TheStreet.com's WEEKEND BULLETIN
October 16, 1999
Market Data as of Close, 10/15/99:
o Dow Jones Industrial Average: 10,019.71 down 266.90, -2.59%
o Nasdaq Composite Index: 2,731.83 down 75.01, -2.67%
o S&P 500: 1,247.41 down 36.01, -2.81%
o TSC Internet: 685.10 down 10.99, -1.58%
o Russell 2000: 414.70 down 4.61, -1.10%
o 30-Year Treasury: 98 02/32 up 23/32, yield 6.261%
Companies in Today's Bulletin:
Hambrecht & Quist (HQ:NYSE)
Silicon Valley Group (SVGI:Nasdaq)
In Today's Bulletin:
o The Coming Week: Bond Yields Might Have the Biggest Effect on Where the Stock Market Is Headed
o Stock Mart: Silicon Valley Group
o Evening Update: Ace Boosts Offer for Capital Re in Quiet Postclose Action
o Bond Focus: Stocks' Slide Invigorates Bonds
TheStreet.com on Fox News Channel
We put ourselves to the test this week on "Stock Drill" as Jeff Bronchick of Reed Conner & Birdwell -- and a TSC contributing editor -- goes over his favorite stock picks with Jim Cramer and Herb Greenberg.
Big market drops, big market gains. The market's been manic for months, but stocks aren't really moving that much. Does that mean your investments should tread water? We'll hear what our "Word on TheStreet" panel has to offer.
Plus, we'll preview our upcoming "Cracking the Books" series. Alex Berenson introduces us to the world of earnings, and why things aren't always as good as they seem.
"TheStreet.com" on the 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" page at www.thestreet.com/tv (look for the yellow box in the upper right hand corner).
Also on TheStreet.com:
Wrong! Dispatches from the Front: Fired Up for Fox
For Cramer, the show must go on. Also, if anybody asks him, he will say that there was nothing conclusive about today.
Brokerages/Wall Street: Ramping Up Its Online Presence, Hambrecht & Quist Will Distribute Offerings Through Ameritrade
The deal is big for Ameritrade, too, as it now joins the major brokerages in offering IPOs to its customers.
Tech Savvy: Blame It on October
Sure, Seymour's a bull who believes this market's going to come back. But he says you have to know when to hold 'em and when to fold 'em.
IPOs: Despite Market Meltdown, Women.com Goes Public and Gets a Warm Welcome
Patience seems to have paid off for the all-women portal, which delayed its IPO in August's sluggish market.
The Coming Week: The Coming Week: Bond Yields Might Have the Biggest Effect on Where the Stock Market Is Headed
10/15/99 8:55 PM ET
thinks the stock market is way too high.
Nothing new in that. Wall Streeters have known about the
chairman's views on U.S. equities for a while now. And they've known about the kind of valuation model that the Fed seems to favor -- at least if a 1997
Fed paper is anything to go by.
The Coming Week: Join the discussion on
It's a pretty standard model -- easy enough that you can figure it out on the back of an envelope -- wherein the earnings yield on the
is supposed to be in line with the yield on the 10-year Treasury. The earnings yield (the 52-week forward earnings estimate divided by the price) on the S&P was about 4.6% when stocks closed
Friday. The yield on the 10-year note was at 6.08%. The S&P, which finished Friday's selloff at 1247.41, would have to fall to about 934 for its earnings yield to match that.
It's scary stuff. Especially when the chairman starts talking about valuations and risk in the market -- as he did on
Thursday night. Warned Greenspan, the "decline in recent years in the equity premium -- the margin by which the implied rate of discount on common stock exceeds the riskless rate of interest -- should prompt careful consideration of the robustness of our portfolio-risk models in the event this judgment proves wrong."
For a market that was already uneasy about valuations, Big Al's words packed a punch. And some reckon there's more pain to come.
"People are realizing that the stock and bond markets are linked," said
Morgan Stanley Dean Witter
chief investment strategist Byron Wien, who uses a valuation model similar to the Fed's. "It's not over. It hasn't been climactic yet."
