Monday, March 29, 1999
DJIA           10006.78   +184.54     (+1.88%)
S&P 500         1310.17    +27.37     (+2.13%)
Nasdaq          2492.84    +73.67     (+3.05%)
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30-Year Bond   94 12/32    -21/32  5.64 Yield


Internet retailing king Amazon.com (Nasdaq: AMZN) gained $10 9/16 to $149 5/8 today after setting the stage for what could be the one of the most interesting cyber battles over the next year or so by announcing that it is going to start an online auction service to compete with top-dog Internet auctioneer eBay (Nasdaq: EBAY). eBay was bid down $6 23/32 to $147 25/32 on the news. Watching the evolution of this auction battle should be helpful in determining characteristics that are integral to success on the Internet, especially the importance of the total eyeballs and brand name factors to a business's ultimate success. As Warren Gump (TMF Gump) noted in today's Fool Plate Special, any investor interested in the Internet space should closely watch this pending battle.

Information technology infrastructure management software firm PLATINUM Technology (Nasdaq: PLAT) rocketed $14 3/16 to $24 1/16 after agreeing to be acquired by enterprise software firm Computer Associates (NYSE: CA) for $29.25 per share in cash -- nearly three times the company's closing price of $9 7/8 on Friday. The purchase price is roughly where PLATINUM's shares were trading a year ago before revenue slowdowns and earnings warnings prompted questions regarding the company's direction. Computer Associates rose $3 9/16 to $37 1/2 on the news, as the deal is a change for the acquisition-hungry company, which has been gobbling up low-margin services firms recently in an effort to offer end-to-end solutions to its clients. PLATINUM, which derives about 55% of its revenues from higher-margin software sales, is expected to add about $0.25 to Computer Associates' per share earnings in the first year and boost operating cash flow by $450 million.

QUICK TAKES: Telecommunications equipment maker Lucent Technologies (NYSE: LU) rang up $7 7/8 to $109 15/16 after signing a $1 billion contract with former parent AT&T (NYSE: T) to supply equipment and services to AT&T's third generation (3G) DigitalPCS time division multiple access-based (TDMA) wireless network... Commercial and residential lighting products maker Juno Lighting (Nasdaq: JUNO) shone $2 1/4 higher to $22 3/4 after agreeing to a buyout offer from privately held investment firm Fremont Partners, which will purchase 87.1% of the company's outstanding shares at $25 per share in cash... Integrated oil and gas firm Atlantic Richfield (NYSE: ARC) gained $8 11/16 to $74 1/16 after confirming that it is in talks with BP Amoco (NYSE: BPA) about a "possible combination transaction." BP Amoco rose $4 9/16 to $105 on the news, which was examined in greater detail in this morning's Breakfast With the Fool.

Railroads and mutual funds operator Kansas City Southern Industries (NYSE: KSU) picked up $2 11/16 to $56 3/8 on news that it will replace AMP Inc. (NYSE: AMP) on the Standard & Poor's 500 Index. Residential carpet and rugs maker Mohawk Industries (NYSE: MHK), which will replace Kansas City Southern on the S&P MidCap 400 Index, rose $1 3/8 to $27 3/8... Computer network directory and messaging products company Banyan Systems (Nasdaq: BNYN) jumped $1 5/8 to $13 1/4 after fiber optic network operator Qwest Communications (Nasdaq: QWST) said it will jointly market a suite of Internet-based communications services to Banyan's Switchboard online white and yellow pages directory... Telecommunications services company McLeodUSA Inc. (Nasdaq: MCLD) moved up $2 7/8 to $41 7/8 after Morgan Stanley Dean Witter raised its rating to "strong buy" from "outperform."

Online training services provider Computer Literacy (Nasdaq: CMPL) added $7 1/2 to $28 1/4 after announcing it will change its name to Fatbrain.com as it expands beyond its traditional e-commerce base of providing technical training tools and into offering professional tools for many industries... British chemical giant Imperial Chemical Industries (NYSE: ICI) advanced $2 1/8 to $36 after saying it is in discussions with privately held U.S. chemicals firm Huntsman Corp. and others concerning the sale of some of its low-margin operations in an effort to focus on its higher-margin specialty chemicals business... Baker Hughes (NYSE: BHI) gained $1 1/2 to $25 5/16 and Halliburton (NYSE: HAL) tacked on $3 1/16 to $41 3/16 after Morgan Stanley Dean Witter raised its opinions of both oil services firms to "strong buy" from "outperform."

