Wednesday, January 24, 1996
MARKET CLOSE

INDEX:

I. Market News: Markets Rebound On Budget Hopes
II. Heroes: Helene Curtis, IBM, Procter & Gamble, United Tech, Cypress Semi, Oak Tech, Micron Tech, Texas Instruments, Int'l Rectifier, Intel, Hasbro, Iomega
III. Goats: Allen Group, STM Wireless, Seitel, Callaway Golf, Xerox, Optical Data Systems, Ahmanson, Sybron Int'l
IV. Investment Perspective: The Internet---Part Two
V. Calendar: Thursday's Economic Events

MARKET CLOSE

DJIA: 5242.84 +50.57 (+0.97%) --- RECORD
S&P 500: 619.96 +7.17 (+1.17%)
NASDAQ: 1043.46 +15.42 (+1.50%)

MARKET NEWS

Somewhere in the President's State of the Union address and the Republicans' response, investors found hope of a settlement to the budget battle. And today, the markets rebounded with a vengeance. Program trading curbs kicked in early in the day, and remained in effect for the rest of the session. The Dow regained all of yesterday's sell-off, plus some, setting another new closing high. The other two indices, while gaining more in percentage terms than the Dow, are still just shy of their previous record levels.

HEROES

Consumer-products giant Helene Curtis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HC)") else Response.Write("(NYSE:HC)") end if %> rocketed ahead for the second day in a row, up $12 3/4 to $65 7/8 after yesterday's $8 gain. The company confirmed that it was in talks with "one or more parties," mulling a possible "business combination." Walt Disney's progeny, Roy, must be particularly happy with this gain, as it was his Shamrock Holdings that submitted a letter to Helene urging it to sell itself or merge with someone else to maximize shareholder value. With products like Finesse shampoo and Degree anti-perspirant, Helene Curtis would make a nice addition to some consumer-products giant like Unilever. Analysts suggest that the company's fair value in an acquisition is somewhere north of $50, and apparently investors agree.

Dow heavies were racking up the points today, led by IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IBM)") else Response.Write("(NYSE:IBM)") end if %>, up $4 to $107. The old mainframe computer manufacturer is the new leader in America's technology revolution, or so thinks the Street. The Food and Drug Administration's (FDA) approval of fat-replacement olestra (generic:Olean) for use in snack foods sent shares of Proctor & Gamble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PG)") else Response.Write("(NYSE:PG)") end if %> up $2 1/8 to $88 1/4. Olestra apparently has no calories, something many fat-conscious Americans are quite worried about. United Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UTX)") else Response.Write("(NYSE:UTX)") end if %> wrapped up the big Dow gainers today, surging $3 1/8 to $97 3/8 when it reported earnings far in excess of consensus expectations. United Technologies is a diversified industrial concern---kind of like Westinghouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WX)") else Response.Write("(NYSE:WX)") end if %> done right---with helicopter-maker Sikorsky and Otis Elevator among its many properties. The fact that the Dow is a price-weighted index means big moves in high-priced stocks cause the average to zip along because a $1 change has the same effect on the index whether it is in IBM or Woolworth.

Better-than-expected earnings for some semiconductor manufacturers helped to turn sentiment in the group of stocks around today. Cypress Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CY)") else Response.Write("(NYSE:CY)") end if %> rose $2 1/4 to $14 3/8 after it came in line with consensus estimates, reporting $0.38 a share (diluted) versus consensus expectations of $0.38. What really is going on here? The Street expected this diversified chip-maker to miss its numbers because of comments by scaremongers like Rick Whittington. And how about those specialty chip makers with a strong hold on their markets? Oak Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OAKT)") else Response.Write("(NASDAQ:OAKT)") end if %> was up $9 13/16 to $54 1/4 after it blew away consensus expectations. Knowing that Oak has the lion's share of the market for CD-ROM controllers would have helped investors hold their shares during the market's temporary bout of depression.

Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> popped up $5 to $37 today after the Washington Post reported that Fidelity Management and Research was buying it and a number of other technology stocks again. Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %>, up $2 3/8 to $48 7/8, International Rectifier <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IRF)") else Response.Write("(NYSE:IRF)") end if %>, moving $2 1/8 to $21 1/2 and Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %>, rising $2 1/16 to $54 3/4 also made this list. This is quite possibly the silliest reason for a rally we have ever seen at Fool HQ. Why Fidelity's change of heart so dramatically affects the underlying values of these businesses is just beyond comprehension. With mutual funds only controlling about 15% of the total shares of stock in the United States, their comings and goings actually matter a heck of a lot less than most people apparently believe. Even the percentage of total stock relative to the market represented by big old Magellan has *declined* in the last few years.

