Publish date:

TheStreet.com's DAILY BULLETIN

December 2, 1999


Market Data as of Close, 12/1/99:

o Dow Jones Industrial Average: 10,998.39 up 120.58, 1.11%

o Nasdaq Composite Index: 3,353.71 up 17.55, 0.53%

o S&P 500: 1,397.72 up 8.65, 0.62%

o TSC Internet: 925.29 down 4.92, -0.53%

o Russell 2000: 453.67 down 0.41, -0.09%

o 30-Year Treasury: 97 21/32 down 3/32, yield 6.290%

Companies in Today's Bulletin:

Analog Devices (ADI:NYSE)

Carnival (CCL:NYSE)

Amazon.com (AMZN:Nasdaq)

China Prosperity International Holdings (CPIH:NasdaqADR)

In Today's Bulletin:

o Wrong! Dispatches from the Front: Check Out the Legs on These Stocks
o Market Features: Faster Economic Speed Limit Carries Danger: Higher Interest Rates
o Evening Update: Norwegian Cruise Parent Calls $1.7 Billion Carnival Offer 'Inadequate'
o Bond Focus: Bonds Shake Off Meyer but Still End Down

TheStreet.com on Fox News Channel

Where's the best place to invest your money? Top Internet analyst Henry Blodget knows a winner when he sees one. The picks he made on his last appearance are up big ... so what does he say is hot now? Find out on this week's "Stock Drill."

And, on "Word on TheStreet," is the tech bubble going to burst or does the Nasdaq have a lot more room to grow? Plus, Gary B. Smith and Adam Lashinsky face off on some favorite stocks and predictions.

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

FNC is Fox's 24-hour cable news channel. To find Fox News Channel in your area, call your local cable operator or see our "TSC on Fox TV" page at www.thestreet.com/tv.

Also on TheStreet.com:

The Buysider: Why Amazon Still Doesn't Add Up

What does Bill Miller see that makes this company worth $84 a share?


Internet: China Prosperity Takes a Wild Ride as World Trade, Momentum Take Center Stage

The stock, around 1 just two weeks ago, touches 80 as investors ignore the star-crossed fundamentals.


Mutual Funds: H&Q to Close IPO Fund to New Investors

The fund has proved to be as popular as many of the stocks it tries to buy.


Brokerages/Wall Street: Big Board Bracing for Rule 390 Change

The SEC 'encourages' the NYSE to part with its key listings rule.


Wrong! Dispatches from the Front: Check Out the Legs on These Stocks


James J. Cramer

12/1/99 3:14 PM ET

If you want legs, check out the action in the semiconductor stocks. That's all from a very bullish report from

Analog Devices

(ADI) - Get Report

. One bullish report fits a whole group!

Join the discussion on

Cramer's Latest, go to our

B2B Forum

, or visit the

Semiconductor Sector Board


It has been like this all year. You get a good number from Analog, you can justify buying everything from

Texas Instruments

(TXN) - Get Report


Applied Materials

(AMAT) - Get Report


It is nice to see this relationship work. So often, we have found lately that good news for one company has meant nothing for any other company in the industry. It is a testament to how strong this business really is that this group can bounce right back.

Random musings

: I am killing

Matt "Young Turk" Jacobs

in the

B2B Rotisserie League, mostly because of dynamite performances from






-- two stocks that I own in the league, but not in the fund! The cost of learning, I guess ...

MCI WorldCom


still being buffeted by a he said/she said rap between firms. And I am still long.


James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Analog Devices, Applied Materials, Texas Instruments and MCI WorldCom. 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


Market Features: Faster Economic Speed Limit Carries Danger: Higher Interest Rates


Thomas Lepri

Staff Reporter

12/1/99 9:12 PM ET

Don't look now, but this New Economy may not be all it's cracked up to be.

To the joy of New Era believers, economists are starting to seriously entertain the notion that the economy's speed limit is higher than previously allowed. But in an unexpected twist for that same camp, they're also pointing out that interest rates may be headed higher because of that new speed limit.

Spikes in productivity, the long-awaited fruit of information-technology investment, are getting increasingly difficult to ignore. The third quarter's 4.2% rise in nonfarm business productivity was just the latest in a fairly consistent string of solid gains over the past couple of years. And that impressive chain of data has a lot of dismal scientists raising, by as much as a full percentage point, their estimates of how fast the economy can grow without producing inflation.

