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weekend06-11-99's WEEKEND BULLETIN

June 12, 1999

Phillips Publishing

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Market Data as of Close, 6/11/99:

o Dow Jones Industrial Average: 10,490.51 down 130.76, -1.23%

o Nasdaq Composite Index: 2,447.88 down 36.74, -1.48%

o S&P 500: 1,293.64 down 9.18, -0.70%

o TSC Internet: 550.24 down 19.84, -3.48%

o Russell 2000: 438.01 down 4.26, -0.96%

o 30-Year Treasury: 87 21/32, down 1 08/32, yield 6.135%

Change on the Week:

o Dow Jones Industrial Average: down 309.33, -2.9%

o Nasdaq Composite Index: down 30.29, -1.2%

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TheStreet Recommends

o S&P 500: down 34.11, -2.6%

o TSC Internet: down 3.22, -0.2%

o Russell 2000: down 4.32, -1%

Companies in Today's Bulletin:

Scottish Annuity & Life Holdings (SCOT:Nasdaq)

Annuity and Life Re (ALRE:Nasdaq)

Reinsurance Group of America (RGA:NYSE)

Pfizer (PFE:NYSE)

In Today's Bulletin:

o Stock Mart: Scottish Annuity
o Wrong! Dispatches from the Front: Count Me Out
o Evening Update: EC Committee Gives Thumbs Down to Trovan, Ending Bad Week for Pfizer
o Bond Focus: Striking Bond Buyers Let Long Bond Yield Hit 6.15%

Also on

The Coming Week: Greenspan Holds Match to Powder-Keg Market

The way stocks trade next week will depend largely on how much Greenspan clears the air during his remarks next Thursday.

Hardware & PCs: Unlike PCs, Success Doesn't Come Cheap for Boxmakers

A Dell exec sees 'rational' pricing, but a low-end price fight could result in less profit for the sector.

The Invisible Mouth: Dissecting Those Words Once Again

Remember that speech Fed Governor Laurence H. Meyer gave in April? Let's revisit the significance of what he said.

Commentary Features: Viewpoint: From Italy to Mexico, Stability Favored Over Market Orthodoxy

The revolt against '90s economic orthodoxy could usher in more sustainable reforms, better growth and less market volatility.

Stock Mart: Scottish Annuity


George Mannes

Staff Reporter

Someone tells you that you can buy a pool of money by spending 72 cents for every dollar you receive. Is it a scam?

No, say fans of

Scottish Annuity & Life Holdings


. It's a bargain, they say.

As of March 31, the fledgling reinsurance company was sitting on a $256 million fixed-income investment portfolio and shopping around for reinsurance business to transact. That hoard translated into a book value of $13.52 a share -- well above Scottish Annuity's Friday closing price of 9 3/4 a share, up 3/16.

"There aren't that many opportunities to buy anything for 9 1/2, 10, when book value is $13.50 or thereabouts," says Paul Newsome, senior analyst at

CIBC World Markets

, which was a co-manager of the company's IPO last year. "It's a pretty hefty discount. It doesn't happen very often." Newsome has a strong buy rating on the stock, the firm's highest rating.

The company's price-to-book ratio of 0.7 compares favorably to that of

Annuity and Life Re


, another reinsurance company that went public last year. Annuity is trading at 1.7 times its book value. A more established reinsurance company,

Reinsurance Group of America

(RGA) - Get Reinsurance Group of America Incorporated Report

, is trading at 2.3 times book value.

So what exactly does Scottish Annuity plan to do with its money? The Cayman Islands-based company is in two major lines of business. The first is life reinsurance, or insuring the risk of life insurance products that have already been written. More specifically, the company, according to CEO Mike French, is insuring annuity products -- those products that promise people annual payments, as opposed to insurance that focuses on death benefits.

The company also is in the life insurance business itself, writing variable-life policies for high-income customers (and using reinsurance itself to spread this risk around).

But Scottish Annuity expects that the biggest part of its business will be reinsurance, a field in which the company is targeting a 15% return on equity.

The company's chairman is Sam Wyly, the Texas investor atop the

Maverick Capital

investment firm, which had $2.5 billion under management as of October. French, an attorney by training, was a Maverick managing director. CFO Peter Presperin is a CPA with 20 years of experience in the insurance business. Chief insurance officer Henryk Sulikowski, who comes from

Swiss Reinsurance

, has "an excellent, excellent reputation," says Newsome at CIBC. And in recent months, the company has added insurance industry veterans to its actuarial staff.

"I think they understand the reinsurance business," Newsome says.

That hasn't prevented the company from stumbling in the past year. The company reported earnings about 12% lower than expected for the first quarter because its portfolio yield was smaller than expected.

"The company has made some steps to fix that," Newsome says. "We're really not that concerned about it because what we think is key to the story is the signing of reinsurance contracts and, to a lesser extent, the selling of life insurance policies."

