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  • Publish date:'s DAILY BULLETIN

November 17, 1999

Market Data as of Close, 11/16/99:

o Dow Jones Industrial Average: 10,932.33 up 171.58, 1.59%

o Nasdaq Composite Index: 3,293.05 up 73.51, 2.28%

o S&P 500: 1,420.03 up 25.64, 1.84%

Companies in Today's Bulletin: (MPPP:Nasdaq)

Pfizer (PFE:NYSE)

Knight/Trimark (NITE:Nasdaq)

In Today's Bulletin:

o Media/Entertainment: Music Types Not Buying MP3's High-Valuation Spin
o Wrong! Dispatches from the Front: Age and the New Age of Valuations
o Evening Update: Longs Drug Stores Announces Earnings and Terra Networks' IPO Priced
o Bond Focus: A Fed Hike is What Bonds Wanted -- So Where's the Rally?

Also on

Biotech/Pharmaceuticals: Pfizer Pulls Out All the Stops, but Investors Aren't Buying

The stock retreats 3% following a big PR push, leaving Pfizer's bid worth just a bit more than American Home's.

The Invisible Mouth: Feeling the Chill Wind of Slowing Productivity Growth

Unit labor costs aren't yet accelerating, but productivity improvements are already slowing.

Tech Savvy: Devices Eclipse PCs at Comdex

The chatter in the booths this year is of a new, post-PC era. Plus, Bill Gates has a new companion and H-P wants a kinder, gentler Web.

Options Buzz: Knight/Trimark Rumored to Be Buying Options-Trading Firm

The Nasdaq market maker is close to cementing a deal with Arbitrade, according to trading floor sources.

Media/Entertainment: Music Types Not Buying MP3's High-Valuation Spin


Alex Berenson

Senior Writer

11/16/99 8:00 PM ET

Ask not for whom the bell tolls. It tolls for MP3.

In a universe filled with overvalued Internet stocks,


may be the most staggering story of all. The Web-music start-up offers songs no one wants through a technology it doesn't own. Its market: anyone bored enough to rummage through the offerings of more than 30,000 artists in the hope of finding the next

Celine Dion


But wait, there's more.'s top executives include Thomas Spiegel, who ran a California savings-and-loan into the ground a decade ago, costing taxpayers more than $1 billion, according to regulators. Spiegel, obsessed with personal security, built two antiterrorist bomb shelters at his S&L's headquarters. A 1990

Los Angeles Times

story reported that he had as many as 19 private security officers protecting him, some armed with automatic weapons. hired Spiegel in July. He's in charge of "strategic business opportunities."

For all this, investors have rewarded with a valuation of more than $3.5 billion. Even for an Internet stock, that valuation is generous, at roughly 50 times MP3's projected 2000 revenue. (Yes, that's revenue, not profit. Like most Internet companies, MP3 isn't expected to be profitable for the foreseeable future.) By way of comparison, the average Internet stock trades at about 20 times next year's expected revenue, according to

Goldman Sachs


Day of Reckoning

But the day of reckoning may be approaching for, which faces increasing attacks from both traditional record companies and other Internet music sites. The announcement last Tuesday that



will open a true Internet music label,

Jimmy and Doug's Farm Club

, is only the first shot in the coming battle among traditional record companies to retake the Internet. (Since Seagram's announcement, stock has fallen to just over 50 from 60.

wrote about Seagram's announcement.) Meanwhile, must fight for consumer attention with newer Web start-ups like

Launch Media


, which features news and songs from established artists at its


"Most consumers of music want music that they already know they like," says Dave Goldberg, Launch's chief executive. "What is MP3 doing? They're basically making unsigned artists available to consumers. That's pretty easy to replicate. The bigger question is, do consumers care?"

To be sure, Goldberg has his own bias, since he's staked his company's future on working closely with major labels. But independent industry analysts agree with his assessment.

"I do not see anything that has or has built up that protects it from more recognizable music from people we know and trust," says Mark Hardie, a senior analyst covering entertainment for

Forrester Research

, the technology consulting firm, which as a policy won't disclose whether it has consulted for companies mentioned in this story.

