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September 3, 1999


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Market Data as of 9/3/99, 1:12 PM ET:

o Dow Jones Industrial Average: 11,056.60 up 213.39, 1.97%

o Nasdaq Composite Index: 2,816.52 up 82.28, 3.01%

o S&P 500: 1,352.89 up 33.78, 2.56%

o TSC Internet: 587.97 up 26.06, 4.64%

o Russell 2000: 433.60 up 6.18, 1.45%

o 30-Year Treasury: 101 12/32 up 1 14/32, yield 6.021%

In Today's Bulletin:

o Midday Musings: Wall Street Charging Into Weekend With Rollicking Rally
o Herb on TheStreet: Does Dendrite Do Right With the Way It Handles Software Expenses?

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This week's "Stock Drill" guest is Richard Babson, president of Babson-United Investment Advisors. Babson is the third generation of management in a firm founded originally by Roger Babson, who is renowned for predicting the 1929 stock market crash and founding Babson College. Join Herb Greenberg and Jim Cramer as they see what Richard predicts forhis favorite stock picks in today's market.

Plus, we'll tell you what sectors you don't want to be in come this falland how to recognize danger zones on "Word on TheStreet."

The show airs Saturday at 10 a.m. ET and again Sunday at 1 p.m. ET. Formoreinfo and how to find Fox News in your area, please see our TSC on Fox pageat

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A look at the sources, real and imagined, of price discrepancies between interest and principal Treasury STRIPS.

Midday Musings: Wall Street Charging Into Weekend With Rollicking Rally


Eileen Kinsella

Staff Reporter

9/3/99 1:19 PM ET

A weaker-than-expected jobs report bestowed some preholiday cheer on the market. On a day when most of Wall Street would typically have already packed up the Range Rover and charted a course for the Hamptons, traders who hung around long enough for the news drove the

Dow Jones Industrial Average

up more than 200 points before throwing in the towel for the beach towel.

The Dow leapt 214, or 2%, to 11,057, following a

Labor Department

report that the economy added only 124,000 jobs in August, falling well below economists' expectation of 220,000 new jobs. The jobless rate edged down an expected 0.1 percentage point to 4.2%, while hourly wages gained just 0.2%, undercutting a forecasted 0.4% gain.

After a long, tiresome week, the market was definitely ready for a little Friday R&R to kick off the weekend. And if the rally was overly optimistic, hardly anyone was surprised. "I think it's overdone on the upside," said Jim Volk, co-director of institutional trading at

D.A. Davidson

in Portland, Ore. "There is a lot of short-covering and positions are easing up for the weekend." Still, with the market down so sharply in the past week, "we were overdue for an oversold bounce."

Aside from a few sorry-looking losers with earnings warnings, namely



, down 4.9% and

Coca Cola


, down 3.6%, stocks were living it up.

Technology stocks were the life of the party. Internet Sector

index was up 26, or 4.5%, to 588, fueled by a yelping



, up 6.3%, and a leaping



, up 6.1%.

In another corner the tech-infused

Nasdaq Composite Index

was hosting its own beach-house bash, up 83, or 3%, to 2817.



popped open the champagne, up 6.6%, and was among Nasdaq's market leaders.

The broad

S&P 500

was up 34, or 2.5%, to 1353, while the

Russell 2000

was up 6, or 1.5%, to 434.

Meanwhile, in the bond market, the benchmark 30-year Treasury was rallying 1 17/32 to 101 13/32, its yield at 6.02%. (For more on the fixed-income market, see today's early

Bond Focus.)

Of course there will be plenty of hangovers next week, but there was no time to think about that today. "I wouldn't get too excited about one number today in the big picture," said Jerry Hegarty, chief analyst at

Cape Market Research

. "This is a heavyweight battle evenly matched between bulls and bears, and it's based on what's going to happen with interest rates. The bulls have won this round; they certainly have not won the battle."

Indeed, most traders expect the fight to kick in again next week ahead of the


Oct. 5 meeting. Until then every piece of economic news that comes out will most likely be carefully scrutinized and quickly acted on as investors attempt to decipher if another interest-rate hike is in the cards.