Quibbling With the Fed's Model
Yet not everybody is taken with the Fed's model. "There are several outright mistakes in that formulation," said Tom McManus, equity strategist at
Banc of America Securities
. Chief among them, thinks McManus, is it doesn't account for the way that the components in the S&P have changed over the last several years.
The top ranks of the S&P 500 are now heavily weighted toward fast-growing tech companies that see few cyclical effects on their earnings. Because growth is higher and risk is lower, the index should be able to carry a higher valuation. Or, to put it another way, does anyone think the forward price-to-earnings ratio of the tech-stuffed S&P should be just 16.4, as implied by the Fed model?
To deal with changes in the S&P's makeup, Douglas Cliggott, equity strategist at
, has tinkered with the standard earnings yield/bond yield model. Instead of assuming parity, he uses a seven-year moving average (seven years because that's the average length of the earnings cycle). His model still shows stocks are 23% above fair value. Something needs to change. The earnings part of the equation needs to go up (which it will over time), bond yields need to fall substantially or stocks need to fall.
"What we don't know is if the market digs in and we range-trade, or if prices keep on moving downward," Cliggott said.
A Massive Bond Bear Market -- Ending?
In the end, though, the direction of the stock market may depend more heavily on where bond yields are going than on anything else. The trouble with valuations amounts to the equity market waking up to the fact that there's been a bear market in bonds surpassed in recent history only by the 1994 decline. This week the benchmark 30-year Treasury's yield swelled to 6.36% before ending at 6.26%.
But people are beginning to talk about the current bear market perhaps coming to a close.
"I think U.S. bond yields are very close to peak," said Mickey Levy, chief economist at Banc of America Securities. "I can't see them going much higher. All the factors are in place for the pace of economic growth to start moderating."
This doesn't mean Levy thinks the Fed won't tighten at its Nov. 16 meeting -- recent data, especially Friday's hot September
Producer Price Index
, have definitely pushed the odds in favor of that. But if it does tighten, he doesn't think long rates will go up very much.
Yet worry persists in the bond market. In the coming week, all eyes in the bond pits will be fixed on the September
Consumer Price Index
, due out Tuesday. "The CPI is going to be the big number next week, no question about that," said Joel Kent, economist at
Lehman Brothers Government Securities
. "There's a lot of nervousness in the market over inflation."
The CPI's effect may be muted after the strong PPI, however -- the market is ready for the inflation number to be boosted by a big gain in tobacco prices. Moreover, if it comes in strong, bonds may again see the sort of boost they got on Friday, according to Kevin Flanagan, money-market economist at Morgan Stanley Dean Witter. "If stocks trade off because of that," he said, "you will see some flight to quality."
Stock Mart: Stock Mart: Silicon Valley Group
10/15/99 6:42 PM ET
If you want to make a bet on the semiconductor sector but figure
looks a little too rich, then take a look further up the assembly line.
Silicon Valley Group
, a San Jose, Calif.-based semiconductor-processing equipment company, is about to benefit from a turnaround in the semiconductor business, according to one buy-side analyst and one money manager. A pickup in demand for chips means Intel and others will be knocking on Silicon Valley's door for its specialized equipment and services, they say.
And given Silicon Valley's depressed stock price -- it closed Friday at 10 3/4, up 3/16 -- the risk is low compared with the potential rewards, they believe. Its price-to-earnings ratio, based on the 2000
First Call/Thomson Financial
estimate of 51 cents a share, is about 21. Its price-to-sales ratio is about 0.9. Value investors look for stocks with price-to-sales ratios below one. And it trades for below its book value of $16.35 a share, according to data-tracker
"They are going to benefit as the whole equipment group will see an incredible increase in spending in the next six to eight quarters," says the money manager, who's long the stock and asked to remain anonymous. "I think in the fourth quarter of this year -- which is their first quarter -- they would be moderately turning." By the middle of next year, earnings momentum should pick up.
He figures the stock could double in the next year. Its 52-week low is 6 5/8, while its 52-week high is 17 11/16.