With its huge variety of bands, is a "flea market" of music, Hardie says. "But a flea market is not where most people shop on an regular basis. ... In discussions around the music industry, I think there is very little support for MP3's model as the future of the music business." Three other independent analysts echoed that sentiment but asked not to be identified.

Indeed, very few of the people who visit buy music from the site. In October, for example, about 470,000 people visited the site on any given day, according to the company's figures, but the company sold only 18,300 CDs for the entire month -- or just 600 a day. In other words, barely one person in a thousand found music worth buying at In addition, while the number of unique visitors to continues to increase, the number of pages each person views per visit has fallen from 6.7 in July to 5.6 in October. That drop is more proof that is having a tough time keeping visitors interested in its offerings.

So what's's long-term plan? The company's not saying. After repeated requests for an interview for this story, responded that only Chairman and Chief Executive Michael Robertson could speak for the company and that Robertson didn't have time to comment.

The sell-side analysts who follow, all of whom work for investment banks that underwrote the company's July offering, also didn't return requests for comment. But their research reports downplay the importance of's music sales to its overall revenue growth.

Credit Suisse First Boston

estimates that only 7% of MP3's revenue next year will come from sales on its site, with the rest coming from advertising, both online and at the music tours that is sponsoring. That revenue split makes clear that despite its talk of revolutionizing the record business, isn't really selling music to consumers. It's selling eyeballs to advertisers. Unfortunately, without good music, eyeballs may soon be hard to come by.

Ace in the Hole

Still, MP3 does have one big ace up its sleeve: a rich agreement from

Groupe Arnault

, a private French investment company that controls the luxury conglomerate

LVMH Moet Hennessy Louis Vuitton


. Arnault will spend $150 million over the next three years on advertising, marketing and promotional services from

In addition, the agreement is set up so that will get $5 million this year, $40 million in 2000, $70 million in 2001 and $35 million in the first half of 2002. That structure means, which had only $6.5 million in revenue in the first nine months of this year, is guaranteed to see its revenue soar for the next two years. In fact, based on analyst estimates, it appears that the Arnault agreement will represent about half of's total revenue over the next two years.

Arnault, which has set up a $550 million investment fund called


to invest in the Internet, also agreed to buy about 3.3 million shares of MP3 stock at 28 when the stock went public in July, a $92 million investment that so far is solidly in the black. Tuesday the stock TKTK.

Groupe Arnault doesn't publicly discuss its investments or Internet strategy, but one person at the company says it views as "a unique marketing opportunity that could work not only for the companies under the LVMH umbrella but also for some of the companies that Groupe Arnault has invested in. ... We do believe in the concept and the overall approach that is taking."

They don't have much company. And long before the Arnault agreement expires in 2002, the music may stop for MP3.

Wrong! Dispatches from the Front: Age and the New Age of Valuations


James J. Cramer

11/16/99 1:16 PM ET

We had an epiphany today at

Cramer Berkowitz

: Stay long



. In this whacky world where overvalued stocks go to extreme overvaluations and extreme overvaluations go into the


Janus fund, we found ourselves long some E.piphany this morning.

Cramer's Latest: Join the discussion on our

message boards.

We had done our homework on the company, met with its management and liked what we saw -- all when I was on vacation! I took the reports home last night, read them and circled the valuation: $2 billion. I wanted to bring up this absurd valuation for a young, unproven company in our morning meeting here. It's ridiculous, no matter how great the company might be executing.

Matt Jacobs

, our young associate, however, said there was good news on E.piphany: It had bought


, a company Matt had actually heard of! Glory be! Matt said the combo was a sure winner.

I snickered to myself. One unknown, overvalued company pays too much for another unknown question mark of a company, and the kid says it will move the stock! Hoo-hah.

We are up 30 points as I write.

I am too old for this business.

Random musings:

What will the


do? How will we react? What am I thinking?

