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midday12-13-99's MIDDAY UPDATE

December 13, 1999

Market Data as of 12/13/99, 12:51 PM ET:

o Dow Jones Industrial Average: 11,199.93 down 24.77, -0.22%

o Nasdaq Composite Index: 3,642.59 up 22.35, 0.62%

o S&P 500: 1,415.29 down 1.75, -0.12%

o TSC Internet: 1,147.92 up 18.42, 1.63%

o Russell 2000: 467.94 up 1.23, 0.26%

o 30-Year Treasury: 99 07/32 down 6/32, yield 6.177%

In Today's Bulletin:

o Midday Musings: Irrepressible Techs Romping as Pullback Turns Around
o Herb on TheStreet: The Smart Investor's List: A Dozen Things You Need to Know to Watch Your Flank Community

You know's the place for great market commentary, but did you know it's also the place for intelligent investing discussion? Whether it's Cramer's B2B League or Greenberg's Garbage Index, we bring the conversation straight to you. Check out all the great talk going on today in the Community section:

Ben Holmes: This Week in IPOs

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Community Hot Board: TSC's Top 25 Hit Quotes Board

Q&A With Jim Seymour: Dec. 15, 1999 -- Post your questions now!

Can't get enough great conversation? Then talk with John J. Edwards III on AOL's MarketTalk at 3:30 p.m. EST. MarketTalk is hosted by Sage Online (Keyword: PF Live). Follow that up with Jim Cramer on Yahoo! at 5 p.m. EST. Register for Yahoo! Chat at: It's free!

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Dear Dagen: Dear Dagen: Consider Your 401(k) a Lender of Last Resort

The cost in taxes and lost earnings can be high.

Midday Musings: Irrepressible Techs Romping as Pullback Turns Around


Justin Lahart

Associate Editor

12/13/99 12:58 PM ET

It was another one of those mornings when, one might have supposed, the long awaited Pause That Refreshes looked like it might be coming. Overseas bourses were soft and the stock index futures were weak. Treasuries were giving back a bit of last week's rally.

But no sooner did stocks open lower than they -- especially the big techs that dominate the

Nasdaq Composite Index

-- started to come back. True though it may be that the rally is overextended, investors saw the opening drop as more of an opportunity to buy than as anything else.

"You can't hang around," said Jim Benning, trader at

BT Brokerage

. "This is historically the strongest time of the year. A lot of people are more afraid of missing the boat than they are of missing a bit on price."

And so all the major indices are off their opening lows, with the tech ones well into the green -- and into new record territory.

Heading into the afternoon, the

Dow Jones Industrial Average

was off 24 to 11,200, while the broader

S&P 500

was down 1 1/2 to 1415 1/2.

The major tech proxy, the Nasdaq, was up 22, or 0.6%, to 3642.



, up 17 3/4, or 4.5%, to 409 1/8, was providing a big push on news that

China Unicom

may complete by mid-2000 a network based on Qualcomm's CDMA wireless technology. Internet Sector

index was up 19, or 1.7%, to 1149, while the small-cap

Russell 2000

was up 1 to 468.

Though followers of traditional valuations may cringe at the levels stocks have reached, the rally does not lack for basis in the real, said Charles Crane, chief market strategist at

Key Asset Management


"The market in general has had some good fundamental reasons for behaving the way it has," he said. "The domestic economy is strong, inflation is well-behaved and the global economy is looking good, as well. Add that all up and you have a great fundamental backdrop for stocks to appreciate."

To this add anticipation of a liquidity boost in January -- along with the fact that fund flows have been surprisingly strong in the usually anemic fourth quarter. "Cash flows into equities tend to be strong in the first quarter, lifted by year-end bonuses and income-tax refunds," said Crane. "This time around, we'll also have the benefit of any cash that may have migrated to the sidelines because of Y2K."

Yet while Crane thinks the recent rally has some steam left in it, he worries about the valuations of the benchmark indices. Though most stocks are, in his estimation, fairly valued, many of the big-caps that dominate the indices have run ahead of themselves. Those stocks will need to tread water for a bit at the beginning of next year, while the rest of the market catches up. Market breadth, which again is not very good today, will need to improve.

