Friday, February 2, 1996
MARKET CLOSE

INDEX:

I. Market News: Blue Chips Fade, Technology Stakes Its Claim
II. Heroes: W.R. Grace, Orbit Semi, Teletek, VideoServer
III. Goats: Aviall, SyQuest, Iomega, Merry-Go-Round, Today's Man, Hasbro
IV. Investment Perspective: The Digital World---Part Nine
V. Calendar: Monday's Economic Events

MARKET CLOSE

DJIA: 5373.99 -31.07 (-0.57%)
S&P 500: 635.85 -2.61 (-0.41%)
NASDAQ: 1072.15 +2.69 (+0.25%) -- RECORD

MARKET NEWS

The Nasdaq Composite finally joins the party, setting a new record high today. Despite the Blue Chip fade today (even in the face of further weak economic data on the employment front), technology stocks held reasonably firm and cracked the old barrier. Maybe it's the fabled January effect a month late? Maybe it's nothing? Maybe it's Friday. It *is* Friday, isn't it?

HEROES

W.R. Grace <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GRA)") else Response.Write("(NYSE:GRA)") end if %> rose $7 3/8 to $69 1/4 today after Baxter Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BAX)") else Response.Write("(NYSE:BAX)") end if %> made a cash and stock bid for its National Medical subsidiary. Baxter wants to buy the kidney dialysis business for $3.4 billion from the diversified maker of special chemicals, a move that makes sense for both companies. Grace shares shot up because many on the Street perceive a looming bidding war for this property, which its current executives tried to take private a few months back for around $2.3 billion. With 10% more people on dialysis every year, and those already on dialysis needing more frequent treatment, the business remains attractive fundamentally. This is right up MF Uptrend's professional alley. Check out his thoughts on the story in the Healthcare folder when he returns from his vacation next week.

Orbit Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ORRA)") else Response.Write("(NASDAQ:ORRA)") end if %> was one of the first members of this recently disappointing group to receive an analyst upgrade in the past few months. Shares rocketed up $2 1/4 to $11 1/2 after Robertson Stephens analyst Dan Niles quoted a 1.46 book-to-bill ratio for the chip-maker and increased visibility of future earnings. Now, could an investor have found out all of this information at the same time Dan Niles did? Sure, by reading the company's recent 10-Q and earnings press release. Nothing fundamentally is different about the company today from yesterday, and this move represents a stunning example of the market's trend-following inefficiency.

Teletek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TKLC)") else Response.Write("(NASDAQ:TKLC)") end if %> has become the latest company to take the ATM mantle---that is asynchronous transfer mode, not automated teller machine, for the non-technical. Teletek shares were up $2 1/4 to $14 1/4 today, five days after the company released news about its new ATM physical interfaces. Could they be doing a "road show," going around to prospective stock buyers and trumpeting the strength of their technology? Could be. The two ATM switches are telecommunications/Internet equipment that MF MOM, MF Networx and MF Bogey over in the Networking area of Industry Research (KEYWORD:SECTOR) probably have a heck of a lot to tell you about. At least more than we can here at the Fool News Desk.

The demonstration of the VideoServer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VSVR)") else Response.Write("(NASDAQ:VSVR)") end if %> Interactive Conference Server must have been a success, given the shares were up $4 1/8 to $28 7/8 today. The company has been a leader in providing real-time video conferencing via its VideoServer Multimedia 440 conference server and Continue Presence technology. Most of the video-conferencing players buy VideoServer products as part of their total conferencing solution. MF Ben in the Desktop Video area in Industry Research (KEYWORD:SECTOR) is probably the best qualified fellow in Fooldom to field questions on the subject.

GOATS

Gruntal's decision to drop coverage of Aviall <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AVL)") else Response.Write("(NYSE:AVL)") end if %> completely did in those shares today. They plummeted $1 1/8 to $5 3/8. Aviall told the Street yesterday that it was selling its airline engine and component repair operations and had hired Salomon Brothers to help with the deal. The Gruntal analyst wrote that he assumed investors were already out of the stock and had redeployed their money elsewhere. Perhaps the fact that Aviall signed on with Salomon rather than Gruntal to sell their operations had something to do with the news?

