midday02-16-00 - TheStreet

TheStreet.com's MIDDAY UPDATE

February 16, 2000

http://www.thestreet.com

Market Data as of 2/16/00, 1:49 PM ET:

o Dow Jones Industrial Average: 10,622.22 down 95.87, -0.89%

o Nasdaq Composite Index: 4,454.73 up 33.96, 0.77%

o S&P 500: 1,393.36 down 8.69, -0.62%

o TSC Internet: 1,140.96 up 5.68, 0.50%

o Russell 2000: 547.29 up 7.05, 1.30%

o 30-Year Treasury: 99 22/32 down 12/32, yield 6.261%

In Today's Bulletin:

o Midday Musings: Steve Perry Market Intact: Nasdaq, Dow Still Going Separate Ways
o Herb on TheStreet: How Salton Has Resorted to Bullying Retailers

Also on TheStreet.com:

Wrong! Tactics and Strategies: As the World Turns

It looks like Europe is signaling continued rotation, but the trader is keeping a close eye on tech.

http://www.thestreet.com/comment/wrongtactics/884906.html

Latin America: Latin American Telecom Sector Es Muy Positivo

As the Interent grows, so does demand for broadband in Latin America.

http://www.thestreet.com/int/latin/884754.html

Bond Focus: Treasuries Weaken in Anticipation of Tomorrow's Greenspeak

The next two days also bring two key economic reports, the PPI and CPI.

http://www.thestreet.com/markets/keynumbers/884971.html

Dear Dagen: Readers Don't Worship at the Altar of Diversification

They're too happy with tech to worry.

http://www.thestreet.com/funds/deardagen/885178.html

Midday Musings: Steve Perry Market Intact: Nasdaq, Dow Still Going Separate Ways

By

Eileen Kinsella

Staff Reporter

2/16/00 1:25 PM ET

The

Dow Jones Industrial Average

and the tech-laden

Nasdaq Composite Index

can't seem to agree on anything these days. Continuing an increasingly familiar pattern, the two proxies went their separate ways this morning and, by midday, were still not speaking to one another.

The Dow was cooling its heels, down 82, or 0.8%, to 10,636, after a brisk 198-point run yesterday. Investors did their best to pull the 30-stock average out of the correction territory it tripped into last Friday, but today there was a sense that

yesterday's rally may have been a bit unwarranted, or at least premature. "Investors really want to see that the rally in this market is spread out a little bit," said Jim Herrick, managing director of trading at

Robert W. Baird

in Milwaukee.

But the mix of optimism and eagerness seemed to be having little effect. "Part of it is just yesterday's rise. It was a one-day phenomenon as a result of selling pressure drying up," said Hank Herman, chief investment officer at

Waddell & Reed

in Overland Park, Kan. Herman surmised there is a fair amount of caution in the air ahead of

Fed

Chairman

Alan Greenspan's

Humphrey-Hawkins

testimony tomorrow.

Elsewhere, what little economic data there were certainly weren't doing any favors for interest-rate-sensitive stocks and cyclicals in general.

Housing starts

showed a 1.5% increase to 1.775 million units for January, edging out economists' forecasts of 1.65 million units. In the bond market, the benchmark 10-year Treasury was down 4/32 to 99 16/32, yielding 6.57%, while the 30-year Treasury was off 11/32 to 99 22/32, yielding 6.27%.

Financials, and particularly

American Express

(AXP) - Get Report

, were feeling some pressure. The

American Stock Exchange Broker/Dealer Index

was down 1%, while the

Philadelphia Stock Exchange/KBW Bank Index

was off 1.6%.

In techland, the Nasdaq Comp was up 19 to 4440, with some of its morning gains starting to drift away. A strong earnings report from

Applied Materials

(AMAT) - Get Report

was largely responsible for the show of strength in the semiconductor sector.

The Philadelphia Stock Exchange Semiconductor Index

was up 0.4%.

Lycos

(LCOS)

was also getting a lift, lately up 6.4%, after a better-than-expected earnings report, though its fellow portal buddies were not sharing in the celebration.

TheStreet.com Internet Sector

index was up 6 to 1141, despite the weight of losses in

America Online

(AOL)

and

Yahoo!

(YHOO)

.

In late Internet news,

DoubleClick

(DCLK)

was halted around 1:06 p.m. EST for news dissemination. The stock was down 4 7/8 to 106 9/16 before the halt.

The broad

S&P 500

was down 9 to 1393, while the small-cap

Russell 2000

was up 6, or 1.2%, to 547.

Looking ahead to Greenspan's testimony, Herman said he expects to hear a cautious tone. "Beauty is in the eye of the beholder. I never saw a time that there wasn't 90 different interpretations" of Greenspan's Fedspeak, he quipped. Still, he predicts we will hear positive talk about productivity tempered with the idea of limits, which are being approached. "We will continue to have these stair-step

interest-rate increases until there is some additional evidence of material slowing" in the economy.

If there is one area in particular that is holding Herman's interest at the moment, it's money supply. "The Fed can hike rates but not be that frugal in terms of providing reserves," he said, noting that a rising-interest-rate environment last fall shared the stage with an increase in money supply. Herman also expressed concern about levels of margin debt but believes attempts to rein it in would come more in the form of Fed "jawboning at the major firms" and reminding them they have some responsibility where margin borrowing is concerned.

Market Internals

Breadth was mixed on the major exchanges, on moderate volume.

New York Stock Exchange:

1,175 advancers, 1,664 decliners, 606 million shares. 44 new 52-week highs, 95 new lows.

Nasdaq Stock Market:

2,016 advancers, 2,014 decliners, 1.06 billion shares. 254 new highs, 61 new lows.