Even after analysts lowered their estimates, the company is still a bargain using a price-to-earnings yardstick. As of Friday, it was trading at about 14 times the

First Call

consensus of estimated 1999 earnings; Annuity and Life Re, by comparison, was trading at about 19 times.

The company's boosters aren't limited to the Wall Street firms that brought it public.

Keefe Bruyette & Woods

, which hasn't done underwriting for the company, rates the firm attractive, its second-highest rating.

So why is Scottish Annuity's stock so low? Problems started with the IPO last November. After going out at 15 a share, it peaked at 16 1/8 on the first day of trading, closed at 13 15/16 and hasn't made it back to its offering price. "With so many hot IPOs, when an IPO doesn't pop sharply, right away, investors tend to view it as a broken IPO," says Newsome.

The other is investor impatience. For all the money and personnel at its disposal, Scottish Annuity just hasn't done much reinsurance business. It decided not to go through with a deal it was contemplating at the time of its IPO; it took until early May to announce its first reinsurance deal, which ties up $11 million in capital. On Friday morning, the company said it had signed a definitive agreement to acquire Delaware-based

Harbourton Reassurance

, an deal that Scottish Annuity said would open up new reinsurance opportunities in the U.S.

"These guys have not ramped up their deals as quickly as expected, so people are saying, 'I don't want to be around anymore,'" says a fund manager holding the stock, speaking on condition of anonymity.

French, the CEO, says the criticism is unfair. "We were careful to try to tell people you don't write this business overnight," he says. "We're on target in that we're very comfortable with the business flow we're seeing."

He adds, "We probably stumbled a little more in public relations than in operations."

Newsome agrees. "With any new company, there's a transition point where you learn how to manage investor expectations and learn how to communicate with investors," he says. "They haven't necessarily gotten those skills down."

Adds the investor, "Once they start cutting reinsurance ... the stock should do very nicely."

All the company needs to attract attention, perhaps, is a little bit more action.

Wrong! Dispatches from the Front: Count Me Out


James J. Cramer

Can you believe these banks? Shouldn't they be tanking with these bonds? Or are the bonds falsely down?

Throughout this period, I have been struck by the rampant inconsistencies of this market since the


went to a tightening bias. Banks should be getting knocked here -- and hard. Drugs should be down big, too, if the bonds are telling the truth.

When we have anomalies, it does not make the market more attractive to me. If the bonds are real, these stocks will fall. That's what I care about right now, and it is why I don't trust this market.

Other than telco tech, nothing really gets me interested -- even down here. Usually I can find something down to buy, but my faves -- like telco tech and semiconductor stocks -- aren't coming in, so count me out.

On the sidelines.

Got a lot of cash and bonds. Other than the portion in the 30-year, my portfolio's not burning a hole in my pocket. The 30-year bonds, however, are positively torching me.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long the long bond. 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: EC Committee Gives Thumbs Down to Trovan, Ending Bad Week for Pfizer


Heather Moore

Staff Reporter

Shares of


(PFE) - Get Pfizer Inc. Report

slipped 1/4 to 97 in after-hours trading following news that a committee of the

European Commission

recommended suspending marketing approval for the company's lately maligned antibiotic


. On Wednesday, the drug maker said the

Food and Drug Administration

urged physicians to limit prescriptions for Trovan after 14 cases of acute liver failure were strongly associated with the drug. As analysts downgraded the stock and estimates for Trovan sales were slashed, PFE recorded a 14.8% loss for the week.

In other postclose news (earnings estimates from

First Call

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

Earnings/revenue reports and previews



reported a fourth-quarter loss of $3.76 a share, including charges. The five-analyst outlook called for an operating loss of 61 cents vs. the year-ago loss of 25 cents.

Offerings and stock actions

Borg-Warner Security


said a group of

Merrill Lynch

-affiliated entities plans to sell up to 4.8 million of its remaining shares of the company's stock in an underwritten secondary offering. Borg-Warner also said it plans to close its purchase of 4.4 million of its shares from the Merrill group June 14.

Central Garden & Pet

(CENT) - Get Central Garden & Pet Company Report

boosted its current buyback program to $105 million from $80 million.


(EMKR) - Get EMCORE Corporation Report

priced a planned 4.5 million-share secondary offering at 19 a share.



filed for a 2.25 million-share offering.


Connecticut Energy's


Southern Connecticut Gas

unit filed for an increase of 10.56%, or $24.2 million, in its base rates.

Bond Focus: Striking Bond Buyers Let Long Bond Yield Hit 6.15%


Elizabeth Roy

Senior Writer

The bond market swooned yet again today, racking up its ninth losing session in a row and hoisting the benchmark 30-year Treasury bond's yield to its highest close in more than a year and a half.