Concentrix Network Corp. (Nasdaq: CNCX) advanced $13 5/16 to $80 5/16 after the provider of Internet protocol and Web hosting services announced a two-for-one stock split... Industrial gas company Praxair (NYSE: PX) gained $2 1/16 to $36 9/16 after announcing that steel mills in Italy and Spain have licensed the firm's CoJet oxygen-based steel making technology. Salomon Smith Barney upgraded the company to "buy" from "outperform"... PC and computing products retailer CompUSA (NYSE: CPU) jumped $1 9/16 to $7 7/16 after announcing a new "online technology superstore" at www.compusanet.com... Laser vision correction systems designer VISX Inc. (Nasdaq: VISX) climbed $6 1/2 to $101 3/4 after BancBoston Robertson Stephens raised its fiscal 1999 EPS estimate for the firm to $2.25 from $2.10 and its 2000 estimate to $3.00 from $2.70.

Critical Path (Nasdaq: CPTH), which provides e-mail hosting services to Internet service providers, Web portals, and corporations, surged $41 7/8 to $65 7/8, or 174.5%, in its first day of trading after selling 4.5 million shares in an initial public offering at a price of $24 per share... Drug maker Bristol-Myers Squibb (NYSE: BMY) gained $2 11/16 to $62 3/16 following newspaper reports in the U.K. that it has held merger talks with Britain's Glaxo Wellcome (NYSE: GLX). The talks apparently stalled before an agreement could be reached, however... Equipment rental company Neff Corp. (NYSE: NFF) moved up $1 1/4 to $7 after saying it has hired Donaldson, Lufkin & Jenrette to consider strategic alternatives, including a possible sale of the company.


Investors weren't encouraged by the flight of CFO Roy Grant from global satellite and paging company Iridium World Communications (Nasdaq: IRID) and showed it by sending the shares down $1 11/16 to $19 15/16 today. Grant's decision to step down April 16 -- the company cited "personal reasons" -- comes at a heck of a time, with Iridium also announcing a 60-day waiver (to May 31) of several key covenants of its $800 million credit facility. Iridium has been having trouble rolling out its global service, apparently because of distribution and staffing problems, as noted in a statement earlier this month in which the company warned that the credit pact might be under fire. It now wants to renegotiate the terms of the credit pact. That, in some form, was probably what led to the CFO's decision. Some suggested that Iridium's banks, concerned about their ability to renegotiate effectively with Grant, might have given him a little nudge, but others believed the CFO, who brought in billions of dollars of financing for Iridium, simply decided he had had enough fun with lenders. The company expects to have a replacement for Grant by the time he leaves.

The recent selloff of drugstore operator Rite Aid Corp.'s (NYSE: RAD) shares continued today, sliding $1/4 to $25 11/16 after the company reported fiscal Q4 earnings of $0.28 -- missing the $0.30-$0.32 range the company said to expect when it issued a warning earlier this month and the $0.31 First Call consensus estimate -- as the chain's growth plan hiccuped. Since the warning, the shares are down more than 30%. Still, investors, particularly those who've noticed the company's approximately 400% share price appreciation between 1994 and the end of 1998, might have reason to start coming back to Rite Aid now that the company's near-term earnings picture appears to be clearing up. CEO Martin Glass had some upbeat things to say in the company's earnings statement -- including the opening of a new replacement distribution center in Maryland and positive trends for same-store sales and operating costs -- but he was trumped by a Rite Aid spokesman, who told Reuters the company expects full-year fiscal 2000 EPS of between $1.53 and $1.63. First Call's consensus is currently $1.53 for the year, with $1.63 near the high end of the range.

QUICK CUTS: Network security detection software maker ISS Group (Nasdaq: ISSX) lost $3 to $80 1/4 after this week's issue of Barron's included a report on the company suggesting that much of the company's growth in recent years "owes more to optimism about ISS's potential than to any financial fundamentals"... Controlled-release drug maker Alza Corp. (NYSE: AZA) gave up $5 1/8 to $40 3/4 after Morgan Stanley Dean Witter lowered its rating on the company to "outperform" from "strong buy"... Los Angeles-based bank holding company GBC Bancorp (Nasdaq: GBCB) dropped $4 7/16 to $15 11/16 after the company said a borrower with a $31 million outstanding balance filed for bankruptcy.

