Friday, March 8, 1996
MARKET CLOSE
INDEX:
I. Market News: Good Economic News Shatters Markets
II. Heroes: Bay Networks, Leader Financial, Cascade Comm.
III. Goats: Tektronix, Hart Brewing, Agouron, Centocor
IV. Investment Perspective: Musings on the Market
V. Another Foolish Thing: The Weekend Research Center
MARKET CLOSE
DJIA: 5470.45 -171.24 (-3.04%)
S&P 500: 633.50 -20.15 (-3.08%)
NASDAQ: 1063.74 -29.38 (-2.69%)
This was a day to remember. Just on the heels of an unexpectedly promising unemployment report, the market plummeted. It later recovered a little, but ended the day amid another rash of selling. At one point, the Dow was down over 200 points---nearly 4%! For perspective, this was the worst single day at the market since the Gulf War. Perhaps the biggest winners today were aspirin manufacturers.
In a Special Section today, we take a closer look at how and why the markets behaved as they did. Another Special Section is our Weekend Research Center. You can find our Special Sections in the Fool main screen listbox. For even more on today's economic indicators, check out MF Merlin's take via the Evening News screen.
Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> chose today---of all days---to stage a rally after racking up almost ten days of straight losses. Shares of the networking concern rose $2 to $34 3/8 today in fairly heavy volume in a sure sign that almost all of the sellers are out of the stock. Bay Networks has been stung by the perception that many of its orders for its new 28000 switch will be cancelled because customers double- and triple-ordered to ensure they would get enough. Gruntal analyst Roxana Googin went as far as to cut the stock's rating based on concerns that it would not make revenue estimates. Check out the opinions of MF Bogey, MF MOM and MF Networx over in the Fool Networking Area (Keyword: Sector).
Leader Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LFCT)") else Response.Write("(NASDAQ: LFCT)") end if %> surged $4 1/4 to $42 1/4 today after Union Planters Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UPC)") else Response.Write("(NYSE: UPC)") end if %> announced it would merge with the fellow Tennessee thrift to create the largest bank holding company in the state. Union Planters will exchange 1.525 shares of its common stock for each share of Leader, worth $44.23 at market close today. The combined companies plan to close 20 branches---pretty significant, as Leader only has 23 branches. Union Planters's CFO Jack W. Parker anticipates $22 to $23 million in annual savings from the deal.
Cascade Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCC)") else Response.Write("(NASDAQ: CSCC)") end if %> surged $6 1/8 to $82 1/16 on rumors that Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> might be interested in buying the company. In a 13-G filed with the SEC on March 7th, Cisco Systems owned 6.4% of Cascade Communications, suggesting this is a little more than mere idle speculation. Cascade manufactures WAN switches and network interface modules that support asynchronous mode transfer and frame relay, markets that Cisco has yet to penetrate. Cascade's primary customers are Internet access providers and telecommunications companies.
QUICK TAKES: SANGSTAT MEDICAL'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SANG)") else Response.Write("(NASDAQ: SANG)") end if %> initial public offering (IPO) at $14 per share proved successful today in spite of the market, with the stock rising $1 1/4 to $15 5/8. . . Internet financial company CYBERCASH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYCH)") else Response.Write("(NASDAQ: CYCH)") end if %> recovered $4 1/4 to $32 after suffering two nasty days of losses. . . SPYGLASS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPYG)") else Response.Write("(NASDAQ: SPYG)") end if %> rose $1 3/4 to $21 on the perception that as a result of Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> expanding the market for its Internet Explorer, Spyglass's royalties will continue to pile up.
Tektronix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEK)") else Response.Write("(NYSE: TEK)") end if %> imploded today, plummeting $9 3/4 to $34 after it released third quarter earnings that could only be called "disappointing." Salomon Brothers downgraded the stock from strong buy to hold after they saw the numbers, commenting that they were completely floored by the revenue deficit. Higher-than-expected costs in its video and networking operations, a decline in Japanese orders, and long lead times for crucial products were behind the problems. The company announced a share repurchase program to attempt to stem the tide today, to no avail.
Recent brewery IPO Hart Brewing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HOPS)") else Response.Write("(NASDAQ: HOPS)") end if %> fizzled down $2 1/2 to $11 today after it said its first quarter of reported earnings would suck. The company said it expects these earnings to be around $0.06-$0.08 per share, as it received the double whammy of lower-than-expected sales and lower-than-expected growth. Hart makes Pyramid Ales and Thomas Kemper Lagers and sees sales growth of only 20-25%, which is way below analyst expectations. The company plans to rapidly expand the states its beer is distributed in and new sites are actively being sought for two new breweries to meet demand.
Volatile biotechnology stocks got it in the chin today when the market slid with market players taking their profits and heading on home. Agouron Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AGPH)") else Response.Write("(NASDAQ: AGPH)") end if %> shed $6 3/8 to $36 3/8 in spite of what Montgomery Securities called its "promising" Viracept product. Not so promising. Centocor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNTO)") else Response.Write("(NASDAQ: CNTO)") end if %>, which violated bank covenents because of cash flow difficulties a few weeks back, shed $3 7/8 to $35.
INVESTMENT PERSPECTIVE: Musings on the Market
On volatile days like this, where there is not a lot of individual stock news, I like to indulge myself in extended market wraps. This provides you with the opportunity to see where our news comes from on an intra-day basis and provides me with the opportunity to tease Wall Street.
