May 18, 2000

Market Data as of 5/18/00, 1:14 PM ET:

o Dow Jones Industrial Average: 10,804.70 up 34.96, 0.32%

o Nasdaq Composite Index: 3,601.82 down 43.14, -1.18%

o S&P 500: 1,444.90 down 2.90, -0.20%

o TSC Internet: 896.81 down 16.77, -1.84%

o Russell 2000: 496.79 down 2.87, -0.57%

o 30-Year Treasury: 100 01/32 down 27/32, yield 6.231%

In Today's Bulletin:

o Midday Musings: Nasdaq Drops to 3600 as Wet Government Blankets Smother Tech
o Herb Greenberg: Herb's Hotline: Drilling Deeper Into Home Depot

Donald Luskin, president, CEO and co-founder of, will be the guest on "" show on Fox News Channel May 20 and 21.

Also on

Wrong! Tactics and Strategies: Defending the Dog

There is no question that Cisco is acting badly, but the trader still likes the company's fundamentals. A Multi-Car Pileup on the Web IPO just goes to show that the Internet IPO craze still has life.

Media/Entertainment: Time Warner, Disney Reach an Agreement

The agreement will give Time Warner the ability to transmit ABC over its cable systems.

Mutual Funds: Pension Giant TIAA-CREF Cracks Down on Frequent Traders

But most retirement plan managers say frequent trading isn't a major problem.

Midday Musings: Nasdaq Drops to 3600 as Wet Government Blankets Smother Tech


Tara Murphy

Staff Reporter

5/18/00 1:21 PM ET The

Justice Department

took to the field today, keeping its eye on a heavy-hitting long-distance merger and the future of a software giant. And with the Old Economy issues on the upside, and tech-heavy growth stocks in the red, it was clear where Wall Street spectators had placed their wagers.

MCI WorldCom




(MSFT) - Get Report

may be in the big leagues, but are they big enough to play the law and win?

The question is a tough one and has left many insiders considering the profound effect that the

Fed and the Justice Department's actions may have on tech growth stocks. "You have two wet blankets: higher interest rates and a proactive Justice Department," said Brian Gilmartin, portfolio manager at

Trinity Asset Management

, referring to the Fed's cautionary comments on future rate increases and the Justice Department's recommendation to stop MCI WorldCom from acquiring



. "You have a Justice Department that's hell-bent on making life tough for growth companies."

Lately, the

Nasdaq Composite Index was falling 45, or 1.2%, to 3600.

In Nasdaq trading, MCI WorldCom shares were slipping 1 11/16, or 4%, to 40 5/16 on news that its merger plans with Sprint were being scrutinized by the government. Sprint was also lower, off 1 3/4, or 3%, to 56 1/4.

Microsoft was down 1 1/16, or 1.6%, to 66 5/8 on word that the government is less than thrilled with the software giant's proposed antitrust remedies.

Elsewhere in tech,



shares were rewarded with a gain of 5 13/32, or 9%, 62 13/16 after the company posted better than expected second-quarter earnings. The stock fell during the previous two sections on news that its would buy Spanish-based

Terra Networks


, in a deal valued at $12.5 billion. Internet Sector

index, which includes Lycos, nevertheless was losing 16, or 1.7%, to 898, with



dragging 2.9%.

The semiconductor sector was also headed south, with the

Philadelphia Stock Exchange Semiconductor Index

sliding 0.4%.


(RMBS) - Get Report


Applied Materials

(AMAT) - Get Report

were both lower.

In the fall of 1999, the Fed gave the green flag to buy tech after pumping cash into the economy. Even with interest rates rising, small-cap tech names were hot issues that were labeled the latest investment trend. But when liquidity pump ended, so did the trend, leading buyers back to some Old Economy names.

"Leadership has changed, whether it's oils or drugs," said Barry Lafer, CEO of

Lafer Equity Investors

, commenting on the shift out of tech into other sectors. "Financials

are acting well in the face of rising interest rates."

Lately, the

Dow Jones Industrial Average was holding onto a gain of 37, or 0.3%, to 10,806, with

General Motors

(GM) - Get Report

its driving force. The stock was gaining ground after Merrill Lynch named its

Hughes Electronics


unit to its Focus One list.

In other

Big Board news,

National Discount Brokers


was in business after

Deutsche Bank

signed a letter of intent to buy a 19.3% stake in the online broker.

The financials were faring well on the session, with the

American Stock Exchange Broker/Dealer Index

popping 2%.

Merrill Lynch


and Dow component

J.P. Morgan

(JPM) - Get Report

were both on the upside.


Philadelphia Stock Exchange Oil Service Index

was sinking 5.2% after posting gains in recent sessions.


(SLB) - Get Report

, which was losing 4.2%, and

Transocean Offshore

(RIG) - Get Report

, falling almost 7%, were pressuring the sector.

But until all of the players get back in the game, its difficult to gauge what will happen next. "You have the backing up of rates and cash on the sidelines, volatile swing will be more pronounced," said Lafer, referring to how a lack of participation effects market activity.


S&P 500 was shedding 3, or 0.2%, to 1445, while the small-cap

Russell 2000 was losing 3, or 0.6%, to 497.

