Publish date:

TheStreet.com's DAILY BULLETIN

November 9, 1999


Market Data as of Close, 11/8/99:

o Dow Jones Industrial Average: 10,718.85 up 14.37, 0.13%

o Nasdaq Composite Index: 3,143.97 up 41.68, 1.34%

o S&P 500: 1,377.01 up 6.78, 0.49%

o TSC Internet: 840.90 up 26.03, 3.19%

o Russell 2000: 445.07 up 2.66, 0.60%

o 30-Year Treasury: 100 29/32 down 3/32, yield 6.058%

Companies in Today's Bulletin:

4Kids Entertainment (KIDE:Nasdaq)

E*Trade (EGRP:Nasdaq)

Telebanc (TBFC:Nasdaq)

AlliedSignal (ALD:NYSE)

Honeywell (HON:NYSE)

In Today's Bulletin:

o Media/Entertainment: No Kidding: 4Kids Shares Put a Bigger-Than-Life Value on Pokemon
o Brokerages/Wall Street: E*Trade-Telebanc Deal Taking Its Own Sweet Time
o Evening Update: Justice Clears AlliedSignal's Buy of Honeywell
o Bond Focus: Ahead of the Auctions, Treasuries Cede a Bit of Ground

Also on TheStreet.com:

Silicon Babylon: AEA Conference: A Chance to Get Up Close and Personal With Tech Execs

The American Electronics Association confab offers access to CEOs without the throngs.


Roque's Gallery: The Microsoft Decision: Software Giant as Also-Ran

Could Microsoft be moving from the top of the tech-stock food chain to the bottom? Its chart activity in recent months suggests that may be true, at least in the short term.


Europe: The Anglo File: KPNQwest IPO Poised to Cash In on Lofty Telco Valuations

The Dutch-American joint venture is set to float on the Nasdaq and in Amsterdam as telco mergers come at ever-increasing prices.


The Invisible Mouth: Riding the Employment Cycle

Can you remember one that ended happily? Yours truly can't.


Media/Entertainment: No Kidding: 4Kids Shares Put a Bigger-Than-Life Value on Pokemon


Alex Berenson

Senior Writer

11/8/99 6:00 PM ET


is a big fad.

A big, big fad.

But is it a $100 billion fad?

That's the bet that shareholders in

4Kids Entertainment


are making as they bid up the company's shares to ever-more ludicrous heights.

In case you haven't noticed, Pokemon is an animated Japanese game from


that has become the biggest hit among American kids since ... well, since


, another animated Japanese toy that came and went about two years ago. But forget Tamagotchi. Pokemon is the real thing. Since hitting U.S. shores last year, Pokemon has spawned the inevitable hysteria from school principals and the inevitable

commercial tie-ins. The inevitable movie is due out this week.

The Good News

All of this is very good news for 4Kids, which holds the rights to license Pokemon outside Asia. For the quarter ended June 30, 4Kids earned 31 cents per share, up from 2 cents per share a year earlier. (4Kids is set to release earnings for the September quarter around Nov. 12.)

And investors have taken notice. Since a


story in March highlighted the company, 4Kids stock has posted an incredible tenfold increase in price, accounting for two stock splits. The company now has a market capitalization of nearly $1 billion.

Putting the Squeeze on Pokemon
Sharp rise in 4Kids short interest shadows the stock's remarkable run

Source: Nasdaq

Unfortunately, even some onetime 4Kids fans say the party may be just about over. Russell Anmuth of

Gotham Holdings

, who once owned as much as 3% of the company's shares, sold the last of his position over the summer. "At these prices, it's all risk," Anmuth says.

Why? Time for a corporate tutorial -- and a little math.

The Middle Ground

4Kids works as a middleman between copyright owners like Nintendo, which owns Pokemon, and companies that want to license characters and trademarks for toys and other products. Besides Pokemon, 4Kids represents

World Championship Wrestling


Comedy Central

, and the company also has a couple of smaller business lines.