SyQuest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYQT)") else Response.Write("(NASDAQ:SYQT)") end if %> got completely hosed today after it reported dismal first-quarter earnings, falling $2 1/4 to $5 1/2. Competing with Iomega's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IOMG)") else Response.Write("(NASDAQ:IOMG)") end if %> Zip drive with an inferior product, one on which they lost money every time they sold a unit probably had a lot to do with them losing $2.98 a share this quarter. Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IOMG)") else Response.Write("(NASDAQ:IOMG)") end if %> was having its own problems today, down $2 3/8 to $13 after yesterday's 3-for-1 split. Iomega is canceling its proposed secondary offering, a sign that there is either something the company does not want to disclose or that it thinks its stock price is too cheap to pull it off. Check out the Fool Portfolio report today for MotleyFool's (David Gardner) take on this question.

Most investors realized earlier this week that the game was up for Merry-Go-Round <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MGR)") else Response.Write("(NYSE:MGR)") end if %>, which went down to $1/8 yesterday, anticipating today's announcement that the company would liquidate. In a tough year for retail, Merry-Go-Round basically choked at the wrong moment. The most surprising thing about this stock is the degree of individual investor interest in it; more questions from neophyte investors about these shares appeared on the Fool's boards and various business radio programs than any others. Perhaps this disaster will serve as a warning for all investors that when a company is in trouble, extreme due diligence is required before you buy the shares. Today's Man <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TMAN)") else Response.Write("(NASDAQ:TMAN)") end if %>, which was down $3/4 to $1 7/8 on news that it was filing for bankruptcy, hopefully will not become the next Merry-Go-Round, drawing inexperienced investors into a penny-stock in hopes of a jackpot turnaround. Deep discounts from Today's Man over the holidays failed to bring in the needed cash flow to pay its bills this year, resulting in Chapter 11.

Hasbro <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:HAS)") else Response.Write("(AMEX:HAS)") end if %> finally convinced Mattel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MAT)") else Response.Write("(NASDAQ:MAT)") end if %> to back off, causing its share price to plummet $6 1/8 to $34 5/8 after investors realized the quick profits of a buy-out were just not gonna materialize. Toy-maker Mattel complained that Hasbro's campaign of disinformation through the media and involvement of congressmen made the deal impossible. Rumors that combat-boot wearing Hasbro executives called the Mattel managers sissies because they relied on dolls like Barbie instead of G.I. Joe were flatly denied by both companies.

INVESTMENT PERSPECTIVE: The Digital World, IX---Services and Conclusion

I. Services: A Broad Overview

I have talked a lot about how the most important practical implication of the digital world is that it enables new relationships and serves as an alternative distribution route for many products. The queue of corporations lining up to tap into this distribution network has lengthened in the past months as the Internet has became incredibly relevant to every retailer and financial company's business. The list of names is dazzling, including such stalwarts as American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AXP)") else Response.Write("(NYSE:AXP)") end if %>, AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:T)") else Response.Write("(NYSE:T)") end if %>, MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MCIC)") else Response.Write("(NASDAQ:MCIC)") end if %>, VISA/Mastercard International and Spiegel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SPGLA)") else Response.Write("(NASDAQ:SPGLA)") end if %>. To be quite frank, I think the names of many companies who will take advantage of these new markets are unknown because they do not yet exist.

The digital world is most salient for financial and retail companies because both can put up new products and services via existing technologies; they don't have to wait for broadband via cable modems, ISDN, ASDL or the latest hot bandwidth-increasing technology to come down the pike. Today, via your 14.4 modem, you can hook up to a bank or credit card company server and look at your account in real-time. You can also hop onto the Web and "shop" various advertising sites, pointing-and-clicking your way to mass consumer debt for those products that you can't live without.

II. Financial Services

There is an important distinction to be made when it comes to financial services within the digital world; some products are required to make commerce possible over the 'Net and some products are simply strategic, costing less to deliver digitally. A mechanism of remote purchasing and transaction processing is required by the appearance of the Internet as a mass cultural phenomenon, whereas traditional financial services only want to take advantage of the lower cost structure inherent in the Internet.

I talked some yesterday about "secure transaction" software. The idea is that there are hackers all over the world waiting to snatch your credit card out of the digital air and misuse it should you be silly enough to send it to a vendor on the Web. This scare tactic may be what has kept the majority of Internet users from buying stuff online, as only 8% of Internet users have bought something online in the past month, according to the Time Mirror Center for the People and the Press. Those who did have the temerity to buy overwhelmingly used plastic to do it---90%, according to their tally. Those brave souls also did not spend too much time fretting about the potential consequences; 42% weren't worried "at all," 40% were "a little" trepidatious and 17% lost sleep over the deal.