"For this market to be enjoyable in the first half of 2000," he said, "We'll need better breadth than we've witnessed in the last couple of months. If we don't see it in the next three months, then I start to get pretty anxious. A substantial decline in the market averages will lower all boats, not just the big ones. The chances of such a decline increases so long as we stay slim and narrow."

Helped by a

Federal Reserve

coupon pass, bonds lost some of their early weakness. The 30-year was lately off 6/32 to 99 7/32, its yield at 6.18%. (For more on the fixed-income market, see today's early

Bond Focus.)

Market Internals

Breadth was poor on healthy volume.

New York Stock Exchange:

1,200 advancers, 1,758 decliners, 533 million shares. 71 new 52-week highs, 315 new lows.

Nasdaq Stock Market:

1,917 advancers, 1,999 decliners, 883 million shares. 218 new highs, 90 new lows.

Monday's Midday Watchlist

By Tara Murphy
Staff Reporter






are getting together, but the market doesn't seem to dig the deal. Under the terms, each outstanding share of USWeb/CKS will be exchanged for 0.865 shares of Whittman-Hart, valuing USWeb/CKS at roughly $68.55 a share. Shares of USWeb were losing 6 3/8, or 12.5%, to 44 9/16, while Whittman-Hart was plummeting 23 1/2, or 29.7%, to 55 5/8.

Mergers, acquisitions and joint ventures

American Electric Power






Bechtel Enterprises

have formed a joint venture to solve power-quality problems and improve transmission. Shares of American Electric Power were sliding 1/4 to 31 1/2, while Siemens, which had not been traded, was at 112 1/8.



was leaping 5 3/4, or 6.2%, to 98 3/4 after it said that it and

Tenet Healthcare


have formed a new company to provide business-to-business e-commerce services to the health-care industry. Chemdex also said it agreed to acquire

, a maker of medical software, in an all-stock purchase valued around $115 million. Shares of Tenet were falling 5/8 to 23 9/16.



and South Korea's


plan to unveil an agreement to invest $500 million in the manufacturing and marketing of Compaq's Alpha microprocessors and computer systems. Compaq shares were adding 7/16 to 25 9/16.

Eastman Kodak



Matsushita Electric Industrial




said they entered a DVD disc venture. Shares of Eastman Kodak were losing 1/16 to 61 3/16, while Matsushita was off 5 1/16 to 250.

Esat Telecom


of Ireland, which is fighting a hostile $1.6 billion takeover bid from


, said it has received approaches from other companies. Shares of Esat Telecom were hopping 2 1/4 to 82 1/2.



was climbing 1/16 to 43 9/16 after it said it ended talks to buy



AMI Leasing

. Shares of Ford were edging up 3/8 to 49 7/16.



has withdrawn its $10 billion offer to buy

Credit Commercial de France

. Shares of ING were stumbling 11/16 to 57 1/4.


Federal Communications Commission

internal memo calls the planned megamerger of

MCI WorldCom





an "intolerable" blow to competition,

The Washington Post

reported Saturday. The Oct. 21 memo obtained by the newspaper was written by Tom Krattenmaker, the research director of the FCC's Office of Plans and Policy. MCI WorldCom was bouncing 15/16 to 79 1/2, while Sprint was shedding 3/4 to 68 3/16.


was sinking 2 1/2, or 9.7%, to 23 3/16 after it said it will buy



in a $173 million stock deal. Shares of NetMoves were mounting 2 1/16, or 37.5%, to 7 9/16.



was dwindling 3/16 to 4 3/4 after said it will receive $97.5 million under a pact with China Unicom terminating their telecom cooperation projects. The Chinese government requested termination of the projects in August, saying the structure of the arrangements was improper. Metromedia also said it would receive an additional $6 million in cash after completion of certain conditions.

