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midday11-04-99's MIDDAY UPDATE

November 4, 1999

Market Data as of 11/4/99, 1:33 PM ET:

o Dow Jones Industrial Average: 10,650.96 up 41.90, 0.39%

o Nasdaq Composite Index: 3,043.20 up 14.69, 0.49%

o S&P 500: 1,361.24 up 6.31, 0.47%

o TSC Internet: 786.16 up 16.84, 2.19%

o Russell 2000: 439.71 up 1.25, 0.29%

o 30-Year Treasury: 100 08/32 up 15/32, yield 6.097%

In Today's Bulletin:

o Midday Musings: Market Hangs Onto Gains, Keeps an Eye on Tomorrow
o Herb on TheStreet: Why Short-Sellers Continue to Hang Around Scient Despite Its Spectacular Rise Community

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Whether it's Cramer's commentary or breaking news, each day we'll be bringing the conversation straight to you.

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Midday Musings: Market Hangs Onto Gains, Keeps an Eye on Tomorrow


Tara Murphy

Staff Reporter

11/4/99 1:46 PM ET

It looks like the bull is holding down the fort on Wall Street, with investors maintaining their positive outlook on the market. Tech fever managed to burn all the way through yesterday's trading session, helping the

Nasdaq Composite Index

finish over the

3000 mark. Despite rocky third-quarter earnings and Y2K issues looming, tech stocks are still on a hot streak, almost stealing the glory from the


, which has made some substantial gains of its own.

Meanwhile, market players are reeling from the news of a surprise bid from






(see below).

Before last week's

Employment Cost Index

report, which signaled to the


that labor costs were rising more slowly than expected, investors hesitated to jump head first into a market.

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"There is a seasonal issue that always plagues October. As a result, you had a lot of people on the sidelines, mutual funds on the sidelines and they were all replete with investable cash," said Ronny Kraft, hedge fund manager at

Gotham Capital Management

. "And then we had the watershed event, the ECI came in at .83 and change. The report, which was roughly .006 of a percent below expectations resulted in Thursday and Friday's 66.22-point runup in the S&P."

Last week's "return of the bull" gave a jolt to the tech sector after many third-quarter disappointments. According to Kraft, who

two weeks ago expressed concern over tech's outlook, mutual funds are playing major role in techs' resurgence.

"Companies aren't being rewarded for their earnings, but mutual funds are rewarding themselves," said Kraft. "With 70% of mutual funds ending their fiscal year in October, I call into question the activity of those funds at the end of the year. They came in and they rocked the market in those two days. Mutual fund companies want people to turn on the 6:30 news and see the Dow, Nasdaq and S&P up."

However, the market's heyday can't totally be attributed to mutual funds desire up end their fiscal year on an up note. Even Kraft allowed that the advanced/decline line was appearing more positive, "but that has been a pattern with the advance/decline line," he said. "It looks strong early in the day and then tapers off as the day proceeds."

While investors revel in Nasdaq 3000 euphoria, they are keeping one eye open for the outcome of tomorrow's October

employment report

. "Tomorrow is another one of these watershed events in the employment report," said Kraft. "The Street is looking for 313,000. Notably, there are a number of well-regarded economists looking for higher than that. If it's above 313,000, they're going to sell this market."

Although tomorrow's jobs report could put a dent in the recent Nasdaq buying spree, its not the only catalyst concerning investors. According to Kraft, Y2K issues are going away, there just moving closer as the new year approaches. "Chief officers at major corporations aren't going to be purchasing the new

Microsoft Office 2000

or the newest speedy Intel chip until they see the fall out from Y2K," said Kraft. "If y2K is benign, then it would be more fair to assume that tech buyers will return in the first-quarter of 2000," said Kraft.

In tech news, the Nasdaq Composite Index was advancing 16, or 0.5%, to 3044. Networking stocks were taking the lead in Nasdaq trading, with

Optical Coating Laboratory


, soaring 50 9/16, or 42.5%, to 169 11/16 on news of its merger with

JDS Uniphase



The Dow Jones Industrial Average was bouncing 39, or 0.4%, to 10,649, with



, leaping 2 9/16, or 3.5%, to 75 15/16.

J.P. Morgan


was also enjoying the ride, up 3 3/4, or 2.9%, to 132 7/8.