Considering those numbers, despite the reckless abandon with which current shoppers hurl their credit card numbers down the digital pike, Netscape's scare tactics appear to have won out. People believe that they need a secure transaction product from a reputable company to safely buy stuff online. A few companies have stepped in to fill this void---American Express, CheckFree <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CKFR)") else Response.Write("(NASDAQ:CKFR)") end if %>, DigiCash, Electronic Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GME)") else Response.Write("(NYSE:GME)") end if %>, HNC Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HNCS)") else Response.Write("(NASDAQ:HNCS)") end if %>, Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTU)") else Response.Write("(NASDAQ:INTU)") end if %>, H.R. Block <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HRB)") else Response.Write("(NYSE:HRB)") end if %>, Enterprise Integration Technologies, CyberCash and First Virtual.

American Express has two approaches to the Internet: one is to have the Card be a method of payment and the other is to have the Internet be a way to check up on the Card. American Express is no pioneer in the payment arena; they have merely arranged with CyberCash, First Virtual, Netscape and Open Market to include the Card as part of their transaction line-up. As far as checking up on the Card, the ExpressNet site debuted on America Online in January of 1995. This area uses the whiz-bang propriety America Online software to check their accounts, pay their bills, make reservations and enroll in rewards programs. They threw a travel database into the site as well---a lure for new customers.

CheckFree used to be Intuit's pal in the electronic transaction universe until Intuit recently decided to develop its own capabilities, realizing that it was giving up the store to some degree. CheckFree does electronic payments---electronic to check (where they debit your account and send a check to where you want it), electronic (where they debit your account and send it electronically to where you want it), or they can just send you checks for your printer. Perhaps it is just me, but the last one just seems completely doomed. Intuit has been developing similar services, as well as debuting the Intuit Visa that you can check on through their Web sites, and becoming a cheap ISP as a way to bring people online. H.R. Block is essentially doing the same thing by having a CompuServe card and an Internet card, as well as developing transaction services over the Web.

Cybercash (www.cybercash.com), a subsidiary of VeriFone <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VFI)") else Response.Write("(NYSE:VFI)") end if %>, takes a slightly different road with DigiCash and First Virtual Holdings when it comes to the world of transactions. CyberCash offers "secure" transactions via its proprietary software: the "wallet" (which is on your PC), something that interfaces with the merchant's server and something that runs off of CyberCash's servers. These basically enable the consumer to use any credit card online rather than debiting the user's checking account or having a specific card for Internet use. CyberCash has what looks like the most partner agreements with the likes of IBM and Cisco Systems signed up. VeriFone is offering up to 10% of CyberCash to the public sometime this quarter in an initial public offering.

DigiCash acts as a bank, by comparison, where you send in a chunk of money in advance and they convert it into "E-cash"---one of the cheesiest Internet-related terms going. DigiCash (www.digicash.com) then provides you access to the E-cash and you spend it (e-asily). First Virtual (www.fv.com) offers a service that allows you to give them access to any credit card and then they give you a secure account number to use instead of the credit card number, again bypassing the need to use a specific card or send a lump-sum in advance.

Electronic Data Systems (www.eds.com), the second-largest processor of credit card transactions in the world, is one of those companies that benefits from more credit card use and sees the Internet as a way to increase its scope, totally wiping out checks. These guys have no direct transaction software, but rather enable anyone else who wants transactions over the Internet by processing the stuff. HNC Software is in a similar position as they make software that detects and stops credit card fraud. With the Internet ramping-up electronic payments, they benefit as a result---particularly as they develop products specifically for that niche market. MasterCard and VISA also benefit from more credit card use and both companies certainly have fantasies where cash and checks become obsolete.

Although there are no real pure plays right for banking or brokering via the Internet, a number of companies are now involved in both businesses as a way of cutting the high cost of staffs and office space. Chase Manhattan's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CMB)") else Response.Write("(NYSE:CMB)") end if %> recent offering on this front, allowing cheaper services, is ordered electronically in probably their first step to getting rid of some of those expensive branch offices. National Discount Brokers with its PAWWS Network is only one of many brokerages trying to siphon traffic from the big boys by offering convenience. Charles Schwab offers discounts on commissions for online orders while Aufhauser goes even further, offering unlimited trades for $800 a year if you use their Web site to make them. This last bit of information illustrates just how much removing people from the financial transaction equation dramatically decreases the cost structure. There *is* a normal bank with an Internet subsidiary; Cardinal Bankshares <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CARD)") else Response.Write("(NASDAQ:CARD)") end if %> owns Security First Network Bank (www.sfnb.com), which offers no-fee checking accounts to Internet users. They immediately got 1,000 applications from 38 states, eclipsing the geographic reach of most regional powerhouses overnight.