Nortel Networks


was hopping 1 7/8 to 90 1/8 after it said it will make a strategic alliance announcement at 1 p.m. EST.



was tumbling 5 3/4 to 113 13/16 after it said it will pay $3.7 billion for

Cablecom Holding

, the cable television business controlled by



and others. The move is part of its strategy for expansion in continental Europe. Shares of Swisscom were gaining 1/2 to 38.

Prudential Securities

said it has purchased

Volpe Brown Whelan




was retreating 1/18 to 5 5/8 after it said it entered a marketing deal with



. Shares of CyberGold were declining 13/16 to 17 3/4.



, a telecommunications company, is acquiring

21st Century Telecom

, a privately held company, for $500 million in stock and debt. Shares of RCN were gaining 1 to 42 3/4.

Earnings/revenue reports and previews


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




on Friday warned investors that fourth-quarter earnings could fall 40% below the 13-analyst consensus estimate of 66 cents a share. In its second consecutive quarter-profit warning, the company blamed Y2K woes for hampering its high-end printing and publishing equipment sales and higher cost from "customer administration reorganization," which includes bad debt, for the disappointing fourth-quarter earnings.

Xerox also pointed the finger at soft profits from its Brazilian unit due to the country's slow economy after its currency devaluation earlier this year, while citing the U.S. dollar's strengthening against European currencies during the fourth quarter as a problem for European revenue and profits. President and CEO Rick Thoman said that earnings should show "meaningful growth in the second half of the year." Shares of Xerox were hopping 1 7/8, or 9.4%, to 21 3/4.

J.P. Morgan

cut its rating on Xerox to long-term buy from buy.


lowered its fourth-quarter earnings estimates to 40 cents a share from 65 cents, and its 2000 EPS estimates to $1.80 from $2.25.

For more on Xerox's woes, take a look at the

story written by

joint newsroom.



was slipping 1/2 to 27 1/2 after it posted first-quarter earnings of 20 cents a share, missing the two-analyst estimate of 34 cents and down from the year-ago 37 cents.



was climbing 1 9/16 to 54 after it said it expects fourth-quarter revenue to exceed estimates and be in the range of $10 million to $12 million, citing higher-than-expected demand for its campaign management services.

Nu Skin Enterprises


was declining 2 7/16, or 18%, to 11 1/16 said revenue from Japan in the fourth quarter will likely be less than expected, which will result in lower-than-anticipated earnings. The company expects fourth-quarter revenue in the range of $220 million, about $30 million less than previously expected and about even with the third quarter. The five-analyst estimate currently calls for the company to earn 26 cents a share in the fourth quarter.

Offerings and stock actions

Track Data


tacked on 2 7/16, or 26.5%, to 11 5/8 after it set a 2-for-1 stock split.


, a wireless affiliate of



, raised the price range for its initial public offering to $17 to $19 a share, from $15 to $17 a share.

Analyst actions

Morgan Stanley Dean Witter

started coverage of



with an outperform rating.

Credit Suisse First Boston

initiated coverage with a buy rating and set a price target of 55, while

Goldman Sachs

added the stock to its recommended list.

Merrill Lynch

started coverage with an intermediate-term accumulate, long-term buy. Merrill was an underwriter on Agilent's IPO last month. Shares inched up 3/8 to 45 1/8.

Bear Stearns

upped its rating on

Bethlehem Steel


and USX-U.S. Steel


to trading buys from neutral. Bethlehem Steel was unchanged at 7 1/2, while USX climbed 11/16 to 30 3/16.

Lehman Brothers







to its European portfolio of recommended stocks, while it removed





from the roster. Shares of Ericsson slipped 5/16 to 59 5/8, Electrolux climbed 1/4 to 42 3/4 and Nokia fell 11/16 to 167 5/16.

Goldman Sachs upped its rating on



to trading buy from market outperformer. Shares climbed 2 3/4, or 6.2%, to 48.

J.P. Morgan raised its price target to year end on

Grupo Televisa


to 75 from 50. Shares of Grupo Televisa were losing 3/8 to 61 1/8.

