Fed 'Gifts' Spark Huge Rally but Also Sow Seeds of Discontent

Volume soared to near-record levels and indices rocketed after the FOMC dropped its bias, but some quibble with the panel's judgment.
Author:
Publish date:

It was a day for moving on (from the uncertainty about the

Fed

), moving away (from concerns about a series of rate hikes) and, ultimately, moving up.

The

Federal Open Market Committee's

decision today to raise the federal funds target rate 25 basis points was largely expected (the discount rate was unchanged). The FOMC's concurrent announcement it is reverting to a neutral bias was less certain, and provided investors with an excuse to get long with gusto as stocks and bonds rallied impressively.

However, the action left some wondering if

Alan Greenspan

is fueling the "irrational exuberance" he once so famously railed against.

"It's a short-term gift for the financial markets because if

Fed officials really had a pulse on the market, they would have seen that an expectation of a more aggressive move was priced in," said Thomas McManus, equity portfolio strategist at

Banc of America Securities

. "I think there is a strong sigh of relief the hike wasn't bigger; to some extent that's unwarranted. Even the Fed doesn't know how much the Fed will have to raise interest rates. It's unknowable."

Nevertheless, the

S&P 500

rose 21.21, or 1.6%, to 1372.66, eclipsing its May 13 record of 1367.56 as a broad base of industry groups joined together in a post-Fed advance.

Tech bellwethers such as

IBM

(IBM) - Get Report

,

Microsoft

(MSFT) - Get Report

and

Cisco

(CSCO) - Get Report

rallied smartly. The latter two helped the

Nasdaq Composite Index

rise 44.30, or 1.7%, to 2686.41, eclipsing its previous best of 2652.05 set April 26. (The announcement of a postclose conference call by Microsoft had some players unnerved, although the company said there were no plans to "prerelease" earnings.)

The

Nasdaq 100

rose 0.7% to a record 2297.21 despite an 8.1% decline by

MCI WorldCom

(WCOM)

, a member of consortium being investigated by the

Justice Department

.

The

Dow Jones Industrial Average

rose 155.45, or 1.4%, to 10,970.80, or 1.2% off its May 13 record of 11,107.19. The index spiked sharply in the market's jubilant reaction to the Fed's announcement at 2:15 p.m. EDT, then retreated a bit before climbing as high as 11,003.41 in the final hour of the last session of the quarter. (Market watchers noted substantial buying on the close in stocks such as

Johnson & Johnson

(JNJ) - Get Report

, likely a result of end-of-quarter window dressing.)

'I think this Fed is one of most spineless we've ever seen," said Alan Gillespie of Gotham Capital Management. 'This Fed is scared. It's been politicized. They've still got a problem of valuation and how to take excess liquidity out of system. They're scared to do it too quickly because it'll crack this market wide open. But they gave everyone a green light to speculate, with margin.'

In addition to IBM,

American Express

(AXP) - Get Report

and

J.P. Morgan

(JPM) - Get Report

were among a host of strong Dow performers as financial stocks overall gained. The

Philadelphia Stock Exchange/KBW Bank Index

and

American Stock Exchange Broker/Dealer Index

each gained 1.7%.

TheStreet.com Internet Sector

index was the best performer among major market averages, rising 20.36, or 3.4%, to 616.93. Industry bellwethers

Amazon.com

(AMZN) - Get Report

and

Yahoo!

(YHOO)

each rallied more than 7%, as did

DoubleClick

(DCLK)

. Elsewhere,

National Discount Brokers

(NDB)

jumped 27.6%.

Additionally, a host of secondary and recently public Net names stormed higher; for example,

Digital Island

(ISLD)

leapt 51.1% after a relatively modest 18.8% gain on its first day of trading yesterday.

The

Russell 2000

gained 3.60, or 0.8%, to 457.68.

In

New York Stock Exchange

trading, 1.12 billion shares were exchanged -- the fourth-busiest session in NYSE history and first plus-billion-share day since April 19 -- while advancers led declining stocks 1,921 to 1,146. In

Nasdaq Stock Market

action 1.32 billion shares traded -- the fourth-busiest day ever -- while gainers led 2,480 to 1,489. New 52-week highs bested new lows 167 to 63 on the Big Board and by 253 to 42 in over-the-counter trading.