Online car buying website operator autobytel.com (Nasdaq: ABTL) slowed $4 7/8 to $35 3/8 after speeding to a $17 1/4 gain on Friday, its first day of trading following its IPO of 4.5 million shares at $23 each. Competitor Autoweb.com (Nasdaq: AWEB), meanwhile, lost $3 to $29 3/4. Autoweb.com signed a three-year exclusive automotive financing deal with north-of-the-border bank Canada Trust... Financial market data provider PC Quote (AMEX: PQT), which advanced Friday following reports that it was in discussions with Time Warner (NYSE: TWX) unit CNNfn about an online joint venture, dropped $13/16 to $9 3/16 today... Biotechnology firm Emisphere Technologies (Nasdaq: EMIS), downgraded to "buy" from "strong buy" by U.S. Bancorp Piper Jaffray, lost $1 1/16 to $8 7/8.

Genesis Health Ventures (NYSE: GHV), which provides healthcare services to the elderly, lost $15/16 to $5 5/8 today. The stock added $1 5/8 Friday. The company told the NYSE it had no comment on the move... Less invasive medical devices maker Perclose Inc. (Nasdaq: PERC), downgraded by two analysts reportedly amid waning takeover speculation, shed $7 to $34 1/8... Circuit maker Cypress Semiconductor (NYSE: CY), which filed to sell 7.6 million shares of company stock, about a 9% boost in the amount outstanding, faded $7/8 to $8 1/16 today... Internet transaction payment system company CustomTracks Corp. (Nasdaq: CUST), which Friday night reported Q4 EPS of $1.60, lost $1 1/8 to $13 13/16. Today, Joseph Charles & Associates suspended its price target on the company pending evaluation of the system.

Audio books direct marketer Audio Book Club (AMEX: KLB) gave back $7/8 to $11 3/8 after reporting a Q4 loss of $0.48 per share, down from an $0.44 loss last year. The company agreed to buy Doubleday Direct's Audiobooks Direct business for an undisclosed sum... Global power company AES Corp. (NYSE: AES), which agreed to buy two power stations in Australia for $350 million Australian dollars, gave up $2 5/16 to $37 3/16 today... Online retailer CyberShop (Nasdaq: CYSP) moved back $1 1/8 to $12 after booking a $2 1/4 gain Friday on news of a new online brand-name apparel and products auction site at http://auctions.cybershop.com.

An Investment Opinion
by Alex Schay

Oracles and Auctioneers

Dow 10,000 has the prognosticators out in force again. It would have been great if the editors at Dow Jones had just decided to fix the Dow's odometer at 4 digits. In which case, after 9,999 it would have been reset to zero. Ahhh -- no messy divisor to deal with and a return to the "purity" of the original index. The new index could be called Dow II -- Back to the Future. In 1884 Charles Dow simply divided the sum of all the prices of the companies in his nascent index by the 11 firms that were in it (the Dow was first computed using the Dow Divisor in 1928). The new millenium scenario outlined above begs the question, "Would we hold the present average in such high regard if it were simply the average price of its current thirty members?"

Silly question, granted, but it lays bare the roots of the now enormous oak we call the Dow Jones Industrial Average. Nightly, every media organization in the nation feels compelled to "report" about the day's market activity, and the accepted token vehicle for this assessment is the Dow. This and most other reporting on equities does a great disservice to the public in portraying the market as a hyperactive race of upticks and downticks -- disconnected to any reality that we might be familiar with. (Although most TV viewers are returning home from a hard day at work for some of those blips.)

Anyway, tonight's column was not meant to be a Dow diatribe, but rather a look at market commentary in general. Watching a whole host of Dow "oracles" parading across financial news screens this morning had me scrambling to find a disembodied chapter from Victor Niederhoffer's semi-autobiography The Education of a Speculator. In my photocopied version of Chapter 3, entitled "Delphic Oracles and Science," Niederhoffer draws some parallels between the Delphic responses of the ancient world and the obfuscations of modern market commentary.

