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daily11-29-99's DAILY BULLETIN

November 30, 1999

Market Data as of Close, 11/29/99:

o Dow Jones Industrial Average: 10,947.92 down 40.99, -0.37%

o Nasdaq Composite Index: 3,421.37 down 26.44, -0.77%

o S&P 500: 1,407.83 down 8.79, -0.62%

o TSC Internet: 969.40 down 16.21, -1.64%

o Russell 2000: 456.95 down 1.99, -0.43%

o 30-Year Treasury: 97 17/32 down 31/32, yield 6.300%

Companies in Today's Bulletin:

National City (NCC:NYSE)

Comerica (CMA:NYSE)

KeyCorp (KEY:NYSE)

Shorewood Packaging (SWD:NYSE)

Chesapeake (CSK:NYSE)

In Today's Bulletin:

o Banking: No Deposit, No Return: Loan-Deposit Gap Presses KeyCorp, Comerica
o Wrong! Rear Echelon Revelations: B2B Draft Results Unveiled
o Evening Update: Shorewood Packaging Rejects Unsolicited Bid From Rival Chesapeake
o Bond Focus: Staring Data in the Face, Bond Market Backs Down Again

Also on

Mutual Funds: Jacob Net Fund Finally Cleared to Launch

But the Internet investing landscape has changed since the fund's hoped-for launch date in September.

Retail: New Navy? Gap's Latest Offshoot Brand Sparks Standalone Talk

The One Below brand is only in New York and San Fran for now, but observers say the Gap needs new ideas to stoke growth.

Roque's Gallery: No Visible Means of Support

While the market powers higher, it does so on less and less, and that's got me concerned.

Europe: The Anglo File: 365 Set to Go Public This Week

Although 365 Corp. has boosted its price range, the content provider's debut is overshadowed by the usual dilemmas: high costs and no profits.

Banking: No Deposit, No Return: Loan-Deposit Gap Presses KeyCorp, Comerica


Peter Eavis

Senior Writer

11/29/99 7:00 PM ET

Funny how the lowly depositor can still affect the performance of large banking corporations in this brave new age of finance.


National City


, which on Nov. 16 cut its outlook for fourth-quarter earnings, pushing its stock 13% lower. Profits at the Cleveland-based institution came under pressure largely because it had fewer cheap deposits to fund loan growth, forcing the bank to borrow more-expensive money in the market.

Now, some analysts think a lack of deposits and a higher cost of funds could squeeze lending margins at


(CMA) - Get Free Report



(KEY) - Get Free Report

, which last week announced a

restructuring that aims to boost its earnings. (KeyCorp's press release on the overhaul didn't address the bank's funding sources, and the bank didn't make someone available to comment. Comerica declined to comment.)

Perhaps partly due to fears concerning dearer funding, Comerica and KeyCorp shares this year have fallen 22% and 20%, respectively, compared with a 5.2% gain for the

KBW Banks Index

. Comerica and KeyCorp trade at about 13 and 11 times estimated 1999 earnings, respectively, vs. 15 times for the index. But despite looking cheap, these banks could fall further if interest rates continue to move higher, observers say. On Nov. 16, the

Federal Reserve

hiked its target for the fed funds rate to 5.5%, the third increase this year.

Too Many Loans, Too Few Deposits

Some banking pundits concerned about funding costs focus on what's called the loan-deposit ratio, which divides a bank's loans by its deposits. The larger the deposit shortfall, the more a bank relies on borrowed funds, which are generally more costly than most types of deposits.

At the end of the year's third quarter, National City had a loan-deposit ratio of 115% (i.e., 15% more loans than deposits), compared with an average of 105% for the nation's 15 largest banks, according to

SNL Securities

, the financial-services analysis firm. The ratios for Comerica and KeyCorp at the end of September were a much higher 140% and 138%, respectively.

"The loan-deposit ratio is definitely something that bank investors should watch, particularly when it's high," says Jacqueline Reeves, managing director at the New York broker

Putnam Lovell de Guardiola & Thornton

. She says that, compared to peers, Comerica and KeyCorp are more at risk to rising interest rates because of their high loan-deposit ratio. (Putnam Lovell hasn't done recent investment banking for either bank, and Reeves doesn't rate those stocks.)

Earnings at KeyCorp and Comerica could be eroded by "a lack of liquidity in their balance sheets," says a bank-stock hedge fund manager who asked not to be identified. His fund has no position in either bank.

National City's net interest margin -- the percentage difference between interest earned on loans and interest paid on deposits and borrowed funds -- shrank to 4.03% in the third quarter from 4.1% in the year-ago period. Over the same time span, Comerica's margin fell to 4.56% from 4.63% and KeyCorp's got compressed to 3.92% from 4.08%. Faced with sluggish deposit growth, all three banks had to borrow significantly more long-term debt over the 12 months, pushing up interest costs.

