Monday, December 29, 1997
DJIA: 7787.68 +108.37 (+1.41%) S&P 500: 951.09 +14.63 (+1.56%) Nasdaq: 1529.54 +18.16 (+1.20%) S. Korea 375.15 +23.70 (+6.74%) 30-Year Bond 102 26/32 -9/32 5.92% Yield

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An Investment Opinion by Dale Wettlaufer

BT Investors Happy to See S. Korea Talks

South Korea's currency, the won, gained 7% against the dollar in Asian trading last night, sending up the stocks of money center banks that are gathering in New York today to discuss financing options for that country's large commercial banks. Citicorp (NYSE: CCI) gained $2 1/16 to $124, Chase Manhattan (NYSE: CMB) rose $1 13/16 to $108 1/2, securities firm and bank J.P. Morgan (NYSE: JPM) rose $1 3/4 to $113 3/16, and Bankers Trust (NYSE: BT) turning in the standout performance, rose $2 3/4 to $114 3/8. With $28 billion in debt due by February and $100 billion in non-won-denominated debt due in the coming year (according to Bloomberg News), the decline in South Korea's currency has effectively increased both the cost of carrying all that debt as well as the amount of won South Korean banks have to come up with to satisfy their obligations.

Rolling over debt to preserve the liquidity of a foreign nation has a distinctly familiar feel to it, especially for investors in companies such as Citicorp. In defense of continually rolling over doubtful Latin American debt, Citicorp's legendary Chairman Walter Wriston once said that foreign countries don't go bankrupt. Rolling over their debt can tie up a lot of capital, though. Mexico in particular caused U.S. money center banks a ton of headaches as oil prices in the 1980s collapsed and brought the old peso down, but that country's more recent collapse had a greater affect on trading houses than it did on commercial and retail banks. While Citicorp's earnings didn't feel much of an effect after the bond market blew up in 1994 and Mexico devalued the peso right before the New Year, Bankers Trust did feel quite a pinch in its risk management business as a result of Latin American financial market turbulence. Investors in that company have to ask themselves what sort of value BT presents relative to its business model and the state of things in East Asia.

With Bankers Trust's leverage ratio (a measure of total capital to non-risk-weighted assets) worsening from last year's third quarter, success in talks being conducted today to bolster the liquidity of South Korea's banks takes a little pressure away from any bank exposed to the various risks of roiling East Asian financial markets. That's especially true if BT holds any South Korean sovereign debt. Sovereign debt shows up in the risk capital measurements of banks as being a safe asset, when in truth Wall Street is very nervous about the counter-party risks posed by countries such as South Korea, where problems aren't necessarily transitory in nature but are imbedded in that country's financial structure. If the New York and other money center banks succeed in bringing some relief to South Korea, it will be a relief to investors in companies such as Citicorp and Chase. Those companies don't pose the same risk as BT, though. Trading at 15 times earnings with a low return on equity relative to the risks inherent in the company's trading and risk management lines of business, Bankers Trust shareholders would be doubly relieved.


Auto parts, aerospace equipment, and chemical maker Allied Signal (NYSE: ALD) gained $1 15/16 to $37 3/4 after receiving favorable coverage in the weekend issue of Barron's. In the article it was suggested that the firm could make $3 per share by the year 2000, and that its share price could reach $50 to $52 in the next twelve months.

Nabors Industries (AMEX: NBR) shot $2 1/8 higher to $30 11/16 after the contract driller of oil and gas wells on land and sea was upgraded to a "strong buy" from "buy" at Robert W. Baird.

After successfully launching eight ORBCOMM communications satellites into low-Earth orbit last Tuesday, Orbital Sciences Corp. (Nasdaq: ORBI) gained $1 15/16 to $28 7/8 this morning after the satellite launch company announced that it is ahead of schedule with respect to performance testing of the eight satellites. The company has established contact with seven of the eight satellites in the constellation and claims to be making the adjustments necessary to contact the eighth.

Moyco Technologies (Nasdaq: MOYC) said today that it has terminated talks to sell its chemical mechanical planarization technology "CMP slurries" to the chemical division of Ashland Inc. (NYSE: ASH). The company said it was close to a deal with another chemical company. Moyco was up $1 1/4 to $6 1/4 on the potential that the company is hammering out a more lucrative deal.

Microware Systems Corp. (Nasdaq: MWAR) rose $1 1/4 to $5 7/8 as the company announced that Zenith Electronics Corp. (NYSE: ZE) had selected its software for use in Zenith's high-definition television sets planned for release in 1998.

Fashion retailer Gadzooks (Nasdaq: GADZ) gained $3 7/8 to $23 1/4 after the company announced that sales in November and the first 28 days of December gained 37% over the prior year period.

ONSALE Inc. (Nasdaq: ONSL), an Internet firm that enables interactive online auctions, gained $1 15/16 to $16 1/16 after the company reported selling more than $1 million worth of disk drives in under one month through its online auction. The company is one of the primary distributors for the remaining inventory of bankrupt drive maker Micropolis, a unit of Singapore Technologies.


Holmes Protection Group (Nasdaq: HLMS) lost $1 1/8 to $16 7/8 after the electronic security systems provider announced that it had entered into a merger agreement to be acquired in a "take-under" by Tyco International (NYSE: TYC) for $17.00 per share in cash.

Neoprobe (Nasdaq: NEOP) fell $1 5/16 to $6 9/16 after the company announced that the FDA's Center for Biologics Evaluation and Research could not approve its "Rigscan" cancer-detection system until the company provides "additional information." The medical device maker intends to submit additional clinical and manufacturing information as an amendment to its Biologics License Application (BLA).

Hong Kong-based Asia Satellite Telecommunications (NYSE: SAT) lost $3 13/16 to $16 5/8 today after the Russian launch of its AsiaSat3 satellite failed at the end of last week. Asia Satellite cannot launch a replacement for at least 12-18 months, and the company's growth will hinge on the capacity available through its two existing satellites (already at 90%) and contract price appreciation.


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