TheStreet.com's WEEKEND BULLETIN
October 9, 1999
Market Data as of Close, 10/8/99:
o Dow Jones Industrial Average: 10,649.76 up 112.71, 1.07%
o Nasdaq Composite Index: 2,886.57 up 25.87, 0.90%
o S&P 500: 1,336.02 up 18.38, 1.39%
o TSC Internet: 732.79 up 9.57, 1.32%
o Russell 2000: 427.71 down 0.40, -0.09%
o 30-Year Treasury: 99 00/32 down 7/32, yield 6.189%
For the week:
o Dow Jones Industrial Average: up 3.7%
o Nasdaq Composite Index: up 5.5%
o S&P 500: up 4.1%
o TSC Internet: up 13.2%
o Russell 2000: up 1%
Companies in Today's Bulletin:
Quantum Digital Loop Tape & Storage Systems Group (DSS:NYSE)
In Today's Bulletin:
o The Coming Week: Fed-Obsessed Market Will Turn Its Gaze to Earnings
o Stock Mart: Topps
o Evening Update: Quantum DLT Group Issues Warning on December Quarter; After-Hours Trading Update
o Bond Focus: Jobs Report Results in Lots of Head-Scratching
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Night Owl Update: SEC Offers Suggestions for After-Hours Trading
Reports designed to provide structure for longer trading days recommend high advertising standards, investor education.
The Coming Week: The Coming Week: Fed-Obsessed Market Will Turn Its Gaze to Earnings
10/8/99 8:04 PM ET
Earnings are coming, and they're going to be good. Big deal.
Join the discussion on
Yes, it's ugly to think the market won't at least momentarily take its eyes off of interest rates to gaze lovingly on third-quarter results. Consensus estimates call for
companies to add 19.3% to their numbers over last year, according to
First Call/Thomson Financial
, and it is likely that, as is usually the case, final results will be even better than that.
But with the
Federal Open Markets Committee's
move to a tightening bias at its meeting on Tuesday, the market still lacks clarity on what's going on with interest rates. Effectively, the bias tells the market that the Fed will weigh the coming economic data and then figure out if it should hike or not.
"The Fed's action will keep investors obsessed with every statistical wiggle that crawls across the tape," said Charles Crane, chief market strategist at
Key Asset Management
. "That means volatility, and whether the market recovers to post a new high or if it drops below 10,000 will depend on the tenor of economic statistics between now and the next Fed meeting."
Economists are pretty much on the fence when it comes to Fed. One camp says the odds favor tightening; the other says they favor standing pat. Friday's bizarro September
, with its unexpected drop in payrolls, did nothing to resolve things. Because it was so out of whack with estimates, there's a general sense that there will be a payback when the October numbers are reported next month.
"If, as many suspect, this number was subject to distortion, you could still get a very strong number next time around," said Marc Wanshel, financial economist and Fed watcher for
. Moreover, Wanshel notes that in the minutes to the Aug. 24 meeting, the FOMC said it was "concerned about the potential for increased cost pressures even if the labor market doesn't get any tighter."
Yes, the economists at J.P. Morgan think the Fed's going to tighten in November.
Not that the outlook from those who think we'll squeak by without a rate hike this is entirely sanguine.
"We're looking for pretty bearish economic numbers through the rest of the month," said Mike Cloherty, senior economist at
Credit Suisse First Boston
Inflation numbers don't look like they'll be all that good. The September
Producer Price Index
, coming out on Friday, should gain about 0.5% overall, 0.4% excluding food and energy prices, according to First Boston (both those numbers are 0.1% ahead of consensus). Oil prices stayed strong in the month, and
R.J. Reynolds Tobacco
boosted prices to distributors by 11%.
On the positive side, Cloherty said there should be some signs of moderating growth in the September
figures, coming out on Friday. The suggestion of a slowing may take enough of the sting out of strong inflation data this month to keep the Fed pat.
"In the end, we think the data isn't going to be strong enough to force the Fed to move in November," said Cloherty, "but it seems unlikely that we'll have enough data to have any confidence in that until the next employment report" at the beginning of next month.
But just because the market remains on Fed watch, and just because there remains a real possibility there's another hike coming, doesn't mean stocks have a heck of a lot of downside left in them. The economists at
Salomon Smith Barney
are some of the more hawkish ones on the Street, but the strategists at the firm doubt there's much stuffing left to knock out of equities.
"At this point, everything we look at tends to say that things are about as bad as they're going to get," said Solly equity strategist Jeffrey Warantz. "The Fed, they've done their damage. The market has pretty much priced in the expected rate increase."
Though he doesn't expect a shoot-em-up rally at the end of the year, Warantz does believe stocks will be higher when everyone's trying to remember the words to
Auld Lang Syne
. "Do I expect to see
12,000 by the end of the year? Absolutely not. Do I think it's possible that the Dow could end the year at 11,000? It's well within reason."