"Stocks are really being held hostage" to interest rates, said Hegarty. "Any piece of good news is going to help, and vice versa." Hegarty said he expects by Wednesday all eyes will be focused on Friday's

Producer Price Index

release and selling will precede it.

On the

New York Stock Exchange

advancers were trouncing decliners 2,136 to 650 on 437 million shares, while on the

Nasdaq Stock Market

leaders were beating laggards 2,301 to 1,211 on 582 million shares. New 52-week highs were topping new lows by a scant 35 to 28 on the Big Board, while new highs were leading new lows 105 to 32 on the Nasdaq.

Friday's Midday Watchlist

By Tara Murphy
Staff Reporter


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



Philadelphia Stock Exchange Semiconductor Index

was pumping up 22.26 to 555.68 after several brokerage firms made positive comments on the industry's stocks. Merrill Lynch maintained its near and long-term buy rating on

Novellus Systems


, highlighting its strong business. Shares of Novellus were jumping 3 7/8, or 6.5%, to 63 9/16.

Applied Materials


, which is also rated a Merrill buy, was increasing 2 13/16 to 77 1/4.



was also boasting a gain, up 1 9/16, or 8.6%, to 19 3/4 after

Salomon Smith Barney

upgraded its shares to a buy from an outperform.

Mergers, acquisitions and joint ventures



was hopping 3 1/4 to 87 1/8 after it said it would provide digital packed radio system, or GPRS equipment to Norway's

Telenor Mobile

for possible commercialization in the year 2000. GPRS allows for faster transmission in mobile-phone systems, which would make more proficient use of Internet functions and multimedia in future phone models.






have been discussing a possible deal involving their television stations,

The New York Times

reported. According to the


, the two media companies are considering ways to benefit from a recent federal judgment that permits a company to own two stations in the same market. Both companies own stations in Dallas, Boston, Miami, Philadelphia and Pittsburgh. Shares of Viacom were up 2 11/16, or 6.2%, to 44 13/16, while CBS was up 1 11/16 to 48 15/16.

Phelps Dodge


was off 1/16 to 57 3/8 after it announced a $2.5 billion hostile takeover bid for




Cyprus Amax


. Yesterday, federal securities regulators gave Phelps their approval to offer stock in the transaction. According to Phelps registration statements, the company would use the stock to purchase Asarco and Cyprus, ending their initial plans for a duo merger. Before launching the hostile bid, Phelps made two friendly offers which the copper producers rejected. Asarco and Cyprus said they would consider a higher offer of $3.3 billion, but Phelps, dismissing the proposal as unreasonable, opted to initiate the hostile takeover. Asarco shares were up 1/8 to 22 3/16, while Cyprus was down 3/16 to 17 5/8.

Earnings/revenue reports and previews



was sliding 2 1/4 to 57 1/4 after it warned that third-quarter earnings would come in shy of Wall Street expectations. The company expects third-quarter earnings of between 34 cents and 35 cents before the financial impact of its European product withdrawal, which it estimates will be about 2 cents to 3 cents a share. For the third quarter, the 16-analyst consensus estimate calls for Coke to earn 36 cents a share. Coke said it's "comfortable" with the current range of analyst projections for earnings per share for full year 2000. The 15-analyst consensus estimate projects earnings of $1.56 a share for 2000.



was advancing 1 1/8 to 34 11/16 after it said that it anticipates a rise in third-quarter earnings per share despite lower operating income from its North American operations. The company said earnings will be helped by increased operating income at




. The 15-analyst estimate calls for third-quarter earnings of 33 cents a share. Earlier today,


raised its rating on its shares to outperform from a perform in line and set a price target of 44.

Sterling Software


was sliding 1/4 to 19 7/8 after it sees fourth-quarter earnings, before charges, coming in at about 47 cents a share, which would be below the seven-analyst estimate of 52 cents.

Analyst actions

American Mobile Satellite


was up 11/16 to 19 7/16 after

Deutsche Bank Alex. Brown

initiated coverage of with a buy rating.



was leaping 2 1/8 to 71 1/16 after Deutsche Banc Alex. Brown rolled out coverage of the stock with a buy rating.