Overall, Niederhoffer notes that for thousands of years scholars have been attempting to uncover the secrets of the Oracle. What accounted for its purported accuracy and tremendous following among the Hellenes of the ancient world (such that after 500 B.C. most Hellenes placed the Oracle's foundation "in the earliest days of the world")? Niederhoffer presents the conclusions of Joseph Faltenras, a scholar of Greek life who conducted over 60 years of research on the subject. Faltenras classified all of the verified historical answers of the Oracle into categories. Here are the results: commands, 30%; statements, 40%; prohibitions, 25%; nonpredicitve future statements, 03%; and finally, clear predictions, 02%.

It would seem that the wisdom of the Oracle really rested on its ability to keep its mouth shut -- or at least not fill it with a mythical foot. Actual predictions were rare, and most of the rest of the statements were difficult to falsify. Niederhoffer provides some examples with their modern day financial market analogs (from actual media statements):

Typical Delphic Responses

Command: Where the old men have long taken baths, and where unwed maidens dance in chorus to flute accompaniment, in the halls of the womanish man, worship Hera.

Statement: The gods forgive all uncontrollable acts [said to a priest who got drunk and had intercourse with a woman].

Prohibition: Restrain yourself, Roman, and let justice endure, lest Pallas bring a mightier war upon you and empty your marketplace and you return home with loss of much wealth.

Nonpredictive future statement: If he [Kallistratos of Athens, who was fleeing a death sentence] goes to Athens, he will obtain the laws. [He went and was executed.]

Clear predictions: Honorius will have a glorious reign.

Modern Market Equivalents

Command: Reduce your investment in bonds by 5% of your portfolio and increase by 5% of your capital your present investment in precious metals stocks.

Statement: Volume is very bullish. The stock market rises on rising volume.

Prohibition: It is so far from its 5-day moving average (29) and its 200-day (18) that it's just too risky for my taste.

Nonpredictive future statement: We bough Fleming at 24. Fleming fell on meaningless news that the company may have to pay $100-$200 million in compensatory damages for breach of contract. The Fleming CEO called the ruling "absurd" and has filed an appeal.

Clear Prediction: Given ideal upside targets and these support levels, the Dow should fall at least 91.5, but no more than 98.3, from its high (of 3000).

In other news today, Amazon.com (Nasdaq: AMZN) shot up $10 9/16 to $149 5/8 after its effusive press release announcing the start of an online auction business. This announcement raises some interesting questions about barriers to entry in the online world. Most of the work on the subject thus far has failed to consider the ability of current online operators to leverage their business into other online segments.

Consider two competitors to eBay (Nasdaq: EBAY). Yahoo! and Excite's Classifieds 2000 both have a substantial base of users but so far have gone nowhere in their attempts to mount a challenge to the premier person to person auctioneer. Both competitors offer free listings for users. In both instances, the firms' business models are natural extensions of their strategy to grow their base of users through the provision of unique services. Neither has grown at anywhere near the rate of eBay.

This outcome is not only due to network effects at eBay -- where the value of the network grows exponentially as the number of members grows arithmetically (check out "Exploring Barriers to Entry for Internet Companies" at capatcolumbia.com) -- and switching costs for sellers increase as well. Consider the bottom line for success in the online auction business: (1) the ability of sellers to get the maximum possible price for an item, and (2) the ability of buyers to find what they're looking for. Auction buyers will have no problem jumping onto multiple networks to check for items -- but sellers need to make a basic decision. Where are they going to consistently get the most eyeballs, and hence the most active bidding environment for their goods (the highest selling prices)? At sites with lots of users and lots of transaction volume.

There's nothing spontaneous about any of this -- Amazon will not be able to convert all of its registrants into auction participants right from the outset. The chief problem initially is attracting the sellers, and that's why Amazon is engaging about 117 businesses that will run auctions on its site. (eBay has many "professional" sellers on its site, essentially using eBay as their storefront.) In my humble opinion, the auction move by Amazon is not the lay-up that the market is pricing in today. Yes, Amazon has very capable management, but there is some simple "Internet physics" that can't be blithely tossed aside. This topic probably deserves an entire column though -- so look for it in future installments of the Fool on the Hill.


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