The bond market will be closed Monday for Columbus Day
Stock Mart: Topps
10/8/99 5:30 PM ET
Just don't call it a
In its most recent second quarter, collectible-card and candy company
got just 18% of sales from the division that includes its new line of Pokemon trading cards. And its shares, which closed Friday at 8 and trades at just 11 times predicted fiscal 2000 earnings of about 72 cents a share, would be a bargain even without the monster connection, say analysts and investors.
"I got into it as an earnings story and a turnaround story, not a Pokemon story," says Tim Gray, an analyst with
Fechtor Detwiler & Co.
who initiated coverage with a buy on Sept. 23. (His firm hasn't underwritten for Topps.)
Until recently, Topps, whose shares have fallen from a high of almost 11 in August but are still up some 56% this year (according to data-tracker
), definitely looked in need of a turnaround. In fiscal 1999, which ended Feb. 27, sales fell 5%, following a 10% drop in the previous year. Sales of collectible sports cards have been soft for much of the decade, a decline exacerbated by the 1994 baseball strike and last year's basketball lockout. And Topps made its own missteps, including its 1998 choice not to offer
cards. (It's since reversed course.)
A Turnaround for Topps
But while the sports-card business still isn't exactly hot -- Topps' sales rose 8% in the second quarter, largely due to favorable timing of shipments -- the segment is no longer declining. "There's been somewhat of a shakeout, and the market has rationalized itself," says Brad Evans, an analyst with
, which owns 697,000 Topps shares. "The issues that plagued the industry seem to have passed." And with its strong distribution network, and place as a lead player in the category along with
, Topps is well positioned to take advantage of the market's recovery, he says.
Topps is also looking to capitalize on its strong card brand by -- you guessed it -- using the Internet. Chairman and CEO Arthur Shorin says details of Topps' strategy won't be announced until toward the end of the fiscal year, but that it would likely extend beyond merely shopping for cards online. Analyst Gray speculates that the plan might include in-house card auctions. Thursday Topps said it elected Ann Kirschner, president and CEO of Morningside Ventures, which develops online education services for
, to its board.
Topps' candy business -- home to the eyepatch-wearing icon
-- generated 45% of sales during the second quarter and is growing like gangbusters. Candy sales rocketed 28% in the second quarter thanks to its new Baby Bottle Pop and older products like the Ring Pop and Push Pop. Competitors
trade at about 3 times revenue, notes Evans. Applying the same multiple to Topps' fiscal 1999 candy revenue gives a price of about 6 -- even before its other units' contributions are added in.
While the candy sector is competitive, Topps has the chance to capitalize on some of its strong brand names through better marketing -- the unit could grow between 15% and 25% annually, says John Taylor, an analyst with
Arcadia Investment Research
in Portland, Ore., who rates Topps a buy. (His firm doesn't do underwriting.) And sticking with its pop theme, Topps is launching a Pokemon pop in November.
Ah yes, Pokemon. Topps has its own line of collectible trading cards, aimed at a slightly younger audience than
Wizards of the Coast line, which contributed about $7 million in sales and 5 cents of per-share earnings in the second quarter. In a recent research note accompanying her downgrade of Hasbro,
Salomon Smith Barney
analyst Jill Krutick said the Topps line may steal sales from Hasbro's own lineup. (Krutick doesn't follow Topps.)
"They're getting in somewhat late to the U.S. market, but the cards are selling out everywhere," says Taylor. And
, beware: Pokemon is gearing up to hit Europe. "The anticipation is huge," says Taylor. "Up until now they've only had gray-market goods." The entertainment division, which includes Pokemon as well as
and Marvel Super Hero Universe characters, had more than $14 million in sales during the second quarter, an increase of nearly sevenfold from the same quarter a year ago. "They'll continue to build that out, and at some point they'll think of it a core business," says Taylor.
Topps has also cut costs galore -- in part by closing plants and contracting out most of its manufacturing -- and improved margins, which, along with reduced royalty payments, helped it swing to earnings of 34 cents per share in fiscal 1999 from a loss of 10 cents per share in fiscal 1998. Gray, of Fechter Detwiler & Co., is looking for Topps to show sales growth of about 8% this year and to earn 72 cents per share and 90 cents in fiscal 2001 -- a projected earnings jump of 25%.
The company's balance sheet is in good shape: Long-term debt fell to about $5 million last year from $22 million a year earlier, and Topps generated about $30 million in cash from operations last year. Insiders have been buying recently, and Topps recently announced a buyback plan. At its current stock price, analysts don't see much downside. In addition to its low P/E, Topps has a price-to-sales ratio of 1.29 and a price-to-book ratio of 3.8.
Fiscal 1999 "was the story of cost-cutting and streamlining, and in 2000 they're focused on growth," says Heartland Funds' Evans. Sure, part of that is hooked to the Pokemon craze, he says. But there's enough going on at Topps to make it a bargain even if Pokemon becomes passe.
And perhaps Bazooka Joe cards will be the next hot thing.