"People are now of the opinion that sustainable growth is somewhere in the 3%-to-3.5% range," says Paul Kasriel, chief U.S. economist at

Northern Trust Co. of Chicago

. "That's a mainstream view of things. Of course, there are others who think that we're still underestimating productivity growth. But my view is that the


is probably thinking somewhere in the 3%-to-3.5% range."

Sustained productivity gains are the bedrock of the New Era, of course. If more goods and services can be produced by the same number of workers in the same amount of time, then total production can grow without attendant increases in unit labor costs or, further down the road, price inflation. Naturally, the Federal Reserve needn't raise interest rates to slow the economy, for, courtesy of productivity, there's more than enough slack in the economy.

Quite a rose garden, to say the least. But there's another line of thinking that says the Fed may actually need to raise rates in a high-growth, high-productivity economy.

Low Inflation Gooses Real Rates

One economist who has been writing a fair amount about the economy's speed limit lately is Richard Berner, chief U.S. economist at

Morgan Stanley Dean Witter

. In a note last week, Berner wrote that "a higher-productivity growth economy, characterized by strong investment and credit demand, is likely to push the level of real interest rates higher than previous 'norms' of 3%."

To begin with, because real interest rates are nominal rates minus inflation, low inflation automatically raises real rates. And periods of high growth and high productivity can create intense credit demand, as people leverage themselves to capitalize on economic booms. That can put upward pressure on interest rates.

More importantly, though, such periods are characterized by rising returns on investment. It's a nifty little phenomenon, and one most clearly seen in the U.S. stock market: Investments in information technology, largely financed by borrowing, raise productivity. That, in turn, boosts profits, which in turn increase valuations. Ultimately, the argument goes, such periods will cause people to look for similarly higher yields on all investments, including loans.

Mark Vitner, vice president and capital markets economist at

First Union

, puts it another way. "The economy's long-term growth rate potential


the real rate of interest," he explains. "It's called opportunity cost. If the economy's sustainable growth rate is stronger than what people thought, then the opportunity cost of holding idle cash is greater. That's something that a lot of people are just waking up to."

If the economy's speed limit is higher than previously thought, therefore, so are real interest rates. To Berner, who thinks the speed limit may have increased by 75 basis points, that means Fed policy is still too accommodative, given the intense growth in the economy. "While real rates are higher, they need to be higher," he says. "And you need still-higher rates to slow the economy."

He's not alone. Significantly, Fed Gov.

Laurence Meyer

argued as much last night in his

speech before the

Stern Graduate School of Business


Monetary policy would have to be alert both to the effect of a higher productivity trend on demand as well as supply and to the implication of the model that an increase in trend productivity raises the economy's real equilibrium interest rate. Therefore, even under the permanent-bliss story, policymakers have to be alert in the short run to the possibility of overheating and, at over a longer run, to aligning the real federal funds rate with its higher equilibrium value.

This may all be a bit academic, however, given that the present growth rate -- a rabid 5.5% in the third quarter, by the

Commerce Department's

last reckoning -- outstrips even the most generous estimations of the economy's speed limit, whatever it may be exactly.

"You'll know when the economy is exceeding its speed limit," says John Lonski, vice president and senior economist at

Moody's Investors Service

. "That will be when prices will grow out of control."

It's safe to say the Fed won't want to wait that long.

Evening Update: Norwegian Cruise Parent Calls $1.7 Billion Carnival Offer 'Inadequate'


Eileen Kinsella

Staff Reporter

12/1/99 9:11 PM ET


(CCL) - Get Report

announced a surprise $1.7 billion cash tender offer for

NCL Holding


, the parent of

Norwegian Cruise Line

. But NCL quickly responded that the so-far-unofficial offer was "inadequate."

Carnival told


it moved to make the tender offer, which expires Dec. 22, after NCL rebuffed an approach from Carnival earlier Wednesday.

Carnival said the deal would not be expected to dilute its 2000 earnings and that the deal could add to earnings in 2001. Check out additional

coverage from


joint newsroom.