Some after-the-Bell news put two stocks on the watch list for tomorrow. Hasbro <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:HAS)") else Response.Write("(AMEX:HAS)") end if %>, down an $1/8 when the New York Stock Exchange closed, jumped over $16 in Pacific Exchange trading when the company announced that it would not merge with Mattel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MAT)") else Response.Write("(NYSE:MAT)") end if %>. The two toy giants face substantial antitrust concerns if they were to get together. Mattel's offer, however, was a 71% premium over Hasbro's close on the New York. Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IOMG)") else Response.Write("(NASDAQ:IOMG)") end if %>, up $1 3/8 to $46 1/8 today, reported earnings after the Bell in line with expectations of $0.48 a share. More exciting was the company's announcement of a deal with blue-chip Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HWP)") else Response.Write("(NYSE:HWP)") end if %> to work on consumer storage products together. This, more than anything that has ever happened with the company, is a definite seal of approval, akin to the UAL symbol on consumer electronics. MF Horns is on the conference call and will post his thoughts later tonight.

GOATS

The news that Allen Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ALN)") else Response.Write("(NYSE:ALN)") end if %> would not make its quarterly numbers crushed the stock, causing it to fall $3 1/2 to $17 3/4 today. The company said that it would only make $0.24 or $0.25 per share versus expectations of $0.31. Slower-than-expected growth in the wireless telephony market is the root cause. The weakness that cellular phone makers like Motorola and Nokia have experienced translated into the cellular equipment market. Cowen & Co. took the opportunity to downgrade the shares today. Allen Group was not alone today in pre-announcing bad earnings. Another wireless concern, STM Wireless <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:STMI)") else Response.Write("(NASDAQ:STMI)") end if %>, made a similar announcement, falling $4 1/2 to $10 3/4. Diversified-energy concern Seitel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SEI)") else Response.Write("(NYSE:SEI)") end if %> reported that it would not make its numbers either, falling $5 1/8 to $26 1/4.

Callaway Golf <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ELY)") else Response.Write("(NYSE:ELY)") end if %> got clubbed when Raymond James downgraded the stock to "neutral" from "buy," causing the shares to lose $2 1/2 to $19 1/8. The shares of this once hot stock enjoyed a renaissance recently when American Brands snapped up Cobra Golf to enhance its own golf operations. This optimism about Callaway and its value to an acquirer has probably dimmed at Raymond James, as the cut suggests that the stock would not fetch much more than its current price to any potential buyer.

Even without one-time charges related to the sale of its Talligent insurance unit, Xerox <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:XRX)") else Response.Write("(NYSE:XRX)") end if %> still missed its quarterly numbers. The stock fell $15 to $126 5/8 after the results were released. Someone pondering the bigger picture might see that Xerox has shed the last vestige of its ill-fated diversification into financial services and take some lessons here. Lesson One: technology companies are not naturally good at financial stuff, a word of warning to Internet hypesters. Heck, they are not even that good at content. That is why they are technology companies. Lesson Two: An out-of-favor faded giant that dumps its financial services units can concentrate better on its core businesses going forward. For this, we need look no further than Sears and its massive run-up in the last two years as it again became the toast of retail. Sure, Xerox has under-performed for the last twenty years, but IBM really did not make anyone money after 1978 either. It might be worth looking into.

Honesty check. I have no earthly idea why Optical Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ODSI)") else Response.Write("(NASDAQ:ODSI)") end if %> lost $4 5/8 to $18 5/8 today after it reported its earnings, but I suspect somebody out there cut his or her rating. The networking concern's earnings were a little better than expected today, posting $0.15 per share versus estimates of $0.13. The problem might have been the company earned $0.17 last year, but it had already pre-announced bad earnings that it blamed, in part, on the government shutdown. The maker of token ring, Ethernet and ATM network equipment might be worth a look despite its warts. Whether it and other companies that rely on government money for networking equipment [like Microdyne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MCDY)") else Response.Write("(NASDAQ:MCDY)") end if %>] will recover in the next year seems at least a possibility.

