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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Global Market Decline Revisited
World equity markets are in a slump. Tokyo's Nikkei 225 index fell 1.40% largely on lack of confidence in a turnaround and the yen falling to an eight-year low against the dollar. Hong Kong equities nose-dived 3.62% to a five-year low, and German stocks are off 3.40%. Russia's main stock market index, the RTS, was down 11.01 points, or 9.11% -- slightly better since the end of a trading halt. And what of the usual problematic Asian suspects like Indonesia, Malaysia, South Korea, Thailand, and the Philippines? Well, in that order, the Jakarta Composite is off 3.35%, the Kuala Lumpur Composite is down 5.26%, the Korean Composite was cut a slight 0.22%, the Thai Stock Exchange was clipped 1.75%, and the Philippines Composite was "Marcosed" 3.82%.
Buying pushed the yield on the 30-year bond to a historic low. The above documented drop in Asian markets, plummeting confidence in Japan's economy, and a major strengthening of the dollar to new eight-year highs against the Japanese yen prompted the latest flight to the "safe haven" of U.S. Treasuries. Is the situation in Asia getting worse? Let's just say if anybody were to go broke because of problems in East Asia, it would be Japanese banks -- and that's probably not going to happen considering the following: The "problem" countries in East Asia represent less than 4% of global international bank lending, and still only account for 6% of Japanese bank lending. If 30% of all the Japanese loans to Thailand and 15% of all the other loans to East Asian nations failed, the net effect would be a 1% drop in Japanese bank loan book (according to David Roche of Independent Strategy). What's the bottom line for the U.S.? Well, East Asian capital market crises generally result in higher risk premiums, higher interest rates, lower economic growth, and lower profit growth.
Yes, nothing new here, except the fact that U.S. growth in corporate profits continues to be incrementally lowered by the major institutions as a result of continued earnings impacts from Asia. Merrill Lynch, for instance, began the year with a top-down forecast of a 3% gain in S&P 500 operating earnings. In the second quarter, S&P 500 operating EPS was up just 2% from a year ago. Merrill recently lowered its top-down earnings estimates for 1998 by $1. This would bring its figure for S&P 500 operating earnings up just 1% to $45 this year, as cyclical sectors continue to get squashed. However, the 1999 estimate is unrevised at $48.50, implying a pickup in momentum to around 8% next year. Merrill believes that crummy growth will eventually lead to the Fed easing up on monetary policy. Now, predictions abound, but what is certain is that price changes track with business results. Investors that continue to focus on the business risk specifically associated with their companies will continue to do well in the long term.
Chicago-based oil, natural gas, and chemicals company Amoco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AN)") else Response.Write("(NYSE: AN)") end if %> jumped $7 to $48 after agreeing to merge with British Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BP)") else Response.Write("(NYSE: BP)") end if %> in a stock swap valued at about $48 billion, or $50 per Amoco share. British Petroleum added $4 1/8 to $80 1/8. The combined company, which will be called BP Amoco PLC, will be 60% owned by BP shareholders. Amoco shareholders will control the remaining stake.
Rambus <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RMBS)") else Response.Write("(Nasdaq: RMBS)") end if %> popped up $6 3/16 to $60 1/2 after South Korea's Samsung Electronics Co. said it has completed development of Rambus's 64-megabit in line memory module and has shipped samples of the device to Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> and box makers Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> and Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>. Samsung forecasts that the new module will eventually grab at least 50% of the market for dynamic random access memory (DRAM) chips, sending DRAM chip maker Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> down $1 11/16 to $31 7/16.
Paine Webber Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWJ)") else Response.Write("(NYSE: PWJ)") end if %> gained $2 3/8 to $47 3/8 after a German newspaper reported that Dresdner Bank has been discussing the possibility of acquiring the brokerage firm with PaineWebber executives for a few weeks.
Contract oil driller Cliffs Drilling Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDG)") else Response.Write("(NYSE: CDG)") end if %> moved up $1 1/8 to $20 1/2 after agreeing to merge with offshore drilling rig operator R&B Falcon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLC)") else Response.Write("(NYSE: FLC)") end if %>. Under the deal, each Cliffs share will be exchanged for 1.7 shares of R&B stock. R&B Falcon fell $1 9/16 to $13 3/4.
Positron Fiber Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PFSCF)") else Response.Write("(Nasdaq: PFSCF)") end if %>, a Canadian designer of advanced broadband network access systems, moved up $1 9/16 to $1 15/16 after agreeing to be acquired by RELTEC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RLT)") else Response.Write("(NYSE: RLT)") end if %> for $13.625 per share in cash. RELTEC expects the deal will be slightly dilutive to its fiscal Q4 earnings per share but will be accretive in fiscal 1999.
Online advertising and marketing software firm NetGravity <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETG)") else Response.Write("(Nasdaq: NETG)") end if %> rose $3 1/8 to $19 7/16 after forming a co-marketing, service, and technology strategic relationship with PC and computing products maker IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>.
If it's Tuesday, it must be Ohio. Signal Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SGNL)") else Response.Write("(Nasdaq: SGNL)") end if %> rose $4 1/16 to $32 1/16 this morning after agreeing to merge with fellow Buckeye State bank FirstMerit Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FMER)") else Response.Write("(Nasdaq: FMER)") end if %> in a $470 million stock swap. The purchase price values Signal at $37.21 per share -- a 33% premium to its closing price of $28 per share yesterday.