Invertebrates at the Central Bank?

Language about remaining "alert to the emergence, or potential emergence, of inflationary forces" in the Fed's

statement left some wondering why they bothered to switch from a tightening bias.

But "they could have done what they did and adopted a slightly more weary stance," McManus countered. "If they'd been looking at copper futures trading they probably would have."

Copper futures rose over 7% at least partially on news of a production cutback by

Phelps Dodge

(PD) - Get Report

, following more drastic steps by

Broken Hill Proprietary

(BHP) - Get Report

last week. Gains by copper -- as well as oil -- had McManus and others fretting the Fed isn't being proactive enough.

"I think rising inflationary pressure in 1999 have probably have not had a maximum impact on equity prices," McManus said. "Even so, I think stocks can work their way higher despite the fact bond yields may not have yet reached peak."

As long as interest rates rise gradually, improving earnings will offset the impact, the strategist said, taking solace in the "broadening" of investor interest. The equally weighted

Value Line Index

, which includes 1,700 stocks, rose 0.7% to a record 1047.35 today and gained 19.2% in the second quarter, he noted.

Alan Gillespie, director of research at

Gotham Capital Management

, a New York-based hedge fund, echoed McManus' view rallying commodities provide evidence inflation (and bond yields) has yet to peak.

"I think this Fed is one of most spineless we've ever seen," Gillespie said. "This Fed is scared. It's been politicized. They've still got a problem of valuation and how to take excess liquidity out of system. They're scared to do it too quickly because it'll crack this market wide open. But they gave everyone a green light to speculate, with margin."

Notwithstanding its advance today -- the price of the 30-year Treasury bond surged 1 2/32 to 89 30/32, its yield declining to 5.98% -- "the bond market is going to get ripped apart," he said. "I got a feeling Thursday and Friday we'll see the first data to put it back on its butt," following today's strong

Chicago Purchasing Managers' Index

report.

In addition to oil and commodity prices, the researcher observed silver prices spiked again, helping the

Philadelphia Stock Exchange Gold & Silver Index

rise 2.6%. "That's where the smart money is going," he said.

Among other indices, the

Dow Jones Transportation Average

slid 5.26, or 0.2%, to 3404.36; the

Dow Jones Utility Average

dipped 5.63, or 1.8%, to 316.82; and the

American Stock Exchange Composite Index

added 20.45, or 2.6%, to 797.93.

For the month of June, the Dow industrials rose 411.06, or 3.9%; the S&P 500 gained 70.82, or 5.4%; the Nasdaq Comp added 215.60, or 8.7%; the Russell rose 19.01, or 4.3%; the DOT hopped 36.29, or 6.3%; the Dow transports declined 11.34, or 0.3%; the Dow utilities slid 12.38, or 3.8%; and the Amex Composite gained 19.19, or 2.5%.

For the second quarter, the Dow industrials rose 1184.64, or 12.1%; the S&P 500 gained 86.24, or 6.7%; the Nasdaq Comp added 224.72, or 9.1%; the Russell climbed 60.06, or 15.1%; the DOT fell 26.08, or 4.1%; the Dow transports added 105.32, or 3.2%; the Dow utilities improved 24.54, or 8.4%; and the Amex Composite gained 87.63, or 12.3%.

Wednesday's Company Report

By Heather Moore
Staff Reporter

(

Earnings estimates from First Call; new highs and lows on a closing basis unless otherwise specified. Earnings reported on a diluted basis unless otherwise specified.

)

As noted above, MCI WorldCom skidded 7 9/16, or 8.1%, to 86 1/16 following news the Justice Department is launching an antitrust investigation in the undersea cable business industry. Although perhaps more directly pressuring the stock was word

PaineWebber

slashed its second-quarter year-over-year revenue growth estimate for MCI WorldCom to 16% to 16.5.% from 17.2%.