I am thinking about catching that plane to the West Coast for a series of meetings. One day I will have a calendar that will black out


meetings so I never schedule anything to conflict with them. I don't have it yet, though.

Kudos to

The New York Times


on the

joint arrangement. Now, how about some visibility, partners?


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long E.piphany and 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: Longs Drug Stores Announces Earnings and Terra Networks' IPO Priced


Eileen Kinsella

Staff Reporter

11/16/99 8:21 PM ET

Longs Drug Stores


reported third-quarter earnings of 32 cents a share, in line with the five-analyst estimate and up from the year-ago 28 cents. Net income totaled $12.4 million, compared with $10.9 million in the year earlier period. Revenue increased 7.2% to $866.9 million. The company also said it would buy back up to 3 million of its common shares.

Longs also announced that CEO Robert Long, who has held the position for 22 years, will step down on Jan 27 and be replaced by president Stephen Roath. Long will remain chairman and a company officer. Though Long did not elaborate on the reason for his departure, he called the change an "orderly transition" and said Roath was, "qualified to lead our team and company in the next millennium," according to



Goldman Sachs

priced 22.3 million shares of

Terra Networks


at $13.41 a share, above the estimated range of $10.66 to $12.44. Terra Networks is the Internet unit of Spanish telecommunication operator



After-Hours Action

A late push by



helped it eke out the most-actives crown on

Island ECN

. Second-best

Euroweb International


faltered over the last two hours of trading, relinquishing what was once a significant lead.

Over on


volume was light.



led all actives with a huge gain on news that it had set a two-for-one stock split. A similar gain was recorded on Island.

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 Eagle Outfitters


posted third-quarter earnings of 50 cents a share, beating the 12-analyst estimate of 43 cents and the year-ago 29 cents.

Bea Systems


reported third-quarter pro forma earnings of 12 cents a share, beating the 12-analyst estimate of 10 cents a share and the year-ago 7 cents a share. The company also set a 2-for-1 stock split payable on Dec. 19 to shareholders of record on Nov. 19.



posted a third-quarter loss of 5 cents a share, a penny narrower than the three-analyst estimate and smaller than the year-ago loss of 8 cents a share.

Etec Systems


posted a first-quarter loss of 3 cents a share, in line with the 13-analyst estimate, but down from year-ago earnings of 43 cents a share.



reported third-quarter earnings of 10 cents a share, a penny shy of the four-analyst estimate, and lower than the year-ago 17 cents a share. HomeBase announced it would buy back up to $20 million of its stock and certain debt after the finalization of a new credit line agreement.



posted third-quarter earnings of 32 cents a share, a penny better than the 17-analyst estimate and up from the year-ago 25 cents a share.

Network Appliance


reported second-quarter earnings of 19 cents a share, beating the 12-analyst estimate of 17 cents and the year-ago 11 cents a share. The company also announced a 2-for-1 split of its common stock, payable Dec. 20 to shareholders of record on Dec. 10.

Quilmes Industrial


posted third-quarter earnings of 15 cents a share, including charges. The three-analyst estimate called for earnings of 16 cents a share, while the year-ago earnings of 17 cents a share also includes charges.



posted fourth-quarter earnings of 49 cents a share, in line with the seven-analyst estimate and up from a year-ago 42 cents a share.



reported second-quarter earnings of 22 cents a share, beating the two-analyst estimate of 19 cents and the year-ago 10 cents a share.

Offerings and stock actions



said its board set a 2-for-1 stock split payable around Dec.17 to shareholders of record on Dec. 3.

Golden State


said it would buy back up to $250 million of its securities in 2000.


Deltic Timber


said it hired

Capital Agricultural Property

to advise it in exchanging its agricultural land into southern pine timberland on a tax-efficient basis. The company said it expects the process to take several months.

Glaxo Wellcome


won a key endorsement for Lotronex, its drug for treating irritable bowel syndrome, which some analysts say could become a billion-dollar seller for the company. A U.S.

Food and Drug Administration

advisory panel unanimously recommended approval for the drug.

