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TheStreet.com's MIDDAY UPDATE

July 27, 1999



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Market Data as of 7/27/99, 1:12 PM ET:

o Dow Jones Industrial Average: 10,975.55 up 112.39, 1.03%

o Nasdaq Composite Index: 2,669.33 up 50.14, 1.91%

o S&P 500: 1,362.44 up 14.68, 1.09%

o TSC Internet: 575.37 up 10.85, 1.92%

o Russell 2000: 445.47 up 2.60, 0.59%

o 30-Year Treasury: 89 11/32 up 3/32, yield 6.016%

In Today's Bulletin:

o Midday Musings: Traders Cautiously Eyeing Bounce
o Tech Savvy: Opportunity Ahead: Donning the Red Hat, Part 2

When Funds Collide
The merger of two mutual funds may seem like a nonevent if you own shares of the surviving fund. But the process of absorbing another fund's portfolio can impact your fund's returns and your tax return. Read today's installments.

When Funds Collide: Name Change Is a Shortcut to a New Image

Last year, more than 1,000 funds changed their names. Some were also hoping to change their fortunes.


When Funds Collide: Combining Capital Gains May Be Your Loss

The tax consequences of mergers can be particularly tough on owners of the target fund.


Cramer's Online Brokerage Speech

On Monday, Jim Cramer spoke at the Friedman Billings Ramsey 4th Annual Technology Investor Conference. Find out what the attendees did: Read the text on TSC, presented in four parts. The first part ran Monday evening. Here are parts two and three. Part four runs later today.

Cramer's Online Brokerage Speech, Part 2

E*Trade and DLJ Direct are the financial answer to Home Depot, helping do-it-yourselfers build a fortune.


Cramer's Online Brokerage Speech, Part 3

The public has decided that it can do a better job in managing its money than the brokerage firms and the mutual funds. And the public is right.


Also on TheStreet.com:

IPOs: Internet Advertisers Find It Hard to Keep Quiet Before IPOs

Looking for a quick burst out of the IPO gate, Net companies spend on TV, Internet and print ads.


Hardware & PCs: Apple Could Benefit From a More Colorful Retail Strategy

Apple needs to improve its online operations, and some suggest that a branded store could further boost its sales.


Dear Dagen: Dear Dagen: Can I Short Stocks I Already Own?

Yes, it's called shorting against the box, but the IRS has cracked down on this practice.


Midday Musings: Traders Cautiously Eyeing Bounce


Brian Louis

Staff Reporter

After closing

yesterday looking like the vestiges of the Woodstock '99 festival, the

Nasdaq Composite Index

today was beginning to repair some of the damage it has suffered since closing at an all-time high on

July 16 .

The tech-laden Nasdaq Comp was lately up 54.45, or 2.1%, to 2673.74 having just surpassed its opening peak of 2672.36.


Nasdaq 100

was up 0.7%, while the

Morgan Stanley High-Tech 35

was up 2.5% and the

Philadelphia Stock Exchange Semiconductor Index

was up 5.4%.

Chip behemoth (and SOX component)


(INTC) - Get Report

was up 6.3% after being upgraded by

SG Cowen

. Intel was most active on the

Nasdaq Stock Market

, with 23.4 million shares changing hands.

Internet stocks were enjoying a decent rise.

TheStreet.com Internet Sector

index was up 11.42, or 2%, to 576, but off its session peak of 584.62.






were among the index's stars so far.


America Online


, a DOT component, was most active on the

New York Stock Exchange

, with 15.3 million shares changing hands. AOL was up modestly.

Dan Marciano, head of trading at

First Albany

, said the rise in tech and Internet stocks was a technical rebound, and he also used an old Wall Street cliche to describe the market's jump. (Hint, the description includes references to a feline and a rubber ball.)

The blue-chip

Dow Jones Industrial Average

was up 132.34, or 1.2%, to 10,995.50. Providing the biggest boost to the Dow has been

American Express

(AXP) - Get Report

, up 4.3%.