On the

New York Stock Exchange

, financials were buoying up the Big Board with

Lehman Brothers


climbing 4 7/16, or 6.4%, to 74 1/4, while

Morgan Stanley Dean Witter


was hopping 4 1/4, or 3.9%, to 113 1/8.

Other major indices were also in the green, with the broad S&P 500 bouncing 6, or 0.5%, to 1361, while the small-cap

Russell 2000

was gaining 1 to 440. Internet Sector

index was climbing 17, or 2.2%, to 787.



, up 2 11/16 to 183 3/8, was pumping up the index after announcing a marketing deal with

NorthPoint Communications


On the Big Board, advancers were leveling decliners 1,574 to 1,338 on 645 million shares, while on the Nasdaq, laggards were edging out leaders 1,871 to 1,841 on 897 million shares. New 52-week highs were leading new lows on the NYSE, 83 to 66, while on the Nasdaq, highs were beating out lows 191 to 70.

On the bond front, the benchmark 30-year Treasury was up 15/32 to 100 9/32, with its yield at 6.10%. (For more on the fixed-income market, see today's early

Bond Focus.)

Thursday's Midday Watchlist

By Eileen Kinsella
Staff Reporter

In a surprise move, Pfizer has made an $82.4 billion offer to acquire Warner-Lambert. The offer values Warner-Lambert at $96.40 a share.

Join the discussion on


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Warner-Lambert and

American Home Products



agreed to a $72 billion merger of equals, and it was not immediately clear whether Pfizer's bid would scuttle that pact.

All three stocks were halted at 12:49 p.m. EST, with Pfizer down 9/16 to 38, Warner-Lambert up 1 3/16 to 85 and American Home down 2 1/4 to 53 3/4.

The American Home Products/Warner-Lambert merger would create the world's biggest pharmaceutical company. The merged company is to be known as


and will rake in $26 billion in annual sales. The companies said AmericanWarner's 20-member board will consist of 10 appointees from AHP, with the remainder selected by Warner-Lambert. AHP Chairman and CEO John Stafford has been tapped as AmericanWarner chairman, while Warner-Lambert Chairman, President and CEO Lodewijk de Vink is slated as the company CEO.

wrote a story on the merger


Optical Coating Laboratory was flying 50 9/16, or 42.5%, to 169 11/16, after JDS Uniphase said it was buying it for $2.8 billion in stock. At midday, Optical, which makes thin film coatings and components, was the top gainer on the Nasdaq. Meanwhile

Morgan Stanley Dean Witter

started coverage of JDS with an outperform rating and a price target of 225. The stock was rising 1 11/16 to 193 1/8.

Mergers, acquisitions and joint ventures

Shares of

Republic New York


jumped 3 5/8, or 5.6%, to 68 5/16 after

The Wall Street Journal

reported that

HSBC Holdings

is close to forging a delayed deal to buy the bank, citing people familiar with the matter.



said they have entered a $75 million e-commerce pact with


. was lately down 1/4 to 63 3/4.

Viewer's Choice LLC

announced plans to forge a joint business with




Liberty Digital


to offer customers interactive features such as instant replays and statistics. ACTV was unchanged at 17, while Liberty Digital gained 1 7/8, or 5.8%, to 34 1/8.

Yahoo! gained 3 3/4 to 184 3/8 and NorthPoint climbed 2 3/4, or 10.6%, to 28 7/8 after saying they inked a marketing and distribution agreement.

Earnings/revenue reports and previews


Earnings estimates from First Call/Thomson Financial; earnings reported on a diluted basis unless otherwise specified.




gained 2 3/16, or 11.8%, to 20 11/16 after it posted third-quarter earnings of 37 cents a share, beating the 10-analyst estimate of 31 cents but down from the year-ago 55 cents.


rose 1 7/16, or 13.5%, to 12 1/8 after it reported a third-quarter loss of 71 cents a share, compared with a year-ago loss of 25 cents a share. A report on


said the First Call/Thomson Financial lone-analyst estimate of a 41-cent loss was incorrect and that the company actually beat estimates. said gross quarterly revenues increased by over 17% and said it completed a number of initiatives designed to increase capacity for the holiday shopping season.



rose 1 3/4 to 83 after it posted a 14% increase in October same-store sales.



inched up 1/4 to 17 7/16 after it reported a third-quarter loss of 3 cents a share, in line with the four-analyst estimate but down from the year-ago 26-cent profit.

