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August 30, 1999

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Market Data as of 8/30/99, 1:10 PM ET:

o Dow Jones Industrial Average: 10,994.55 down 95.62, -0.86%

o Nasdaq Composite Index: 2,723.14 down 35.76, -1.30%

o S&P 500: 1,333.31 down 14.96, -1.11%

o TSC Internet: 556.45 down 17.54, -3.06%

o Russell 2000: 427.59 down 4.86, -1.12%

o 30-Year Treasury: 101 07/32 down 27/32, yield 6.023%

In Today's Bulletin:

o Midday Musings: Traders Wonder About Greenspan Hangover Amid Selloff
o Herb on TheStreet: Has Anybody Taken a Really Close Look at Amazon's Latest Quarter?

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The captain of this up-and-coming CLEC now relies more on cooperation with the Baby Bells.

Midday Musings: Traders Wonder About Greenspan Hangover Amid Selloff


Thomas Lepri

Staff Reporter

8/30/99 1:15 PM ET

It seems like investors have been on the sidelines longer than

Don Shula

. And a third straight session of broad consolidation doesn't seem to be dislodging many from their


watch posts today.

In very light trading, all the proxies were underwater at midday, led by the

Nasdaq Composite Index

, off 37 to 2722. The

S&P 500

was down 15 to 1333, while the

Dow Jones Industrial Average

was off 98 to 10,992. The Dow was struggling under the weight of loss-leading financials


(C) - Get Free Report


American Express

(AXP) - Get Free Report


J.P. Morgan

(JPM) - Get Free Report

, down 5%, 2.9% and 2.7%, respectively. Internet Sector

index was 18 lower to 556, paced by

(AMZN) - Get Free Report

, off 6 11/16, or 5.2%, to 121 13/16. The small-cap

Russell 2000

was off 5 to 428.

Market players were searching for new reasons for the consolidation.

"I think we're just seeing some leftover selling after Greenspan's remarks on Friday, said Bruce Bittles, market strategist at

J.C. Bradford

in Nashville, Tenn. Bittles was referring to

Alan Greenspan's

speech Friday at the

Kansas City Fed

symposium in Jackson Hole, Wyo., in which the Fed chief said that stock prices are one factor among many that all central banks must consider when they frame monetary policy. "People aren't spooked to the point of being aggressive sellers," Bittles qualified. "But we're seeing some carryover selling."

"It seems to be unnerving people," concurred Rao Chalasani, chief investment strategist at

Everen Securities

in Chicago.

Others downplayed the Jackson Hole theory. "If people were spooked by it, you would have seen a bigger reaction Friday," said Bob Basel, director of listed trading at

Salomon Smith Barney

. "Why is the Dow down 30 points? Who knows?"

Whatever its cause, this morning's selling was happening on extremely light volume, with 335 million shares trading on the

New York Stock Exchange

and 456 million shares changing hands on the

Nasdaq Stock Market

. The action should pick up a bit -- just a bit -- as the week's economic data unfold. Tuesday and Wednesday will bring the

Chicago Purchasing Managers' Index

and the

National Association of Purchasing Management

index, respectively. Friday's

employment report

caps off the week.

As important as the week's coming data are, their effect on the market may prove muted with so few players on Wall Street right now, according to Basel. "This week isn't going to be much," he said. "But the employment data on Friday is going to determine where we go next."

Bittles, who describes himself as "cautious on the market," thinks this week is more crucial than that. He sees the market rallying into Labor Day, provided the data come out friendly. "It's important that it does rally," he said. "If it didn't, that would be a reason to raise some more cash, which we're inclined to do. The market's technically on unsafe ground -- the monetary situation

relating to Greenspan's comments Friday is a second strike now."

Elaborating on that "unsafe ground" was Tim Hayes, senior equity strategist at

Ned Davis Research

. He noted that the S&P 500 was still in mired in the right shoulder of a

head-and-shoulders pattern -- a precarious position with significant downside potential: "The Dow already broke that

pattern to the upside, but we didn't get any follow through." Hayes is watching to see whether the S&P 500 can break through the 1380 area; if it fails, he said, neckline support stands all the way down at 1280.