Reflecting the snap-back in tech,



was the second-biggest boost to the venerable average, up 3.3%.


S&P 500

was up 16.56, 1.2%, to 1364.32. The

Russell 2000

was up 2.44, or 0.6%, to 445.31.

"It's nice to see a little bit of a bounce," said Ted Bridges, vice president and money manager of

Bridges Investment Counsel

in Omaha, Neb.

Among several risks for equities going forward, Bridges cited high valuations as most paramount. Although the market leaders have been pounded, have valuations come down enough to get anything more than a bounce?, he asked. "I kind of suspect not." However, Bridges confessed that he did not know.

Forward Looking

Looking ahead,

Federal Reserve


Alan Greenspan

is scheduled to testify before the

Senate Banking Committee

tomorrow. Greenspan is widely expected to mainly repeat testimony delivered last week before the

House Banking Committee

. However, a big unknown is what -- if anything -- will come out of the question-and-answer period with senators.

Last week the Fed chief warned the Fed won't hesitate to raise interest rates if signs of inflation emerge. That warning only intensifies the already high interest in upcoming economic data, although Marciano said he didn't hear anything different in Greenspan's testimony last week than in previous comments by the chairman.

Regardless, there are a couple of big reports coming up, including the

Employment Cost Index

for the second quarter and the advance estimate of second-quarter

gross domestic product

. Both reports are slated for release Thursday at 8:30 a.m. EDT. According to the average estimate of economists polled by


, the ECI is projected to rise 0.8%, while GDP is predicted to increase 3.3%.

In the Treasury market, the 30-year bond was lately up 7/32 to 89 14/32, its yield dipping to 6.02%. (For more on the fixed-income market, see today's early

Bond Focus.)

On the NYSE, advancers were leading decliners 1,559 to 1,245 on 410.4 million shares. In Nasdaq trading, winners were beating losers 1,951 to 1,658 on 550 million shares.

On the NYSE, 26 issues were trading a new 52-week lows while 84 had touched new highs. On the Nasdaq, 42 issues had set new 52-week lows while new highs totaled 46.

Meanwhile, among other indices, the

Dow Jones Transportation Average

was up 1%, the

Dow Jones Utility Average

was down 0.5% and the

American Stock Exchange Composite Index

was up 0.2%.

Tuesday's Midday Watchlist

By Heather Moore
Staff Reporter

As noted above, Intel was up 3 15/16, or 6.3%, to 66 7/8 after SG Cowen raised it to buy from neutral and lifted its 1999 earnings estimate for the company to $2.33 from $2.25 a share. The firm said the chip maker will be helped in the second-half by rising sales promotions for PCs. "Higher capacity utilization will mean decent profitability, even from low-end processors," analyst Drew Peck wrote in a research note this morning.

Mergers, acquisitions and joint ventures

Cox Communications


was down 7/8 to 37 15/16 after

The Wall Street Journal

reported the company plans to acquire the cable TV assets of


(GCI) - Get Report

for $2.7 billion. Gannett was up 1 13/16 to 76 5/16.

Sinclair Broadcast

(SBGI) - Get Report

was up 3/8 to 17 3/4 on news it's selling 43 radio stations in nine markets to

Entercom Communications

(ETM) - Get Report

for $821.5 million in cash. Entercom was up 1 15/16, or 5.2%, to 39 1/16.


downgraded Sinclair to attractive from buy, and

Morgan Stanley Dean Witter

upgraded Entercom to strong buy from outperform.

Earnings/revenue reports and previews

Advanced Fibre Communications


was up 1 1/2, or 10.3%, to 16 1/8 after last night announcing second-quarter earnings that beat analyst predictions by 2 cents a share.

