Wednesday, February 3, 1999
DJIA            9366.81     +92.69     (+1.00%)
S&P 500         1272.07     +10.08     (+0.80%)
Nasdaq          2493.41     +29.99     (+1.22%)
Russell 2000     423.74      +2.01     (+0.48%)
30-Year Bond   99 30/32      -6/32  5.25 Yield


In what seems to be becoming a two or three month recurrence upon which commodity traders can set their watches, the United Nations requested that the remaining U.S. weapons inspectors leave Iraq today, renewing the threat of yet another military confrontation in the region. This may sound like a broken record, but oil traders still seem to like the tune as it raises hopes that Iraqi oil production will be curtailed, easing the ongoing oil supply glut a bit. Of course, this theory hasn't actually worked in practice yet, but that's beside the point. Oil prices moved up some 3% today anyway, boosting shares of several oil services firms. Among the winners, Schlumberger (NYSE: SLB) rose $2 13/16 to $52 7/16, Halliburton (NYSE: HAL) gained $2 to $30 3/4, Baker Hughes (NYSE: BHI) added $1 5/16 to $18 1/16, BJ Services (NYSE: BJS) tacked on $1 11/16 to $16 11/16, and Cooper Cameron (NYSE: RON) climbed $2 13/16 to $26 1/2.

Enterprise decision support software maker Business Objects (Nasdaq: BOBJY) picked up $8 3/8 to $40 1/8 after reporting Q4 EPS of $0.26, up from $0.10 a year ago and ahead of the Zacks mean estimate of $0.20. The French company also announced a U.S. and Canadian reseller agreement with IBM (NYSE: IBM) and received an upgrade to "strong buy" from "buy" courtesy of BT Alex. Brown. By working in the data mining and warehousing backwaters of the enterprise resource planning (ERP) field, Business Objects has managed to make a name for itself without being washed-up in the recent ERP washout. The company's software has helped medical products distributor Owens & Minor (NYSE: OMI) improve its access to customer pricing and sales data and perfect the just-in-time inventory model used by Nike (NYSE: NKE). Those happy clients have produced happy shareholders, who have watched Business Objects' stock jump 250% since its lows in October.

QUICK TAKES: Victoria's Secret parent Intimate Brands (NYSE: IBI) moved up $4 1/4 to $44 3/16 after saying an 11% increase in January same-store sales will result in fiscal Q4 (ending Jan. 30) earnings of $0.98 per share, $0.03 higher than the Zacks mean estimate. Intimate Brands parent Limited (NYSE: LTD) picked up $2 13/16 to $37 7/16 as well... Electronic hardware and software design tools maker Mentor Graphics (Nasdaq: MENT) added $2 5/8 to $13 9/16 after reporting Q4 EPS of $0.21 (excluding charges), topping the Zacks mean estimate of $0.18. "We are outgrowing the competition and taking market share on many fronts," said President and CEO Walden Rhines... Toymaker Mattel (NYSE: MAT) hopscotched $2 1/16 higher to $27 7/16 after announcing two new PC-enhanced toys designed with Intel (Nasdaq: INTC).

E-commerce application software developer Open Market (Nasdaq: OMKT) gained $3 1/4 to $16 15/16 after signing a revenue-sharing e-commerce agreement with portal Lycos (Nasdaq: LCOS). Under the deal, Lycos will use the company's Transact software to power the Lycos electronic marketplace and implement Open Market's ShopSite software to build Internet storefronts... That big sucking sound heard on Wall Street today is from money going into Perot Systems Corp. (NYSE: PER), the computer services firm headed up by presidential infomercial purchaser extraordinaire Ross Perot. The company continued its rise today, gaining $18 3/8 to $61 7/8, after climbing to $43 1/2 yesterday following its initial public offering at a price of $16 per share... TV network operator CBS Corp. (NYSE: CBS) eyed a $2 gain to $36 5/8 after Bear Stearns started coverage with a "buy" rating.