Chalasani said he doesn't care much for technical analysis, and that the market "seems to be in good shape with respect to the economy and corporate earnings." But he did say that the market may be due for a consolidation after its most recent run-up.

Stocks were losing ground nearly across the board. Inveterate interest rate worries had financial stocks especially on the run at midday. The

Philadelphia Stock Exchange/KBW Bank Index

was down about 3.3%, and the American Stock Exchange Broker/Dealer Index was off 3.4%.

Oil stocks were holding up better than the broader market, while drug stocks were downright solid. The

American Stock Exchange Oil & Gas Index

was up 0.3%, while the American Stock Exchange Pharmaceutical Index was about 1% higher.

Breadth was lousy. Decliners were beating advancers 1,949 to 827 on the NYSE, where there were 21 new 52-week highs against 60 new lows. In Nasdaq action, decliners were beating advancers 2,217 to 1,323, with 63 new highs and 49 new lows.

Monday's Midday Watchlist

By Tara Murphy
Staff Reporter


Earnings estimates from First Call; earnings reported on a diluted basis unless otherwise specified



(T) - Get Free Report

was off 3/8 to 47 1/8 after it announced two new calling plans, AT&T One Rate 7 Cents and AT&T Family Plan. The first plan allows consumers to make interstate long-distance calls from home anytime for 7 cents a minute with a monthly fee of $4.95 if the company also handles their residential local calls. If not, the monthly fee is $5.95. AT&T Family Plan is a wireless plan. Earlier today, the company said it is on track to reach its 1999 financial goals but consumer long-distances revenues could fall 4% to 5% due to price competition. AT&T anticipates revenue growth of 5% to 7%, with business revenue up 6% to 7%.

Mergers, acquisitions and joint ventures


European Commission

has decided to open an in-depth investigation into



acquisition of


(HON) - Get Free Report

. The commission said its initial investigation "has shown that the merger may lead to the creation or strengthening of a dominant position in one or more markets for avionics products, but this has to be subject to further investigation." Shares of AlliedSignal were off 1 1/4 to 63, while Honeywell was falling 3 1/2 to 115 7/8.

Telephone carrier



was up 2 3/4, or 8.7%, to 34 3/8 after it said

Forstmann Little

, a private investment concern, is investing $1 billion for a 12% stake in the company.

Phelps Dodge

(PD) - Get Free Report

on Friday announced plans to launch a $2.5 billion hostile bid for

Cyprus Amax Minerals




(AR) - Get Free Report

. Cyprus and Asarco are planning their own merger. Shares of Phelps were up 1/16 to 56 11/16, while Asarco was down 3/8 to 22 5/16. Cyprus shares were off 1/16 to 17 1/2.

Earnings/revenue reports and previews

Oil and gas producer

Cross Timbers Oil


was up 1/2 to 12 1/4 after it announced that recent purchases could boost total cash flow for the third quarter to more than 80 cents a share and $1 a share for the fourth quarter. The company also said that it anticipates established reserves to add up to more than two trillion cubic feet of natural gas equivalent, with higher reserves helping to slate it among the 10 largest independent oil companies. Chairman and CEO Bob R. Simpson said the company expects equity to grow from asset sales gains, net income and a possible equity offering. Simpson said that the equity would not be offered to shareholders until its stock price was "substantially higher."


(PGR) - Get Free Report

was plummeting 17 1/2, or 14.8%, to 101 1/2 after late Friday warning of a third-quarter earnings shortfall. J.P. Morgan cut the stock's rating to long-term buy from buy, along with its 1999 estimate to $3.90 a share from $4.95 and its year 2000 estimate to $4.10 a share from $5.50.

Offerings and stock actions

Alternative electric service provider

Plug Power

has filed with the

Securities and Exchange Commission

to raise $117.3 million in an IPO.

Goldman Sachs


Hambrecht & Quist


Merrill Lynch



will serve as underwriters for the deal.