Avery Dennison

(AVY) - Get Report

was up 1/16 to 63 1/16 after posting second-quarter earnings of 63 cents a share, 2 cents above the seven-analyst view and higher than the year ago 55 cents. The company also said it sees double-digit earnings growth in the second half.



was up 3 3/4, or 7.2%, to 56 1/2 after it met analyst estimates yesterday, reporting a net loss of 61 cents a share for the second quarter. The Santa Clara, Calif.-based provider of high-speed data services posted revenue of $10.8 million, up sharply from $809,000 one year earlier. The stock has fallen 21% from 67 1/2 on July 15 as investors worry about growth prospects for Covad and its sector.


(EBAY) - Get Report

wasn't invited to breakfast today. After the online auctioneer last night posted second-quarter earnings of 4 cents a share vs. the year-ago 2 cents, the stock was off 2 13/16 to 101 5/8.

The market apparently needed a little

Insight Enterprises

(NSIT) - Get Report

before lunch, lifting the stock 3 3/8, or 10.6%, to 35 1/8 after the company posted second-quarter earnings that exceeded predictions by 4 cents a share.

Integrated Silicon Solution


flexed some early muscle, jumping 3 3/16, or 10%, to 34 15/16. After training and eating its vitamins, the company beat last year's quarter by 56 cents a share with a figure that includes a charge and an extraordinary gain. The company provided no per-share operating figures.

International Network Services


opened big, up 3 points in the first half-hour of trading. But by lunch, the stock had given the gain back somewhat, and lately was up 2 5/8, or 6.7%, to 42 1/4. The company beat a fourth-quarter earnings prediction by a penny a share yesterday.

LifePoint Hospitals


was up 3/8 to 9 13/16 after late yesterday beating a second-quarter estimate by 3 cents a share.

Gentlemen, start your engines.

Monaco Coach


peeled out at the bell, jumped 3 points and came in with a midday gain of 1 7/16, or 5.6%, to 26 151/16 after passing a second-quarter earnings estimate by 14 cents a share and lapping last year's quarter by 35 cents.



? Exactly. Although the company beat second-quarter predictions by a penny yesterday, by midday the company needed something to stop the bleeding. It recently was off 2 7/8, or 11.1%, to 23 1/8.

Sykes Enterprise

(SYKE) - Get Report

was up 1 to 27 7/16 after last night it matched second-quarter earnings estimates.


(WAT) - Get Report

was up 3 3/16, or 6%, to 56 5/16 after late yesterday the company drowned the analysts, and beat their second-quarter prediction by 4 cents a share.

In other earnings news:

Analyst actions

American Express was up 5 13/16 to 142 5/16 after Morgan Stanley Dean Witter started coverage with a strong buy and a price target of 175.

Dow Chemical

(DOW) - Get Report

was up 3 3/8 to 124 3/8 after PaineWebber upped the stock to neutral from unattractive. The firm also lifted

Union Carbide


to attractive from neutral. Union Carbide was up 1 5/8 to 47 5/8. Separately,

ING Barings Furman Selz

upgraded Union Carbide to hold from sell, saying the company's earnings probably will improve in the coming months.

Hewlett-Packard was up 3 7/16 to 109 1/8 after

Salomon Smith Barney

raised its price target for the stock to 130 from 105.

Eric Gillin contributed to this report.

Tech Savvy: Opportunity Ahead: Donning the Red Hat, Part 2


Jim Seymour

Special to TheStreet.com

Red Hat

, roaring like a freight train down a steep grade toward a very big IPO early next month, has several advantages that are likely to keep it atop the


market I discussed

yesterday and lead to serious profitability.

The most important of those advantages are:

Market share.

According to

International Data Corp.

, Red Hat has about 54% of the commercial Linux market, way ahead of Germany's


, in second place with 11.5%, and Utah's


, in third place with 6.3%. As difficult as it is to command a majority market share over time, I see no reason Red Hat shouldn't be able to hold onto its lead, and maybe even enlarge that share.

Intel plus Linux.

