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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
A Tighter Fed?
News that the Federal Reserve has dropped its bias toward interest rate neutrality sent both the stock and bond markets down this morning. Although the Federal Reserve Board Governors' Web page hasn't yet posted the minutes from the March meeting, reports have it that the Federal Open Market Committee (FOMC) has moved from a neutral bias to a tightening bias. According to the Wall Street Journal, some FOMC members are sounding hawkish about the possibility of inflation: "Apparently, Asia has not yet slowed the economy, though there are some evidences of weaknesses," former McKinsey & Co. partner and current Fed Governor Roger W. Ferguson, Jr. said last week. "The important part of that sentence is the 'yet.' We'll have to wait and see. Either Asia will slow the economy to something that is more sustainable, or there may have to be some Fed action that will do that." Pretty open words from a Fed Governor and FOMC member, but then, he was only appointed to the post last November.
In response to the return of thinking that says there's a natural limit to the rate of non-inflationary growth the economy can sustain, financial services stocks sold off pretty hard this morning. Among the harder-hit issues were those companies that are currently involved in mergers. NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> dropped $3 1/8 to $73 3/8 and BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> slid $3 5/8 to $81. First Chicago NBD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCN)") else Response.Write("(NYSE: FCN)") end if %> fell $3 1/4 to $88 1/2 as merger partner BANC ONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> declined $2 1/4 to $56, and Citigroup cohorts Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> lost $7 3/8 to $147 13/16 and Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> dropped $2 9/16 to $60 5/16. Forever the whipping boys when this sort of thing happens, the government-sponsored enterprises were brought down a few notches, with Freddie Mac <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %> falling $1 3/8 to $42 3/4 and Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> getting tossed on its fannie for a $1 1/2 loss to $56 11/16.
With March consumer price inflation below 1 1/2%, down from a subdued level below 2% at the beginning of the year and core CPI inflation (ex. food and energy) at its lowest level since 1966, some economists aren't asking when the tightening will happen but rather where the easing is! With overall inflation down sharply over the last year and short-term interest rates flat, the real interest rate has actually tightened over the last year.
Traders in Chicago are ambivalent on the issue, as the 90-day T-bill contract, which has a better track record than the pundits and economists on forecasting what will happen to short-term interest rates, does not look like it's telegraphing much right now -- though it is nearing the bottom of a year-long channel, meaning it's closer to pricing a tightening than at any time over the last year. The moral of the story here is that you take what the market gives you. The economic signals and the money markets are either pointing to lower inflation or aren't saying anything decisive on the matter, but that does stop equity traders from easing up on their positions. A little downdraft in here might actually provide a refreshing respite from the recent heat in the stock market.
PLC Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PLC)") else Response.Write("(AMEX: PLC)") end if %> jumped $5 7/8 to $18 1/4 after an FDA advisory panel unanimously approved the firm's heart laser system for transmyocardial revascularization for marketing on Friday. The laser basically drills tiny holes in the heart, creating channels that facilitate blood flow. Last July, the same panel rejected the product due to a lack of data.
Brick and boot maker Justin Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JSTN)") else Response.Write("(Nasdaq: JSTN)") end if %> added $1 3/8 to $15 3/4 after receiving a favorable write-up in the latest edition of Barron's. In the article, the company's CEO said he had "no quarrel" with the First Call earnings estimate (by one analyst) of $1.08 per share for fiscal 1998 and $1.21 per share for fiscal 1999.
Phone service provider and forgotten Bell, Cincinnati Bell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSN)") else Response.Write("(NYSE: CSN)") end if %> rang up a $3 1/16 gain to $37 after reporting fiscal Q1 EPS of $0.36 (excluding a $42.6 million acquisition charge), beating the First Call mean estimate by $0.03. Also, the company said it will spin-off its MATRIXX Marketing teleservices and CBIS billing and customer service outsourcing subsidiaries, forming a new company to be called Convergys Corp.
Vitalink Pharmacy Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTK)") else Response.Write("(NYSE: VTK)") end if %> surged $1 13/16 to $21 5/8 after the provider of infusion and other ancillary services agreed to merge with eldercare services provider Genesis Health Ventures <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GHV)") else Response.Write("(NYSE: GHV)") end if %> in a deal valued at about $690 million. Vitalink's shareholders will elect to receive either $22.50 in cash or $22.50 in Genesis convertible preferred stock per share.
Music seller K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> tacked on $2 3/16 to $28 15/16 after direct response TV service provider and infomercial broadcaster TV Media Holdings PTE Ltd. agreed to market the company's K-tel Express online service worldwide.
