Wednesday, January 13, 1999
DJIA 9297.29 -177.39 (-1.87%) S&P 500 1225.24 -14.27 (-1.15%) Nasdaq 2303.59 -17.16 (-0.74%) Value Line Idx 924.29 -12.34 (-1.32%) 30-Year Bond 101 19/32 +1 2/32 5.14 Yld

An Investment Opinion
by Warren Gump

Real Volatility

News of a de facto devaluation of the Brazilian real, along with the resignation of Brazilian Central Bank President Gustavo Franco, led to wild swings in worldwide equity markets this morning. European Market Indices fell anywhere from 2%-9%, the Brazilian Bovespa fell up to 10%, and markets here in the U.S. were impacted as well. The Nasdaq composite index fell as much as 5%, while the Dow Jones Industrial Average and Standard and Poor's 500 fell as much as 3% in early morning trading. These declines had moderated at lunchtime, as shown in the Market Midday table.

The trading band on the real was moved to 1.20 to 1.32 reals per dollar, up from a previous range of 1.12 to 1.22 reals. In addition, the government announced that the range would be adjusted every three days in a transition to a "floating currency." Leaders hope this devaluation lowers Brazilian interest rates, which had been forced higher to support the real. While these high rates maintained the currency band, they causing a severe contraction in the Brazilian economy.

Turmoil in Brazil could have a more adverse impact on the U.S. economy than the "Asian contagion" given the significant ties between our economy and that of Latin America. U.S. banks have roughly $74 billion in loans to Latin American countries, about a third of which are directly to Brazil. With a weaker currency, those loans become more challenging to repay. In addition, Brazil is the 15th largest trading partner with the U.S., representing 1.7% of trade. Further disruption to the Brazilian currency and economy (it was already expected to contract 4% this year) will cause an even greater slowdown in U.S. exports.

The historical high returns from equity investing are caused because these investments entail more risk and volatility than other options. You have to expect it. That's why we recommend that you only place money invested for the long term in stocks. Dramatic daily movements (either up or down) are insignificant to "buy-and-hold" investors. Stick to the investment plan you have in place. If you have money automatically invested each month or quarter, dips in the market work to your advantage because you are able to buy more stock at lower prices.

Having problems staying mellow? Quickly let out your steam. Yell, scream, or go for a good exercise workout. Once that energy's released, help out our southern trading partner by going out and buying a Brazilian beer. When you're relaxed, reevaluate your investment strategy. Such a high level of discomfort with normal market movements probably indicates that something's out of synch with your investments and your risk tolerance.


Leading computer chip maker Intel (Nasdaq: INTC) rose $4 1/16 to $139 5/8 after reporting an 18% increase in fourth quarter earnings to $2.06 billion on strong demand from PC makers. Q4 earnings came in at $1.19 a share, up from $0.98 last year and ahead of the First Call analysts' mean estimate of $1.07. For more insight, see the latest Drip Portfolio Report.

Data networking equipment company Ascend Communications (Nasdaq: ASND) moved up $4 7/16 to $79 3/8 after telecom equipment maker Lucent Technologies (NYSE: LU) agreed to buy the company in an all-stock deal valued around $19.3 billion, or $89 per share, based on Lucent's closing price yesterday of $107 7/8. Lucent lost $4 7/16 to $103 7/16 on the news, which was rumored for days. For more details on the deal, see this morning's Breakfast With the Fool.

Drug developer Eli Lilly & Co. (NYSE: LLY) popped up $3 7/8 to $80 3/8 after a U.S. district court in Indiana ruled to reduce the number of issues to be tried in a case challenging two U.S. patents for the company's powerhouse Prozac antidepressant. Barr Laboratories (NYSE: BRL), which is bringing the case against Lilly along with Geneva Pharmaceuticals, lost $2 to $44 9/16 this morning.

Integrated circuits manufacturer Linear Technology Corp. (Nasdaq: LLTC) advanced $4 3/8 to $92 after reporting fiscal Q2 EPS of $0.59, beating last year's $0.55 mark and Wall Street's $0.57 consensus estimate. The company also announced plans for a 2-for-1 stock split effective Feb. 19.

Hamburger chain Wendy's International (NYSE: WEN) sizzled $1 1/4 to $23 1/4 after The Wall Street Journal's "Heard on the Street" column quoted analysts who said the company is operating with shareholders' interests in mind and believe the stock is due for an upturn in light of recent gains at market leader McDonald's (NYSE: MCD).

Technology training and graphics software products developer ViaGrafix Corp. (Nasdaq: VIAX) added $6 1/2 to $12 1/4 this morning after it announced an agreement to market its products through America Online's (NYSE: AOL) online service. ViaGrafix already has its first order after a recently completed market test on AOL.

KeraVision Inc. (Nasdaq: KERA), which is developing a non-laser approach for correcting low to moderate myopia, beamed up $3 13/16 to $15 3/16 after the FDA recommended approval of the company's first product, Intacs, for treatment of nearsightedness. Intacs reshape a cornea by adding material to the eye rather than cutting away tissue.