But Pokemon, an interactive game in which children collect a universe of 150 "pocket monsters," has been the driver of 4Kids' earnings -- and its stock. 4Kids admitted as much in its most recent earnings release, saying that its increasing profits "primarily reflect the exceptional growth in the Nintendo Pokemon licensing program."

Unfortunately, that exceptional growth means much less to 4Kids than most investors realize. Remember, all 4Kids does is connect Nintendo with the companies that want to make Pokemon-branded merchandise and tie-ins. For this, 4Kids gets a golden crumb, a piece of Nintendo's licensing fee.

How big a piece remains unclear, since 4Kids has never publicly disclosed what its royalties are. But Anmuth says Chairman Alfred Kahn told him that 4Kids gets about 3% of Pokemon's wholesale sales. 4Kids Chief Financial Officer Joseph Garrity confirms that the company's fee is between 1% and 5% of wholesale sales.

Add It Up

Now for the math. Assume 4Kids' non-Pokemon properties are worth around $100 million, a generous figure considering that the company as a whole was worth $40 million at the beginning of 1999. So Pokemon must account for the remaining $800 million-plus in 4Kids' market cap.

At first, that figure doesn't seem so strange, given Pokemon's popularity. But if 4Kids gets only around 3% of Pokemon's wholesale sales, and retailers usually mark up products like Pokemon by a factor of two, every $10 a kid spends on Pokemon means only 15 cents to 4Kids.

Now, much of that money should flow straight to 4Kids' bottom line, but the company does have expenses, including deals with Kahn and Garrity that together entitle the men to 12% of 4Kids' pretax income. In addition, 4Kids has to pay taxes, which totaled 40% of its net income last year.

So, of the 15 cents 4Kids receives on a $10 Pokemon sale, Kahn and Garrity get around 2 cents, and local and federal governments get another 5 cents. That leaves 8 cents for 4Kids shareholders. Give or take.

Now multiply those figures by a factor of 10 billion, and voila: For Pokemon to justify 4Kids' current market cap, its total retail sales would need to be $100 billion.

$100 billion. That's a patently ridiculous figure, more than the total worldwide sales of music and movies combined this year. 4Kids won't discuss its projections for sales of Pokemon merchandise but says it's very happy with the response the character has generated.

Of course, 4Kids is trying to develop new lines of business to prepare for the inevitable cooling of Pokemon, but entertainment fads are inherently difficult to predict, and even 4Kids fans agree this stock is a Pokemon story.

Short End of the Stick

"Incredible is a kind word," says one West Coast short-seller, who calls 4Kids' valuation "insane." This person shorted 4Kids stock last week in advance of the release of the


movie, scheduled for Nov. 12. His strategy is to short stocks a few days before a major positive news event that's already well known to investors (and thus presumably already priced into a company's stock).

So far, though, Pokemon has been a graveyard for shorts, who sell stocks they don't own in an effort to buy them back later at a lower price. 4Kids' sharp rise has forced many shorts to cover their positions, and the resulting demand has pushed its stock even higher.

"This is not about

4Kids, this is not about Pokemon," says Anmuth of Gotham Holdings. "This is about a scarcity of stock. This stock is overborrowed. ... This is the mother of all

short squeezes." (For an explanation of how short squeezes work, click


4Kids surely deserves kudos for recognizing the potential of Pokemon, and the company has done a great job profiting from the game's wild popularity. But at this point the numbers just don't add up.

"Our job is to run the company as the best way we see fit and to maximize the returns, and the stock price will take care of itself," Garrity says. Indeed.

Brokerages/Wall Street: E*Trade-Telebanc Deal Taking Its Own Sweet Time


Caroline Humer

Staff Reporter

11/8/99 2:06 PM ET

By the time






break out the champagne, Y2K may be just a memory.

The Street is taking to heart their latest merger due date, Dec. 31. In the past week or so, the companies' stocks have moved closer together, signaling increasing investor confidence that the e-broker will close its buyout of the online bank soon.

But investors might want to turn their attention to Washington from Wall Street to find out why the two might not raise a toast until 2000. It's there that the merger agreement between these two Internet pioneers has become even more embroiled in government bureaucracy.