Before the stock sees that kind of increase, however, the company will have to improve earnings. In the nine months ended June 30, Silicon Valley recorded a net loss of $27.1 million, or 82 cents a share. For the year ended Sept. 30, Silicon Valley is expected to report a loss of 83 cents, though it's expected to pare its losses to a penny a share in its fiscal fourth quarter.
Yang Lie, an analyst at shareholder
funds, says the losses have been due more to industry cyclicals than to any management problems. Papken Der Torossian has been its chief executive officer since 1986 and its chairman since 1991.
Silicon Valley agrees. "We all got hit. The whole industry got hit by the cyclical nature of the business," says Werner Rust, the company's director of marketing.
Formed in 1977, Silicon Valley specializes in advanced photolithography exposure systems. That's still one of its lines, but it also makes so-called photoresist processing equipment and is in the chemical vapor deposition market. In layman's terms, Rust explains, Silicon Valley makes chip-building tools for about 20% to 25% of the more than 600 steps in the process that takes place to build those chips while they are in the wafers, or building trays.
In Silicon Valley's sectors of the business, it's considered a high-end player and has a dominant market share, the money manager says. But in order to realize its potential, it needs to expand its customer list.
"The downside to Silicon Valley is that they are very dependent on just a few customers, Intel being one of them. If they could increase their customer base, they would see growth," Lie says.
Silicon Valley's customers include Intel,
Silicon Valley's Rust says the company has long acknowledged its need to build customers. "I think we're very aware of this. We're seen as a very U.S.-based company," he says. "We have a strong presence in Europe, but Asia has been a weak point."
In July, Silicon Valley bought Palo Alto, Calif.-based
semiconductor equipment group for $6 million plus debt. The purchase included products that Silicon Valley planned to merge into its thermal systems business. That business, the money manager says, could help Silicon Valley expand its customer list.
And if Intel's too expensive, at least you'll invest with the giant when it comes to Silicon Valley. In May, Intel invested $15 million in Silicon Valley for a 4.7% stake.
Evening Update: Ace Boosts Offer for Capital Re in Quiet Postclose Action
10/15/99 7:44 PM ET
has revised its previous bid for Capital Re upward, raising its offer to $13 from $10.05 a share for each Capital share in cash and stock. The increased bid comes four days after
upped its offer for Capital Re to $13.
In other post-close news (earnings estimates from
First Call/Thomson Financial
; earnings reported on a diluted basis unless otherwise specified):
Mergers, acquisitions and joint ventures
said it implemented a stockholders rights plan with a 15% trigger, in reaction to an unsolicited offer to purchase its shares. Daisytek said its board deemed the bid inadequate and not inline with its proposed strategy to spin-off its e-commerce division
El Paso Gas
announced its plans to acquire
Crystal Gas Storage
, in a deal valued at $224 million. The transaction calls for Crystal's common stockholders to receive $57 a share in cash, while the preferred stock would be exchanged at $1.00 a share. A spokesperson for El Paso said the company expects the deal to be completed in the first quarter of fiscal 2000.
said it has bought a 50% stake in
, a Canada-based Internet company. Critical Mass will join Omnicom division
, a recently established electronic customer relations management company.
Earnings/revenue reports and previews
posted third-quarter earnings of 63 cents a share, falling below both the six-analyst estimate of 65 cents and the year-ago 68 cents.
warned investors that it expects to post second-quarter earnings between 66 cents and 68 cents a share, greatly missing the nine-analyst estimate of 74 cents. The printing company attributed the disappointing results on Hurricane Floyd's effect on September sales.
reported third-quarter earnings of 24 cents a share, above both the 11-analyst estimate of 23 cents and the year-ago 21 cents.
reported third-quarter earnings of 64 cents a share, which included an 18-cent increase in net purchase power costs. The company beat the eight-analyst estimate of 62 cents a share, but fell from the year-ago 80 cents.
Offerings and stock actions
set plans for a 5 million-share IPO, which is expected to price between $8 to $10 a share, according to a
Securities and Exchange Commission
filing. The company has applied to be listed on Nasdaq under the ticker "ASDS."
