Tuesday, February 23, 1999
DJIA 9573.47 +20.79 (+0.22%) S&P 500 1276.28 +4.14 (+0.33%) Nasdaq 2383.74 +41.73 (+1.78%) Russell 2000 399.93 +2.11 (+0.53%) 30-Year Bond 97 26/32 -20/32 5.40 Yield

An Investment Opinion
by Alex Schay

Prerequisite for Greenspan's Job -- Caution

Mr. Greenspan was back at it this morning, giving the first part of his testimony before the Senate Committee on Banking, Housing, and Urban Affairs required by the Humphrey-Hawkins Full Employment and Balanced Growth Act. In terms of economic data that have the biggest impact on the prices of financial assets, the semiannual report on monetary policy figures rather prominently -- despite its omission from most studies on the subject. Within the report to Congress, the Federal Reserve reveals its latest economic assumptions as reflected in its predictions for various economic indicators:

1999 Federal Reserve

                  Current  Previous (7/98)
Real GDP 2.5-3.0% 2.0-2.5%
(chain weighted)
Nominal GDP 4.0-4.5% 4.25-5.0%
CPI 2.0-2.5% 2.0-2.5%
Unemployment 4.25-4.5% 4.5-4.75%

Although focusing on business-specific risk is by far the most fruitful endeavor for individual investors, understanding market indicators also helps investors gain insight into any volatility that might wind up providing an opening for some stock purchases beneath intrinsic value. Today's headlines will undoubtably report on what has become Greenspan's standard fare, "Equity prices are high enough to raise questions about whether shares are overvalued," and "after eight years of economic expansion, the economy appears stretched in a number of dimensions, implying considerable upside and downside risks to the economic outlook." Greenspan again sounded his inflationary fear hypothesis with the current unemployment rate at a record low of 4.3%: "Should labor market conditions continue to tighten, there has to be some point at which the rise in nominal wages starts increasingly outpacing the gains in labor productivity, and prices inevitably will begin to accelerate."

Most commentators will probably shrug aside the testimony as the "same old slowdown story" seen in previous reports. In fact, the causal factors for the slowdown in capital spending and consumption that Greenspan expects are the same ones that were in place last year (even with 75 basis points in rate cuts, low mortgage rates, and signs of some recovery overseas). While forecasting economic conditions is rather fruitless for individual investors, understanding the impacts of the three economic indicators that really affect asset prices -- Employment Report, Advance GDP, and Retail Sales -- can be very useful. Again, all with an eye toward looking past the volatility and buying firms at discounts to intrinsic value.


Online services giant America Online (NYSE: AOL) moved up $3 5/8 to $90 1/8 following reports that Internet metering company Media Metrix named aol.com as the most popular destination on the Web for U.S. surfers in January. Yahoo!'s (Nasdaq: YHOO) start page was number two -- its shares rose $10 5/8 to $156 3/8 this morning. A study conducted by International Data Corp. said Yahoo!'s users were the Web's most loyal.

News Corp.'s
(NYSE: NWS) 40%-owned British Sky Broadcasting (NYSE: BSY) improved $1 1/8 to $52 following reports in The Wall Street Journal that the company is in preliminary talks with France's Canal Plus SA about a merger that could create the largest TV superpower in Europe. The deal would be accounted for as a merger of equals, not an acquisition of Canal Plus, the largest pay-TV company in Europe with more than 11 million subscribers in 10 countries, by BSkyB, the biggest pay-TV provider in the U.K. with 7 million subscribers but a larger market cap.

Ubiquitous coffee retailer Starbucks (Nasdaq: SBUX) perked up $3 to $52 7/8 after it announced a 2-for-1 stock split, which will take effect March 19. The company's shares, which closed up $1 1/2 yesterday, have increased 32% in the last year and are trading at more than 41 times estimated earnings compared with a multiple of 25 times earnings for the S&P 500.

Acquisitive technology company Artra Group (NYSE: ATA) added $1/4 to $6 13/16 after announcing the purchase of entrade.com, an online commerce and auction company, and a 25% interest in asseTrade.com, an asset recovery and inventory management company, from WorldWide Web NetworX Corp. for $5.4 million in "funding" and 2 million shares of stock. Artra also said it has fallen below several of the NYSE's listing criteria and is working to get back in compliance.

Metal manufacturing company MascoTech (NYSE: MSX) added $1 5/8 to $16 3/8 after it reported Q4 EPS of $0.36, a penny below last year's mark but a penny above estimates. The company will replace Primadonna Resorts (Nasdaq: PRMA) on the Standard & Poor's SmallCap 600 Index after the close on Feb. 26.