For a look at stocks in the midsession news, see Midday Movers, published separately.

Herb on TheStreet: How Salton Has Resorted to Bullying Retailers

By

Herb Greenberg

Senior Columnist

2/16/00 6:30 AM ET

If the kiss of death for any hot product is the discounting of its price, then a sign of desperation might be when the manufacturer of that hot product bullies retailers into not cutting the price. Which brings us to

Salton

(SFP)

, the housewares-maker, known best these days for the red-hot George Foreman Grill.

In a Dec. 10 letter from Salton Chairman David Sabin to major retailers, a copy of which was obtained by this column, Salton unveiled what it calls its "Order Acceptance Policy," telling retailers which Salton products cannot be discounted. "The Salton OAP recognizes that whenever we have filled an order for any of our products you, as a retailer, have the right to sell those products to consumers at prices which you determine," the letter said. "It also recognizes that we have a separate right to decide, independently, whether or not we will sell OAP products to particular customers."

As a result, Salton said, "Whenever we determine that a customer has advertised or sold any of the OAP products at retail price below our recommended selling price, we will automatically reject future orders placed by that customer." Salton also said it will "reject future orders" if a retailer is selling products similar to Salton's, but is using Salton's products as a way to bait and switch customers to the competition.

Products on the December list, not surprisingly, included two models of the George Foreman Grill, which has been the center of a tug-of-war between the Salton bulls and the bears for the better part of a year. (So far, the shorts have been gored, but as of last month that still accounted for roughly 46% of the public float, or shares that trade.) The Grill is generally regarded as a lifesaver for Salton; in the second quarter all George Foreman products represented roughly 38% of sales. Salton responded to the grill's success by recently paying $137.5 million to buy the George Foreman brand, with plans to expand the George Foreman name to many other products, including an outdoor grill. "They've taken this further than the bears ever thought they would," concedes one short-seller, who says the bet among the shorts was that discounted models of the grill would start showing up at Christmas. "That's the final red flag, when you see the grill discounted," this short-seller says.

Knockoff products, after all, are part of the history of the housewares industry. And with competition comes lower prices. The grill business has already attracted plenty of copycats; in fact,

Consumer Reports

recently rated the

Hamilton Beach

Health Smart grill and the

West Bend

Heart Smart grill over the George Foreman Grill, whose models sell at a price range of around $50 to $100.

So, why hasn't there been discounting of the George Foreman Grill? Salton President Bill Rue says it remains in high demand. What about Salton's bullying tactics? He doesn't quite see it that way. "Retailers send us their policy letters, we send them our letters back," he says. "We don't find this an unusual letter. It's not a new policy for us. It's a policy we decided to clarify with some of our retailers."

Is that because they wanted to discount the grill? Not according to Rue, who says, "This is a policy that covers how we market our products and it was put together to clarify any questions retailers may have."

So, if they discount the product, Salton will cut off future orders? "The retailer has his rights, and we have our rights," Rue says. "We're trying to protect the investment we have in our brand. ... We're saying it's our decision to make if we have a decision to make ... on whether we want to accept his offers in the future."

If Salton is seen as being too heavy-handed, however, the tactic could backfire if Salton's future products don't sell as well as the grill. The housewares business, known for its ultra-low margins, is a difficult business for even the best of promoters. (Remember

Sunbeam

(SOC)

?) Just because one product is a hit doesn't guarantee that an entire line of products -- bearing the same George Foreman brand -- will do anywhere near as well.

What's more, bullying tactics don't generate goodwill with retailers. A top exec at one housewares firm, who requested that his name not be used, says that some retailers have expressed outrage at Salton's demands. "I've never seen anything like this," he says. "It's so audacious, it's so arrogant."

About the only time a manufacturer can have clout is if it can roll out one blockbuster after another. The company had been chatting up a $199 face mask called Rejuvenique, but word in the industry is that it hasn't been doing well. (Rue says that it is doing as well as expected, though not as well as some retailers might have liked.) Salton also will soon begin selling a new magazine-size Web-access appliance (tentatively priced at $599 for 16 megabites of memory and a 32-bit processor) called the ePods, which will compete with similar devices being rolled out by the likes of

Dell

(DELL) - Get Report

,

Compaq

(CPQ)

and

Microsoft

(MSFT) - Get Report

. The only difference is that rather than selling its Web device in computer stores, Salton expects to go the discount and department store route (yes, alongside the grills) assuming, that is, that they'll continue to take Salton's merchandise, after the recent round of bullying.

IDT insight:

Great scoop by

CNBC's

David Faber the other day about

America Online's

(AOL)

reported desire to buy out our old friend

IDT's

(IDTC)

stake in

Net2Phone

(NTOP)

. If such a deal does happen (there hasn't been any announcement yet) short-sellers will likely be licking their chops over IDT -- at least they will be after they

sell

the IDT stock they currently own. (That's right: short-sellers own it as part of an arbitrage of being long IDT and short Net2Phone.)

So, why would they then go short IDT? Because as this column

pointed out, according to IDT's convoluted fourth-quarter earnings report, its prepaid telephone card biz doesn't look so great. To quote from that column: "Gross margins are on the wane. Most telling was that the fastest growth -- 55.6% -- came from non-IDT-branded cards, which have meager 3.5% gross margins; that compares with an 8.9% gain of IDT-branded cards, which have margins of 26.9%. There were similar examples in other parts of the company, which suggest that in order to deliver that stunning revenue growth, IDT all but gave a good chunk of its biz away."

Agree or disagree with me? Don't email me -- take it to the

message boards.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.

Copyright 2000, TheStreet.com