Genomic-related technologies developer Incyte Pharmaceuticals (Nasdaq: INCY) advanced $5 1/8 to $27 3/4 after saying it has cancelled plans to create a tracking stock for its Incyte Genetics unit, opting to finance the division from "current financial resources" instead. The company expects fiscal 1999 revenues to increase 40% to about $190 million, setting it on a course to return to profitability in the second half of 2000... Analog and digital signal processor (DSP) chipmaker Analog Devices (NYSE: ADI) was boosted $5 7/8 to $34 on news that the company and chip giant Intel (Nasdaq: INTC) have entered a DSP development joint venture... Stent maker Boston Scientific (NYSE: BSX) picked up $1 11/16 to $25 1/2 on word that a corrected version of its recalled Nir on Ranger with Sox stent will be back in the market in the second half of this year...

Digital wireless communications developer QUALCOMM (Nasdaq: QCOM) added $4 to $66 5/8 after saying it will take a $20 million charge in fiscal Q2 related to a plan to reduce its workforce by 700, or about 6%. Merrill Lynch raised its near-term rating to "accumulate" from "neutral"... Hotel real estate investment trust Patriot American Hospitality (NYSE: PAH) gained $11/16 to $5 3/4 after The Wall Street Journal reported that Hilton Hotels Corp. (NYSE: HLT) is in talks to possibly acquire a number of Patriot hotels for as much as $1 billion and make an equity investment in the company of around $350 million... Information technology and systems integration services firm Computer Sciences Corp. (NYSE: CSC) tacked on $4 11/16 to $72 1/4 after being awarded a payroll and benefits information technology consulting contract worth up to $198 million.

Equipment and supplies distributor W.W. Grainger (NYSE: GWW) added $5 3/16 to $43 after reporting Q4 EPS of $0.69, beating the First Call mean estimate by $0.08. BancBoston Robertson Stephens raised its rating to "buy" from "long-term attractive"... Telecommunications software developer Lightbridge Inc. (Nasdaq: LTBG) shined $1 11/16 to $7 1/16 after posting Q4 EPS of $0.09, topping the First Call mean estimate of $0.07... Software developer Micro Focus Group (Nasdaq: MIFGY) picked up $1 1/4 to $10 3/4 after saying its Intersolv unit will provide secure data access technologies to Infoseek's (Nasdaq: SEEK) GO Network portal.

Systems management software designer New Dimension Software (Nasdaq: DDDDF) warped $2 11/16 higher to $56 7/16 after posting Q4 EPS of $0.53, up from $0.27 last year and ahead of the Zacks mean estimate of $0.42... High-end women's clothing designer St. John Knits (NYSE: SJK) stitched up a $1 9/16 gain to $27 9/16 after the company accepted a cash buyout bid from a group led by founder Bob Gray at $30 per share, which was higher than the $28 per share the group initially offered late last year... Hotel operator Starwood Hotels & Resorts (NYSE: HOT) was smokin' today, rising $1 13/16 to $26 5/8 after putting up Q4 pro forma funds from operations of $1.40 per share compared to $0.85 per share a year ago.


Specialty retailer Genesis Direct's (Nasdaq: GEND) first session of trading as its new incarnation, online sporting equipment retailer Proteam.com (Nasdaq: PRTM), wasn't a slam dunk today, as the shares lost $1 17/32 to $7 1/2 in busy trading. The company plans to raise $60 million selling off its non-sports assets -- it agreed to sell its institutional/business-to-business catalogs to School Specialty Inc. (Nasdaq: SCHS) for $23 million -- and use that money, along with $10 million in recently acquired debt financing, to build out its nine sports brands, which include the official catalogs of the NBA, NHL, Nascar and Major League Baseball. "We already have the infrastructure necessary to support the growth we expect in this area," said CEO Warren Struhl, who said the company has the capacity to handle over $500 million in sales, more than twice the $218 million recorded over the trailing 12 months. Also hurting the shares was a fiscal Q3 loss of $0.58 per share, humbling the year-ago $3.63 loss but short of First Call's estimated $0.03 loss. Wall Street currently anticipates a return to profitability -- EPS of $0.03 -- in fiscal 2000, but that three-analyst projection is almost certain to change given today's news.