It's All About Liquidity

The hedge fund manager says high loan-deposit ratios are less of a problem for banks with large amounts of the sort of loans -- like mortgages -- that can be easily sold to raise liquidity. He names


(STI) - Get Free Report

, which, although it has an above-average loan-deposit ratio of 111%, also has nearly a third of its loan book in residential mortgages. (His fund holds SunTrust.) By contrast, Comerica and KeyCorp are heavily biased toward commercial credits and only have 6.8% and 2.8%, respectively, of their loan books in residential mortgages.

However, Carl Dorf, manager of the


Pilgrim Bank & Thrift Fund, disputes this approach, saying there's now a good market for commercial credits that can be used to raise liquidity.

Dorf also argues that National City's problems were in some ways unique. First, the bank, which Dorf is long, actually suffered a 7% drop in deposits in the third quarter from a year earlier, while Comerica's deposits rose 3% over the same period.

But the hedge fund manager points out that even though Comerica's deposits did rise slightly, the bank's loans grew at a much faster 12.7% clip in the year's third quarter from a year ago.

One way of building deposits is to buy other banks and absorb their deposits, says Mark Davis, head of research for the


Banc Stock Group financial-services mutual fund. But he notes that Comerica hasn't been a busy acquirer and comments that KeyCorp, due to its operating weakness, is hardly in a position to be an active predator. Davis' fund has no position in Comerica or KeyCorp.

And even if some banks' loan growth is restricted by the rate of deposit growth, they can still post robust revenue increases by focusing more on fee-based, nonlending activities, Davis adds. But some of KeyCorp's nonlending operations have been sources of weakness at the bank, while Comerica's noninterest income, though up 12% in the third quarter, makes up a relatively small 30% of the bank's total revenue.

Wrong! Rear Echelon Revelations: B2B Draft Results Unveiled


James J. Cramer

11/29/99 7:45 PM ET

We didn't have the glaring


lights or the chanting fans. Nobody booed or hissed when

Ask Jeeves


went for $125,000, or when no one chose



. And the style -- random names drawn from a hat -- took away from the drama and tension of the first-round drafts.

But it was good theater nonetheless. So let me do my best to describe it. The bidding was done in $25,000 increments, with no bids below $25,000. You could pass, but nobody got last licks, meaning that if I passed and

Matt Jacobs

bid $25,000, I could up him. Each captain had to budget for 10 picks, which meant for a lot of gamesmanship.

Join the discussion on

Cramer's Latest, go to the

Red Hots Forum

, or visit our

B2B Forum


I drew



as my first pick out of the bag. I was conscious that Chairman Marty Wygod is a moneymaker, and as the brains behind CareInsite, he was too good an asset to pass up. I bid $25,000, the minimum, and Matt passed.

CareInsite was mine.

BEA Systems


came up next, and Matt wanted it bad. He bid $50,000 to start. I countered with $75,000, then back to Matt for a hundo and finally my $125,000 bid took it all. I was starstruck by the CEO of the company on


last week and didn't want to pass it up.

Matt and I both have a jones for


(VRSN) - Get Free Report

, so it was no surprise when he took the bidding up to $175,000. As much as I love this one, I wasn't going to trump him with $200,000 and leave myself wide open for some lousy drafts down the line.

Sapient then got drawn, and we both passed. So much for those hybrid players.


(PCOR) - Get Free Report

came up, and we both passed again. No vote of confidence there.

Next thing I know, Ask Jeeves was on the table, and I paid $125,000 for a company I scoffed at a few months ago. Got to have my Jeeves.



got drawn next. Nobody liked the gross margins, so we both passed.

Then Matt overpaid for



, bidding $125,000. Just one man's opinion, but I wouldn't pay that much for a site-meister.

As luck would have it, we picked Sapient again. The piece of paper was folded so well it felt like a new one from the outside. We passed again.

We also passed on the next draw --



. Nobody liked the business model.




drew spirited bidding, and I snared it for $100,000.

Twice more Sapient got picked. Incredible coincidence. Twice more we passed.

Matt then picked

(STMP) - Get Free Report

and got it for $50K. No thanks.

Matt pulled out all the stops to get


(BVSN) - Get Free Report

, the next pick, paying $175,000 for it. I wanted it badly and made him pay severely.

I then reached for



for $50,000, which I thought was a steal compared to Matt's pick.