Evening Update: Quantum DLT Group Issues Warning on December Quarter; After-Hours Trading Update
John J. Edwards III
10/8/99 8:41 PM ET
Quantum Digital Loop Tape & Storage Systems Group
warned that sales and earnings for its third quarter ending December will be "relatively flat" with year-ago figures, citing a Y2K-related slowdown and slower sales to a large customer. The 12-analyst
First Call/Thomson Financial
estimate calls for third-quarter earnings of 41 cents a share; year-ago figures weren't immediately available. The company also said it expects to report second-quarter earnings of 34 cents a share on sales of $357 million. Those earnings would match the current estimate.
finally caught a bit of a break after hours, rising in the No. 3 volume position on
. Two of today's standout IPOs saw some upside action as well, but overall the late session was sleepy.
Island ECN offers trading, mainly in Nasdaq-listed stocks, from 8 a.m. to 8 p.m. EDT
In other postclose news (earnings estimates from First Call/Thomson Financial; earnings reported on a diluted basis unless otherwise specified):
said it plans to close a sewing and finishing plant in Greenwood, Miss., and relocate its operations to Mexico, eliminating 250 jobs. The plant will close around the end of November.
said CFO Phillip Storin resigned to return home to Texas. Destia also said its previously announced merger with
should close by the end of the year.
settled all patent litigation with
. Under the settlement terms, StorageTek will pay Odetics license fees of $100 million, $80 million of which was paid at the time of settlement with the remainder to be paid in installments of $10 million in each of the next two years. StorageTek said it will record third-quarter pretax expenses of $15.5 million for the settlement.
Bond Focus: Jobs Report Results in Lots of Head-Scratching
David A. Gaffen
10/8/99 3:58 PM ET
The muddied, muddled
produced a similarly confused reaction from the bond market as Treasuries ended mixed in a shortened trading session.
Immediately following this morning's release of the eagerly anticipated jobs data, a euphoric (albeit brief) rally commenced, followed by a whiplash of selling, and several hours of trying to discern what today's release is going to mean for the markets and
policy in the next month.
reported an 8,000 decline in
in September, adding that a 50,000 gain probably would have shown up had it not been for Hurricane Floyd, which took place the same week as the survey. This made the market jump, but only for a few minutes, as bonds then sold off on the 0.5% increase in
average hourly earnings
, a greater-than-expected increase.
The 30-year Treasury bond rose almost a point before losing most of those gains, and was lately down 7/32 to 99, boosting the yield by 2 basis points to 6.20%. The benchmark bond tacked on 7 basis points to its yield this week, and now sits at its highest yield since Aug. 12. Short-term securities fared better today, with the two-year note finishing unchanged to yield 5.81%.
consensus estimate called for a 218,000 increase in nonfarm payrolls, and a 0.3% increase in average hourly earnings. Now, the market has an entire month of chewing on this data before the next employment report reveals whether the job market is indeed slowing down while wage growth is picking up -- or if the entire report turns out to be a wash.
"This confusion is likely to be persistent for months to come," said Dana Johnson, head of capital markets research at
Banc One Capital Markets
. "There's an important issue about how much growth is slowing. There's a question as to whether
the unemployment rate will be stabilized at too low a rate, and how much pressure on prices will result."
Judging by the last two months' results, job growth may finally be slowing in a manner more in line with the Fed's wishes. August's payroll growth was revised downward to a gain of 103,000, meaning just 95,000 jobs have been added over the last two months. Some of this can be traced to students leaving work to go back to school: Retail shed 49,000 workers this month.
On the other hand, payroll growth was revised upward in July. If the economy is truly running out of workers to hire, more hourly wage increases could be in store. Wage growth is currently rising at a 3.8% year-over-year rate, which is still slower than last September's 4.1% rate.
Just as Floyd and other seasonal glitches could have distorted payroll figures, the same can be said for average hourly wages. Two economists said low-paying workers were probably the ones that fell out of this survey due to the hurricane, which would boost the wage figure higher.
It's unclear whether, going forward, the Fed will pay more attention to the payroll figures or the wage data. If growth has started to slow, at least in the labor market, a more pronounced surge in wage inflation might be required for the Fed to act a third time this year.
Henry Willmore sees it the other way, passing off the payroll losses to Floyd and other flukes, and focusing on the wage growth. In a comment, he revised his Fed forecast, predicting a Fed hike at the next meeting, Nov. 16, and one in the first quarter of 2000.
Of course, nothing is settled at this point. About a month-and-a-half of releases remain before the next meeting. Next week's calendar, save for Thursday and Friday, is relatively light. September's
report will be released Thursday and the important wholesale inflation indicator, the
Producer Price Index
, is scheduled for release Friday.
The PPI is expected to rise 0.4%, while the core rate, which excludes food and energy prices, is forecasted for a 0.3% increase, according to
. Two other important indicators,
, also will come out Friday.
TO VIEW TSC'S ECONOMIC DATABANK, SEE:
Chat with John J. Edwards III Monday Oct. 11 on AOL's MarketTalk at 3:30 p.m. EDT. MarketTalk is hosted by Sage Online.
Copyright 1999, TheStreet.com