weekend10-22-99 - TheStreet

weekend10-22-99

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TheStreet.com's WEEKEND BULLETIN

October 23, 1999

http://www.thestreet.com

Market Data as of Close, 10/22/99:

o Dow Jones Industrial Average: 10,470.25 up 172.56, 1.68%; up 4.5% for the week

o Nasdaq Composite Index: 2,816.52 up 14.57, 0.52%; up 3.1% for the week

o S&P 500: 1,301.65 up 18.04, 1.41%; up 4.3% for the week

o TSC Internet: 716.11 down 2.85, -0.40%; up 4.5% for the week

o Russell 2000: 418.69 up 4.42, 1.07%; up 1% for the week

o 30-Year Treasury: 97 00/32 up 2/32, yield 6.350%

Companies in Today's Bulletin:

Sycamore Networks (SCMR:Nasdaq)

Hewlett-Packard (HWP:NYSE)

Charles Schwab (SCH:NYSE)

Chase Manhattan Bank (CMB:NYSE)

In Today's Bulletin:

o The Coming Week: Ignoring the Market's Demon Heart
o Wrong! Dispatches from the Front: Schwab Mentality
o Evening Update: H-P Details Agilent Spinoff Terms in Aftermarket
o Bond Focus: Bonds Shift Into Neutral, Ending a Lousy Week

TheStreet.com on Fox News Channel

Steve Sanders, president of MDL Capital Management, is this week's guest on "Stock Drill." See what Herb Greenberg and Dan Colarusso have to say about this money manager's picks.

"Chartman" Gary B. Smith takes on a new rival in funds columnist Dagen McDowell and tries his hand at charting mutual funds. And on "Word on TheStreet," our panel will be taking a look at IBM and Y2K and Cramer offers some thoughts on making the most of earnings news and taking advantage of negativity.

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

IPOs: Sycamore Networks Wows the Market With Its Public Offering

Sycamore finished its first day up an astounding 386% as investors rushed to get a piece of the networking company.

http://www.thestreet.com/stocks/ipos/800888.html

The Invisible Mouth: Foreign Investment and the Coming Cash Crunch

The U.S. spends far more than it invests, leaving it vulnerable to capital flight.

http://www.thestreet.com/comment/economics/800477.html

Online Brokers: Schwab Web Site Suffers Third Day of Technical Glitches

The problems come at a time when the online broker is facing more competitors, including Merrill Lynch and Morgan Stanley Dean Witter.

http://www.thestreet.com/stocks/trading/800841.html

Mutual Funds: Funds Notebook: At Chase, Arrival of Moving Vans Is Ominous Sign

Also, an all-short fund is ready to launch, fund managers say the darndest things, and gold folds.

http://www.thestreet.com/funds/funds/800501.html

The Coming Week: Ignoring the Market's Demon Heart

By

Justin Lahart

Senior Writer

10/22/99 8:02 PM ET

There was a raucousness on Wall Street going into the weekend, a feeling that the week's solid rally -- backed by a steady gain in breadth -- had sunk a stake into October's demon heart. And while there was some worry that the demon might be a bit like Jason in

Friday the 13th

-- you know, like, dead, but not

really

dead -- most were comfortable with getting up, giving the monster a poke with a stick and blithely turning their backs.

Coming Week: Join the discussion on

TSC

Message Boards.

"I think we're heading immediately for a retest of the October high," said Peter Canelo, the

Morgan Stanley Dean Witter

investment strategist who has been so accurate in calling the markets ups and downs this year. "Break that, and you have to think we're going to attempt to go back to the highs."

Whether the market reaches toward its highs of the year or peters out -- shifting back into that up-and-down pattern that's gotten so familiar -- will greatly depend on investors getting a little clarity on some of the issues that have been bugging them lately.

The big worry remains the

Fed

. "I think they'll raise rates," said Canelo, who thinks the market's discounted a 25 basis-point hike. "But there's some concern that they'll go twice

or that they'll hike by 50 basis points. Or that they won't go at all. Figure that out."

All right, we're game.

The problem with a Fed that ends up hiking by 50 bps is that that's at least twice as much as the market expects right now. Bonds get knocked down another peg, that nice bottom that formed in financial stocks gets taken out.

Et cetera.

The problem with a Fed that doesn't move at all -- for some people at least -- is that that's a Fed that may end up way behind the curve on inflation. It's the kind of thing Steve Roach, the chief economist at Canelo's firm, worries a lot about. If the Fed has to play catch-up with inflation, it has to tighten a lot more than if it had it acted preemptively. And if that happens, the economy could decelerate too quickly -- sending the U.S. into its first recession in nine years.

The inflation worry isn't idle.

