April 3, 2000

Market Data as of 4/3/00, 1:49 PM ET:

o Dow Jones Industrial Average: 11,107.45 up 185.53, 1.70%

o Nasdaq Composite Index: 4,327.66 down 245.17, -5.36%

o S&P 500: 1,500.81 up 2.23, 0.15%

o TSC Internet: 1,044.46 down 62.61, -5.66%

o Russell 2000: 526.10 down 12.99, -2.41%

o 30-Year Treasury: 105 29/32 up 4/32, yield 5.831%

In Today's Bulletin:

o Midday Musings: Nasdaq Today's Big Loser as Microsoft Readies for Ruling
o Herb on TheStreet: Why Pacific Gateway Is in a World of Hurt

Also on

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Silicon Babylon: Incubator Postmortem

What happens when an incubator doesn't incubate? A clue: egg on face.

Retail: Late Easter Isn't Exactly Tickling Retail Investors

March sales data are expected to show weakness. But how will the market react?

Mutual Funds: Flood of Assets Pushes Fidelity Biotech Fund Into Uncharted Territory

Can the fund absorb billions in new cash and continue to perform?

Midday Musings: Nasdaq Today's Big Loser as Microsoft Readies for Ruling


Justin Lahart

Associate Editor

4/3/00 12:51 PM ETMaybe the


just watched

King Kong

too many times. How else can you explain the sympathy pains it feels for an 800-pound gorilla?


(MSFT) - Get Microsoft Corporation (MSFT) Report

shares are suffering mightily after its talks with the government, aimed at settling antitrust charges against it, unraveled Saturday. The judge in the case, Thomas Penfield Jackson, is planning to issue his ruling in the case at 5 p.m. EDT today, and is widely expected to find that the company has, indeed, violated antitrust laws. Microsoft was lately down 15 1/8, or 14.2%, to 91 1/8.

This has all come at a bad time for tech stocks, which have been hurting badly for the past week. It has re-ignited a vicious rotation into so-called old economy stocks just when people were talking about how the market was beginning to regain its footing.

"The Microsoft news shook up tech investors," said Peter Boockvar, equity strategist at

Miller Tabak

. "People are using the proceeds

from tech stocks to buy other stocks. No one's exiting the market. There's just a lot of confusion out there."

As with last week, the selling remains confined to stocks that trade on the

Nasdaq Stock Market

. Although the

Nasdaq Composite

is off 223.89, or 4.9%, to 4348.94, it's

New York Stock Exchange

counterpart, the

NYSE Composite

, is up 7.3, or 1.2%, to 655.13.


Dow Jones Industrial Average

is doing even better, up 163.89, or 1.5%, to 11,085.81. That despite Microsoft taking 75 points out of the index.


S&P 500

, which is about 33% tech, was up 0.91, or 0.06%, to 1499.49.

Banks were performing well. The

Philadelphia Stock Exchange/KBW Bank Index

was up 33, or 4.2%, to 828. Drug companies were also getting into the act. The

Amex Pharmaceutical Index

was up 11.4, or 3.3%, to 358.7. Internet Sector

Index was down 52.73, or 4.8%, to 1054.34. The small-cap

Russell 2000

was off 9.2, or 1.71%, to 529.89.

Despite the violence of the markets' apparent move away from technology, many market watchers welcome it. There had long been a perception that tech stocks were overextended, particularly given how badly the rest of the market had performed.

Steve Goldman, market strategist at


notes that outside of technology valuations had come down remarkably, particularly given the backdrop of what remains a low interest-rate environment.

"I think we'll move higher," he said. "It may be irregular due to the tech weakness, which may last for a while."

For traders, however, the market's recent action has less to do with some grand movement from the new to the old economy than just plain old volatility.

"There was a lot of damage done to the market in the past week or so," said Jim Volk, co-director of institutional trading at

D.A. Davidson

. "I think that the markets are still digesting last week's news and the markups we had toward the close on Friday."

Market Internals

New York Stock Exchange:

1,454 advancers, 1,422 decliners, 513 million shares. 53 new 52-week highs, 25 new lows.

Nasdaq Stock Market:

1,218 advancers, 2,791 decliners, 855 million shares. 42 new highs, 102 new lows.