Waste processing company KTI Inc. (Nasdaq: KTIE) wafted up $1 11/32 to $23 15/32 after non-hazardous waste services company Casella Waste Systems (Nasdaq: CWST) agreed to buy the company in a stock swap valuing KTI at about $25.59 per share, a 15.7% premium on yesterday's closing price.

Healthcare management software developer QuadraMed Corp. (Nasdaq: QMDC) took $1 1/16 to $28 5/8 after it said it won a five-year $5.4 million contract to manage New Jersey's hospital discharge claims data. Adams, Harkness & Hill started coverage of the company with a "strong buy" rating today, according to reports.

Zila Inc. (Nasdaq: ZILA), an international provider of healthcare products for dental/medical professionals, rose $3/16 to $9 13/16 as an FDA panel was set to discuss the company's new drug application (NDA) for OraTest, a rinse for diagnosing malignant mouth lesions, this morning.

Refractive laser technology developer VISX Inc. (Nasdaq: VISX) managed a gain of $6 13/16 to $108 1/4 after pre-announcing Q4 EPS of between $0.71 and $0.73 per share, well ahead of last year's $0.30 mark and beating the market's $0.66 consensus projection. The company said shipments and license fees hit record levels in Q4.


Given the turmoil in Brazil, it was not too surprising to see many stocks with ties to the country taken out and shot this morning. Brazilian bank Unibanco (NYSE: UBB) tumbled $1 11/16 to $10 5/8 and the American depositary shares of the 12 holding companies formed by last year's breakup of telephone monopoly Telebras also dropped. Among the latter group, Telesp Participacoes (NYSE: TSP) slid $2 1/8 to $15 7/16, Telecomunicacoes Brasileiras (NYSE: TBH) sank $4 1/2 to $58 1/8, and Tele Norte Leste Participacoes (NYSE: TNE) slumped $15/16 to $10 3/8.

Several U.S. multinational firms with good-sized business units in Brazil and South America also felt the heat this morning. Xerox (NYSE: XRX) slid $5 7/16 to $112 3/16, Ford Motor Co. (NYSE: F) lost $1 7/8 to $61, DaimlerChrysler (NYSE: DCX) reversed $2 3/4 to $101 1/8, and Gillette (NYSE: G) was nicked $2 to $53.

Among those hardest hit in the financial services sector from the Brazilian fallout, Citigroup (NYSE: C) lost $4 to $51 3/4, Chase Manhattan (NYSE: CMB) dropped $4 to $69 7/8, J.P. Morgan (NYSE: JPM) slid $4 3/4 to $107 1/16, BankAmerica (NYSE: BAC) shed $2 3/4 to $64 3/16, and American Express (NYSE: AXP) trended down $2 15/16 to $99 7/16.

Several Internet-related stocks also skidded this morning. Yahoo! (Nasdaq: YHOO) slid $4 to $398, America Online (NYSE: AOL) dropped $4 5/8 to $149, Amazon.com (Nasdaq: AMZN) slipped $5 1/4 to $158 1/2, and Excite (Nasdaq: XCIT) fell $2 1/8 to $73.

Multimedia wiring systems distributor Anicom Inc. (Nasdaq: ANIC) tanked $1 13/16 to $7 9/16 after warning that its Q4 EPS will come in between $0.08 and $0.10, missing the First Call mean estimate of $0.13. The company blamed the shortfall on expenses related to the sale of its Broadband products group during the quarter.

Books retailer Books-A-Million (Nasdaq: BAMM) was thumped $11/16 to $12 15/16 after saying its December same-store sales rose by a scant 0.4% compared to a year ago. So far during the fiscal fourth quarter, the company's same-store sales are down 1.9% from last year's levels.

Digital wireless communications network operator Nextel Communications (Nadsdaq: NXTL) dropped $1 3/8 to $28 1/16 after Legg Mason lowered its rating to "outperform" from "buy."

Online software retailer Beyond.com (Nasdaq: BYND) was thrown for a $4 1/8 loss to $32 7/8 after reporting a fiscal Q4 loss of $0.53 per share compared to a loss of $0.12 per share last year, which was a bit worse than the $0.47 per share loss expected by analysts surveyed by Zacks. On the bright side, revenues posted a 35% sequential increase during the quarter to $13.1 million.

Online discount broker E*Trade Group (Nasdaq: EGRP) gave back $5 3/16 to $95 3/4 this morning, ending a five-day rally that had boosted the company's share price by a cumulative 87%.

Managed healthcare provider Foundation Health Systems (NYSE: FHS) settled for a $1 1/4 loss to $9 1/4 after Goldman Sachs lowered its rating on the stock to "market outperform" from "trading buy."

Interactive entertainment software developer Acclaim Entertainment (Nasdaq: AKLM) slid $1 11/16 to $10 5/8 despite reporting fiscal Q1 EPS of $0.16, a penny ahead of both last year's results and the First Call mean estimate. The company said it has shipped 1.4 million copies of its Turok 2: Seeds of Evil game since the product was launched last month, nearly eclipsing the entire 1.5 million unit sales total of its predecessor, Turok: Dinosaur Hunter.


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