One reason Linux in general has taken off is that it runs so well on


(INTC) - Get Report

x86 processors, specifically Pentium PCs. This makes for an ideal workstation or server-hardware-software buy for customers, since Intel-based hardware, adhering to industry standards and built from standard parts, is much cheaper to buy and maintain than proprietary boxes from the likes of

Sun Microsystems

(SUNW) - Get Report






(IBM) - Get Report




, among others. Although Red Hat delivers its versions of Linux for Alpha CPUs and also SunSparc processors, it has emphasized the Intel market. (Intel has been a willing partner here, of course, not only investing in Red Hat but also sponsoring a well-attended Linux Tech-Talk Day at the Santa Clara Convention Center. Intel's well-publicized and growing operating-system agnosticism irritates certain parties in Redmond, Wash., but is a key to Intel's future: It doesn't care who wins in software, so long as it sells more and more chips.)

Windows NT's slow development and limited scalability.

Many Linux shops point to the agonizingly slow development cycle for Windows NT; the next version, once called NT 5.0 but now dubbed by


(MSFT) - Get Report

Windows 2000, is years late. By contrast, Linux is in a constant state of updating. NT has a rep -- to a large extent, I believe, a bum rap -- about not being scalable enough. (Scalability refers to software's ability to handle very large numbers of users' demands at once.) NT is highly scalable, and Microsoft has been working furiously on the scalability issue. But Linux, as a Unix derivative, has native scalability of a very high order. (Consider, for example, that



, probably the highest-traffic Web site in the world, runs on Apache server-software running atop Linux.) Red Hat's Linux is highly scalable.

Important investors.

Eager both to assure Red Hat's survival and to hitch their stars to an increasingly well-known name, Red Hat has over the past year drawn equity investments from such powerhouses as IBM,








(DELL) - Get Report



(ORCL) - Get Report


Important software partners.

The limited availability of Linux-flavored software applications, as opposed to the massive list of apps for Windows NT, has been a problem. Now, enterprise-software firms such as Oracle,


(SAP) - Get Report




are producing Linux versions, and their ranks are certain to increase. On the individual level, a superb, absolutely free (for personal, student and noncommercial use) productivity software suite is available from

Star Division: StarOffice 5.0 Personal Edition can be downloaded from the company's Web site. You can also buy $39 to $169 CDs of the product from that site, along with licenses for networked commercial use, starting at $499. StarOffice runs very well on Linux (as well as on many other platforms, including Windows 95, 98 and NT, Solaris and even IBM's O/S 2). Red Hat is benefiting greatly from this increase in commercial-quality Linux applications. (Another heads up: Star moved last year from Germany to Silicon Valley, and is planning an IPO later this year.)

Star programming talent.

Although Linux creator Linus Torvalds works for


in Silicon Valley, Red Hat has attracted three-star Linux programmers to its ranks in North Carolina: Alan Cox, David Miller and Stephen Tweedie. All are well-known names in the Linux world, and have been involved in extending and improving Linux nearly from the beginning. Red Hat also recently added former


chief technical officer Eric Hahn to its board. In all, Red Hat can draw from an extremely deep pool of technical talent on staff.

On the negative side, Red Hat faces only a few major risks:

New competition.

Free software has to be the ultimate in low-barriers-to-entry businesses. You and I could start up a Linux-offspring company this afternoon with lunch money. But we'd have a heck of a time competing with Red Hat's big mo: its reputation, market presence, programming and management talent ... and very soon, its capitalization.

Antagonizing the Linux community.

Much is made of the risk Red Hat faces in antagonizing the Linux community -- which is, to put it mildly, tilted pretty far in the "software should be free" direction. The more Red Hat looks like a commercial success -- and the more Linux programmers and customers generally perceive Red Hat as taking their beautiful, free baby away from them -- the more it will be disliked, even reviled, in the Linux community.

Already, comparisons are being heard to their ultimate evil empire, Microsoft. I think this is way overblown. Red Hat's success and future lie not so much in the Linux world of years past, but in attracting new Linux users. The opinions of the early Linux boosters will be less important than Red Hat's emergence in the business community as a stable, well-financed, well-respected corporation. As Red Hat CEO Bob Young frequently points out, the company tries to show its respect for the Linux community by scrupulously playing by the rules in the Linux game, immediately contributing its many software improvements to the Linux community generally.