Elsewhere in the industry,

Sprint

(FON)

lost 2 1/16 to 53;

AT&T

(T) - Get Report

rose 3/16 to 55 13/16; and

Level 3 Communications

(LVLT)

lost 8 5/8, or 12.5%, to 60 1/16.

Mergers, acquisitions and joint ventures

Corning

(GLW) - Get Report

grew 4 15/16, or 7.6%, to an all-time high of 70 1/8 after

I-21 Future Communication

said it will use Corning fiber for 80% of the 8 million kilometers of optical fiber it plans to deploy in Europe's largest broadband network. I-21 is a unit of

Interoute Telecommunications

, a privately held, pan-European telecom group.

Danka Business Systems

(DANKY)

plunged 1 27/32, or 25.4%, to 5 5/8 on word its agreement to sell an outsourcing unit to

Schroeder Ventures

was terminated.

Gainsco

(GNA)

flew 1 11/16, or 40.3%, to 5 7/8 on news an investor group including rainmaker

Richard Rainwater

agreed to acquire a 23% stake in the property and casualty insurer for $31.6 million. The group --

Goff Moore Strategic Partners

-- also acquired warrants enabling it to increase its stake going forward.

National Semiconductor

(NSM)

picked up 5/16 to 25 5/16 after

agreeing to sell its

Cyrix

PC processor business to Taiwan's

VIA Technologies

. The deal is estimated to be worth $150 million to $175 million,

Reuters

reported.

Newcourt Credit Group

(NCT)

jumped 3/4, or 6.2%, to 12 15/16 after saying merger discussions with

CIT Group

(CIT) - Get Report

, rumored to have been on the verge of collapse, are continuing. CIT slipped 13/16 to 28 7/8.

Pinnacle Holdings

(BIGT)

shot up 5 7/16, or 28.7%, to an all-time high of 24 1/2 after

last night announcing plans to acquire

Motorola's

(MOT)

North American antenna site business for $255 million in cash. Motorola tacked on 3/8 to 94 3/4.

Tellabs

(TLAB)

slipped 1 3/4 to 67 9/16 after rising as high as 69 3/8 on word it's acquiring privately held

NetCore Systems

for about $575 million in stock.

Earnings/revenue reports and previews

Federal Express

parent

FDX

(FDX) - Get Report

shaved off 7/8 to 54 1/4 after reporting fourth-quarter earnings of 73 cents a share, 2 cents above the 11-analyst view and ahead of the year-ago 57 cents.

Franklin Electronic Publishers

(FEP) - Get Report

tanked 1 1/16, or 22.4%, to an annual low of 3 11/16 after posting a fourth-quarter loss of $2.73 a share vs. a loss of 11 cents a year ago. The company also said it expects a "substantial loss" in its fiscal first quarter.

Nautica Enterprises

(NAUT)

lowered 1/8 to 16 7/8 after recording first-quarter earnings of 12 cents a share, beating the 14-analyst forecast for 11 cents but falling behind the year-ago 23 cents.

Copper giant Phelps Dodge climbed 2 15/16, or 5%, to 61 15/16 after announcing plans to reduce costs and improve operating performance by further curtailing higher-cost production, The moves will result in a nonrecurring aftertax charge of $61 million, or $1.05 a share, in the second quarter.

Goldman Sachs

lowered the stock to market perform from outperform.

Supervalu

(SVU)

added 7/16 to 25 7/8 after announcing first-quarter earnings of 46 cents a share, in line with the six-analyst estimate and above the year-ago 42 cents.

Offerings and stock actions

Network Plus

(NPLS)

zoomed up 4 15/16, or 30.9%, to 20 7/8 after Goldman Sachs priced the telephone service provider's 8 million-share IPO top-range at $16.