Office of Thrift Supervision

, which regulates the nation's savings and loans, already was considering questions about the ownership structure of the new company, which had delayed the deal. (


examined the issue in September.) Now, the OTS is considering

Community Reinvestment Act

issues as well, and it may not rule until February. (CRA effectively mandates that banks and thrifts lend in poor areas.) And the firms have yet to even file with the

Securities and Exchange Commission

, which will have to review the merger prospectus.

The deal almost certainly will close ultimately. But for E*Trade, the extended delay puts it even further behind in its strategy to become more than just one of the largest online brokers. And that move is becoming even more important for online brokers as they try to diversify their revenue streams away from commissions. While trading volumes appear to have been strong in October, a decline in the summer showed how quickly a slowdown hits broker bottom lines and stocks.

"It's not good if it's delayed longer because they've pumped up this strategy and whether you believe it or not, delays are going to keep the company from executing," says Rich Repetto, an analyst at


, which hasn't performed underwriting for either company.

E*Trade has insisted all along that there are few problems with the transaction, even as regulators were digging deeper. For instance, on Oct. 5, E*Trade Chief Executive Christos Cotsakos said on


, "Well, we think probably

the deal will close around late October. You know, we're going through a regulatory piece now and it's moving very, very smoothly."

Obviously, that didn't happen. Says Repetto, "I'm sure a good part of this may be out of their control, but it is a credibility issue."

Telebanc President and CEO Mitchell Caplan and E*Trade spokesman Patrick DiChiro say the firms are working with regulators to get the deal done by the end of this year. "I think the issue frankly isn't the timing," Caplan says. "I view us as having a very good relationship with the regulators. We're working with them to get them the information they need to review the files."

E*Trade first said it would buy Telebanc, the holding company for Telebank, on June 1 and added that it expected to close the transaction at September's end. On June 28, it filed with the OTS for a change of control at Telebanc.

Soon after, questions arose about Japanese technology and venture capital firm


27% stake in E*Trade. On Aug. 5, the U.S. unit of Softbank filed a document saying it didn't control E*Trade, and letters between the OTS and E*Trade on this issue continued into September, according to documents obtained under the

Freedom of Information Act

. (Softbank is a minority investor in

TheStreet.com Inc.


, the publisher of this Web site.)

E*Trade's application still isn't complete. Recently, the OTS moved its indication for the decision date to Feb. 9, 2000, from Dec. 26. That date, available on the OTS

Web site, is used as a guideline by the agency and based on the maximum response periods of 30 days or 45 days that accompany requests for new information. Once the application is complete, the OTS has 60 days to decide. E*Trade and Telebanc say the February date doesn't necessarily reflect when the deal will be complete. OTS spokesman Bill Fulwider and regional caseworker Kathryn Haney declined to comment on the ongoing application.

Then there's the CRA issue. Community activist Matthew Lee, of

Inner City Press/Community On The Move

in the Bronx, N.Y., is pushing for more community lending. He wants Telebanc to change its status to a retail bank from a wholesale bank, which would increase its CRA obligations.

CRA is an issue regulators take seriously, and it has delayed bank mergers in the past. On Oct. 15, the OTS wrote E*Trade's lawyers, requesting a response within 30 days to an Oct. 4 letter from Lee touching on these points and repeating requests for a meeting. Lee has high hopes that Telebanc's nationwide marketing plan will require a CRA commitment beyond the bank's Arlington, Va., headquarters.

Lastly, E*Trade and Telebanc still have to file with the SEC: E*Trade must send a registration statement to issue new shares and Telebanc must file a proxy for shareholders to vote on the merger. The SEC then reviews that statement and, according to SEC spokesman John Heine, engages in "meaningful dialogue with the filer." Translation: more time.

E*Trade and Telebanc said they were waiting for numbers for the September quarter -- announced in October -- to file. Telebanc's Caplan explains that because E*Trade wanted to include its restated financials that accounted for its purchase of securities firm


, both companies waited -- as is typical in a merger, the companies will file jointly. According to other SEC documents, Telebanc had spent $870,000 on the merger as of Sept. 30.