The Microsoft Factor

Never to be ignored, the threat of retaliation by Big Redmond is very real for any company that mounts a direct assault on Fortress


. But I think Red Hat is safe here, especially if it continues to follow a game plan not explicitly aimed at taking away Windows NT customers.

Microsoft has already had its dalliance with Unix, back in the 1980s, in the form of an embarrassing failure, Xenix. And "selling" free software is not exactly Microsoft's style. Yes, it does give away its Web browser, Internet Explorer; and yes, it bundles for free some tasty add-ons with Windows NT, such as its excellent Internet Information Web Server.

But Microsoft is unlikely to mount a head-on assault on the Linux market, and especially on Red Hat, in the near- to mid-term future. It has plenty on its plate now -- getting its corporate customers through the Y2K cycle, and migrating them up from NT 4.0 to Windows 2000 (as well as poaching customers from Novell Netware and, yes, various forms of Unix, including other Linux flavors).

In general, Microsoft claims to the outside world that it's not much worried about Linux because of the performance advantages of NT -- while internally using both Linux and Sun's Solaris OS as its benchmarks for ongoing evaluation of NT improvements. A much-quoted evaluation by the independent testing lab


, as well as a comprehensive evaluation by

PC Magazine's

labs, which appeared in the June 1999 issue, show clear performance leads for Windows NT. (Full disclosure time: I have a continuing relationship with

PC Magazine

, as a columnist.)

But tests are always selective; Linux boosters, including Red Hat, can point to their own favorite evaluations, conclusively "proving" Linux's advantages. Despite their apparent scientific nature, choosing among competing test claims in computer software performance comes down to a "you pick 'em" decision, and most of us choose the tests that support the bias we brought to the table.

In general, Microsoft is likely to go on claiming Linux is a nuisance, a worrisome fly on the back end of its elephant -- while internally working frantically to improve the performance of NT to match or stay ahead of Red Hat's Linux performance.

Certainly there have been some funny moments along the way in the NT-Linux contest. When Microsoft paid $400 million for the free email service Hotmail last year, it was abashed to find during its due diligence work that Hotmail's 9.5 million email accounts were running on servers using ... Apache on Linux. Microsoft insiders acknowledged privately that that was not a server load Windows NT was then prepared to handle.

David, Goliath and a Big Multiple

The importance of NT in the corporate market is actually an advantage for Red Hat. The merits of NT are today widely discussed, among both IT managers and senior corporate managers not involved in IT decisions. The more attention we as potential customers pay to the stability, performance and reliability of the operating systems upon which our PCs and networks run, the higher profile Red Hat is likely to earn.

Moreover, the role of David is always a juicy one, and often a highly profitable one. Yes, I'd rather be in Bill Gates' position than in the seat of Red Hook's Bob Young. But increasingly, nearly every press mention of NT is including references to the nervy upstart in North Carolina as well. Red Hat is getting a ton of highly valuable free press -- and Young has shown he knows how to exploit that.

Perhaps the biggest and toughest job for Young & Co. is to manage expectations.

So many stories have appeared -- and we'll see thousands more before the end of the year -- positioning Red Hat as a Microsoft killer that Young has to keep the unrealistic hype down. Red Hat isn't going to topple Microsoft this week, next month -- or in your lifetime or mine. It doesn't have to in order to become a very profitable company and a heck of an investment.

But the growing perception of Microsoft as a force that must be stopped, or at least hobbled, leads to an uncomfortable, eventually unsupportable Great White Hope status for Red Hat. If Bob Young and his programmers down in Durham can keep pumping out a superior product, can keep up the company's current excellent rep for support, and can persuade the world that beating Microsoft isn't its corporate mission, those who are lucky enough to get a few shares of this high-profile IPO are likely to be very happy investors indeed over the next couple of years.

Especially at the closing price on opening day.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at


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