I. Market News: Technology Turnaround
II. Heroes: Penn Traf., Baxter, Gen. DataComm, Applied Mat., Savoy
III. Goats: Movie Gal., Cntrywide Cr., Sun Hlth., Flow Int'l, Off. Depot
IV. Investment Perspective: Packard Bell Behind It All?
V. Calendar: Wednesday's Economic Events

MARKET CLOSE

DJIA: 5078.10, up 7.22 (RECORD)
S&P 500: 606.45, up 5.13 (RECORD)
NASDAQ: 1050.05, up 20.73

MARKET NEWS

Turnaround seems only fair play. After seemingly countless days of the Blue Chips pouring it on while technology stocks languished, the roles were reversed today, with the DJIA down big in early trading and the Nasdaq Composite screaming ahead by 2 percent. By the end of the session, the Dow turned around and followed the Nasdaq higher, setting yet another record.

For those of you wondering about the Boston Beer IPO, here's the number to call to see if you got your shares: 1-800-526-0801.

HEROES

MF Shorty has not been having a good time of it lately. The Shortfolio was stopped out of Harrah's Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HET)") else Response.Write("(NYSE:HET)") end if %> the day after shorting it, smacked around on Oxford Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OXHP)") else Response.Write("(NASDAQ:OXHP)") end if %> until a stop-buy forced him to cover there as well, and got smashed today on Penn-Traffic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PNF)") else Response.Write("(NYSE:PNF)") end if %>, the ailing supermarket he has slighted in favor of Wegman's. Penn Traffic shares were up $7/8 to $12 3/4 today on fairly brisk volume, possibly in anticipation of earnings. In MF Shorty's defense, S&P has moved in the past two weeks to rate the company's outlook as "negative," which is never a good sign. Check out the Shorting Stocks folder in the Let's Talk Investment Approaches area for MF Shorty's take on today's action.

Baxter Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BAX)") else Response.Write("(NYSE:BAX)") end if %> provided the market with some excitement today when it announced that it would break itself into two publicly traded companies. Rising $2 7/8 to $41 3/8 on this news, Baxter became just the latest in a series of high-profile break-ups, joining AT&T Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:T)") else Response.Write("(NYSE:T)") end if %>, ITT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ITT)") else Response.Write("(NYSE:ITT)") end if %>, Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:S)") else Response.Write("(NYSE:S)") end if %> and Morrison Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RI)") else Response.Write("(NYSE:RI)") end if %>. Baxter will spin-off its health care cost operations, keeping the remaining medical technology operations under the Baxter International name. The spin-off will be on a tax-free basis (really the only reason to do such a thing) and will contain Baxter's cost management, U.S. distribution and surgical products operations. The distribution ratio has not been set.

General DataComm <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GDC)") else Response.Write("(NYSE:GDC)") end if %> became today's Boston Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BSTN)") else Response.Write("(NASDAQ:BSTN)") end if %>, rising $2 3/4 to $20 3/4 on news of a big pact with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:T)") else Response.Write("(NYSE:T)") end if %>. AT&T will now offer General DataComm's Asynchronous Transfer Mode (ATM) systems as part of its broadband ATM solutions. The contract is for three-years and sets AT&T as a value-added reseller, targeting customers in Europe, the Middle East, Africa and the Asia-Pacific region. The absence of North America from this agreement is interesting, although the Evening News was unable at press time to determine the reason for the omission.

Earnings were released for Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %> after the bell today, posting $0.84, right in line with consensus estimates. The shares of the semiconductor equipment company were up today $4 1/8 to $46 1/4 in anticipation of this release. Applied Materials smoked estimates for the last two quarters and the speculation was that it would go for a hat-trick. Lam Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LRCX)") else Response.Write("(NASDAQ:LRCX)") end if %> rose $7 to $57, Novellus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NVLS)") else Response.Write("(NASDAQ:NVLS)") end if %> lurched ahead $7 5/8 to $63 3/4 and Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLIC)") else Response.Write("(NASDAQ:KLIC)") end if %> moved along $1 7/16 to $28 9/16, all in sympathy with AMAT. Investors who want to hear the conference call tape at 6:30 EST tonight can call 1-800-633-8284; the number is courtesy of Mark Keple in the Applied Materials folder. Thanks a lot, Mark!