Net incubator

Internet Capital Group


was everybody's top pick going into the draft, so it wasn't surprising that $175,000 got it, nor that it was Matt who paid for it. He had shelled out for BroadVision, VeriSign and ICGE, and he had earned them.

But now he was short cash, and I could have my way.

I nailed



for $25,000 -- a fabulous buy, I think.

Then a moment of awkwardness when


(ORCL) - Get Free Report

came up and nobody bid on it -- despite

Cramer Berkowitz

being long it. Small-cap bias perhaps.

Matt then snared

Siebel Systems


for $50,000, which I think was $25,000 too much.

I grabbed



for $150,000. VerticalNet was my fave name going into it, so I thought I did pretty well.

Oracle came up and got passed over again.

Then Matt took



for $25,000. I think I will regret not bidding $50,000 for that one.

pcOrder came up again, and this time we just threw it on the discard pile and didn't put it back.

Then Matt took



for $25,000 -- again, something I think I will regret.

Commerce One


was mine. I wasn't going to lose it, and Matt knew it. The bidding stopped at $125,000.

We then redshirted Chemdex.

Oracle got picked again, and this time Matt took it for $50,000.

He then finished by taking Sapient for $150,000. He only had room for one more player on his roster, and he had to use all of his cash.

I then grabbed



for $150,000, giving me three of a kind -- Commerce One, Ariba and VerticalNet -- which made me very happy.

Then I burned $125,000 on



to finish out my roster.

All in all, a draft well done. I do hope you will follow along with us, and I am told that the site will try to update our portfolio valuations regularly


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Ariba, BroadVision, Oracle, Siebel Systems, VeriSign and VerticalNet. 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: Shorewood Packaging Rejects Unsolicited Bid From Rival Chesapeake


Eileen Kinsella

Staff Reporter

11/29/99 8:19 PM ET

Shorewood Packaging


rejected an unsolicited $480 million bid from



, saying it was not for sale and would continue to pursue an attempted $700 million purchase of the rival company. Shorewood called Chesapeake's $16.50-a-share bid grossly inadequate.

For those of you who haven't had a chance to read

Merger Jargon for Dummies

, Chesapeake's move is a seldom-used strategy known as a

Pac-Man defense, which comes in response to Shorewood's $40-a-share bid for Chesapeake last month. Shorewood also has a trick or two up its sleeve, namely a poison-pill anti-takeover defense that would make it prohibitively expensive for any party to acquire more than 25% of its stock.

Speaking of pills, cholesterol drug Lipitor is shaping up as a major source of contention -- and possibly pain -- in the current merger skirmish between





(PFE) - Get Free Report


Retaliating against a hostile $80 billion takeover bid from Pfizer, Warner moved to end their agreement to jointly market Lipitor, the blockbuster cholesterol treatment with expected 1999 sales of more than $3.6 billion. Warner filed a counterclaim against Pfizer alleging "flagrant breach of contract," according to



Pfizer responded by saying it did not violate any of its agreements with Warner-Lambert and said it will continue to support Lipitor sales. If a court rules in its favor, Warner-Lambert said it would not be required to make payments to or share revenue with Pfizer. Earlier this month, Warner agreed to merge with

American Home Products


in a $67.1 billion deal.

Standard & Poor's





Old Kent Financial


will be added to the

S&P 500

index. Molex will replace



after the close of trading tomorrow. PacifiCorp is being acquired by

Scottish Power

. Old Kent will replace


(HON) - Get Free Report

after the close of trading on Dec. 1, due to its acquisition by fellow S&P 500 component

Allied Signal



After-Hours Trading

After-hours trading on

Island ECN

was very heavy, with the top five issues trading in excess of 200,000 shares each. The exchange was led all night by



, which traded in excess of 800,000 shares, an extraordinary volume.

Inexpensive tech stocks like

Imaging Technologies



Walker Interactive Systems


continued to pique the most interest.

Across town on


, volume was virtually nonexistent.

(AMZN) - Get Free Report

led on 1000 shares.

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

ITC Deltacom


said it expects fourth-quarter revenue and profits to fall below expectations due to a shortfall in sales to Internet service providers. The company said it expects a fourth-quarter net loss of 26 cents to 27 cents a share, compared to a previous forecast of a loss of 25 cents a share. The current 12-analyst estimate is for a loss of 24 cents a share.

Mergers, acquisitions and joint ventures

Chase Manhattan


said that about 21.5 million shares, or 71.9%, of

Hambrecht & Quist


stock have been tendered in its offer to buy the company. Chase also extended its offer to Dec. 8 from Nov. 29, making it the third time Chase has extended the offer in the past month.



said it would exercise an option to buy shares of



at $34.56. Elan said the total cost of the exercise deal is worth up to $182.8 million. The company also said it would exercise an option to buy shares of


at $61.01 each, making the deal worth about $76.3 million.