Merrill Lynch

chief quantitative strategist Rich Bernstein's

Inflation Composite Index

is an equal-weighted average of year-to-year change in eight common inflation barometers (the

Consumer Price Index

, gold, average hourly earnings, etc.) It troughed in August of last year and last month it turned positive for the first time since 1996.

The index can be used as a measure of where inflation is headed, but maybe more importantly it is a good measure of inflation

expectations

. Most investors look at least a couple of the index components when they try to get a read on whether things are heating up. The index's turn positive suggests that more investors might begin worrying about a behind-the-curve Fed.

For Bernstein, the important thing about the inflation index going positive is that it suggests companies will have better pricing power. Better pricing power tends to benefit the stock of companies that are tied to the earnings cycle -- rather than growth companies, whose big draw is that they grow steadily through the entire cycle. The Nifty Fifty is out, in Bernstein's book, and value stocks are in. With a rebound in global growth, Bernstein reckons that the best place to look for returns is cyclical stocks with heavy overseas exposure.

Besides a little clarity on the Fed, Morgan Stanley's Canelo thinks that investors will need to get a better sense of what's going on with Y2K.

IBM's

(IBM) - Get Report

disappointing earnings -- blamed in part on slower purchases ahead of the millennium change, has stirred worries that other techs may suffer. It's gotten a little confusing --

Microsoft

(MSFT) - Get Report

and

Oracle

(ORCL) - Get Report

say they haven't seen a Y2K slowing; IBM and

Lexmark

(LXK)

say they have. Canelo says that as more results get released next week -- and more companies testify on what sort of Y2K impact they're seeing -- the issue will see some sort of resolution.

Interestingly, Y2K issues may play a part in the big economic reports getting released in the coming week, according to Jim Glassman, U.S. economist at

Chase Securities

. The big reports will be third-quarter

gross domestic product

and the third-quarter

Employement Cost Index

, both out on Thursday. Both reports are expected to come in strong.

"People are going to be nervous about these numbers, but I don't think it's going to be as much of a clear-cut case for tightening as you might otherwise," he said. He believes that a lot of the strength in the third quarter has come from inventory building by companies who worry that Y2K glitches could make their just-in-time operations anything-but.

Said Glassman: "The market is betting that the Fed is going in November. I personally think that they're uncertain about how much of the strength in the economy is being driven by stock-piling."

Wrong! Dispatches from the Front: Schwab Mentality

By

James J. Cramer

10/22/99 3:07 PM ET

Got a real hankering for

Schwab

(SCH)

stock. Think of it -- the darn thing goes up significantly in the face of the company losing market share to

E*Trade

(EGRP)

, having its system down every day and generally being in denial about its systemwide problems.

Cramer's Latest: Join the discussion on

TSC

Message Boards.

Is this stock telling you something? Is this stock saying that trading has come back -- bunch of straight days with volume of 900 million? Is it saying that this

Glass-Steagall

stuff really matters? Is it saying that many hedge funds have been short the brokerages all year because they have been coining money?

I just don't know. I know this, though: This segment is so low and so ripe for consolidation that I have chased Schwab up all day, hoping it will come in.

Right now, it looks like I'm not going to get my wish.

Bummer.

******

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long E*Trade. 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

jjcletters@thestreet.com.

Evening Update: H-P Details Agilent Spinoff Terms in Aftermarket

By

Eileen Kinsella

Staff Reporter

10/22/99 7:48 PM ET

Hewlett-Packard

(HWP)

subsidiary

Agilent Technologies

said it plans to sell 57 million shares in an estimated range of 19 to 22 a share. Agilent makes test, measurement and monitoring instruments as well as semiconductors and optical components. It said it plans to use the estimated $1.1 billion it hopes to raise to pay Hewlett-Packard as a dividend. Hewlett-Packard will pay about $983 million in cash to Agilent under the terms of its separation agreement.

Following the IPO, H-P will hold about 87% of Agilent's common stock, or 380 million shares, and plans to complete its divestiture by mid-2000 by distributing shares to common stockholders. The underwriters include

Morgan Stanley Dean Witter

,

Goldman Sachs

,

Credit Suisse First Boston

and

Merrill Lynch

.

Meanwhile, medical device maker

Vascular Solutions

has a weak heart from all this market turbulence. The company has postponed its proposed IPO indefinitely, saying that it intends to reevaluate market conditions in 2000. Vascular had originally announced in July that it planned to raise $40 million.

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

CV Therapeutics

(CVTX)

posted a third-quarter loss of 50 cents a share, a penny wider than the two-analyst estimate and wider than a year-ago loss of 35 cents.

Macdermid

(MRD)

posted second-quarter earnings of 36 cents a share, missing the five-analyst estimate of 39 cents, but up from a year-ago 34 cents a share. The company estimated that the earthquake in Taiwan, a weaker dollar and start-up and integration costs reduced second-quarter earnings by 5 cents.