Speculation that Barry Diller might buy Savoy Pictures <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SPEI)") else Response.Write("(NASDAQ:SPEI)") end if %> in order to build his own network from the ground up caused shares of the troubled movie house to rise $1 1/4 to $6 3/8 today on very heavy volume. Diller, who nurtured the rogue Fox network from upstart to the dominant player in the key youth market, so far has put together 12 UHF stations owned by Silver King Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SKTV)") else Response.Write("(NASDAQ:SKTV)") end if %> and Liberty Media's Home Shopping Network stake <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HSN)") else Response.Write("(NYSE:HSN)") end if %> in his effort to begin a network. This all comes after his failed run for CBS last year. Apparently Diller sees another opportunity either to squeeze out CBS or Fox or crush UPN and Warner Brothers' nascent network offerings. Savoy would add movie production facilities to Diller's fiefdom. Many are skeptical about his potential for success, however.

GOATS

Back on October 2nd, the Evening News honed in on video rental chains as potential investment opportunities. Movie Gallery <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MOVI)") else Response.Write("(NASDAQ:MOVI)") end if %>, which closed at $34 13/16 then, was off $2 7/8 today to close at $34 1/4. Since we looked at Movie Gallery, the cash-weak chain has been on an acquisition binge, adding about 38 video stores to its 546 under management, not counting its 93 franchisees and licensees. Although estimates have been trimmed substantially since we originally reported on the company's shares, they still sport a PEG of about 0.75 and are slated to grow at 45% annually for the next five years. Today's downdraft appears to be the result of tax loss selling since it was on fairly light volume. Perhaps a tax-loss candidate to keep an eye on until the end of December?

Countrywide Credit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CCR)") else Response.Write("(NYSE:CCR)") end if %> was buffeted today by lower-than-expected numbers in yesterday's report from the National Association of Realtors, suggesting that Existing Home Sales dropped for the first time in six months. Countrywide Credit was down $2 to $20 1/2 on this news as investors anticipate lower earnings on fewer mortgage applications. However, Countrywide Credit profits from servicing loans as well as originating them, and this servicing business will benefit from any rate cuts resulting from ebbing home purchases. The company trades at a little less than nine times next year's earnings, according to Zacks consensus estimates.

The Federal Government turned up the heat on Sun Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SHG)") else Response.Write("(NYSE:SHG)") end if %> today, announcing that its investigation of the nursing home provider's billing practices have been expanded. Sun Healthcare dropped $1 1/8 to $11 7/8 as the government reported it would review what rehabilitation therapy Sun actually provided and whether it billed for "unnecessary and unordered services." Sun also disclosed today in a filing to the SEC that another of its units has become involved in the billing-fraud probe. Not only is Sun's Sundance Rehabilitation Corp. being examined, accounting for 20% of the company's revenue, but Sunrise Healthcare Corp., responsible for another 65% of the company's revenues, is on the table as well. Sun continues to deny any wrong-doing.

A shift in its product mix caused Flow International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FLOW)") else Response.Write("(NASDAQ:FLOW)") end if %> to miss consensus estimates by 33%, and it got pummeled today, losing $2 to $8 1/2 as a result. Last year's acquisition of robotics and automation technology spurred more of these lower-margin systems to be sold than the company's traditional pump, spare parts and access systems business, pushing the company's gross margin down to 39.7% from 43.3%. An increase in the shares outstanding hurt earnings comparison as well, dealing a one-two punch to earnings. Flow International develops and manufacturers ultrahigh-pressure waterjet cutting and cleaning systems. Its shares have been under pressure for the last two weeks, seemingly in anticipation of these rotten earnings.

Office Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ODP)") else Response.Write("(NYSE:ODP)") end if %> sold off $2 1/8 to close at $24 7/8, possibly in anticipation of a negative story on the office products giant scheduled to air on "A Current Affair" tonight. The show will profile an African-American couple who were allegedly denied credit to buy a computer at nine Office Depots because of ethnicity. The company has also been giving indications that sales for November were lighter than expected. Some market followers went as far as to link Packard Bell's woes to Office Depot's problems today, although it does seem a bit of a stretch. OfficeMax <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OMX)") else Response.Write("(NASDAQ:OMX)") end if %> got hit as well, down $5/8 to $21 5/8.

INVESTMENT PERSPECTIVE: Those Chips Sure Look Like Dominoes

Packard Bell is a name that has been on investors' lips an awful lot lately, especially considering that the closely-held San Francisco manufacturer of personal computers is not publicly traded. The low-cost personal computer maker has been blamed for everything from causing Cirrus Logic shares to dive in a spectacular one-day belly-flop to forcing Intel Corp. to convert 14% of its accounts receivable balance into a loan because the company could not pay its bills on time. Some have even gone as far as to suggest that Packard Bell may be the reason why spot DRAM prices have dropped so much over the past few weeks.