Networking hardware and software maker Digi International (Nasdaq: DGII) slid $1 5/8 to $8 on last night's news that President and CEO Jerry Dusa will resign effective Feb. 28. While Dusa said his decision to move on is "essentially a life style choice," that life style was certain to be impacted by the fact that the next few months at Digi probably won't be entirely stress-free: the company last week reported disappointing fiscal Q1 EPS results, saying its efforts to shore up operating expenses probably won't show results until the second half of the year. Wall Street expects the company's earnings to underperform year-ago figures in the second and third quarters. Dusa, for his part, plans a return to his consulting and investment roots -- he ran Phase One Partners between 1995 and 1997 before joining Digi. Digi will start a national search for a replacement; Dusa will stay on Digi's board.

QUICK CUTS: Internet networking giant Cisco Systems (Nasdaq: CSCO), which reported fiscal second quarter earnings of $0.36 a share (before charges) compared with last year's $0.29 and a penny ahead First Call's mean estimate after the bell yesterday, slipped $1 1/4 to $111 1/8. Market buzz had investors reacting to disappointment that a hoped-for stock split wasn't in the making. Second banana 3Com Corp. (Nasdaq: COMS), meanwhile, peeled off $6 3/4 to $37 3/8 as investors worried that their company was losing market share to Cisco. For more on the Cisco earnings news, dial up today's Breakfast With the Fool... Chip maker Advanced Micro Devices (NYSE: AMD) lost $3 3/8 to $20 15/16 after Richard Forte resigned as president and CEO of its Vantis subsidiary. The company also reportedly worried investors by canceling two appearances at investor conferences.

Online brokerage E*Trade (Nasdaq: EGRP), offline for more than an hour today reportedly because of software issues, retreated $3 to $55 1/4... Friday IPO Tut Systems (Nasdaq: TUTS), which makes products that speed Internet access over copper telephone lines, ended its blazing start as public company this week with a fall of $10 1/8 to $66 today... Chip metrology tools supplier Veeco Instruments (Nasdaq: VECO) cracked $1 5/16 to $51 13/16 after pricing an offering of about 3.6 million shares at $52 per share... British drug maker Zeneca Group PLC (NYSE: ZEN) faded $1 1/2 to $44 3/8 after Merrill Lynch downgraded the stock's near-term rating to "neutral" from "accumulate," saying the company's planned merger with Sweden's Astra AB (NYSE: A) increases its exposure to patent expirations.

Office furniture supplier Knoll Inc. (NYSE: KNL) lost $1 1/16 to $22 despite reporting Q4 EPS of $0.55, up from both last year's $0.42 and Wall Street's $0.51 projection. The company also extended a share buyback program to total 5 million shares, up from 3 million with 2.1 million already repurchased. Knoll and several competitors fell recently on worries about demand... Real estate investment trust Associated Estates Realty Corp. (NYSE: AEC) moved back $1 1/4 to $10 7/16 after Q4 funds from operations (FFO) came in at $0.44 per share, well off last year's $0.55 mark and short of the market's $0.47 consensus estimate. The company also restated Q3 FFO, lowering the figure to $0.44 per share from $0.46... Disk drive suspension assembly supplier Hutchinson Technology (Nasdaq: HTCH) fell $1 1/4 to $45 1/2 after selling 4.8 million common shares for $45.50 each in a secondary offering.

Computer telephony products maker Notify Technology Corp. (Nasdaq: NTFY), a huge winner yesterday, gave back $3 13/16 to $5 9/16 today. The company's stock ran ahead more than 380% yesterday on news of a new e-mail notification service... Horsham, Pa.-based biotechnology company Cell Pathways (Nasdaq: CLPA) continued its recent slide, losing $1 5/8 to $7 3/8 on the heels of an $18 1/4 loss yesterday driven by the announcement that the company's Phase III clinical trial for Prevatec (an anti-cancer drug) "suggests that the study did not achieve a statistically significant clinical response when compared to placebo"... Coronary stent and medical devices maker Guidant (NYSE: GDT) extended yesterday's losses, bleeding a further $1 3/16 to $53 1/2 after letting $3 11/16 go yesterday on news that competitor Medtronic (NYSE: MDT) won FDA marketing approval for its new Gem II DR dual-chamber implanted defibrillator, putting the screws to Guidant's efforts in the fast-growing segment of the coronary care market.