Managed care provider Oxford Health Plans <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> added $11/16 to $17 1/8 after reporting a Q1 loss of $0.57 per share (including a $16.3 million restructuring charge), which was not quite as bad as the First Call mean estimate of a loss of $0.62 per share. Total revenues increased 24% in the quarter to $1.2 billion, while enrollment in the firm's medical plans swelled 88,000 to 2.096 million.
Bright Horizons <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRHZ)") else Response.Write("(Nasdaq: BRHZ)") end if %>, which runs day-care centers for corporations, rose $1 3/4 to $29 after agreeing to merge with CorporateFamily Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFAM)") else Response.Write("(Nasdaq: CFAM)") end if %>. Under the deal, each Bright Horizon share will be swapped for 1.15022 shares of the new company. Each CorporateFamily share will be exchanged for one share of the new company's stock.
Electronic testing tools manufacturer Fluke Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLK)") else Response.Write("(NYSE: FLK)") end if %> gained $6 11/16 to $29 7/8 after agreeing to merge with environmental controls equipment and tools maker Danaher Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DHR)") else Response.Write("(NYSE: DHR)") end if %> in a stock swap valued at about $625 million. Each Fluke common share will be converted into 0.4524 of a share of Danaher stock, valuing Fluke's stock at $33.39 per share -- a 44% premium to its closing price of $23 3/16 per share on Friday.
Voice messaging and other business telephony services provider Applied Voice Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVTC)") else Response.Write("(Nasdaq: AVTC)") end if %> rose $3 15/16 to $46 15/16 after reporting fiscal Q1 EPS of $0.32 (before charges) on Friday, beating the Street estimate by $0.04.
Yurie Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YURI)") else Response.Write("(Nasdaq: YURI)") end if %> gained $3 1/8 to $34 5/8 after the maker and servicer of asynchronous transfer mode (ATM) access products agreed to merge with Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> for $1 billion in cash, or $35 per share.
Internet companies careened off the information highway this morning after running up for much of the last three weeks. America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> fell $2 7/16 to $72 1/16; Infoseek Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> lost $2 1/16 to $28 15/16; Excite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> dropped $3 1/4 to $57 1/2; Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> slid $4 1/8 to $110 5/8; Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> sank $1 5/16 to $24 3/8; and Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> slipped $3 5/16 to $50 3/16.
Diversified financial services company UICI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UICI)") else Response.Write("(Nasdaq: UICI)") end if %> plunged $4 3/4 to $27 1/4 after announcing Friday that it expects its first quarter earnings will not meet analysts' expectations and will be less than the operating earnings of $0.44 per share reported for Q1 1997. The shortfall is due to lower earnings from its Self Employed Agency division. Operating profits of the company's other business units are "in line with expectations."
PC maker Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> fell $1 5/16 to $27 3/4 after two conflicting reports were issued that cast some doubt about the strength of the PC market. Dataquest reported that the worldwide PC market grew 14%, while International Data Corp. issued a report stating that the industry gained 10%. Compaq, while shipping 55% more units to distributors, still has not seen many of them wind up with end-users. Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> fell $2 11/16 to $73 5/8 and Gateway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %> dropped $1 3/8 to $57 1/8 as well.
Joining the industry coupon war, Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> skidded for $2 1/2 to $39 3/16 after announcing on Friday that it will give coupons worth $500 to $1,000 to owners of Dodge, Chrysler, Plymouth, Jeep, and Eagle vehicles, as well as to owners of selected competitors' vehicles, good toward the purchase of a new 1997, 1998, or 1999 model vehicle.
After a run-up on optimism over its new male impotence drug Viagra, Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> dropped $5 to $113 1/4 this morning. The company has gained 17% over the last two weeks, primarily on the strength of an opening surge in demand for Viagra.
Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> lost $1 11/16 to $49 after it was reported that Singapore Airlines is getting close to purchasing 10 A340-500 jetliners from Boeing competitor Airbus Industrie -- dashing Boeing's hope that it could secure a new customer for its long-range model 777.
PhyCor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYC)") else Response.Write("(Nasdaq: PHYC)") end if %> dropped $1 1/4 to $21 5/8 after Wheat First downgraded its rating on the company to "outperform" from "buy." PhyCor also announced that it is changing its policies regarding amortization of its intangible assets. It is adopting a maximum of 25 years as the useful life for amortization of its intangible assets in place of charging costs to expense through amortization using the straight line method over 30 to 40 years.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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