, AOL shares bounced 3 1/2 to 130, on 2.375 shares.

After-Hours Markets

"How to Go Thermonuclear in After-Hours Trading," by

America Online



Step one: Announce two-for-one stock split at 5:16 p.m. EDT.

Step two: Cheer as stock skyrockets up


most-actives list in heavy trading. Well, heavy for MarketXT, anyway.

Aside from AOL's huge performance,



was strong, along with heavily traded


(INTC) - Get Report



(AMZN) - Get Report

led most of the evening after dethroning original leader

Triton PCS


around 6:00 p.m.

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, MarketXT traded issues from 6 to 8 p.m.

Need more information on the ins and outs of after-hours trading? Click

here to see how the rules change when the sun goes down.


Eric Gillin

In other post-close news (earnings estimates from

First Call/Thomson Financial

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

Earnings/revenue reports and previews

American Xtal

(AXTI) - Get Report

posted third-quarter earnings of 14 cents a share, missing the six-analyst estimate of 16 cents but up from the year-ago 3-cent loss, which included a charge.



posted third-quarter earnings of 51 cents a share, beating the 18-analyst estimate of 49 cents a share, and the year-ago 39 cents which included charges.



said that operating losses from its latest acquisition,

Data General

, will cut fourth-quarter earnings by "a few pennies", but would boost fiscal 2000 earnings. EMC said it also plans to assume a transaction and restructuring charge for more than $100 million for the quarter. The company recently posted third-quarter earnings of 29 cents a share, beating the 20-analyst estimate of 27 cents. According to the company's CEO, Michael Ruettgers, EMC and Data General would have had combined third-quarter earnings of 27 cents a share. For the fourth-quarter, the 20-analyst estimate has the company forecasted to earn 32 cents a share and for fiscal 2000, the 21-analyst estimates sees the EMC raking in $1.41 a share.

Laclede Gas


reported a 21-cent loss for the fourth-quarter, which included a charge related to a minority participation in Clark Enterprises. The results are narrower than the two-analyst estimate of a 26-cent loss but wider than the year-ago 18-cent loss.

Methode Electronics


warned investors that it expects to post second-quarter earnings 10% to 20% below the year-ago 26 cents a share. Methode said its second-quarter results will include a 6-cent charge from the bankruptcy of a large automotive customer. The four-analyst estimate has the company pegged to make 27 cents a share in the quarter.



posted third-quarter earnings of 88 cents a share, which includes an exchange translation loss. The report beats the three-analyst estimate of 81 cents a share and the year-ago 73 cents a share.



, parent of this publication, reported a third-quarter loss of 32 cents a share, in line with the six-analyst expectation and smaller than a year-ago loss of 40 cents a share.



posted a third-quarter pro forma loss of 15 cents a share, smaller than the lone-analyst estimate of a 38 cent loss per share, and a year-ago pro forma loss of 25 cents a share.

Offerings and stock actions

Goldman Sachs

priced a 15.75 million-share IPO for

Allied Riser

(ARCC) - Get Report

at $18 a share, the top of its expected $16 to $18 price range.

Salomon Smith Barney

priced a 22.5 million-share IPO for

Chartered Semiconductor Manufacturing

above its $18 to $19 price range, at $20 a share.

Houston Exploration


said it has boosted capital expenses for 1999 by $20 million, increasing its capital budget to $125 million. According to the company, the $20 million increase will be principally used to support offshore exploratory drilling.

Goldman Sachs also priced a 6 million-share IPO for

Plug Power

(PLUG) - Get Report

at the top of its $13 to $15 range at $15 a share.


The U.S. government announced its plans to file legal proceedings in an attempt to halt



planned acquisition of



, claiming the deal would boost the price of certain mainframe software.


(INTC) - Get Report

said it does not expect Y2K to put a dent in its business and is forecasting PC prices to stabilize. According to the company, it has now captured more than 60% of the under-$1,000 PC market and will further pursue acquisitions involving networking and communications.