Bear Stearns upped its rating on



to buy from attractive, while Credit Suisse First Boston raised its price target to 95 euros from 75. Shares popped 4 15/16, or 6.4%, to 82 9/16.

Morgan Stanley Dean Witter rolled out coverage of

MetaSolv Software


with an outperform rating. Shares of MetaSolv Software were skidding 6 5/8, or 7.6%, to 81 7/16.

Donaldson Lufkin & Jenrette

cut its rating on

Public Storage


to buy from top pick. Public Storage slipped 1/8 to 21 5/8.

U.S. Bancorp Piper Jaffray

cut its rating on



to neutral from buy. Shares edged down 1/16 to 23 9/16.

Goldman Sachs started


as a market outperformer. Shares rose 2 9/16 to 80 13/16.

Lehman Brothers raised its 12-month price target on



to 170 from 95. Shares of STMicro were falling 5/16 to 136 1/2.

Deutsche Banc Alex. Brown

said it sliced its rating on

Transkaryotic Therapies


to market perform from buy. Shares of Transkaryotic Therapies were stumbling 3 11/16, or 8.8%, to 38 3/16.

Warburg Dillon Read

started coverage of



with a hold rating. Virata dropped 3 1/4, or 8.3%, to 35 7/8.


Online brokerage

Charles Schwab


Monday said that November trading activity skyrocketed. Schwab said that daily average revenue trades rose 41% to 202,900 in November from October's 144,300. The last time the company saw numbers like that was in April, when daily average revenue trades jumped to a record 207,700 from 155,200.

On the year, average daily trades are up by 68%, Schwab said. The company also said that it opened 109,400 accounts during the month, bringing total retail accounts -- both online and offline -- to 6.4 million. Online brokerage stocks, though, were largely unmoved by the news with Schwab falling off 1 1/2, or 3.9%, to 39 1/8.

For more on this, please see the

story written this morning by

joint newsroom.

Murphy Oil


was climbing 1 9/16 to 53 3/4 after it said it has increased its capital spending budget by 18%, to $457 million.

The Heard on the Street column in the


offers a broad look back at the stock market over the past decade. The story compares actual events with some predictions made in 1989. Heading into the decade, predictions of Dow 5000 were scoffed at, the Japanese market was still viewed as a miracle, and U.S. investors were extremely anxious about the markets. Since then, the

Dow Jones Industrial Average

has more than quadrupled, and the

Nasdaq Composite Index

has multiplied in value almost eight times, the story said. Tech stocks have replaced '80s stars such as

Philip Morris


among others. The bottom line: For the decade ahead, the biggest story may be one that no one has called yet, the column says.

Herb on TheStreet: The Smart Investor's List: A Dozen Things You Need to Know to Watch Your Flank


Herb Greenberg

Senior Columnist

12/13/99 6:30 AM ET

We're back to the "fundamentals don't matter anymore" phase of the market. That's when, more than ever, you need to remember how deliberately some companies try to make their financial performance look better than it really is. (Yep, Martha, there he -- meaning me -- goes again!)

So when my colleague

Jesse Eisinger

sent around an email to

staff that had been collecting dust on his hard drive, my first reaction was, What a column! It was written by a former brokerage analyst (with several very well-known firms), and it was a list of his favorite red flags. I called the author, and he gave me permission to reprint it.

The only caveat (and you'll see why) is that I couldn't use his name. It's so good you should print it out and reread it from time to time


as a reminder. Without further babble, here it is.

I look at your current subject, accounting wiggle room, with an unusual perspective. My career has included sell-side analyst positions, a long period as a journalist and my present role in investor relations (for a midsize company).

Herb's Latest: Join the discussion on

TSC message boards.

Earnings-smoothing is alive and well despite

Arthur Levitt's

broadsides. Companies are so frightened of missing EPS consensus in any coming quarter (because of the market's fixation on "the number") that they may sacrifice the future. Rules I have learned:

Be suspicious of any company's results in quarters subsequent to a one-time accrual for merger or restructuring charges. You would be amazed at what qualifies as an expense that can be allocated to these accruals. No doubt that the Big Five let companies overstate precharge earnings over a protracted period.