Analyst actions


(ALL) - Get Free Report

was down 1 15/16, or 5.4%, to 33 9/16 after Merrill Lynch lowered its rating to near-term neutral from buy.

Fairchild Semiconductor


was sliding 3/4 to 26 despite

Credit Suisse First Boston

starting coverage of its shares with an initial strong buy rating and a price target of $32.

Fair Isaac


was sinking 3 3/16, or 10.6%, to 26 11/16 after

U.S. Bancorp Piper Jaffray

lowered its rating to neutral, reducing both its 1999 and 2000 estimates along with its price target.

(FLWS) - Get Free Report

was off 5/8 to 20 despite Goldman Sachs rolling out coverage of the shares with a recommended rating.

Interactive Pictures


was up 13/16 to 20 7/8 after

J.P. Morgan

analyst Susan Walker White rolled out coverage of the stock with a buy rating and a price target of 37.

Internet Capital Group


was soaring 7 9/16, or 14.1%, to 61 1/4 after Merrill Lynch initiated coverage of its shares with a near-term accumulate rating, a long-term buy rating and a two-year price target of 125. Merrill was lead underwriter on the company's IPO.

Deutsche Banc Alex. Brown

also started coverage with a buy rating.

(QUOT) - Get Free Report

was down 1 1/2, or 12%, to 11 1/4 despite


initiating coverage of the stock with a buy rating. PaineWebber was an underwriter on Quotesmith's IPO.


(PEP) - Get Free Report

was off 1 1/8 to 34 3/16 after

Donaldson Lufkin & Jenrette

cut its full-year 1999 earnings estimate to $1.20 a share from $1.22, and its 2000 estimate to $1.37 from $1.38.

Pinnacle West

(PNW) - Get Free Report

was declining 1 to 38 7/8 after

Morgan Stanley Dean Witter

cut its rating to neutral from outperform.


(PVTL) - Get Free Report

was slipping 1 3/8, or 7.7%, to 16 1/2 after Merrill Lynch initiated coverage of the stock with a near-term accumulate and a long-term buy rating. Merrill was the lead underwriter on Pivotal's IPO.



was jumping 11 1/8, or 21.3%, to 63 1/2 after Morgan Stanley upped its rating on the stock to outperform from neutral.


Avado Brands


was up 1/2, or 7.8%, to 6 7/8 after it said it signed on financial advisor

BancBoston Robertson Stephens

to devise strategic alternatives to boost shareholder value. Avado operates restaurants including

Don Pablo's Mexican Kitchens


Canyon Cafe Restaurant Grills


Leaders of


(BA) - Get Free Report

largest union urged rank and file members to accept a new three-year contract offer from Boeing. Members of the union will vote on the proposed contract Wednesday. Shares of Boeing were up 1 to 45.'s

Holly Hegeman

recently wrote a

piece on the subject.



was up 7/16 to 59 15/16 after it said its duo drug treatment, which includes anti-platelet




, returned blood flow in obstructed coronary arteries in heart attack patients more effectively than Retavase alone. According to the study, 61% of patients who received Repro and 60 units per kiliogram of heparin, reached optimal coronary artery blood flow within 60 to 90 minutes compared to 47% who were given Retavase alone. In July, Centocor said it would be bought by

Johnson & Johnson

in a $4.9 billion stock swap. The merger is expected to be completed in the fourth quarter.


announced that its "very celebrated" arthritis drug


will receive priority review by the

Food and Drug Administration

as a remedy for growths in the colon which could develop into cancer. Searle, which is a subsidiary of


(MTC) - Get Free Report



(PFE) - Get Free Report

, serves as co-marketer for the osteoarthritis and adult rheumatoid arthritis treatment. According to the companies, the FDA awarded the priority review status to Celebrex to stop colorectal adenomatous polyps in patients with familial adenomatus polyposis, or FAP. According to the companies, there are no current treatments for FAP approved by the FDA. Shares of Pfizer were up 5/8 to 39 1/4, while Monsanto was off 5/8 to 42 3/8.

Shorewood Packaging


was up slightly to 14 after it said it would close its Stanley, N.C., packaging plant by the end of November. The company expects the move to save $3 million.

