Surprising Rally Leaves Puzzled Traders Wary

A jump ahead of the FOMC decision has some on Wall Street wondering if players will sell on the news tomorrow.
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SAN FRANCISCO -- Stocks, bonds and the dollar rallied today as traders (at least those in New York) seemed more concerned with tonight's

baseball playoff game than the

Federal Open Market Committee's

meeting tomorrow.

Despite a strong

tankan

report in Japan, the dollar was quoted at 106.27 yen in New York trading, up from 105.13 late Friday. That laid the foundation for bonds to recover about two-thirds of

Friday's thrashing; the price of the 30-year Treasury rose 21/32 to 101 14/32, its yield falling to 6.09%.

Those developments helped equities advance, as did widespread speculation the

Fed

will leave interest rates unchanged tomorrow.

Equity investors "sense the Fed is not going to hike," said John Lonski, senior economist at

Moody's Investors Service

. "The Fed does not want to shock an overvalued equity market into a 15%-to-20% decline. I think they can wait; they have luxury of doing so, given consumer price inflation remains well contained."

Lonski does not expect a rate hike but did forecast over 50% chance the Fed will adopt a tightening bias tomorrow. He also expects another 25-basis-point hike by year-end. The

National Association of Purchasing Management

index released Friday is a good "leading indicator of interest rates and Fed policy," he said.

But the possibility of future Fed tightening seemed far from investors' minds today. Merger news -- of both the actual and rumored kind -- also aided major stock proxies.

The

Dow Jones Industrial Average

rose 128.23, or 1.3%, to 10,401.23 while the

S&P 500

gained 21.79, or 1.7%, to 1304.60.

Financials such as

American Express

(AXP) - Get Report

aided the blue-chip averages, as did consumer names such as

Procter & Gamble

(PG) - Get Report

and

Wal-Mart

(WMT) - Get Report

. The

Philadelphia Stock Exchange/KBW Bank Index

rose 3.4%, the

Morgan Stanley Consumer Index

added 1.1% and the

American Stock Exchange Retail Index

added 2.8%.

Airlines were also on the rise, helping the

Dow Jones Transportation Average

gain 90.76, or 3.2%, to 2959.10. The

American Stock Exchange Airline Index

soared 6.6%.

Although

Hewlett-Packard

(HWP)

was the Dow's biggest drag, most bellwether tech stocks were higher, including

Sun Microsystems

(SUNW) - Get Report

,

Motorola

(MOT)

and

Intel

(INTC) - Get Report

. The

Morgan Stanley High-Tech 35

gained 2.7%; the

Philadelphia Stock Exchange Semiconductor Index

rose 4.6%.

'I think it's clear the selloff we've had has given the Fed a lot of breathing room,' said Frank La Salla of

BHF Securities

. 'I think

today's rally is more of a retracement; I don't think the selling pressure is completely gone away.'

The

Nasdaq Composite Index

rose 59.72, or 2.2%, to 2795.97 and the

Nasdaq 100

gained 2.6%.

TheStreet.com Internet Sector

index rose 8.49, or 1.3%, to 655.61.

In merger news,

Sprint

(FON)

gained 6.1% on news reports the company is considering competing buyout offers from

BellSouth

(BLS)

, which fell 5.9%, and

MCI WorldCom

(WCOM)

, up 1.6%.

In the "done deal" department,

AMFM

(AFM)

gained 2% after agreeing to a buyout offer from

Clear Channel Communications

(CCU) - Get Report

, which slid 4.8%.

TV Guide

(TVGIA)

jumped 10.1% thanks to a merger agreement with

Gemstar International

(GMST)

, which shed 9%. Separately,

Preview Travel

(PTVL)

gained 37.6% on its planned merger with

Sabre Holdings

(TSG) - Get Report

, which rose 14.1%.

Meanwhile,

Mattel

(MAT) - Get Report

dumped 29.6% after warning of a forthcoming earnings disappointment.

"I think it's surprising" that the markets would rally ahead of the Fed meeting, said Doug Myers, vice president of equity trading at

IJL Wachovia

in Atlanta. "I'm afraid -- I hope I'm wrong -- that everyone is buying on the rumor and they'll sell on the news."