Earnings Movers

(Nasdaq: EWBX) down $1 7/8 to $48 7/8; Q4 EPS loss of $0.53 per share vs. loss of $0.54 last year; estimate: loss of $0.58

Fundtech (Nasdaq: FNDTF) down $1 3/8 to $24 1/2; Q4 EPS $0.20 vs. $0.07 last year; estimate: $0.18

IDEC Pharmaceuticals (Nasdaq: IDPH) down $2 7/8 to $47; Q4 EPS $0.24 vs. $0.35; estimate: $0.24

Immunex (Nasdaq: IMNX) down $10 to $147; Q4 EPS $0.26 vs. loss of $0.12 last year; estimate: $0.26

MagneTek Inc. (NYSE: MAG) down $1 3/8 to $11 3/8; fiscal Q2 EPS $0.08 vs. $0.28 last year; estimate: $0.11

Metro Information Services (Nasdaq: MISI) down $5 7/16 to $29 9/16; Q4 EPS $0.27 vs. $0.20 last year; estimate: $0.26

Novel Denim Holdings
(Nasdaq: NVLDF) down $5 3/4 to $15 1/4; Q4 EPS $0.50 vs. $0.42 last year; estimate: $0.54

Novoste Corp.
(Nasdaq: NOVT) down $1 5/8 to $24 5/8; Q4 EPS loss of $0.86 vs. loss of $0.50 last year; estimate: loss of $0.74

Tekelec (Nasdaq: TKLC) down $4 11/16 to $15 5/16; Q4 EPS (before benefits) $0.16 vs. $0.15 last year; estimate: $0.19

Tropical Sportswear International (Nasdaq: TSIC) down $4 1/8 to $32; fiscal Q1 EPS $0.30 vs. $0.18 last year; estimate: $0.29

An Investment Opinion
by Louis Corrigan

Margin Speedbumps

A week ago, the Fool's David Gardner received this e-mail from an unhappy online trader. "I am one of thousands of Waterhouse Securities customers trading on margin to take advantage of the bull market," he said. "Last week, I was informed that there was a $50,000 margin call against my account due this past Monday." He continued, "I believe there are many people like me that had margin calls in the tens to hundreds of thousands of dollars and were forced to sell their positions in fast-growing equities to cover their margin call." David's correspondent speculated that this spate of margin calls may have contributed to a market sell-off, particularly in the shares of many Internet-related companies, and that the ensuing recovery in Internet stocks commenced once these calls had been met.

This story is not unusual. In recent weeks, a number of leading online brokers -- including Charles Schwab (NYSE: SCH), E*Trade (Nasdaq: EGRP), Waterhouse, a unit of Toronto Dominion Bank (NYSE: TD), and Ameritrade (Nasdaq: AMTD) -- have changed their margin maintenance requirements, sometimes with little advanced notice. They've done so in order to protect themselves, and their customers, from the volatile trading -- and speculative bubbles -- in Internet-related securities.

Some online brokers, such as Schwab and Waterhouse, have also made additional moves, such as barring or restricting online trading of certain stocks. Schwab, for example, won't allow trades for some initial public offerings to be made through its website. And for certain fast-moving issues, it requires investors to enter a limit order setting a target price or to call a company representative to change a market order. Other firms such as Knight-Tribune (Nasdaq: NITE), Herzog Heine Geduld, and Schwab have removed certain Internet issues from their automatic execution systems.

The incredible volatility in stocks like Broadcast.com (Nasdaq: BCST) and eBay (Nasdaq: EBAY), for example, has simply left market makers exposed to rushes of buy or sell orders that they can't or don't want to handle. Market-makers are supposed to provide liquidity in such one-sided markets, in part by creating more shares temporarily through naked shorting in order to satisfy investor demand. However, that demand has been so intense as to leave firms reluctant to fill that role since they can be quickly scalped for heady losses. Even major brokerage houses such as Bear Stearns have stopped making a market in particular Internet stocks because they don't want to be exposed to such volatility.