Mergers, acquisitions and joint ventures

The

Federal Communications Commission

approved

AT&T's

(T) - Get Report

$10 billion joint venture with

British Telecommunications

(BTY)

.

InterDent

(DENT)

said it signed a merger agreement with a group consisting of an affiliate of

Leonard Green & Partners

and management members including its CEO Michael Fiore. Shareholders will receive $9.50 a share in cash under the terms of the agreement, in a transaction valued at $325 million.

Offerings and stock actions

Genentech

(DNA)

said the record date for its previously announced 2-for-1 stock split will be Oct. 29, when shareholders will receive one additional share for each share held.

Miscellany

Pharmacia & Upjohn

(PNU)

said it was cleared by U.S. regulators to market Aromasin, a new treatment for advanced breast cancer in menopausal women.

Bond Focus: Bonds Shift Into Neutral, Ending a Lousy Week

By

David A. Gaffen

Staff Reporter

10/22/99 4:26 PM ET

After this week's bout of selling, the bond market put itself on automatic pilot today, kicked up its feet and coasted into the weekend. Treasuries ended the day virtually unchanged, as there were no economic releases or significant activity in the dollar to direct the market.

With bond yields resting near two-year highs, the market appears to be at a crossroads. For the selling to continue, according to analysts, it's going to take some decidedly unfriendly economic news. For a turnaround to occur, the market needs evidence that the economy is slowing. But the first test of that won't come until Thursday, with the releases of the third-quarter

Employment Cost Index

and

GDP

reports.

The 30-year Treasury bond was quoted lately at 96 31/32, up 1/32, leaving the yield unchanged at 6.35%. The market ignored the 170-point

Dow

rally as well.

"This market has finally gotten itself priced at a reasonable level versus a 5.5% fed funds rate," said Jim Kochan, fixed-income strategist at

Robert W. Baird

, expecting the Fed will raise the funds rate to that level Nov. 16. "Until we see evidence that it's going

higher

than that -- or that it won't reach 5.5% at all -- then I think we're stuck here."

The market: Join the discussion on

TSC

Message Boards.

The fed funds target is currently 5.25%, last raised by the Fed on Aug. 24. The bond market has sold, in part, during the last week due to a growing perception that the Fed has fallen behind in its efforts to fight inflation.

The evidence isn't overwhelming.

But economists have recently argued that official statistics didn't portend rising inflation in 1994, when the Fed began a cycle of gradually raising the funds target. (In Feb. 1994, the core

Consumer Price Index

had actually fallen to a 2.8% year-over-year rate of increase compared with 3.6% a year earlier.)

If the market is any indication, the 30-year bond, which reacts negatively to prospects of higher inflation, has tacked on 10 basis points this week. Today it sits at its highest yield since Oct. 22, 1997.

"The Fed is slowly falling behind the curve here," said Scott Graham, co-head of government trading at

Prudential Securities

. "There's all the anecdotal data: the

Philly Fed

survey is showing prices paid on the rise. We continue to see inflationary news. They need to tighten and they probably need to maintain a tightening directive."

The Fed next meets Nov. 16 and, currently, the fed funds futures contracts listed on the

Chicago Board of Trade

are pricing in a 64.3% probability of a rate hike. Yesterday, the November fed funds contract was pricing in a 68.5% chance of a rate hike.

The quarterly reports will provide two of the earliest clues as the Fed meeting approaches. The consensus estimate for GDP, according to

Reuters

, is for a 4.4% growth rate in the third quarter. The economy bounced back after a 1.6% rate in the second quarter, when businesses allowed inventories to run down. A build-up in inventories, increased production and a slight decrease in the trade deficit will all likely enhance the GDP figure.

The ECI -- one of the market's most important wage inflation indicators -- is forecast to rise 0.9% compared with a 1.1% jump in the second quarter. The tightness in the labor market is expected to pressure compensation costs. On a year-over-year basis, the ECI was rising at a 3.2% clip in the second quarter, compared with 3.5% in the second quarter of 1998.

"We should have a fairly sizable gain in the wages/salaries component," said Anthony Karydakis, senior financial economist at

Banc One Capital Markets

. "Any gain in excess of what the market has priced in would not go over well. People are already getting edgy and I believe the Fed will have no patience for a large ECI gain."

TO VIEW TSC'S ECONOMIC DATABANK, SEE:

http://www.thestreet.com/markets/databank/793633.html

Streeting Sightings

John J. Edwards III will chat on AOL's MarketTalk on Monday, Oct. 25 at 3:30 p.m. EDT. MarketTalk is hosted by Sage Online. (Keyword: PF Live)

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