Foundation Health


reported third-quarter earnings of 29 cents a share, in line with the 14-analyst estimate and up from a year-ago 24 cents.



rose 5/16 to 8 1/2 after it reported third-quarter earnings of 13 cents a share, which includes the beneficial effect of the premium deficiency recorded in the first quarter. The report beat the 17-analyst estimate of 11 cents and the year-ago 18-cent loss.



gained 7/16 to 31 5/8 after it posted third-quarter earnings of 37 cents a share, beating the 10-analyst estimate of 35 cents and the year-ago 33 cents.



slipped 1/4 to 38 1/16 despite boasting an 8% rise in October same-store sales.

Suiza Foods


fell 3 1/4, or 9%, to 32 15/16 after it posted third-quarter earnings of 91 cents a share, missing the nine-analyst estimate by a penny and up from the year-ago 76 cents.



climbed 2 5/8, or 5.2%, to 53 1/4 after it said October same-store sales rose 11.6%.

joint newsroom covered October same-store sales in a

story this morning.

Offerings and stock actions


is set to price a 4 million-share IPO for

Collectors Universe


at $7 to $9 a share.

Bear Stearns


Morgan Stanley Dean Witter

priced a 13 million-share offering for

Covad Communications


at $43 a share. Shares of Covad rose 7/8 to 45 1/16.

PacifiCare Health


jumped 7 3/8, or 16.2%, to 52 7/8 after saying its board approved the repurchase of up to 12 million shares.



jumped 12, or 7%, to 184 3/4 after saying it set a 2-for-1 stock split.

Goldman Sachs

is expected to price a 25 million-share IPO for



today between $11 to $13 a share

Analyst actions

Morgan Stanley sliced its rating on



to neutral from outperform. Albertson's fell 15/16 to 33 3/8.

Warburg Dillon Read

started coverage of



with a buy rating. Laboratory was unchanged at 2 15/16.

Deutsche Banc Alex Brown

narrowed its fourth-quarter loss estimate for



to 5 cents from 7 cents. Jupiter jumped 3 3/4, or 10.4%, to 39 13/16.

Credit Suisse First Boston

upped its fiscal 2001 earnings estimates on



to 86 cents a share from 79 cents and maintained a strong buy rating. Shares of Micromuse were hopping 18 13/16, or 18.8%, to 119.

Credit Lyonnais

started coverage of

New York Times



E.W. Scripps


with buy ratings. New York Times, which also received a price target of 50, gained 1/8 to 38 1/8, while Scripps, whose target was set at 73, added 1/2 to 46 3/16.

Credit Lyonnais also started

Time Warner


as a hold due to its price. Time was rising 1 5/16 to 66 5/16.

Herb on TheStreet: Why Short-Sellers Continue to Hang Around Scient Despite Its Spectacular Rise


Herb Greenberg

Senior Columnist

11/4/99 7:00 AM ET

Big thanks to JJC:




piece Wednesday couldn't have been timed better. Turns out that when it hit the


big screen

yesterday, I was working on a Scient piece of my own that drew the exact opposite conclusion. (Imagine that!) Instead of talking about how its fundamentals are so good, I planned to focus on why they were so vulnerable.

Instead of talking about why anybody would've been a fool for selling Scient before its big run-up, I planned to mention why Scient investors shouldn't mistake momentum for margins. And instead of talking about how investors should ignore their intuition and hang onto the Scients of the world, I planned to mention why trusting your intuition plays an important role in sane investing. (OK, I really hadn't planned on writing that, but I


believe intuition plays a big role in when and what I decide to write.)

Herb's Latest: Join the discussion on


Message Boards.

And while you may be kicking yourself for selling Scient too soon, you can only imagine how short-sellers feel for thinking Scient was a layup just as many points ago.

Why, you can't help but wonder, would


stay short a stock like this?

I'll tell you why, or at least what one large short-seller who has suffered through the last 50 points told me: Because of the fundamentals inherent in the information-technology consulting biz. Scient specializes in the even narrower (and right now hotter) e-biz consulting niche. "The dynamics of the business are not commensurate with the valuation," says the short-seller.