Bond Focus: Long Treasury Yield Hits Two-Week Low on Muted Inflation Data


Elizabeth Roy

Senior Writer

10/28/99 5:04 PM ET

Treasury yields slid to their lowest levels in more than two weeks today after two key economic reports detected less wage and price inflation than forecasters were expecting.

However the economic reports failed to change many minds about the likelihood that the


will hike interest rates again next month, with most market participants continuing to see a roughly 70% chance of a hike in the fed funds rate from 5.25% to 5.5% at the Nov. 16 meeting of the

Federal Open Market Committee


The benchmark 30-year Treasury bond leapt a point in the minutes after the 8:30 a.m. EDT release of the third-quarter

Employment Cost Index



reports, and hung onto that gain for the balance of the session. It finished up 1 at 98 8/32, trimming its yield 7 basis points to 6.26%, its lowest since Oct. 12. Shorter-maturity note yields shed similar amounts.

The ECI, which measures wages and salaries and benefit costs, rose just 0.8% during the third quarter, vs. an average forecast for a 0.9% gain among economists polled by


. Wages and salaries rose 0.9%, while benefit costs advanced 0.8%.

GDP grew a bit faster than expected in the first of three estimates, clocking a 4.7% pace vs. the 4.8% average forecast. But the GDP report's price deflator -- a measure of price inflation -- came in at 0.9%, vs. an average forecast of 1.2%.

"We still have a very strong economy with little in the way of underlying price pressures," said David Greenlaw, chief U.S. fixed-income economist at

Morgan Stanley Dean Witter


Greenlaw said the odds still favor a Nov. 16 rate hike, a conclusion bolstered by the fact that the November fed funds futures contract

listed on the

Chicago Board of Trade

didn't budge. "But it's a closer call now." The November fed funds contract closed at a price that discounts a 72% likelihood of a rate hike.

Greenlaw also emphasized the favorable performance of a key subset of the ECI -- the year-on-year growth rate of private wages and salaries, excluding sales occupations. It slowed to 3.3%, the slowest pace since early 1997, from 3.6%. "That's extremely impressive in an environment of tight labor markets and strong economic growth," he said.

Others are even less optimistic about the possibility of a reprieve from the Fed.

The ECI and the GDP deflator "looked good," said Bob Auwaerter, senior fixed-income portfolio manager at

Vanguard Group

in Malvern, Pa. "But if you look at the real side of the economy, particularly final sales, it still shows the economy as really on fire."

The outcome of the Nov. 16 Fed meeting is "a close call," the fund manager said. "But if I were a betting person I would say they're going to tighten," in part because the final Fed meeting of the year on Dec. 21 is perceived as off-limits due to the Y2K date change a week and a half later. "I think the way they'll couch it is, 'We're just removing the final ease we did last fall to foster liquidity in those market conditions.'"

Today's numbers "call off the dogs in terms of an immediate problem," concurred Michael Pianin, vice president at

ING Futures & Options

. "But the economy is still very strong. The numbers are probably not going to dissuade the Fed from going."

Long-term interest rates can rally even when the Fed is perceived as poised to tighten if the tightening cycle is seen as nearing its end, since rate hikes are anti-inflationary, and long-term yields are based on inflation expectations. "If people think the Fed is doing a good job, and is on top of inflation and ahead of the curve, the long end can still rally,"

Warburg Dillon Read

Treasury market strategist Mark Mahoney said.

Whether Treasuries can sustain their recent rally hinges on whether Fed Chairman

Alan Greenspan

signals anything about the likely course on monetary policy in a speech at 7:30 p.m. EDT tonight.

If he doesn't, Pianin says the prospects are doubtful in the short term. "We're starting to get up against a decent level to start selling again," he said. "It doesn't seem like we're drawing in new buyers on this information. I think we're drawing in short-covering."



Street Sightings

TheStreet.com reporter Roland Jones will chat with author Michael Lewis Friday, Oct. 29 on ABCNEWS.com. They'll discuss Michael's latest book The New New Thing.

Copyright 1999, TheStreet.com