"We said we would be filing shortly, meaning in the next few weeks," Caplan says. That certainly means by the end of November, he explains, because adding 30-day notification from that point would put the shareholder vote at the end of December -- but still before the millennium.

Evening Update: Justice Clears AlliedSignal's Buy of Honeywell


Tara Murphy

Staff Reporter

11/8/99 8:18 PM ET


Justice Department

gave the green light for



to follow through with its plans to purchase


(HON) - Get Report

in a $14.9 billion stock transaction. The government said the companies had to divest some of their avionics businesses, to prevent cutting the competition down to two, or in some instances three.

After-Hours Trading


(AMZN) - Get Report

drew lots of interest on both

Island ECN



after announcing it will make a "significant announcement regarding additions to its product line that will impact the competitive landscape of online shopping" tomorrow.

Which brings us to


(BYND) - Get Report

. Why on earth is this company trading on such heavy volume? Maybe investors believe "regarding additions to its product line" really means, "Amazon.com will announce its purchase of online software-seller Beyond.com tomorrow."

Island ECN, owned by Datek Online, offers trading, mainly in Nasdaq-listed stocks, from 8 a.m. to 8 p.m. EST.


MarketXT, formerly Eclipse Trading, offers after-hours trading to retail clients of Morgan Stanley Dean Witter's (MWD) Morgan Stanley Dean Witter Online 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. EST Monday through Thursday.



explains how the rules change when the sun goes down in Investing Basics: Night Owl, a section devoted to after-hours trading.


Eric Gillin

In other postclose news (earnings estimates from

First Call/Thomson Financial

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

Earnings/revenue reports and previews

Freemont General


posted a third-quarter loss of 92 cents a share, wider than the six-analyst estimate of a 45 cent loss and down form the year-ago 49-cent profit.

Jack in the Box


reported fourth-quarter earnings of 47 cents a share, beating the seven-analyst estimate of 42 cents and up from the year-ago 31 cents.

Oceaneering International

(OII) - Get Report

posted second-quarter earnings of 18 cents a share, beating the nine-analyst estimate by a penny but down from the year-ago 34 cents.

Pacific Sunwear


posted third-quarter earnings of 38 cents a share, beating the 18-analyst estimate of 35 cents and the year-ago 25 cents.


(PFE) - Get Report

said its proposed $74 billion purchase of

Warner Lambert


would instantly add to its EPS. Pfizer also said it sees its fiscal 1999 earnings in line with the high end of the 27-analyst estimate range of 83 cents to 85 cents a share.

Offerings and stock actions



and some of its stockholders will sell 2.5 million shares through a public offering, according to a

Securities and Exchange Commission

filing. The company disclosed in the filing that it plans to offer 1 million shares, while its shareholders will put up the remaining 1.5 million shares. Goldman Sachs,

Credit Suisse First Boston


Robertson Stephens


Lehman Brothers

are serving as the deal's underwriters.


Amylin Pharmaceuticals


said its diabetes remedy


, aided in decreasing blood sugar levels in patients with type I, or juvenile onset diabetes during its Phase III study. According to Amylin, type I diabetics participating in the trial who included Symlin with their insulin treatments noticed a considerable improvement in 6 months. The company said it plans to apply for the drug's approval to treat type I and II diabetes in the U.S. and Europe by mid 2000.

General Motors

(GM) - Get Report

said its fourth-quarter North American production plans remain in line with the prior estimate of 1.45 million units. The estimate is down 4% from the year-ago production report of 1.51 million units.

MIIX Group


said that its president and CEO Daniel Goldberg has asked for a leave of absence for reasons not associated with his role as CEO. The company said that its executive vice president and CFO Kenneth Koreyva would serve a interim CEO.


VocalTec Communications


said it has tapped Chairman Elon Ganor as its new CEO. Ganor will replace Doron Zinger, who is stepping down to pursue other interests.

Bond Focus: Ahead of the Auctions, Treasuries Cede a Bit of Ground


Elizabeth Roy

Senior Writer

11/8/99 4:56 PM ET

The Treasury market surrendered just a bit of the huge tract of ground it captured over the last two weeks today, with intermediate maturities setting the trend ahead of the quarterly refunding auctions, which start tomorrow.