Herb on TheStreet: Has Anybody Taken a


Close Look at Amazon's Latest Quarter?


Herb Greenberg

Senior Columnist

8/30/99 6:30 AM ET

Oh, no, not another story bashing (AMZN) - Get Free Report! We already know that sales growth is slowing, revenue per customer is down and marketing costs are rising. (Not a healthy combo.) We also know the company is expanding into a broad-based, nonbooks retailer (lots of competition) and that it's spending heavily on bricks-and-mortar warehousing infrastructure (so much for the online advantage). Then there's the uncertainty about Amazon's expansion away from books, where the lack of selection makes it just another retailer. What else could possibly be said? Read the following, a piece written exclusively for this column by hedge fund manager Jeff Matthews, who holds puts on -- a bet that its stock will fall -- and you'll see why any Amazon investor should really be taking a closer look at the most recent quarter's numbers. Jeff runs Ram Partners in Greenwich, Conn. and is one of this column's longtime and most thoughtful sources. Remember his call here a year and a half ago about problems at Compaqundefined? His Amazon comments are just as good. Rather than try to work a column around what he says, I thought I'd let him say it himself. He calls it "A River Runs Dry." Enjoy. HG


A funny thing happened on the way to the New Paradigm. Unnoticed by the press, and unremarked on by Wall Street analysts, is the disquieting implication of the recent earnings report from the granddaddy of the Internet --

A close look at Amazon's June quarter numbers reveals that the company may be (as a friend of mine likes to say about these things) "hitting the trees with no flaps down."

No, I'm not recycling the old news that the company lost 26 cents on each revenue dollar and that cash flow was negative; Amazon is not a profit story. And the fact that Amazon's customer acquisition costs are going up while its customers' average purchase is going down has already been mentioned in the financial press.

My focus is on growth, which is what Internet investors (including myself) pay for. And what is remarkable is that Amazon barely grew from the March quarter to the June quarter. Sequential sales growth was only 7% -- down from last year's 33% growth in the same time period and the slowest sequential growth ever for the company.

Give the company credit for masking the decline by blaming what Wall Street analysts said was "normal seasonality" in retail sales generally and Internet sales in particular (people spend more time outdoors in the spring, goes the thinking). But Amazon's deceleration is not normal, it is not seasonal and it is worse than it looks because half the growth came from international sales and from new initiatives. The core U.S. business approached stagnation.

Here are the numbers: We know international sales made up 23.9% of Amazon's revenue in the June quarter, and 22% in the March quarter. Backing out those international sales, Amazon's U.S. business grew only 4.5% sequentially. One more thing: the company started up its auction business in the month of March. I'll guesstimate that in the June quarter, Amazon's auction site did no more than a few percent of the $50 million


(EBAY) - Get Free Report

did in their June quarter -- call it $2 million. Subtracting both the international business and the auction guesstimate gives us an "apples-to-apples" comparison of what Amazon's U.S. book, music and video business did from the first to the second quarter of 1999: 3.4% growth. Repeat: 3.4% growth.

This means Amazon barely outperformed

Barnes & Noble's

(BKS) - Get Free Report

"dinosaur" bricks-and-mortar superstore business, which grew 2% from first to second quarter. Barnes & Noble's Internet business, by the way, grew 21% during the same period -- off a smaller sales base, but still it grew six times faster and about the same in dollars as did Amazon's U.S. business.

Now, in order to confirm that Amazon's slowdown went beyond "normal seasonality" in overall retail sales, it was necessary to find a retailer that uses the calendar fiscal year, as Amazon does. (Amazon is on a calendar fiscal year, so its first and second quarters end in March and June, while Barnes & Nobles is on a "retail" fiscal year ending in January, so its first and second quarters end in April and July.) So I found a retailer that is about as generic as you can get.