Among today's other new issues:

  • ID Systems (IDSY) flew 7/16, or 6.3%, to 7 7/16 after Gilford Securities priced its 2 million-share IPO bottom-range at $7. The company designs and develops wireless monitoring and tracking systems using radio frequency technology.
  • Private Bancorp (PVTB) gained 3, or 16.7%, to 21 after Everen Securities priced the bank holding company's 900,000-share first offering high-end at $18.
  • Seminis (SMNS) , a seed company, tacked on 1/16 to 15 1/16 after Goldman Sachs priced its 13.75 million-share IPO bottom-range at $15.
  • Software company ShowCase (SHWC) dropped 1/2, or 5.6%, to 8 5/8 after its 3 million-share IPO priced bottom-range at $9 by Merrill Lynch.
  • VaxGen (VXGN) expanded 3 1/4, or 25%, to 16 3/8 after Prudential Securities priced the biotech concern's 3.1 million-share IPO low-range at $13.

Yesterday's IPO names also rallied.

E-Loan

(EELN)

, which soared 164% in its public debut yesterday, rose 1 1/2 to 38 9/16.

nFront

(NFNT)

, which gained 33.8% yesterday, rose 1 13/16, or 13.6%, to 15 3/16 in its second day of trading. Meanwhile, Digital Island, which rose a relatively modest 18.8% on its first day yesterday, rose 6 1/16, or 51.1%, to 17 15/16. Also,

Mail.com

(MAIL)

, which went public June 18, rose 6, or 47.1%, to 18 13/16.

Among other Net stocks,

About.com

(BOUT) - Get Report

took in 7 1/4, or 16.4%, to 51 7/8 on continued takeover speculation.

Equitex

(EQTX)

rallied 2 1/8, or 19.1%, to 13 1/4 after announcing plans to introduce online mortgage lending, following its recent acquisition of privately held

First Bankers Mortgage Services

. And National Discount Brokers excelled 12 1/2, or 27.6%, to 57 3/4 after

U.S. Bancorp

began coverage with a strong buy.

Time Warner

(TWX)

advanced 4 1/16, or 5.9%, to 72 5/8 after the

Nihon Keizai Shimbun

said the company sold its entire 25% stake in

Titus Communications

, Japan's second-largest cable television company, to fellow shareholder

MediaOne

(UMG)

.

Analyst actions

Chiron

(CHIR) - Get Report

shed 1 1/8, or 5.2%, to 20 3/4 after PaineWebber started coverage with a neutral.

Circle

(CRCL)

climbed 2 5/8, or 13.6%, to 21 7/8 after

Deutsche Banc Alex. Brown

upgraded it to strong buy from buy.

Coinstar

(CSTR) - Get Report

surged 3 3/4, or 15%, to an all-time high of 28 11/16 after Goldman Sachs added the stock to its recommended list.

Covad Communications

(COVD)

vaulted 12, or 29.1%, to 53 5/16 after

Morgan Stanley Dean Witter

initiated coverage with a market outperformer recommendation.

Great Plains Software

(GPSI)

slid 2 1/2, or 5.1%, to 47 3/16 even after Merrill Lynch raised its price target for the stock to 58, citing last night's strong fourth-quarter earnings report from the company.

i-Cube

(ICUB)

jumped 3 9/16, or 18.8%, to 22 1/2 thanks to a Morgan Stanley Dean Witter upgrade to strong buy from market outperformer.

pcOrder.com

(PCOR)

grew 4 9/16, or 12.4%, to 41 9/16 after

Credit Suisse First Boston

increased its fiscal 1999 revenue estimate for the company to $36.6 million from $31.6 million.

Pfizer

(PFE) - Get Report

tacked on 4 1.8 to 109 after

Credit Lyonnais Securities

initiated coverage with a hold.

Phillips Petroleum

(P)

added 2 1/8 to 50 5/16 after PaineWebber raised it to attractive from neutral.

United Technologies

(UTX) - Get Report

advanced 3 1/16 to 72 after

CIBC World Markets

pushed it up to buy from hold.

Miscellany

Iridium World Communications

(IRID)

popped up 17/32, or 5.4%, to 10 11/16 after its lenders agreed to extend its $800 million secured credit facility through Aug. 11. This is the third extension received by the satellite phone company since March. (

TheStreet.com's

Herb Greenberg wrote about the company last

Friday.)