After-Hours Trading

Intelect Communications


has the after-hours crown on

Island ECN

, trading in excess of a million shares. Volume is pretty heavy, furthering a recent trend that has sent issues into the sort of hyperactivity that causes insomnia in kindergarten teachers.

Last night,


(DWCH) - Get Report



(VONE) - Get Report

cracked the seven-digit shares-traded barrier.

Over on



Network Associates


dominated trading, taking the crown with a nice pop in the last hour of trading.

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

ADC Telecommunications

(ADCT) - Get Report

posted fourth-quarter earnings of 46 cents a share, beating the 23-analyst estimate of 43 cents and the year-ago 37 cents a share.

American Eagle Outfitters


said same-store sales for November were up 12.2%.

Baker Hughes


said it took a $130 million charge in December from the disposition of assets and that it sees a small operating loss in the fourth quarter. Baker said it would dispose of its holdings in


(TBI) - Get Report

and expects a $29 million gain in the fourth quarter.

Burlington Coat Factory


said second-quarter net sales climbed 4%, while comparable-store sales fell 3.9% due to warmer-than-normal temperatures.

Casella Waste Systems

(CWST) - Get Report

reported second-quarter earnings of 29 cents a share, in line with the three-analyst estimate and up from the year-ago, restated 13 cents.

CSK Auto


reported third-quarter earnings of 49 cents a share, beating the nine-analyst estimate of 47 cents and the year-ago 37 cents a share.

J.D. Edwards


reported fourth-quarter earnings of 3 cents a share, beating the 11-analyst expected loss of 1 cent a share, but below the year-ago 34 cents.

Finish Line


said it sees a wider-than-expected loss in the third quarter due to a decrease in sales in its apparel division. The company said it expects a loss of 8 cents to 10 cents a share. The current eight-analyst estimate is for a loss of 1 cent.



said bookings were down but that it expects to meet its fourth-quarter earnings estimates. The current eight-analyst estimate calls for earnings of 38 cents a share. Galileo also said its outlook for 2000 remains unchanged.

Mergers, acquisitions and joint ventures

Charter Communications

(CHTR) - Get Report

agreed to swap certain cable systems with a unit of


(T) - Get Report

as part of a plan to build regional cable "clusters" that are cheaper to operate. Charter, the brainchild of


(MSFT) - Get Report

co-founder Paul Allen, said the agreement with AT&T

Broadband & Internet Services

would create more efficient cable operations and speed the delivery of broadband services.

Charter plans to take over AT&T's cable systems serving about 704,000 customers in the St. Louis area as well as other communities in Missouri, Illinois, Alabama and Georgia. Meanwhile AT&T's broadband unit will take over some Charter systems serving about 632,000 customers and receive an undisclosed amount of cash. The proposed swap is expected to take several months to complete.

Hilton Hotels

(HLT) - Get Report

revised the preliminary stock-to-cash ratio calculations for its acquisition of

Promus Hotel

, which closed yesterday. Hilton said holders of Promus common stock chose to receive $38.50 in cash for each Promus share held, and 11% of Promus shareholders elected to receive 3.2158 shares of Hilton stock for each Promus share.

Reliant Energy

(REI) - Get Report

said it bought an additional 12% of the capital stock of Dutch power generation company


for about $490 million, boosting its ownership to 52%. The company said it will purchase the remaining 48% of the shares on March 1, and that the total acquisition price is about $2.3 billion.

Offerings and stock actions

Flextronics International

(FLEX) - Get Report

set a 2-for-1 stock split of its ordinary shares in the form of a bonus issue payable to shareholders as of Dec. 8.

Hot Topic


set a 2-for-1 stock split, effective Dec. 27 to shareholders of record Dec. 13. The company also reported a 31.9% increase in same-store sales for the four weeks ended Nov. 27.

Level 3 Communications


said it filed to offer, from time to time, about $2.375 billion of debt, securities, common and preferred stock and depositary shares.

Morgan Stanley Dean Witter

priced 6.25 million shares of



at $12 a share, the top of the estimated $10 to $12 range. McAfee provides antivirus, Y2K compliance and security services for computers.



said it would buy back up to 5 million shares of its common stock.