III. Online Retail

The developments here have been more cautious, as retailers with specific niches or those who are particularly brazen have been the ones who have opened their doors online. 1-800-FLOWERS (www.800flowers.com) now lets you order by phone or online those petunias for your Aunt Matilda. The beauty of this is that most people don't look at the flowers they send Auntie anyway, making it a great item to purchase online, unlike things you have to see or feel to be sure off. PC Flowers is a competitor who formed just to take advantage of this niche, also doing business through electronic kiosks and Regional Bell Operating Companies (RBOCs) phone interfaces.

CUC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CU)") else Response.Write("(NYSE:CU)") end if %> is probably the biggest company involved in the Internet. They do all those shopping clubs you get solicitations with your credit card bills to join (solicitations you can stop, incidentally, by calling the credit card company and telling them too). CDs, software and crystal get marketed to credit holders, credit unions and all sorts of organizations that test well on their risk parameters. NetMarket is what they have formed to provide marketing and sales "solutions" for organizations. How solutions differ from the basic service is something that escapes me. Shoppers Advantage is another deal they offer that basically does what First Virtual is doing---gives you another "secure" number to use in place of your credit card, but also opening you up for all sorts of mailers and offers to join their other clubs. CUC has operated shopping services on most of the big Online Service Providers for a while. CUC's recent purchase of Advance Ross (a value-added tax refund service) might work nicely online as well.

The Home Shopping Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HSN)") else Response.Write("(NYSE:HSN)") end if %> is in the fray as well with its Internet Shopping Network, which is basically the TV stuff online. One of my favorite lame-o companies, L. L. Knickerbocker <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KNIC)") else Response.Write("(NASDAQ:KNIC)") end if %>, is selling their Annette Funicello teddy bears and Farah Fawcett posters online to all sorts of retro-70s consumers, to my complete dismay. (I know I'm going to receive tons of flame-mail for the above comment, by the way.) Speigel is a traditional direct-mail retailer that has set up an experimental Web-site. The beauty of the web for the catalog marketers is that it tremendously reduces their cost structures---no more mailing out those stupid, expensive catalogs---a huge burden in a world of quickly rising postal costs. Right now they just have you look at the catalog online and call their 800 number. Someday they might hook up with one of the transaction services to enhance the interactivity.

IV. Conclusion

In the past two weeks, I have tried to take readers on a tour of the digital world which has yet to be explored---the one most traditional reporters, for reasons of lack of research and deep bias, tend to ignore. Given that it is this very medium that has given birth to the possibility of me writing what I write on a daily basis, I think that I bring to it both the proper sense of awe and a highly concrete sense of the limitations as well. The Internet, for me, first and foremost is a "new thing," something that Negroponte writes lyrically about in his collection of essays, "Being Digital." As a "new thing," it is philosophical, personal and revolutionary in a breath; the kind of reporting required is not the tired old rehashing of facts in the third person but a breathless sort of first person, as the exploration is a joint effort and not simply a recapitulation of the wisdom of Mount Sinai brought down to the masses.

I have found writing this series to be a rewarding as well as an arduous task. Perhaps the clearest thing I have gained from it is the need for clear and accurate reporting of the digital world. The more bad summaries of networking or inaccurate assessments of America Online's core business that you read, the more you understand that disinformation has taken the place of reporting and that most nonline writers have simply taken as gospel what others have said---a self-referential loop that verges on extinction.

The exceptions to this blanket condemnation are many. Walter Mossberg writes compellingly in his Personal Technology column on Internet related issues; Robert Seidman (author of the weekly Seidman's Online Insider) does the very sort of first-person breathless reporting that the medium requires; Mary Meeker remains one of the few "reporters of value" when it comes to telling which companies are bunk and which have tremendously undervalued shares. I thank all of them and many more who have slipped my deadline-stricken mind for making this enterprise possible, and hope that you have found this as rewarding as I have.

MONDAY: Back to our regularly scheduled program of timely issue coverage. . . for a while.

Monday's Economic Events

---December Housing Completions (10:00)
---Treasury announces results of its auction of $32.4 bln in 13- & 26-Week Bills (1:30)
---January Ford Car Sales (completes US sales data)

Byline: Randy Befumo (MF Templar)