Bond Focus: A Fed Hike is What Bonds Wanted -- So Where's the Rally?


David A. Gaffen

Staff Reporter

11/16/99 5:20 PM ET

So this is the big rally everyone was waiting for?


Federal Reserve

did what many disparate bond market participants expected -- raised rates and adopted a neutral policy directive, essentially closing the book on another rate hike for three months. Many thought the longer-dated securities would rally on the news, as it demonstrated the Fed's commitment to fighting inflation.

Well, so much for that. The market spiked higher when the Fed's 25 basis-point hike to 5.5% was announced, but then sellers came in, sending the long bond downward. Lately, the 30-year Treasury bond was down 17/32 to 100 26/32, boosting the yield to 6.01%.

An intraday price chart of the 30-year bond resembles that of a person who got a question wrong on a lie detector test. There's a big spike up, a larger spike down, one more move up -- to the peak at 101 28/32 (up 18/32) -- and finally another bout of selling to the low at 100 23/32 (down 19/32) before leveling off.

The selling, according to two sources, was due to dealers and others taking profits after riding this rally that began with the 30-year's yield at 6.40% about three weeks ago. However, strategists are confident that the long end will do better in the coming weeks.

"Short term, the market is consolidating but I think there's a possibility of further gains to 6%," said Carl Ericson, director of taxable fixed income at

Colonial Funds

. "With the Fed taking back all of

last year's liquidity, the market will be more comfortable that we'll see a slowdown."

Join the discussion on


Message Boards.

The two-year note, which reacts directly to changes in monetary policy, sold on the news as expected. It was lately down 5/32, boosting the yield to 5.85%. So, while the entire market lost ground today, the 30-year is still outperforming the rest of the yield curve. The yield spread in basis points between the two-year and 30-year narrowed to 21 basis points today from 26 yesterday, reflecting the market's expectation that the Fed will hold inflation in check and that the economy will start to slow.

"The short end of the yield curve has to reset itself to the cost of funds," said Tony Crescenzi, chief bond market strategist at

Miller Tabak

. "But there is a positive reaction in the bond. It's not discernable because there's lots of speculative

selling right now."

Crescenzi's referring to people who made short-term bets that the bond would do better after a Fed announcement. Once a little buying took place, those players came in and took profits, causing the bond's decline.

In a comment, traders at

Aubrey G. Lanston

attributed some of the selling to the Fed's mildly hawkish-sounding

statement. The Fed acknowledged the nascent evidence of a slowdown, but was more concerned about how the overall economic expansion was causing the labor pool to dry up. The statement recalls an Oct. 28

speech by Alan Greenspan, which outlined similar concerns.

"The pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue," the statement read.

However, Bill Cheney, chief economist at

John Hancock Mutual Life Insurance

, said he believes improved productivity argues for the Fed holding off. He concedes that the Fed might have wanted to take out insurance against the threat of inflation, but "tentative" signs of a slowdown, such as declines in housing and auto purchases, indicate that this hike may not have been necessary.

"In the last few years they have been willing to test the limits of the new economy and see how low a pool of unemployed workers the economy can function with," said Cheney. "My problem with acting now is, there's no evidence I can see that 4.1% (the current unemployment rate) is the point at which trouble sets in."

Most expect the Fed to keep policy on hold at the Dec. 21 meeting, the last of 1999, because of concerns revolving around the Y2K date change. The Fed's first meeting in 2000 is on Feb. 1.

The market's going back in the fire with the release of the October

Consumer Price Index

tomorrow, the market's broadest measure of inflation, at 8:30 a.m. EDT. The consensus estimate as polled by


shows economists looking for a 0.2% increase in the overall and the core (ex-food and energy) CPI.

Crescenzi said the Fed's rate hike could mitigate the market impact of a stronger-than-expected report.


Street Sightings

Chat with Gary B. Smith on AOL's MarketTalk Wednesday, Nov. 17 at 4:30 p.m. EST. MarketTalk is hosted by Sage Online. (Keyword: PF Live)

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