Loewen Group


said Robert Lundgren, who has been at the helm for just a year, will resign as president and CEO tomorrow, and will be replaced by Paul Houston. The company did not disclose the reason for Lundgren's departure.

ValueVision International


said it hired

Banc of America Securities

to help with its growth and investment plans and said it has $300 million in cash available for investments.

Bond Focus: Bonds Shake Off Meyer but Still End Down


Elizabeth Roy

Senior Writer

12/1/99 4:57 PM ET

Bond prices pared the steep losses they suffered early in the session on hawkish comments by an equally hawkish


official, but still ended the day lower, extending the downtrend they have been in since Nov. 16.

Relief from Fed Governor

Laurence Meyer's

cautionary comments came in the form of the November

Purchasing Managers' Index

, which turned in a friendlier-than-expected performance.

Still, the benchmark 30-year Treasury bond ended the day down 4/32 at 97 22/32, lifting its yield a basis point to 6.30%, its highest since late October. Shorter-maturity Treasury note yields rose by comparable amounts. It was the Treasury market's ninth down day in the last 11.

The market: Join the discussion on


Message Boards.

Now, analysts expect very little noise out of the Treasury market until Friday morning, when the Labor Department releases the November

employment report

, the most important monthly economic indicator.

The long bond fell as much as 26/32 this morning on Meyer's

comments at

New York University's Stern Business School

last night. Meyer, whom Fed-watchers consider the most hawkish member of the Fed's monetary policy committee, made two statements suggesting that additional interest-rate hikes may be necessary.

In the first, he said that while rising productivity has lowered the NAIRU -- the non-accelerating inflation rate of unemployment, the unemployment rate below which inflation accelerates -- "old rules still apply to the new limits. Overheating still eventually results if the growth of demand exceeds the growth of supply for long enough, driving the unemployment rate below the NAIRU. Excess demand in labor markets still ultimately puts upward pressure on nominal compensation."

In his second headline-grabbing statement, Meyer said: "Once the unemployment rate falls far enough below your best estimate of the NAIRU, for example, it would be prudent to return to a more normal responsiveness of interest rates to further declines in the unemployment rate. In my judgment, we are already in a range in which such a normal response to further declines in the unemployment rate is warranted."

At the

Chicago Board of Trade

, where futures contracts on the fed funds rate are

listed, traders today boosted (to 70.9% from 62.3%) the implied likelihood of a rate hike to 5.75% from 5.5% at the Fed's Feb. 1-2 meeting.

Futures traders believe there is almost no chance that rates will be hiked at the next Fed meeting, scheduled for Dec. 21.

The magnitude of the reaction to Meyer surprised different analysts for different reasons.

"He conceded that because of uncertainty

about whether the forces that have allowed growth to accelerate without accelerating inflation, you don't want to tighten as aggressively as you would normally," said Henry Willmore, senior economist at

Barclays Capital

. "There are stylistic differences between


and him, but what they're saying is pretty similar."

Others focused on Meyer's reputation as an unreconstructed inflation hawk, solidified in a January 1997

speech in which he declared that either growth would slow or inflation would heat up.

"I can't believe we even reacted,"

Warburg Dillon Read

Treasury market strategist Mark Mahoney said. "He's been making the same speech everywhere forever. I don't get why the market would pay that much attention."

Fortunately, the Purchasing Managers' Index provided a reprieve. The index itself, which signals manufacturing sector expansion when it's over 50, was in line with expectations, dropping to 56.2 in November from 56.6 in October. More importantly though, a companion index that measures prices paid by manufacturers retreated to its lowest level since August. The Price Index dropped to 65.3 from 69.4.

The development was especially important because

yesterday, the price component of the

Chicago Purchasing Managers' Index

, a regional version of today's report, rose sharply. "After the Chicago number, people were really worried about what the Purchasing Managers' was going to look like," Mahoney said.



Street Sightings

Chat with Brenda Buttner on AOL's MarketTalk Thursday, Dec. 2 at 1:30 p.m. EST. MarketTalk is hosted by Sage Online. (Keyword: PF Live)

Gary B. Smith will be chatting on Yahoo! Thursday, Dec. 2 at 5 p.m. EST. Register to Yahoo! Chat at: chat.yahoo.com It's free!

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