Stocks were falling today because of an improving economy---probably the most perverse use of economic indicators with the single exception of presidential primaries. Whether it was high-growth technology stocks that benefit from a strong economy or slow growth commodity companies that. . . well. . . benefit from a strong economy, odds are it was probably down today. Two interesting trends that investors witnessed today were the lack of volatility among many battered technology shares that apparently have had all of the sellers wrung out of them and the sudden tech-like volatility of the financial companies, which have run long and hard based on falling interest rates.
Not even a downgrade by Salomon Brothers could shake semiconductor equipment bellwether Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %>. With the analyst citing "an acceleration of push-outs for [semiconductor] capital equipment," he basically downgraded every semiconductor equipment stock he followed---failing to move much of the group one iota. In fact, quite perversely Applied Materials managed to close up on the day. Could it be that there is simply no one left to sell?
There is a lot of talk on certain televised Wall Street shows concerning so-called "bottoms" and "tops", with the speculation that somehow you can tell when one or the other has occurred by looking at the volume relative to the price movement. Although I have a lot of doubts that this is any more useful a predictor than entrail reading, I do believe that at a certain point, the majority of people who are going to sell a stock based on what has already gone before have already sold the stock. The final capitulation of the sellers is evident on slight up days, with the buying volume probably generated by savvy short sellers who correctly called a short-term negative move driven by investors fearful of shrinking capital equipment budgets.
What does this mean for Applied Materials? For the company, not a lot. They still face all of the same challenges they did yesterday or the day before, highlighting yet again that a stock price only follows the fate of a company over the unpredictable longer haul and that short-term price movements are as random as lightning strikes. The worldwide expansion of semiconductor equipment fabs appears to be underway with some push-outs coming along more frequently. Applied has staked its fate on 150 mm and 200 mm silicon wafers remaining the standard, moving to 300 mm wafers much more slowly than its counterparts like Lam Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LRCX)") else Response.Write("(NASDAQ: LRCX)") end if %>. The threat of push-outs from semiconductor manufacturers shaken by either the inventory correction or the Intel-Packard Bell-Cirrus Logic effect is still making shareholders nervous. This is in spite of the $4.00 in EPS that the analyst at Salomon sees. Think about it. . . 8 times earnings and he moved the stock to "hold."
Outside of the ever-volatile networking segment, it looks like the selling in most of the techs is over for now---or at least until a new piece of information comes out. Book-to-bill will be announced Monday. Even though I think it is a terrible indicator (contrary to Cowen & Co.'s Drew Peck, who seems to believe it's the bee's knees), it will definitely affect the so-called technology stocks---particularly those involved in the manufacture of computers.
As for the financial stocks, the story there is interest rate cuts---or lack thereof. With today's stronger-than-expected jobs report, the Street economists are now unanimous in their opinion that rates will not go lower come the 27th of March. Apparently, this had been discounted into the financials as they all crashed and burned today. Banks, insurance companies, credit card companies, mortgage companies---you name it---if it is involved in money it was down.
I saw Traveler's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %>, the old American Can, down $4 to $63 1/4 (brokerage and insurance); Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> losing $3 1/8 to $68 7/8 (banking); Federal National Mortgage <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %>, best known to many as Fannie Mae, off $2 3/4 to $31 (mortgage lending); First USA (NYSE FUS) (credit cards) shedding $4 1/4 to $52 1/2---almost its entire gain for the week from news that its IPO of its payment services company would be hot. The financial companies went boom because many have factored in higher-than-currently-expected profits, based on the assumption that the Federal Funds rate would hit 5.0% fairly soon.
Almost every Wall Street economist sat around today and raised her forecast for growth in the economy, sending wave after wave of panic selling through the market. Now you ask, who in their right mind was selling? I mean, isn't a healthy economy supposed to be good? Weren't we fretting just yesterday that corporate profits might be worse than expected because of a slowdown in growth? Short-term, a sagging bond market drags stocks lower because both compete for funds. If interest rates rise, people reallocate money to bonds to capture the yields, causing almost indiscriminate selling of stock. Long-term, however, stock price appreciation follows earnings growth with an uncanny 0.99 correlation---meaning that over periods of 12 months or more in a growing economy, your money should be in stocks, whether you are 2 or 200 years old.
The funds that dominate the Street don't think like this, however. They are totally focused on the quarter, not next year, in their pursuit of shareholder satisfaction. The perverse tendency of most people involved in funds, whether mutual, pension or annuity, to look to this quarter's performance drives many to hedge their bets and capture bonds when rates increase, liquidating stocks to do so. Banks and insurance companies are particularly adamant about this, as they tend to have the smallest risk profiles and the greatest love for bonds.
The last bunch that got the whammy today were the classic ones that get killed when fears of a bear market erupt---brokerage stocks. Quick & Reilly <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BQR)") else Response.Write("(NYSE: BQR)") end if %> shed $5/8 to $25 3/4, Waterhouse Investors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHO)") else Response.Write("(NYSE: WHO)") end if %> lost $2 to $21 3/4 and Schwab <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %> fell $1 1/4 to $25---on the concern that a protracted bear market would bring their trading revenues down. A bit far-reaching, I know, but the thinking here is that if rate cuts don't come, equities will poop out and margin income will flatten, making equities unattractive places to be. Personally, I would invest in a brokerage because service is great, it is taking market share and it is improving its cost structure. . . but what the heck do I know -- I'm just a Fool.
YET ANOTHER FOOLISH THING: Fools on the Radio!
That's right! David and Tom Gardner are bringing their Foolish outlook to the airwaves this weekend. Tune in to the Monitor Radio's Weekend Edition---stations and times are listed in the Radio page.
Byline: Randy Befumo (MF Templar)