Hot would be an understatement for Scient's growth, with revenue over the past three quarters zooming to $30.8 million from $9.4 million (or sequential growth of 49%, 75% and 88%). But that growth also means explosive growth of Scient's billable head count -- or actual consultants -- and that's the heart of this story. There are other issues, such as the company getting 17% of its biz in its 1999 fiscal year from dot-coms which were backed by the same VCs that now own 30% of Scient. ("You cannot grow your business ad-infinitum mooching clients from your venture backers," our short-selling source says.) And in a few days, company insiders will be free to sell shares as the post-IPO lockup expires. (More pressure on the stock, but so what? With its hyperinflated shares down 8% Wednesday, the company announced plans to split its stock!)

But the real issue is people -- and the cost of them. Unlike other Internet-related businesses like



, growth-oriented consulting firms must add new employees, capable of billing out their time, to generate additional revenue. Rule of thumb is a new employee for every couple of hundred thousand dollars of revenue. And in a fast-growing industry where there's plenty of competition for the same pool of employees, those employees don't come cheap. "Head-count costs are spiraling out of control," our short-selling source says. He figures that, year over year, "Scient's costs per billable employee have risen by about 35%. And that doesn't include noncash options charges."

For a peek at what Scient could look like, consider the case of

Cambridge Technology Partners


, a highflier in its not-too-long-ago heyday. After reporting a strong third quarter, the company said its fourth-quarter earnings would be well below estimates. Two of the reasons: higher turnover (as employees are lured to the likes of Scient) and high compensation costs to stop the outflow. Even rival



, which is profitable, recently told analysts it's concerned about turnover as employees are attracted to the lure of higher salaries being offered by competitors and Web start-ups.

Where does that leave Scient? Let's just say existing growth rates aren't likely to continue. Scient itself says as much in its


filings, saying that it doesn't believe "this growth rate is sustainable for the long term." When it does slow, one thing is certain: Don't expect the momentum and daytrading crowds to hang around.

Scient officials, preparing for an analyst presentation today, were unable to be reached Wednesday.

Don't like what I wrote about Scient? Don't email me, post it on's

Herb on TheStreet

board so our discussion can be public.

Short Positions

Conseco gets a conscience?:

If you haven't read

Shawn Tully's

excellent piece on





and how it was outdealt by the former used-car-dealing chief of

Green Tree Financial

, do so now. Speaking of which: Conseco prides itself on the amount of stock execs have bought. But the purchases have been somewhat suspect, because the company not only loans the execs money, but guarantees that if the company is sold for


than what insiders have spent to buy and finance the stock, the execs will be off the hook for the interest.

Seemed kinda smarmy. So much for execs having the same commitment as insiders. So, on Monday, I asked Conseco about the deal, which was detailed as recently as Oct. 18 in an SEC filing by CEO Stephen Hilbert. "Why," I asked, "should investors think such a purchase plan is advantageous? The execs appear to be taking no economic risk unless they leave the company. That would appear to put their conviction at


than the stock-purchase plan would suggest."

A spokesman responded that "directors and management can't conceive that the company would ever be sold at less than the purchase price of any program. To make that point clear to investors, directors and executive officers have agreed to eliminate that provision with respect to the shares they purchased in all programs."

So, they've scrapped the "off-the-hook-for-interest" part of the plan. Good for them. So far, there hasn't been any SEC filing or announcement regarding the change. But then again, hopefully that's one reason you're reading this column. (Don't forget to tell your friends and neighbors. Shameless hucksterism, I know; learned from the master.)

That's entertainment, update:

Nobody gave much of a hoot about an item

here six weeks ago suggesting that




Hollywood Entertainment


were considering a merger, or, in the very least, Blockbuster was considering buying Hollywood's

unit. Then, two days ago, Hollywood said it plans to file soon to spin its unit off to the public. And, on Wednesday, Blockbuster announced a $30 million investment from

America Online



Still, my sources say, Hollywood and Blockbuster are flying the notion of some kind of transaction up the


flagpole. Evidence of that comes from the latest issue of trade pub

Video Store Magazine

, which reports the FTC is interviewing independent video-store owners. Among the questions: What would happen if Blockbuster and Hollywood merged?

So, if they're planning to merge, why would Hollywood announce an IPO for Reel? According to my sources, to hedge its bets. You know that FTC -- not the most predictable bunch.

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 1999,