Market Internals

Breadth was negative on both the Nasdaq and NYSE, on moderate volume.

New York Stock Exchange:

1,228 advancers, 1,496 decliners, 478 million shares. 42 new 52-week highs, 52 new lows.

Nasdaq Stock Market:

1,535 advancers, 2,179 decliners, 726 million shares. 25 new highs, 66 new lows.

For a look at stocks in the midsession news, see Midday Stocks to Watch, published separately.

Herb Greenberg: Herb's Hotline: Drilling Deeper Into Home Depot


Herb Greenberg

Senior Columnist

5/18/00 1:09 PM ET

Home Sweet Depot (continued): I merely

questioned a few days ago whether

Home Depot

(HD) - Get Report

was cannibalizing itself by opening so many new stores within miles of existing stores.

It was a throwaway line.

You'd think, based on the reaction, that it was a full-blast attack.

On one hand, there were the

Bobby Atkinsons

of the world, who wonder why HD doesn't just add more registers to handle the long lines. (Because the parking lots would still be too crowded.) Others echoed

John Schubert

in Atlanta, who wrote, "The cannibalization issue was hashed over here several years ago in the newspaper with the HD critics deploring the strategy for the same reason you did, declining same-store sales. Guess what; it appears to work as they keep building. ... My observation here is that they are making sure you are never more than five miles from a store. And I'll bet that they will replicate that in every metro area. ... I suspect that a slight decline in SSS

same-store sales growth is a good tradeoff for increased sales, especially when


(LOW) - Get Report

and HD are coexisting in many locations here." Could very well be gaining market share in the process.

But that's not why some folks are short the stock. Checked in with one person who is short HD, but


because of deteriorating fundamentals. ("Would you rather have one store that is doing $100 million where the shopping experience sucks or two stores doing $65 million where the shopping experience is great but the same-store comps are down?" he asks. "I'd rather have two stores doing $130 million than one store doing $100 million." And gaining market share, to boot.)

So tell us why he's short!!! He's short because of interest rates, which have already taken 20 points out of the stock. But doesn't home remodeling rise along with interest rates (or so they say)? Sure, but when interest rates go up "Home Depot isn't a company in Atlanta that operates stores," the short says. "It's a two-letter symbol that says, 'Sell me because I'm perceived to be sensitive to interest rates.' ... I'm a pattern recognizing person." ... And that's one pattern that repeats itself time after time. Interestingly,


writes that he thinks the

stock is oversold and the interest rate jitters are already factored in. ... The short, however, remains short because he is betting there's more interest rate news to come. (Two smart guys agree to disagree. Love it!) At the same time, the short says that a long-term HD investor might use current prices to add more for the future. "From a five-year perspective," he says, "it might be a great buy." (End of discussion!)

Toy talk:

Brett Fromson's

great piece on management change at


(MAT) - Get Report

is a must-read. Snippet: "Warren Buffett has said that when a good manager meets a bad business, the manager normally fails. We will see in this case what happens when a good manager meets a good -- but broken -- business." ... Arf:



, lately trading at 3 3/16, can only dream that it's



(lately 19 1/2,) which is being bought.

More dinging of


(DELL) - Get Report

: This time from Danny Lam of

FHI Research

, who says his research shows that Dell,




Micron Electronics


"will be experiencing a period of slower growth because they have not been successful in exporting their business model overseas to the fast growing PC Markets in Asia and Europe. ... At the same time, companies like








(IBM) - Get Report

, who have preserved their indirect channels and their build-to-inventory systems even as they improved their efficiency and matched the direct model in key aspects, will likely see a period of strong and profitable growth like they have not seen in over 3 years." (Assuming you believe


PC players will do well.)

Donut or doughnut:


(no last name) is puzzled by

Krispy Kreme


. "The doughnut maker," he writes, "has doubled in three weeks, sports a P/E over 100, yet it faces lower than average gross margins in its peer group and a growth rate of barely 20%." Agreed ... lots of holes in the story (I'm dying here, folks). ... Speaking of holes, time for a


: Now, with


(MSFT) - Get Report

turning into a key competitor of

Lernout & Hauspie


in the voice recognition biz -- rather than just a partner and investor -- the Microsoft part of the story from Lernout, er, from chief cheerleader Rob Stone of

SG Cowen

, has suddenly changed. In a new report to clients, Stone writes Microsoft "was never central to the L&H story."

Never Central?!?

For the


time Microsoft


the story! (And thanks, Rob, for the perfect lead into our next item. ...)

Hillbilly logic:

Yesterday's comments on Jethro Clampett, er, Bodine, brought the Bodines out of the woodwork, including

Mike Hogge

, a


subscriber whose username is "Jethrobodine." (Shazam!) And regarding yesterday's Hotline topic of knot vs. naught,

Kerry Cone

, from Texas, writes: "I think that may be naught, not knot. I live where people actually still talk like Jethro but they rarely spell anything so it is hard to tell. Finally,

D.L. Hampton

writes, "The guy, after all, was a hillbilly!! You know there are some really rich hillbillies. Ever been to Tennessee?" Actually, spent a year living in Nashville in the mid-70s ... which about says it all for this topic -- and this edition of ... The Hotline.

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,