Year-over-year comparisons are for the naive. Too bad so many corporate execs manage off of them. Worse, a majority of Wall Street analysts build their earnings models based on assumed year-over-year growth rates rather than coming to understand how sequential results create those numbers. I have seen middle managers awarded bonuses for producing good-looking year-over-year percentage growth when their units had flat performance or worse for the final six months of the fiscal year. Needless to say, continue that trend and next year is awful. Why shouldn't GAAP capture the sequential trend? There is zero analysis of sequential trend in


financial statements.

Watch out for earnings before interest, taxes, depreciation and amortization, or EBITDA. Companies can amortize a tremendous variety of true operating costs, especially regarding severance, legal and a wide variety of corporate-type expenses. If the latest exposure draft on accounting for business combinations is approved, financial statements will reveal how much amortization expense remains after goodwill. Might be shocking in some cases.

Segment reporting is screwball. The SEC thought it hit a home run with SFAS 131, a 1998 accounting rule requiring financial reporting by operating segment. But the standard for allocating corporate vs. segment costs is virtually nonexistent. In the limited data already filed, you can find many companies with huge swings in segment margins decided largely by how overhead costs are allocated. This is useful information?

It is too easy for companies to manage earnings by using nondisclosed acquisitions. A large enough company can make accretive acquisitions without disclosing them as long as the deals are not "significant." Surprisingly, an insignificant transaction may add one cent or more to quarterly EPS. Perfect way to tweak a quarter.

Also, companies tend to pick up a full quarter's results of an acquired business even though the deal is announced midquarter. Analysts are surprisingly naive about this practice. And I have encountered numerous instances where company execs lied about how much an acquisition contributed to a given quarter.

On the other hand, the balance sheet effect of an acquisition (under purchase accounting) is taken from the date the deal closes. Meaning there's a mismatch between cash flows and changes in assets that distorts the statement of cash flows. Many investors worship the statement of cash flows, but any sequential analysis is hugely problematic. For many companies, it is impossible for investors to calculate an accurate receivables turnover. Financial statements do not contain the necessary information about acquired company's balance sheets on date of acquisition and quarter end. Investors may either rely on what the company says on the conference call, or they can use the reported balance sheet data, which are misleading.

The balance sheet is distorted by the assumptions built into the revalued assets/liabilities of an acquired company. It is pretty common practice for companies to take highly conservative accruals at time of acquisition. That means they can use these large accruals to smooth future earnings.

Beware of large sequential declines in selling, general and administrative, or SG&A, expenses at the end of a company's fiscal year. Companies do not have to disclose whether they disgorged bonus accruals to make year-end expectations. In doing so, companies may be sabotaging future growth potential. Depriving employees of bonuses is a powerful turnover incentive.

I have seen companies defer marketing expenses in a given quarter to make earnings. I have seen companies take what amounts to one-time tax credits (unannounced) to make earnings. I have seen companies give away margin to obtain high-volume contracts to boost revenue growth, even at the expense of earnings. And in all of these cases, investors were not fooled and the execs were mystified ... and replaced.

Investors were fooled long enough to believe those companies did not see dark clouds on the horizon. GAAP do not ensure that companies must disclose in timely fashion all concerns likely to affect the performance of a stock.

Watch out for surprises in companies' accruals for worker compensation and health-care benefit expenses. Inflation has returned to health care. Betcha almost every small or midsize company in America is underaccrued. Might hit large companies, too, though their pools are large enough to allow for a greater margin for error.

It is interesting, on the other hand, to see Web-hype companies accorded the opportunity to spend madly in pursuit of growth. Those execs have their own key numbers they have to beat, but they don't have to worry about managing to maximize quarterly EPS. They have a tremendous competitive advantage in that respect. Balancing current outcome and future opportunity is the most difficult challenge of all growth companies.

Which is why the pressure to fudge is so great.

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,