Herb on TheStreet: Why Pacific Gateway Is in a World of Hurt


Herb Greenberg

Senior Columnist

4/3/00 6:30 AM ET


TheStreet Recommends


Ostrich award

: Years ago I used to hand out Ostrich awards for companies that were trying (or hoping) not to be seen by announcing bad news late on a Friday afternoon. For whatever reason, the practice seemed to slow. Or so I thought, until I was tipped to look at

Pacific Gateway Exchange


, which late Friday (how does 7:28 p.m. EST sound?) disclosed (as this column previously

suggested) that it has a serious cash problem.

And that's only the half of it.

Turns out the company had gotten a bit too aggressive with its accounting -- at least too aggressive for its auditors. The result: It is restating each quarter from last year, which means audited year-end earnings won't be the same as those reported a mere 31 days earlier. (They'll be 41 cents per share rather than 48 cents.) Reading between the lines: The auditors had problems with the timing of certain expenses, the way some expenses had been capitalized (or spread out over an extended period of time) rather than taken as a direct hit to earnings, and the way costs of a junk-debt offering were expensed.

What's more, according to Pacific Gateway's skimpy 10-K, the company doesn't have the cash to come up with a scheduled credit-line reduction payment -- putting it in default on certain loan agreements. And its lenders have given the company less than two months to scrounge up the required $25 million. If it can't get the money, the company warns that its banks "will have the right to immediately accelerate this indebtedness and foreclose on the assets that we have pledged as security." Such a default, in turn, would result in a "cross default" under another financing arrangement.

The upshot: Pacific Gateway's auditors have warned that the company may not be able to continue as a going concern. "Going concern" letters, while not unusual, aren't routine. The company says it's scrambling (my words, not its) to find financing alternatives.

Lernahooligan alert

: While I was away

Lernout & Hauspie


said it was


Dragon Systems

, the industry leader in speech-recognition software. Created a bit of the whooping-it-up kind of frenzy that occurs with mania-driven stocks. (At least that's what you'd conclude after seeing my email.)

Does this acquisition mean Lernout is out of the


Hardly, at least not according to Cohodes (as in Marc of

Rocker Partners

, the most vocal short-seller in the stock). He's more fired up than ever about his bearishness on the company, for a number of reasons.

One is that merely joining the No. 1 and No. 2 speech-recognition software companies is no guarantee that the combination will create a great company. (To understand why, go back and read

MSN Money Central

Senior Markets Editor

Jim Jubak's


Picking the Right Gorilla. "Speech-recognition technology is developing so fast," he wrote, "that there's a good chance the winning technology is yet to emerge.")

Next, go look at what Lernout actually acquired. Dragon may be No. 1, but it ain't exactly growing -- at least not when you compare Dragon's sales and earnings from last year, as disclosed by Lernout, with the prior year's financials that were disclosed by Dragon last year when it considered going public. According to that calculation, Dragon's sales actually


17% last year, while earnings swung from a positive $10 million to a loss of $22 million. (There were similarly bleak quarterly comparisons for


, which L&H agreed to acquire a few weeks earlier.) "If this is a new day," Cohodes asks, "why are they buying a company whose sales are down 17%?"

Good question. I didn't even both to ask 'cause they don't take my calls.

IDT talk

: Looks like






, no strangers to this

column, come away winners, especially after


(T) - Get AT&T Inc. Report




last week took stakes in Net2Phone (with AT&T

infusing $1.4 billion into Net2Phone, which is majority-owned by IDT).

Doesn't mean concerns raised

here about the convoluted nature of IDT's financial statements weren't appropriate. Just means IDT has a stake in something that other companies think has value. Whether Net2Phone is everything AT&T and Yahoo! think it's cracked up to be doesn't really matter at this point. An investment (from AT&T) of $1.4 billion is an investment of $1.4 billion. Cash is cash.

End of story.


: Very strange to be away last week, staying at a Hilton in Del Mar, Calif., that




or any business programming. Didn't take my PC (too heavy for a nonworking trip), so no


, and I didn't have time to read anything but

USA Today

. (Fine for updates, but I missed real time!) It was like living in a time warp -- though I did catch a peek at


from time to time; every shop or restaurant in the area that had a TV had it tuned to you-know-what.

Came back to a financial world seemingly in shambles -- only you wouldn't have known it Friday watching the sun set over the ocean from atop Sbicca (the old Kirby's restaurant in Del Mar). (Kinda helps keep things in perspective.)

P.S.: While I may have been a week or two early, the


, per my prediction on




touch 4,400! (Eat your heart out,

Smith, as in


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

Mark Martinez assisted with the reporting of this column.

Copyright 2000,