I found


(S) - Get Free Report


And Sears' retail sales grew 15% from its March quarter to its June quarter. You can't blame "seasonality" for crimping Amazon's sales. Lowly Sears beat Amazon hands down. I then checked



, one of the first Internet e-tailing sites, to see if sales slowed in their June quarter because "people spend more time outdoors in the spring." Onsale grew 20%. (And Onsale is no great shakes businesswise -- in fact, it recently preannounced that September quarter revenue would be far lower than published estimates.)

A reasonable person could conclude that Amazon has sprung a leak. This swift maturation of what was expected to be a long-enduring business model has tremendous ramifications -- not just for the momentum investors who own Amazon stock but for the dozens of copycat companies that have come public; the hundreds that have received venture funding; the thousands that are now starting up in the hopes of becoming "the next Amazon."

A hasty judgment? Perhaps. But I am no Luddite. I have been an Amazon customer for several years. I have invested privately in Internet start-ups. I was short Barnes & Noble stock when, in my opinion, "they just didn't get it." I do admit to being a "value-oriented investor" with little taste for P/E's above 10 times sales (and having an insignificant put position in Amazon's shares and an outright short position in Onsale, more than offset by other Internet-related long positions). But by no means have I ever doubted the power of a business model with negligible fixed costs and instant worldwide market potential via a few mouse clicks. I just thought it would last longer than this.

Defenders of the faith will scoff at the notion that Amazon is headed for a Sears-type old age this early in its life. A mere one or two quarter's worth of sales reverting to the mean has not scared anybody, to judge by the stock's recent uptrend. Besides, not one Wall Street analyst has highlighted the slowdown, or noted its severity or questioned its meaning (a simple back-of-the-envelope calculation would reveal it, but nobody uses envelopes any more).

Yet there is a deeper manifestation of the problem with Amazon, and it goes to the heart of the matter. Now that Amazon is ramping up its own distribution centers (rather than outsourcing distribution), the company's fixed asset base is exploding. And as it explodes (up 10-fold in one year), the company becomes less efficient at turning its invested dollars into sales.

Last year, Amazon's second-quarter sales were $116 million, or eight times its fixed assets (computers, office space, telephones, desks, etc.). That was a great ratio, because it meant Amazon was much more efficient than most retailers at generating sales from a small investment in overhead. Sears, by comparison, turned fixed assets only 1.4 times in the same period. This year, however, Amazon's fixed asset turnover dropped to two times. (And I have not included the large goodwill they now carry as a result of recent acquisitions, which would drop the ratio below one.)

If Amazon is only turning its fixed asset base about as fast as Sears -- the company long considered the worst large retailer on the Big Board -- and if Amazon's sales growth is looking more like a bricks-and-mortar chain than an e-tailer, and if it is losing 25 cents on each dollar of those sales, how will Amazon ever --


-- make a profit?

Amazon's business model is broken, that much seems clear from the numbers at hand. How much time does management have to fix the model? Well, Amazon is unique in many ways besides the size of its Web site, the size of its book inventory and the size of its huge new distribution centers. It is unique among Internet companies in the size of its debt. Amazon has $1.45 billion of debt, and $1.1 billion of cash. The debt was sold when Amazon stock was going up, along with the company's revenue. Now, the cash is being spent quickly -- at least $100 million per quarter so far this year -- yet the sales growth is slowing.

Unless the trends change quickly, Amazon may well become merely a slow growth company losing 20 cents or more on the dollar, with a lot of debt to repay and continuing negative cash flow.

Give Amazon management credit for keeping our eyes on the next big thing rather than the numbers: Amazon auctions (disappointing thus far), Amazon toys (still in its, er, infancy), Amazon consumer electronics (too new to call). Besides, Wall Street is pointing to a strong Christmas season as a reason to own the stock and others like it. But a broken model is a broken model, whether it's Christmas, spring, summer or fall; whether the model is losing money by selling

Tom Clancy

novels or


(COMS) - Get Free Report

Palm Pilots. And the numbers show that Amazon's core business of books, music and videos has already matured, right before our eyes.

In "Internet time."

Amazon declined comment.

Jeff Matthews runs Ram Partners, a private hedge fund in Greenwich, Conn. At the time of publication, his fund was short and Onsale, although positions may change at any time.

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.

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