H. A. Ahmanson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AHM)") else Response.Write("(NYSE:AHM)") end if %> tanked $2 1/2 to $21 7/8 when it missed its quarterly numbers by about 20%, reporting only $0.40 a share. The savings and loan giant was hurt by large credit losses and a pathetic California real estate market. The fact that Ahmanson spent a lot of money increasing the credit business that created the nasty losses did not help the bottom line either. But even missing your numbers by only a penny can hurt. Sybron International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SYB)") else Response.Write("(NYSE:SYB)") end if %> was off $2 to $22 1/2 after it missed its earnings by $0.01 a share, reporting $0.25. For the Street, a disappointment is a disappointment these days.

INVESTMENT PERSPECTIVE: The Digital World---A Brief History of the 'Net

A. The Word Itself And Why A History.

I really hate the word "Internet". The reason is simple; it is a terribly misused word. Simply signifying the "network of networks" that connect to main Internet "backbone," originally known as NSFNet, the Internet has been erroneously adopted as a general descriptive term for the universe of online communications. Even if a network is not directly linked to this backbone, consumers or business can use the buzz word "Internet" as a label. This is a problem for two reasons: First, the vague rubric contributes to the popular misconception that the "Internet" is some discrete thing that can be quantified and pigeonholed---or can even be called a fad. Second, in smashing all things online together, it blinds us to the actual segmentation that exists in the universe of online communications.

If I avoided the use of the word in this series of articles, however, a lot of people would be very confused. A useful compromise is to have the word "Internet" mean nothing more than the "digital world of online communications." My revised definition thus includes closed networks, corporate networks that are not linked to the Internet, like that of America Online message boards or the Whole Earth 'Lectronic Link (WELL), a popular San Francisco-based bulletin board service (BBS). So when I use the term Internet or the "digital world," I am talking about one thing---the entire array of online communications and "new media" that can be accessed via telephone and network systems.

Now that we have the word, we can start talking about investments, right? Er. . . no. I really think it is impossible to invest in anything unless you have a grasp of the history that lays behind it. What *has* happened is always an excellent guide when one is trying to understand what "might" happen, informing one's projections with concrete history. Although it might seem to be an academic aside to explore the history of what we now call the Internet, much to the contrary I believe that it is vital for us to understand the range of companies involved and to be able to decide which business plans are solid and which are tremendously flawed.

B. Origins of the Internet.

As many as five individuals and groups vie for authorship of the word "Internet." These claims are somewhat difficult to substantiate, however, as widespread adoption of the appellation occurred in the mid-80s. The Internet was originally just a network of networks, commercial and private, that are completely independent from one another but operated with the same physical "backbone" of network cable laid across the United States. Development began on this vast system in 1968 when Bolt, Beranek and Newman <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BBN)") else Response.Write("(NYSE:BBN)") end if %> received a Defense Department contract to link four military computers. In September, 1969, BBN created APRAnet, a system that allowed the computers to communicate with each other but could still function if one or more of the member machines was destroyed in a nuclear war. The primary use of APRAnet was to allow the Department of Defense to maintain their computer systems in the event of all-out war.

This all changed in 1972, when the APRAnet become more than just a gaggle of interconnected computers. In 1972, the first documented e-mail message was sent. This military network gradually became a means for communication between people rather than just machines. E-mail really did not matter much in 1972, as only Defense Department employees could use the system. It was only In 1973 and 1974 that APRAnet was transformed into something resembling the Internet we know today. Vint Cerf and Bob Kahn, the two gentlemen responsible, developed the transmission communication protocol and Internet protocol, better known to us as TCP-IP. This common suite of protocols opened the Internet to any computer that could run them, allowing more machines to link up. It also created Ethernet, the set of protocols most local area networks (LANs) use to operate, an important development that became relevant almost a decade later when these local networks began hooking up directly to the Internet when it was opened to commercial users.

When AT&T's Bell Labs revised its UNIX language in 1977, TCP-IP was incorporated, giving most computers running this common mainframe language the ability to link up to the Internet. This allowed the Internet to be used for remote connections, or Telnet. File Transfer Protocol (FTP) enhanced this by allowing users to connect, log on, browse through the files available on a network and upload or download files. Until this point, however, the Internet remained functional only for government, researchers and business, as there was little resembling the type of content that might draw a lay-person.