As David's correspondent suggested, though, some of these moves by brokerage houses may have contributed to the very volatility they were designed to counteract. In addition, the policy changes have no doubt annoyed some customers who find their online broker is no longer delivering the type of service they've come to expect. On balance, though, this is the free market in action. It may not be pretty, but the firms changing their rules have simply surveyed their risks and determined that it's in their interest to curtail their exposure to these Internet stocks. While the online brokers may alienate some customers, they may also save others from a lot of heartache if (or when) these stocks come crashing down.

Let's consider what's going on here. Investors who trade on margin are basically taking out a loan from their brokers and using the money to buy stock. The Federal Reserve determines what stocks are marginable, and thus which ones can be used as loan collateral. The Fed also determines the minimum equity for an initial margin loan. Though set at a very low 10% during the 1920s, the threshold in recent years has held steady at 50%. This means that to buy $10,000 worth of stock, you must start with at least $5,000 cash on deposit. The New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) both require margin investors to maintain account equity amounting to at least 25% of their initial positions. However, most brokerage firms have a higher minimum maintenance requirement, typically 30% to 35%. If your portfolio loses value and falls below this mark, your broker gives you a margin call telling you to put more money in your account or sell some of your stock.

As the largest discount broker and leading online broker, Schwab's recent moves exemplify the trend. In early December, Schwab boosted its minimum maintenance level from 35% to 50% for a group of Internet issues. Two weeks ago, it pushed the minimum equity threshold to 70% for a group of 23 stocks, including Amazon.com (Nasdaq: AMZN), Books-A-Million (Nasdaq: BAMM), CMG Information (Nasdaq: CMGI), eBay, OnSale (Nasdaq: ONSL), Yahoo! (Nasdaq: YHOO) and Schwab's own competitors, Ameritrade and E*Trade. There are now 52 other issues on the firm's 50% maintenance list, including Broadcast.com (Nasdaq: BCST), @Home (Nasdaq: ATHM), Mindspring (Nasdaq: MSPG) and theglobe.com (Nasdaq: TGLO).

While E*Trade has boosted its margin maintenance requirements well above the normal 35% level to 40% to 60% on several dozen stocks, it's actually made over a dozen stocks totally unmarginable. The number two online broker now requires investors to put up 100% cash to buy or keep issues like K-tel (Nasdaq: KTEL), uBid (Nasdaq: UBID), and Xoom.com (Nasdaq: XMCM). Meanwhile, Waterhouse has its own slate of 100% margin maintenance stocks, and Fidelity reportedly has some 50 Internet stocks on a list requiring 80% equity.

These higher margin standards may crimp the style of some online investors who've used hefty margin borrowing to leverage their gains in Internet stocks. Still, the brokerage firms have a perfect right to raise their standards for making loans. After all, it's their money, and they want to make sure they get it back. (If you own stock in any of these brokerage firms, these latest moves likely seem pretty smart.) These firms are simply looking at the stock being offered as collateral for the loans and making their own judgments regarding what they think these shares are really worth. Like pawn brokers, brokerage firms don't have any obligation to loan money on what they consider poor quality goods, or stuff that glitters but just ain't gold.

Moreover, investors should prefer to see speculation in the marketplace addressed through stiffer margin requirements and other reasonable speedbumps to trading rather than through something as truly draconian and destabilizing as actual trading halts. Since December, a subcommittee of the NASD, which runs the Nasdaq market, had been considering the possibility of temporarily shutting down trading in especially volatile issues. In theory, such halts would give investors a chance to take a deep breath and think before they traded again. Yet, the lesson learned from the New York Stock Exchange's circuit breakers during the market's meltdown in 1997 is that volatility-related suspensions of trading only exacerbate existing problems. Anxious investors playing a game of musical chairs may act rashly to get a seat before the music stops. Luckily, the NASD committee voted down this proposal according to a story in today's Wall Street Journal.

The more basic, issue, though is that nobody should be using more than a little margin (say 10% of your equity) when investing. Margin loans can boost your overall returns if your stocks rise in value, but leverage naturally works both ways. Talk to the geniuses at Long-Term Capital Management. You can lose money a lot faster if you've taken out fat margin loans to pay for your stock portfolio and things go wrong. And sooner or later, things do go wrong.


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