Mergers, especially the "competition" for Sprint, were part of today's advance, Myers said, but he compared the market to a surfer who just happened to pick a given wave.

"The decision to get in and out of the water is a different story," he said. "The mom-and-pops are still saying, 'Over the long haul common stocks have yet to prove me wrong.' I don't know real smart guys are selling out

but I don't know they're jumping in" either.

In

New York Stock Exchange

trading today, 803.4 million shares were exchanged while advancers led declining stocks 1,758 to 1,243. In

Nasdaq Stock Market

action 917.8 million shares traded while gainers led 2,048 to 1,874. Still, new 52-week lows bested new highs 146 to 48 on the Big Board and by 114 to 79 in over-the-counter trading.

Bubble? What Bubble?

"I think it's clear the selloff we've had has given the Fed a lot of breathing room," said Frank La Salla, CEO at

BHF Securities

. "I think

today's rally is more of a retracement; I don't think the selling pressure is completely gone away. Going through the end of the year it's going to be a concern whether the Fed would put the brakes on a third time."

The market forecaster said the Dow could rally as high as 11,000 as third-quarter earnings are released, but he foresees the index more likely meandering in a range of 10,200 to 10,500 until year-end.

La Salla does not expect the Fed to tighten tomorrow, nor does he expect them to adopt a tightening bias. The market watcher did not think a tightening was forthcoming in

August either, and still believes it was unnecessary.

"We're still in the grand scheme in a bull market

but this time the Fed took the winds out of the stock market's sails," he said. "If

Alan

Greenspan

wanted to burst the speculative bubble," he's already accomplished that feat.

La Salla believes the two rate hikes this summer sufficiently slowed the economy, noting a curtailment of refinancing activity and auto sales, among other indicators.

Economic growth "is going to be a lot slower than people think," he said, forecasting GDP growth "south" of 2% in both fourth-quarter 1999 and first-quarter 2000. "The market is confirming that" slowdown with the correction he sees as ongoing. "I can't see any reason why the Fed would tighten into that right now."

Among other indices, the

Russell 2000

gained 3.08, or 0.7%, to 426.61; the

Dow Jones Utility Average

gained 4.33, or 1.4%, to 305.87; and the

American Stock Exchange Composite Index

rose 3.30, or 0.4%, to 789.83.

Elsewhere in North American equities, the

Toronto Stock Exchange 300

rose 110.96, or 1.6%, to 7042.30 and the

Mexican Stock Exchange IPC Index

gained 59.40, or 1.2%, to 5044.61.

Friday's Company Report

By Eileen Kinsella
Staff Reporter

(

Earnings estimates from First Call/Thomson Financial; earnings reported on a diluted basis unless otherwise specified. New highs and lows on a closing basis unless otherwise specified.

)

BellSouth lost 2 11/6, or 5.9%, to 42 11/16 after offering to buy Sprint, with a bid that surpasses the buyout offer Sprint received from MCI WorldCom, according to reports in

The Wall Street Journal

and

The New York Times

. Shares of Sprint jumped 3 7/8, or 6.8%, to a record 60 7/8, while MCI added 1 1/8 to 71 5/8.

Preview Travel shot up 6 5/8, or 37.6%, to 24 5/16 after agreeing to be acquired by Sabre Holdings, which plans to combine it with its

Travelocity.com

unit. Terms weren't disclosed, but the new, publicly traded Travelocity is expected to have more than 17 million members and more than $1 billion in sales. Sabre, which closed up 6 1/8, or 14.1%, to 49 1/2 also said it agreed on terms with

Yahoo!

(YHOO)

for an extension of their existing contract. Despite the news, Yahoo! lost 4 1/4 to 171 3/16.

Separately,

America Online

(AOL)

rose 1 1/4 to 109 1/9 after it set a multiyear content and commerce pact with Travelocity.com, valued at up to $200 million. Under the deal, Travelocity.com will become the exclusive reservations engine integrated into the AOL service,

AOL.com

,

CompuServe

,

Digital City

and

Netscape

when the Preview-Travelocity merger is completed.

In other AOL news, the company's

ICQ

unit reached a deal with

Net2Phone

(NTOP)

to offer a prepaid virtual calling card that will route calls over Net2Phone's Internet protocol network. Net2Phone added 4 3/8, or 8%, to 56 9/16. The announcement is the first in a series of initiatives under a four-year agreement between Net2Phone and ICQ.