The selloff was triggered by a stronger-than-expected May

retail sales

report, and it was accelerated at times by feverish, unconfirmed rumors that the


intends to meet and raise interest rates before its next scheduled meeting on June 29-30 (at which it is widely expected to deliver a 25-basis-point hike in the fed funds rate, perhaps the first of a series). There were also rumors about a hedge fund in trouble, and more rumors that the rumored emergency Fed meeting was to address the situation. (Rumors which, if true, ought to have rallied the bond market.)

But market watchers also laid blame to a pair of larger, more sweeping forces. Corporate treasurers are in a hurry to tap the debt markets before rates go any higher, and that's prompting their investment bankers to sell Treasuries as a hedge (to be explained shortly). And at the same time, market watchers vehemently insist, there are no buyers out there to break the fall in prices. And why should there be? Would you buy Treasuries ahead of key economic data (next week's May

Consumer Price Index

) that may suggest the Fed is likely to raise rates more than once in the months ahead?

Thus, the long bond tumbled 1 2/32 today to 87 25/32, lifting its yield 9 basis points to 6.15%, its highest close since Nov. 10, 1997. Shorter-maturity note yields likewise tacked on anywhere from 3 (the two-year note) to 10 (the 10-year note) basis points. Volume was paltry, however. Tracker


saw $57.2 billion change hands, 23% below normal for a fourth-quarter Friday.

At the most basic level, blame the Fed, said David Ging, Treasury market strategist at

Donaldson Lufkin & Jenrette

. The statement: "The Fed's in a tightening mode and that's never good for Treasuries" explains the bulk of the bond market's behavior this month, Ging said.

Against that backdrop, the retail sales report looked particularly menacing. In the last several weeks, the bond market has detected a shift on the part of the Fed. Previously, the Fed was thought to be waiting for inflation in the form of a rising

Producer Price Index

and Consumer Price Index before raising interest rates. Now, traders see the Fed as likely to respond to evidence of continued strength in consumer demand, because of the risk that it will lead to higher inflation down the road.

So when retail sales rose 1.0% in May, two-tenths more than expected, and the April increase was revised to 0.4% from 0.1%, bond traders shuddered. "This is still a Fed-fearful market and today's data was strong," said Ken Logan, mananging analyst at

Thomson Global Markets

in Boston. Retail sales excluding autos rose 0.5%, in line with expectations, but the April ex-autos gain was revised up to 0.8% from 0.4%.

It didn't matter that the PPI, also released today, was right in line with expectations -- up 0.2% overall and 0.1% at the core, which excludes volatile food and energy prices.

But retail sales can't shoulder all of the blame for the selloff, which picked up steam as the day wore on. Logan says a fair amount of it belongs with corporate treasurers. Corporate bond issuers were very active this week, selling an estimated $13 billion of investment-grade debt, compared to a four-week average that topped out at $10 billion in April. That's expected to continue, as corporate treasurers rush to sell bonds before rates go any higher.

That broad trend could have been partly responsible for today's selloff as investment bankers sold Treasuries and Treasury futures in order to guarantee borrowers a certain interest rate, Logan said. (If rates go up, profits from the short Treasury position will offset the higher cost of money.) "There's a window of opportunity between now and when the Fed meets to issue debt or rate-lock it."

But while corporate treasurers may have been behind much of the selling, they can't be blamed for the fact that bond buyers are on strike. "There's just no buyers as far as I can tell," said Jim Kochan, senior bond strategist at

Robert W. Baird

in Milwaukee. "There's an ongoing lightening of positions and nobody is buying."

The utter lack of buyers explains why the market has been falling so quickly through price levels (the 1998 high yield for the long bond, for example, which got taken out today) that were expected to hold up better as support levels, said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "There's a lack of buyers at meaningful levels," he said. "The volume of selling is not substantial, but there's a continued condition of no buyers at levels where you might expect them to be interested. The ease with which it breaks through important technical levels," he believes, "shows it has further to go."

Market watchers seem to agree that Treasuries have firm support at a yield level of 6.20% or 6.25% on the long bond. That would correspond with yields of 6.50% on many older Treasuries issues, a 5.75% yield on the two-year note (a comfortable 100 basis points over the fed funds rate), and 6% on the five-year note, Crescenzi said.

Curiously, though, there's disagreement over how high a fed funds rate those yields imply. Ging sees them as fitting with a 5% fed funds rate, while Kochan thinks the market is already pricing in "more than the Fed is likely to do over the near term."

Rising oil prices and a drop in the value of the dollar also pressured bonds today. The July crude oil contract moved up sharply from 17.85 to 18.43, while the dollar lost nearly a full yen, dropping to 117.92 from 118.85.

Street Sightings

Chat with John J. Edwards III on AOL's MarketTalk Monday, June 14, at 3:30 p.m. EDT. MarketTalk is hosted by Sage Online. (Keyword: PF Live)


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