With no economic indicators on the calendar, volume was light as traders studied an enlightening biweekly report on Treasury futures activity and pondered how the


decision on interest rates next week might affect the market.

The benchmark 30-year Treasury bond ended unchanged at 100 30/32, its yield 6.06%. But the five- and 10-year notes each added a basis point of yield.

The market: Join the discussion on


Message Boards.

The long bond's yield tumbled from a two-year high of 6.37% on Oct. 26 as two key pieces of wage inflation data -- the third-quarter

Employment Cost Index

and the

average hourly earnings

component of the October

employment report

-- rose less than expected, despite the fact that the

unemployment rate

stands at a near 30-year low of 4.1%.

The long bond outperformed shorter-maturity Treasury notes today because the fourth-quarter refunding auctions don't include a new 30-year bond. The Treasury Department's quarterly refunding is its auctions of new five-, 10- and 30-year notes and bonds, except that the 30-year bond was cut first from the May refunding and then from the November refunding as the government's borrowing needs shrank with the federal budget deficit.

The absence of a new bond from the November refunding could help the bond's performance relative to the notes in the days leading up to the auctions. The fourth-quarter refunding starts tomorrow with a $15 billion five-year note auction and ends Wednesday with a $10 billion 10-year note auction.

With nothing on the economic calendar and no


officials making public remarks, many bond traders turned their attention to the biweekly

Commitments of Traders

report, which confirmed their strong sense that the massive rally of the last two weeks was attributable in large part to short-covering.

The Commitments of Traders report by the

Commodity Futures Trading Commission

measures exposure to futures on the part of both hedgers (who are also active in the bond market itself and use futures to mitigate risk) and speculators (who aren't active in the bond market and absorb risk from hedgers).

The data are interesting because historically, speculators have proven to be poor market-timers. They've tended to be net short at market bottoms and net long at market tops. The opposite is true of hedgers.


Oct. 22 Commitments of Traders report found speculators in the Treasury futures contract listed on the

Chicago Board of Trade

net short 66,525 contracts, a record high.

Two weeks and more than 30 basis points in the wrong direction (from a short's perspective) later, the CFTC late Friday reported that Treasury futures speculators were net short just 32,198 contracts. The speculators added a few long positions, but the drop occurred mainly because they closed out some 27,000 short positions.

Total open interest in the Treasury futures dropped by roughly 8,000 contracts, to 629,445, over the two-week period.

"A bullish sign would be a rally on expanding open interest,"

Bianco Research

president Jim Bianco wrote in his analysis of the development. "That would signal that new buying has entered the market. Otherwise, this rally will end when the net short position of the large speculators is gone."

With no major economic indicators due out tomorrow either (this week's biggies -- the

Producer Price Index


retail sales

, both for October, are slated for Wednesday and Friday), traders are left to handicap the Fed and listen for indications from Fed heads about the likelihood of a interest rate hike at the Fed meeting a week from tomorrow.

Fed funds futures traders at the Chicago Board of Trade continued to discount a 39% chance of a hike in the fed funds rate from 5.25% to 5.50% in

today's trading. The argument against a hike is that growth appears to be slowing, while productivity growth appears to be accelerating, enabling the economy to grow faster without generating inflation.

The argument in favor of a hike is that the tightness of the labor market will eventually lead to higher inflation, and the Fed has little to lose by returning the fed funds rate to where it was before the three rate cuts of last fall.

Scott Graham, co-head of government bond trading at

Prudential Securities

, said the latter view is so widespread that if the Fed doesn't hike, long-term yields will rise, reflecting higher long-term inflation expectations. "There would be the perception that they are not fighting inflation," Graham said. "If the Fed wants to be vigilant, they have to cut it off at the knees."



Ben Holmes will be chatting on Yahoo! at 5 p.m. EST, Tuesday, Nov. 9. Register for Yahoo! Chat at: chat.yahoo.com. It's free!

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