C. The Network Opens Up to All Comers.

The Usenet's appearance in 1981 marked a dramatic shift in online demographics. This bulletin board system allowed users to post messages that others could view and respond to, making it the first Internet bulletin board. Moving the Internet further toward mass utility, the Gopher file search and transfer system put FTP protocols in the hands of anyone with a computer system and a modem (still somewhat expensive in those days, however). Both of these developments raised the profile of the Internet among academics and executives. The Internet still remained closed to most other networks, though. The agency in control of the backbone needed to change before it could be completely open.

In 1986, the National Foundation for Science linked their supercomputers with a batch of high-speed connections and called it NSFNet. With the Department of Defense using its own private network and killing APRANet, NSFNet became the center of the Internet, with the name formally adopted by the National Foundation of Science for its network. NSFNet linked regional networks to massive lines that allowed users to connect to each other from coast to coast. A series of speed upgrades to NSFNet by the Merit team (led by MCI and IBM) made it even more useful. Advanced Network Services (ANS), now AOLNet, and a private company eventually took over management of the backbone for the National Foundation of Science.

At this time, closed private networks like CompuServe and Quantum Computer Services (America Online's previous incarnation) were not hooked up to the Internet. It was only in 1988, when MCIMail got permission to connect to NSFNet as part of its participation in Merit, that you saw a move by closed online systems to connect as well. CompuServe, ATTMail and Sprintmail all attached themselves by 1989. It was only then that a massive mail system which was underwritten by the US government became possible over the Internet, allowing virtually anyone connected to a network to send mail to anyone else. To further this trend of commercial networks connecting to the Internet, the Commercial Internet Exchange (CIX) appeared in 1990, allowing anyone with a network to hook up if they wanted.

D. Content Comes to the Web.

The debut of the World Wide Web at the Conseil Europeen pour la Recherche Nucleaire (CERN) in 1989 furthered the development of content on this network. The World Wide Web was made possible by http protocol, a system that located text on all sorts of varying networks throughout the world. Thus scientists could suddenly place links in their network documents to similar material on other networks, allowing people who were reading the document to connect to the other ones with only a click of their mice. This functionality, known as "hypertext," furthered the interconnectedness of the Internet by creating links between previously isolated content. CERN kept the Web under its hat until 1992.

The Web truly came into its own in 1993 when Mosaic was developed at the University of Illinois by the National Center for Supercomputing Applications (NCSA), led by a team of students, including the resident genius at Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NSCP)") else Response.Write("(NASDAQ:NSCP)") end if %>, Mark Andersen. Mosaic was the first graphical-user interface (GUI) to the Web, allowing pictures as well as text to be transmitted. This software was distributed over FTP servers for free, allowing anyone who wanted to download the software to "surf" the Web.

E. Where Is The Internet Headed Now?

In April of 1995, NSFNet began its official withdrawal from NSFNet funding, marking the end of government participation in the Internet. Although NSFNet still intends to support vBNS, a large network for academics and researchers, it no longer intends to pay for something that is becoming increasingly commercial.

The NSFNet backbone will gradually be replaced (over a two-year period) by a backbone built and owned by the Group of Six. The Group of Six includes PSINet, UUNET, ANS/AOL, Sprint, MCI and AGIS-Net99. It is to these networks that the 300-plus Internet Service Providers connect in order to make widespread Internet connections possible, allowing the vast majority of people using the Internet to send mail or view content.

The important thing to realize in this history is that the commercialization of the Internet happened in about two years, despite the fact that the network took 30 years to develop. Although the end-user probably does not know the difference, the fact that the major backbone of the Internet will soon be owned by six major companies rather than the government implies that business is coming to the Internet---and rapidly.

The chain of events that made this article possible really has only come about in the past two years. With the development of a big network, decent modem connections and the attachment of most of the major online service networks to the broader Internet, everyone is suddenly talking about a world few had even heard of in 1993. The speed of development should not persuade people that this is some kind of fad, though; as I argued yesterday, the Internet is a new means to communicate and distribute products and services interactively. We will look at how this is possible in tomorrow's article.

Tomorrow: The Digital World: Routers and Railroad Ties

CALENDAR: Thursday's Economic Events

---Weekly State Unemployment Claims (8:30)
---December Existing Home Sales (8:45)
---Weekly Money Supply Statistics (4:30)

Byline: Randy Befumo (MF Templar)