Mergers, acquisitions and joint ventures

Clear Channel Communications lost 3 7/8 to 76 1/2 after it said it was buying AMFM, which closed up 1 5/16 to a record 65 3/16. Under terms of the deal, AMFM shareholders will receive 0.94 of a Clear Channel share for each AMFM share they hold on the record date of the deal, which is expected to be in the second half of 2000.

Computer Horizons

(CHRZ)

climbed 1, or 8.3%, to 13 1/8 after saying it plans public offerings to spin off two of its businesses. The company said it would offer about 20% in both its

Princeton Softech

and

Network Services

units.

Medscape

(MSCP)

added 1 3/16, or 11.8%, to 11 5/16 and

CBS

(CBS) - Get Report

lost 1/8 to 47 3/4 after the companies unveiled plans to start a consumer health Web site.

RCN

(RCNC)

jumped 7 11/16, or 20.2%, to 45 23/32 after Paul Allen's

Vulcan Ventures

said it would make a $1.65 billion investment in the telecommunications company. RCN also said, in a conference call, it expects to have a positive cash flow for the full year 2001 and very significant positive cash flow by 2003.

Summit Bancorp

(SUB) - Get Report

gained 13/16 to 33 after saying it would buy

NMBT

(NMBT)

for $69.4 million. NMBT leapt 8 3/16, or 52%, to a record 23 15/16.

Temple Inland

(TIN)

added 3/4 to 59 7/8 after saying it plans to sell its bleached paperboard unit to

Westvaco

(W) - Get Report

for roughly $625 million, in an attempt to concentrate on its core corrugated packaging business. Shares of Westvaco edged up 3/16 to 25 13/16. The deal is expected to be completed by the end of the year.

TV Guide climbed 4 3/16, or 10.1%, to 45 15/16, while Gemstar International lost 7 1/2, or 9%, to 76 3/16 after the companies announced a $9.2 billion merger. Under the terms of the deal, TV Guide shareholders will receive 0.6573 shares of Gemstar common stock for each of their TV Guide class A and B shares. TV Guide will own 45% of the merged company and Gemstar CEO Henry Yuen, will be president and CEO. The new company,

TV Guide International

, is expected to generate annual revenue of more than $1.5 billion and cash flow of about $400 million.

Earnings/revenue reports and previews

AlliedSignal

(ALD)

added 3/4 to 60 11/16 and

Honeywell

(HON) - Get Report

climbed 1 3/8 to 113 3/8 after the companies said they expect to report third-quarter earnings in line with analyst estimates. The companies, which are in merger talks, said they would divest assets that account for 1% of combined overall revenue.

Catalytica

(CTAL)

lost 3/4, or 5.1%, to 13 7/8 after the company said it expects third-quarter profits of 1 cent to 3 cents a share, after charges. Analysts had expected the company to report operating results of 11 cents a share.

Harleysville

(HGIC)

lost 1 3/8, or 9.1%, to 13 3/4, after warning second-half results will fall well below analysts' estimates due in part to higher catastrophe losses resulting from Hurricane Floyd.

Information Resources

(IREG)

lost 1 7/16, or 7.3%, to 18 1/2 after saying it sees a third-quarter loss of $1.5 million, or 27 cents a share, worse than the consensus estimate of a 1 cent per-share loss.

Mattel fell 5, or 29.6%, to 11 7/8 after saying it expects third-quarter earnings to fall well below analyst estimates as its

Learning Co.

educational software business takes larger-than-expected losses. The toy company said it expects to report earnings of 30 cents to 40 cents a share, well below the consensus estimate of 67 cents a share.

Novell

(NOVL)

slipped 1 5/16, or 7.1%, to 17 11/32 on earnings worries. Novell held a conference call today at the request of

Morgan Stanley Dean Witter

, and apparently it did not go swimmingly.

Policy Management Systems

(PMS)

dropped 7 1/8, or 23.3%, to 23 7/16 after it warned third-quarter results before charges will fall 28% to 38% below estimates due to delays in licensing deals and weak overseas results. The company said it sees profits of 31 cents to 36 cents a share before charges, below the consensus estimate of 50 cents a share.