American National Can


was unchanged at 15 7/8 after

Lehman Brothers

initiated coverage of the stock with an outperform rating and a 12-month price target of 21.

Campbell Soup


was up 3/16 to 43 3/4 after

Donaldson Lufkin & Jenrette

sliced its rating to underperform from market perform.



was booming 3 13/16, or 8.7%, to 47 7/8 after Deutsche Banc Alex. Brown upgraded its shares to a strong buy from a buy.

General Dynamics


was up 11/16 to 63 1/2 after

Credit Suisse First Boston

boosted its rating to a strong buy from a buy.



was up 1/8 to 5 3/4 after

ABN Amro

upped its rating to an outperform from a hold, citing strong cash flow and Internet business growth.



was off 1 1/4, or 12.5%, to 8 11/16 after Credit Suisse First Boston downgraded its shares to a hold from buy.



was up 3/16 to 29 1/16 after

Banc of America Securities

sliced its fourth-quarter estimates to $1.70 from $1.81.

West Pharmaceuticals


was up 7/16 to 38 3/16 after

Warburg Dillon Read

rolled out coverage on the stock with an initial buy rating and a price target of 45.



vice president of logistics, Jimmy Wright, has announced his retirement from the company,

The Wall Street Journal

reported. The


said that Wright's decision to leave was amicable and the company would look outside the company to fill his position. Shares of Amazon were increasing 1 5/16 to 61 3/8.

Law enforcement officials said that hundreds of accounts at international banks took in about $10 billion in connection with a money laundering investigation at

Bank of New York


, the


reported. According to the newspaper, the Fed conducted an inquiry in 1995 into possible illegal banking activities at Russian bank


, which is now a focus of the investigation. Bank of New York was advancing 1 13/16, or 5%, to 37 1/8.

Seagate Technology


was mounting 1 1/8 to 35 1/16 after it announced plans to restructure its software division and purchase all of its outstanding shares. The company is attempting to cut costs and excess production.

Stillwater Mining


was lifting 9/16 to 22 15/16 after it said it reached a temporary agreement with Montana land environmental groups regarding its proposed land development. The deal calls for the company to pay for several environmental activities including the formation of a Watershed Protection Group.



was skidding 1 5/16 to 44 5/16 despite saying August same-store sales at

Radio Shack

rose 10%.

In the Inside Wall Street column in

Business Week

this week, Gene Marcial writes that a U.S. telecom company is set to invest $25 million for a 10% stake in

Log On America


. Log On was jumping up 2 9/16, or 12.2%, to 23 1/2.

Elsewhere, the column says

MTI Technology


has been soaring because of its switch to fiber channel-based technology and, more importantly, because it has acquired a 25% stake in privately held

Caldera Systems

, a provider of the


operating system. Brion Tanous, a senior analyst at

First Security Van Kasper

, is cited in the column as saying that based on

Red Hat's


valuation -- Red Hat is the biggest distributor of the Linux operating system whose stock has skyrocketed since going public -- MTI's 25% stake in Caldera is worth 21 3/4 a share to MTI shareholders. Today MTI was popping up 2 5/16, or 9.69%, to 26 1/4, while Red Hat shares were up 1 7/8 to 81 3/4.




is mentioned as a takeover target with Joanne Wuensch, an analyst at

ING Baring Furman Selz

, quoted as saying "



appears the most likely to go after MicroTherapeutics." MicroTherapeutics shares were hopping 1 7/8, or 17.6% to 12 5/8, while Guidant was increasing 1/16 to 60 7/16.

Herb on TheStreet: Does Dendrite Do Right With the Way It Handles Software Expenses?


Herb Greenberg

Senior Columnist

9/3/99 6:30 AM ET


Capitalizing on a bull market:

Never heard of

Dendrite International


? I hadn't either until a numbers-crunching source pointed it out and steered me in the direction of its accounting (in conjunction with its zooming stock price).