Could Packard Bell be the lone force behind most of the fundamental information that suggests a cooling in the red-hot technology market? Although at first glance, this may seem an outlandish conspiracy theory, the confluence and timing of the events does suggest that problems with one industry giant might be shaking up the entire market.

The most telling piece of information available to support this thesis is the one actually not being bandied about much of late, Dataquest Inc.'s quarterly rankings of personal computer market share in the United States. For the third quarter, Dataquest reported that Packard Bell slipped to third place with 11.8% of the market while relative newcomer Hewlett Packard snapped up a little more than 5% of the personal computer market. A competing survey by the International Data Corp. had similar numbers for Packard Bell's total sales, although it differed on whether Packard Bell was now number two or number three in the U.S., both held Compaq as far and away number one in worldwide market share.

Packard Bell's slippage in U.S. market share is significant because it supports the anecdotal reports that its product mix is off. Analysts believe that Packard Bell was caught with way too many Pentium 75 units on the shelves, an entry level offering which sells for a lower price than the sizzling Pentium 100 units. If this is in fact true, a lot of logical relationships can be established between otherwise disparate points of information that put Packard Bell behind the scenes of every high profile technology disappointment in the last three weeks. Supporting the contention that Packard Bell's mix is off is information that sales from retail stores decreased from 53% in the first quarter to 49% in the third quarter. Clearly consumers are more interested in faster CPUs.

Cirrus Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CRUS)") else Response.Write("(NASDAQ:CRUS)") end if %> tumbled $12 3/4 to $28 on November 11th after one of its biggest customers trimmed orders. Cirrus stated at that time that earnings for the next fiscal quarter would be 10-15% below consensus estimates. All eyes at that time turned to Intel Corp. and Packard Bell as the culprits. Decreased orders from Packard Bell for Intel motherboards, which use Cirrus Logic video chipsets, was the prevailing explanation.

About this same time, the spot market for dynamic random access memory (DRAM) chips was falling as well. Rumors abounded that a personal computer manufacturer had over-ordered DRAM and cut its needs dramatically, dumping the unneeded DRAM onto the spot market, which reacted by taking the spot price much lower. The contract price for DRAM, which is set in advance, remained fairly constant and according to industry sources, the spot price, despite its drop, stayed above the more stable contract price. However, the damage was done; the perception of a seller's market for DRAM had disappeared completely, caused Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> and Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %> to crumple, falling as much as 40% below their 52-week highs set in September.

Yesterday, in a 10-Q filing to the SEC, Intel Corp. revealed that it has converted its accounts receivable balance from one of its largest customers into a loan. Again, speculation centered around Packard Bell. If in fact Packard Bell ordered too many Pentium 75 chips attached to motherboards from Intel and could not get rid of them in the consumer market as fast as they had anticipated, they could have required such dramatic moves by Intel. According to the company, Intel has never converted accounts receivable to a loan before, suggesting that this was a sudden development at one company rather than an overall problem for the industry.

Two Asian suppliers to Packard Bell got pasted on Southeast Asian exchanges last night. Lite-On Technology Corp., which also supplies monitors to Packard Bell, and GVC Corp., which supplies Packard Bell with modems, tumbled on the news that Intel converted part of its accounts receivable to a loan. Lite-On said it checked with the senior management of Packard Bell and confirmed the company was in "normal operations," saying further that the "so-called financial troubles were purely unfounded rumors." Lite-On's move had as much to do with supporting their own stock price as coming to Packard Bell's rescue, though.

Investors and analysts both have been scared to death about personal computer sales over the Christmas holiday season, which account for roughly 35% of annual personal computer sales. All of these apparently unrelated problems contributed to an atmosphere of uncertainty which caused investors and analysts alike to react in panicked attempts to hedge their positions.

Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HWP)") else Response.Write("(NYSE:HWP)") end if %> and Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CPQ)") else Response.Write("(NYSE:CPQ)") end if %>, which account for almost 20% of PC market share, have been pushing faster Pentiums than Packard Bell. If Packard Bell has erred in its calculations on whether consumers will want Pentium 75s, it would explain virtually every negative event that has riled the Nasdaq Composite over the last month. If this is in fact true, Packard Bell needs to take some action immediately to shore up its exposed flank, especially considering rumors that the company will go public in the next 12 months.

CALENDAR: Wednesday's Economic Events

---October Durable Goods Orders (8:30)

Byline: Befumo/Sheard (MF Templar/MF DowMan)