Offerings and stock actions

AT&T

(T) - Get Report

added 2 to 43 3/4 after the

Journal

reported it is considering issuing several tracking stocks in an effort to increase shareholders' return. Under one proposal, Ma Bell would issue three stocks that would track AT&T's wireless division, its cable and Net undertakings and its outsourcing unit for businesses.

Idexx Laboratories

(IDXX) - Get Report

lost 1/16 to 17 after it set plans to buy back up to 2 million shares of its common stock.

iVillage

(IVIL)

fell 1 to 32 3/4 after it filed with the

Securities and Exchange Commission

to offer 3 million shares of common stock.

King Pharmaceuticals

(KING)

gained 1 to 36 5/16 after it set a 3-for-2 stock split.

PCQuote.com

cut the size of its planned IPO to 5 million shares from 7.75 million and lowered the expected price range to $8 to $10 a share, from $11 to $13 a share.

XM Satellite

cut its expected IPO price range to $12 to $13 from $14 to $16.

Analyst actions

AmSouth Bancorp

(ASO)

gained 1 3/16, or 5.1%, to 24 11/16 after

Merrill Lynch

reinstated coverage with an intermediate-term accumulate rating and a long-term buy rating.

Commonwealth

(CMIN)

added 3/4, or 6.6%, to 12 3/8 after Morgan Stanley Dean Witter upped its rating to outperform from neutral.

Compaq

(CPQ)

slipped 1/16 to 22 7/16 after

Credit Suisse First Boston

lowered its third-quarter earnings estimate to 5 cents a share from 9 cents and its fourth-quarter estimate to 22 cents from 34 cents. CSFB also cut its estimate for fiscal 2000 to $1 from $1.25.

Hospitality Properties Trust

(HPT)

fell 13/16 to 21 15/16 after Merrill Lynch sliced its rating to accumulate from buy.

Lamar Advertising

(LAMR) - Get Report

added 5/8 to 48 5/32 after Morgan Stanley upped its rating to strong buy from outperform.

Lifepoint Hospitals

(LPNT)

climbed 7/16, or 5.2%, to 8 7/8 after

Warburg Dillon Read

rolled out coverage with a buy rating.

Revlon

(REV) - Get Report

lost 2, or 16.7%, to 10 after Warburg Dillon Read cut its rating to hold from buy.

Miscellany

Advanced Micro Devices

(AMD) - Get Report

inched up 5/8 to 17 7/8 after it introduced a 700-megahertz processor as the latest product in its Athlon line. The new processor is reportedly faster than rival Intel's Pentium III. Shares of Intel moved up 2 to 77.

Amazon.com

(AMZN) - Get Report

lost 1/4 to 77 1/16 after saying it launched a wireless service that will enable customers to shop through Amazon using wireless access devices, including

3Com's

(COMS)

Palm VII. Shares of 3Com rose climbed 3/4 to 29 15/16. Amazon said it also acquired privately held

Convergence

for $20 million, in connection with its wireless service plans. Convergence makes Internet access software.

Boeing

(BA) - Get Report

climbed 13/16 to 43 11/16 after the

Journal

reported the company's plans to restructure its customer-finance division in order to enhance its jet-leasing service and increase its profits. The reorganization effort helps put Boeing in closer competition with leasing firms that purchase its planes, the newspaper reported.

Dura Pharmaceuticals

(DURA) - Get Report

gained 3/8 to 13 13/16 after saying agreed to pay $3.5 million for litigation associated with its decision to terminate a merger agreement with

Scandipharm

in late 1997.

H.J. Heinz

(HNZ)

climbed 3/8 to 44 after the company said it would combine all of its U.S. grocery and food service businesses into a single $5 billion "megacompany" with a base in Pittsburgh.

Humana

(HUM) - Get Report

slipped 1/16 to 7 after saying it is facing a class action lawsuit claiming that the HMO did not release details associated with its coverage for subscribers, the plaintiff's lawyers reported.

Rite Aid

(RAD) - Get Report

slipped 3/8 to 13 1/4 after saying it is considering an outright sale of or strategic investment in

PCS Health Systems

, its pharmacy benefit management subsidiary. The company said it hired

J.P. Morgan

to advise it on alternatives for PCS.