Several red flags, right off the bat:

First, the New Jersey company, which makes software used by salespeople in the pharmaceuticals industry, capitalizes (or spreads out) its software development costs for as long as four years rather than booking them as expenses as they occur.

Capitalizing is perfectly legitimate, but it's often a sign of aggressive accounting.

Siebel Systems


, for example, goes out of its way in its


filings to say it doesn't capitalize anything. A Siebel spokesman says that company's accounting department doesn't capitalize because most software companies don't. And for good reason: Capitalizing, by its nature, is considered aggressive because by deferring expenses, earnings wind up looking better than they really are. It's fine as long as the products aren't outdated earlier than their expected life. If that happens, the company could be forced to write off the remaining, deferred amount, which would end up taking a bite out of earnings anyway.

Capitalizing is especially disconcerting when the amount being capitalized has a big jump (Dendrite's nearly doubled in the second quarter, compared to the end of 1998) or when the capitalized amount is unusually large relative to a company's sales and/or expenses. In the case of Dendrite, the capitalized software equals nearly 30% of expenses and almost all of the $6.7 million the company collected in licensing fees in the second quarter. That means almost all of the licensing revenue went straight to the bottom line. (Licensing margins are good, but not





capitalized software development costs are just 1% of licensing revs and less than 1% of expenses.

Second red flag: Dendrite has opened the door for more aggressive recognition of revenue. Historically the company has recognized revenue as its products are installed and used, otherwise known as the percentage of completion method. Now, thanks to products that aren't as customized, it says it also may start recognizing revenue when those products are delivered to customers. (A small point, maybe, but that could mean more revenue up front.)

Finally, last year three customers --

Johnson & Johnson







-- accounted for a whopping 56% of sales. (It's never good when so few customers carry so much weight.)

Dendrite officials were unavailable yesterday. If and when they do get back to me, their comments will be published here immediately.

From the "that's why they call it value" department:

A few months back this column

noted how




Alliance Semiconductor


could benefit from their ownership in

United Semiconductor

, which was in the process of being acquired by

United Microelectronics

, the largest foundry in Taiwan. Since then, UM's price has appreciated 30%. The shares of S3 and Alliance have also bounced.

However, my original source believes Alliance hasn't bounced enough. Unlike S3, she believes there's a wealth of value buried in Alliance, which currently trades at 11 3/8. Its UM stake alone is worth $13.98 per share. (By contrast, S3 trades


the value price of its UM holdings) Alliance also owns shares in



valued at around $1.26 per share; it has nearly $2 per share in cash and its investment in

Chartered Semiconductor

, a private fab based in Singapore, is worth roughly $1.23 per share (and "given the booming state of the foundry business today," our source says, "it's reasonable to speculate that they'd be contemplating a public offering soon."

What's more, she says, "Alliance's base business, DRAM and SRAM chips, is strong and probably deserves some modest valuation, as opposed to the negative valuation which this calculation suggests."

Sure, it's in a crummy commodity biz, but so are the likes of

Micron Technology



Cypress Semi


, and look what happened to their stocks


any of the extras.

Reader Scott Davey writes:

Herb, I never could quite understand your approach to journalism. You seem to take pride in the extent of hatred you incur by your readers. Hell, you even measure it. You are to journalism what those teens were in the Colorado school shooting to their classmates -- a force for the dark side, a petty little man with some twisted self-deluded sense of mission."

Actually, I measure in at just shy of six feet (and shrinking by the year).

Then there was this, from reader

Mark Lastfogel

, who writes: "A few months ago, you reported on the problems

Party City

was having ... How did you find out so early the problems that were about to occur? I owned stock in the company and spoke with analysts who all said the stock was a strong buy and in fine shape."

Likely story. Many (if not most) brokerage analysts are too busy doing investment banking deals to do the amount of research necessary to red-flag a possible problem. Or at least to red-flag it in writing to investors (for fear of being alienated by the company). I found out about Party City's problems in my normal course of reporting -- by resorting to the dark side. Yep, I stooped so low as to talk with a lowly short-seller who didn't like the company's biz plan or its balance sheet. Inventories appeared to be outa control. That, as it turns out, was an understatement.

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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