Heart arrhythmia treatment device maker InControl <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INCL)") else Response.Write("(Nasdaq: INCL)") end if %> picked up $11/32 to $5 5/8 after agreeing to a $6 per share cash buyout bid from pacemaker and medical device developer Guidant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDT)") else Response.Write("(NYSE: GDT)") end if %>. Guidant said it will take a $90 million one-time charge related to the deal.
Children's clothing maker OshKosh B'Gosh <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GOSHA)") else Response.Write("(Nasdaq: GOSHA)") end if %> advanced $1 to $41 after setting a two-for-one stock split. The company also increased its quarterly Class A share dividend 42% to $0.10 per share and announced a plan to buy back up to $60 million of its Class A shares over the next two years.
Swedish appliance maker Electrolux AB <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELUXY)") else Response.Write("(Nasdaq: ELUXY)") end if %> rose $1 5/16 to $31 15/16 after reporting profits of $154 million in its fiscal second quarter, thanks to a pickup in demand for its products in Europe. A year ago, the company reported a Q2 loss due to charges related to a 10% reduction in its workforce.
Multifamily, retail, and office buildings real estate investment trust (REIT) Colonial Properties Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLP)") else Response.Write("(NYSE: CLP)") end if %> tacked on $1 5/16 to $26 9/16 after Wheat First Union reiterated its "buy" rating on the stock.
Pharmaceutical contract research services and clinical trials management firm Parexel International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRXL)") else Response.Write("(Nasdaq: PRXL)") end if %> climbed $3 to $34 3/8 after reporting fiscal Q4 EPS of $0.22 versus $0.17 a year ago, which was in line with the Street's mean estimate. The company said orders increased 41% sequentially to $110 million during the quarter.
Major technology and banking stocks led the U.S. markets lower following sharp declines in Asian and European markets and a further drop in the Japanese yen against the U.S. dollar as Japan said that its recession is deepening. Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> fell $2 3/16 to $84 7/16, Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> lost $3 15/16 to $106 5/16, IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> dropped $3 1/2 to $126 3/8, and Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> shed $1 15/16 to $49 5/16. In the banking arena, Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> tanked $8 to $144 1/2 as merger partner Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> was cut $3 to $58 9/16, NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> sank $3 3/16 to $70 3/4 while its merger partner BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> pulled back $3 1/4 to $80 1/16, Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> lost $2 7/16 to $60 7/16, and J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> sold off $3 13/16 to $116 3/8.
Internet portal company Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> slid $3 7/8 to $64 1/16 after announcing it will acquire directory and email services company WhoWhere? Inc. for $133 million in stock. Lycos' cohorts also pulled back with the market this morning: Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> fell $2 9/16 to $91 7/16; Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> was down $1 1/2 to $44 1/4; Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> dropped $1 3/8 to $29 13/16; America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> sank $5 3/4 to $107; and CNET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> shed $1 3/8 to $44 7/8.
Aerospace and aircraft company Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> fell $1 5/8 to $37 5/8 after The Wall Street Journal reported that the U.S. State Department suspended the company's license to launch commercial satellites as part of a project known as Sea-Launch for security reasons. Boeing spokesman Dick Dalton said that resolving the issue could cause another delay in the $500 million project.
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> lost $1 11/16 to $34 1/8 after Morgan Stanley Dean Witter cut its earnings estimates for the beverage and snack company on account of slower growth in the company's Frito-Lay business. Morgan Stanley lowered its 1998 EPS estimate to $1.31 from $1.34 and 1999 estimate to $1.40 from $1.47, and reduced its price target to $42 from $50. Pepsi's nemesis Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> dipped $1 11/16 to $78 7/16.
Managed care provider United HealthCare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> was crippled for another $3 loss to $30 3/8 after yesterday calling off a proposed merger with Humana <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> as United's stock price has fallen in the wake of its disclosure of a $900 million Q2 charge last week. Humana lost $1 5/16 to $16 5/8.
Prepaid telecommunications services company SmarTalk TeleServices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTK)") else Response.Write("(Nasdaq: SMTK)") end if %> plummeted $8 13/16 to $7 13/16 after announcing it is postponing the release of its second quarter results as it resolves "potentially significant issues with the Company's accounting treatment for acquisitions that occurred during 1997 and certain other items relating to 1997," which could impact anticipated Q2, year-end, and prior quarterly results.
Mutual funds invested in Russia pulled back this morning after the Russian Trading System Index dropped 12% in afternoon trading there today following a 9% slide on Monday. Templeton Russia Fund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRF)") else Response.Write("(NYSE: TRF)") end if %> lost $1 15/16 to $16 1/2, while the Morgan Stanley Russia & New Europe Fund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RNE)") else Response.Write("(NYSE: RNE)") end if %> shed $1 1/8 to $13 1/2.
1-800 Contacts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTAC)") else Response.Write("(Nasdaq: CTAC)") end if %> plunged $2 15/16 to $5 7/16 after the direct seller of replacement contact lenses reported a Q2 loss of $0.03 a share compared with pro forma earnings of $0.04 in the year-earlier period, primarily due to higher advertising costs including new TV ads. Analysts had expected Q2 EPS of $0.06.
Personal communications services company Omnipoint Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OMPT)") else Response.Write("(Nasdaq: OMPT)") end if %> sank $2 3/32 to $16 21/32 after reporting a Q2 loss of $3.17 a share, wider than last year's loss of $1.33 and analysts' expectations of a $2.52 loss. To listen to a replay of the company's conference call held yesterday, dial (888) 562-3875.
Network integrator Pomeroy Computer Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMRY)") else Response.Write("(Nasdaq: PMRY)") end if %> dropped $3 1/2 to $20 3/4 after reporting Q2 EPS of $0.42, up from $0.34 last year and in line with estimates.
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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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