Friedman Billings Ramsey
will serve as underwriters for the deal.
Bond Focus: Stocks' Slide Invigorates Bonds
10/15/99 5:35 PM ET
A bruiser of a wholesale inflation report briefly sent the bond market running scared this morning. But then it turned on its heels and headed boldly higher as some economists argued that the inflation report was more smoke than fire, and as stocks took a beating that sent money flowing into bonds.
The benchmark 30-year Treasury bond, which traded down as much as 17/32 after the release of the September
Producer Price Index
and which hadn't had a price gain since last Wednesday, ended the day up 27/32 at 98 4/32, trimming its yield 7 basis points to 6.26%. Shorter-maturity note yields shed anywhere from 7 to 9 basis points.
The PPI, the key measure of inflation at the wholesale level, rose 1.1% in September, more than twice as much as forecast and the largest increase since September 1990. The core PPI, which excludes volatile food and energy prices, rose 0.8%, twice as much as forecast and the biggest increase since last December.
Initially, traders reasoned that the strong advances in wholesale inflation might prompt the
to hike interest rates at its next meeting next month. But they reconsidered after some economists delved into the guts of the report and concluded that it contained enough special factors to make the Fed think twice.
The PPI was inflated by food, energy and tobacco prices, as expected. Food prices rose sharply due in part to crop destruction by hurricanes, rising oil prices and a one-time cigarette price hike. Car and truck prices also rose sharply, which was not expected, but they are still down on a year-on-year basis. The
Bureau of Labor Statistics
, which compiles the report, noted that excluding food, energy, tobacco and cars, prices rose just 0.1%. "Before anybody says that we just took all the fun out of life, remember that it is the underlying trend that is important to the Fed,"
economist Mark Vitner said in a research note.
In addition, Jerry Lucas, government bond strategist at
, points out that inflation is a lagging indicator. There are tentative signs that the economy is slowing, he says, pointing to slower job growth in the last few months. "As the economy starts to slow, because of strong growth in the past, you'll see inflation going up due to the time-lag effect." Still, Lucas conceded, overall the PPI "gives the Fed more active reason to consider tightening at the upcoming meeting." Increases in the prices of intermediate and crude goods could eventually push the prices of the finished goods that the PPI tracks even higher, he said.
Lucas said the friendlier-than-expected showing by the September
report, also released today, helped the bond market turn around. Hampered by Hurricane Floyd, industrial production slipped 0.3%, vs. an average forecast it would rise 0.2%. As production eased, so did the
rate, to 80.3%, indicating more slack in the industrial economy. The Fed, which releases the data, said production would have posted a slight increase without the effects of the hurricane.
But as the day wore on, it was almost certainly the continuing selloff in stocks that pushed the bond market deeper and deeper into positive territory.
Bonds rallied as stocks sagged for two reasons, said Richard Schwartz, senior vice president at
New York Life Asset Management
. First because some of the money that left the stock market found a home in the bond market. Second because "lower equity prices have the potential down the road to cause a slower economy" by tempering consumer spending.
Schwartz thinks the stock market has so much power to curb consumer spending by virtue of how large its total value has become relative to the real economy that a selloff of the magnitude stocks have experienced this week argues strongly against another rate hike by the Fed. The PPI may have temporarily increased the chances the Fed will hike on Nov. 16, "but the reaction of the equity markets clearly acted to reduce the likelihood of tightening," he said. It's "reasonably likely," Schwartz said, that the initial bond market selloff in reaction to the PPI took yields to the highest levels they will see this year.
TO VIEW TSC'S ECONOMIC DATABANK, SEE: http://www.thestreet.com/markets/databank/793633.html
John J. Edwards III will chat on AOL's MarketTalk at 3:30 p.m. EDT., Monday, Oct. 18. MarketTalk is hosted by Sage Online. (Keyword: PF Live)
James J. Cramer will chat on Yahoo! at 5 p.m. EDT., Monday, Oct. 18. Register for Yahoo! Chat at: chat.yahoo.com.
Copyright 1999, TheStreet.com