Offerings and stock actions

Continental Airlines

(CAL) - Get Free Report

said it increased its stock repurchase program by $400 million. Continental also said its 2000 jet capacity growth would shrink to 4.6% from 6%.



said it sees no reason for the recent drop in its stock price. PolyMedica fell 2 1/4, or 11.8% to 16 7/8 in trading today. Shares have dropped more than 30% from a close of 25 7/16 on Nov. 10.



Federal Aviation Administration

said it would conduct a special audit of


(BA) - Get Free Report

after a string of recent aircraft quality problems, including improperly tightened bolts and parts that failed federal flame tests. The FAA said the inspection would begin Dec.2, and likely run through February.

Delta Airlines

(DAL) - Get Free Report

pilots ratified an agreement for B-777 captains to be paid $250 an hour, and B-767 pilots to be paid $230 an hour.

Integrated Health Service


said the 30-day grace period has expired for the payment on its $150 million, 10.25% senior subordinated notes due 2006, and the company has elected not to make the payment. Integrated had previously announced it is in discussion with lenders regarding debt restructuring.

Bond Focus: Staring Data in the Face, Bond Market Backs Down Again


Elizabeth Roy

Senior Writer

11/29/99 5:36 PM ET

The Treasury market refused to be consoled today.

The day's only economic indicator, October

existing home sales

, slid much more than expected to a 16-month low. (

joint newsroom took

a closer look.) Oil retreated from the eight-year high it set last week. The dollar rallied against both the euro and, thanks to an intervention by the

Bank of Japan

, the yen. (The Japanese central bank sold yen and bought dollars because the yen's increasing strength threatens the country's export-led recovery.) Also, gold took a big hit following a coolly received auction by the

Bank of England

(not that anyone really cares).

But for the fifth consecutive session, the bond market sulked, sending long-term yields to their highest levels in over a month. The benchmark 30-year Treasury bond gave up 28/32 to end the day at 97 19/32, lifting its yield 6 basis points to 6.30%, its highest close since Oct. 27. Shorter-maturity note yields rose by comparable amounts, but the move sent the two-year note's yield to the highest level since July 1997, 6.04%.

The market: Join the discussion on


Message Boards.

Analysts attributed the move chiefly to concern that key economic reports due out later this week will give the


reason to keep its finger on the interest-rate trigger. The fear is that the Fed is poised to raise the fed funds rate, the short-term interest rate it controls, in the new year in order to prevent inflation from heating up as the economy continues to grow.

"People are back concerned about the Fed, is the big thing," said Bill Hornbarger, Treasury market strategist at

A.G. Edwards

in St. Louis. The economic reports, due out tomorrow, Wednesday and Friday, are the

Chicago Purchasing Managers' Index

, which measures manufacturing activity in the Midwest, the

Purchasing Managers' Index

, which measures manufacturing activity countrywide, and the

employment report

, respectively. All are for November.

"You're staring all this data in the face," said Michael Pianin, vice president at

ING Barings Futures & Options


Meanwhile, last week's data --

Wednesday's revisions to third-quarter



Friday's October

personal income and consumption

report -- provided no reason to hope that the Fed will go back into its cave.

Amid those concerns, Hornbarger said, "You've got a market that doesn't feel good right now, so the path of least resistance is still lower prices, higher yields."

Abetting the situation, the analysts said, was the fact that a handful of the 30 primary dealers of Treasury securities end their fiscal years tomorrow. On the last days of their fiscal year, securities firms typically take themselves out of the market. Poor liquidity can cause the market to make a bigger move than it otherwise would.

On top of that, Pianin noted, the final days of November and the first week of December is a period when the Treasury market historically has done well. As a result, people are reluctant to maintain short positions. That, too, makes it easier for the market to move lower. "There's no short base to take any kind of selling," he said.

The good news, Pianin said, is that all the selling of the last week has put the market in a "very oversold" condition from which it will probably move higher before it moves lower.

In addition, he said, it appears that just as the Treasury market rallied strongly up until the Nov. 16 Fed meeting, pricing in the best possible outcome, it is now pricing in the worst possible economic news.

If the numbers are ugly the market may continue to go down, Pianin said. But he thinks the likelier scenario is a retreat from these lows in the event the economic reports are in line with expectations. "It's likelier we're going to be at the worst possible price points before the events," he said. "Today felt like some kind of capitulation."


Street Sightings

James J. Cramer will be chatting on Yahoo! at 5 p.m. EST, Tuesday, Nov. 30. Register for Yahoo! Chat at: It's free!

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