Bank holding company SouthTrust (Nasdaq: SOTR) moved ahead $3 13/32 to $41 1/8 on news that it will replace Oryx Energy (NYSE: ORX) in the S&P 500 Index, vacating its spot in the MidCap 400 Index.

Entertainment company Trimark Holdings (Nasdaq: TMRK) jumped $1 11/32 to $8 3/8 after it said it licensed its film library for distribution over the Internet through Broadcast.com (Nasdaq: BCST). Trimark will exchange a 9% stake in the company for an equivalent dollar amount of shares of Broadcast.com, which moved up $8 1/2 to $78 13/16 this morning.

Healthcare services provider United Payors & United Providers (Nasdaq: UPUP) rose $3 1/8 to $25 3/4 following news that Chairman and CEO Thomas Blair agreed to buy 4.5 million shares of company stock from Principal Financial Group for $27.60 each, a 22% premium over yesterday's closing price. In addition, Capital Z Financial Services Fund II bought 1.75 million shares of company stock from executives and employees for $35 million with an option for 2.25 million more of Blair's shares at $27.60 a pop.

Specialty semiconductor manufacturer VLSI Technology (Nasdaq: VLSI) grabbed $1 to $11 1/16 after BancBoston Robertson Stephens upgraded the stock to long-term "attractive" from "market perform" and set a $13 per share 12-month target price.

New and pre-owned compact disc retailer CD Warehouse (Nasdaq: CDWI) spun up $1 to $13 after announcing Q4 EPS of $0.08, a penny off last year's mark. Net income for the quarter was $308,000, 89% above the $163,000 for the same period a year ago. The company also announced the purchase of 16 San Diego-area stores for $4 million in cash and stock, bringing the chain's total to 330.

Canadian fuel cells maker Ballard Power Systems (Nasdaq: BLDPF), upgraded to "strong buy" from "neutral" by Morgan Stanley Dean Witter, powered up $2 3/16 to $27 7/8. Analyst Bob Chewning set a $33 per share price target.

Chip maker Micron Technology (NYSE: MU) took on $3 5/8 to $71 3/4 after Donaldson, Lufkin & Jenrette boosted its rating on the stock to "buy" from "market perform." The brokerage set a $100 per share price target on the stock.


Seattle-based retailer Nordstrom (Nasdaq: NOBE) was knocked down $2 1/2 to $41 3/8 despite reporting Q4 EPS of $0.47, up from $0.38 a year ago and in line with the First Call mean estimate. However, the company said efforts to better match inventory levels with sales volumes contributed to a 0.6% drop in quarterly revenues and a 5.4% year-on-year slide in Q4 same-store sales.

Bookseller Barnes & Noble (NYSE: BKS) was burned for $4 to $31 3/4 after saying it expects to report 1998 year-end EPS of $0.76 (excluding a $0.53 one-time gain) next month, which will fall $0.04 shy of the First Call mean estimate. For more details on the shortfall, grab a helping of this morning's Breakfast With the Fool.

Air carrier holding company America West Holdings (NYSE: AWA) descended $3 1/8 to $18 1/4 after dissing what it called "highly conditioned expressions of interest" for a buyout, reportedly from the likes of United Airlines parent UAL (NYSE: UAL), and deciding to fly solo as a "growing, profitable and independent company."

Regional Bell Operating Company US West (NYSE: USW) slumped $4 1/16 to $58 1/8 after saying it will spend an additional $300 million in fiscal 1999 to enhance its telecom network, reduce bottlenecks, and improve its e-commerce efforts in order to fend off growing competition in its key service areas. The increased spending is expected to reduce earnings growth this year to about 10% from the 12% to 14% growth previously forecasted.

The American depositary shares of Italian telecommunications services provider Telecom Italia (NYSE: TI) slid $4 3/4 to $105 1/16 this morning after Italian stock market regulators declared smaller rival Olivetti's recent $58 billion takeover bid void due to a lack of disclosed details about the offer. Undeterred, Olivetti said it will press on and start a tender offer for Telecom Italia's shares anyway.

Residential heating, ventilation, and air conditioning (HVAC) systems installer and maintenance firm Service Experts (NYSE: SVE) dropped $4 1/4 to $15 7/16 after warning that recent warm weather and additional fixed overhead outlays will result in fiscal 1999 EPS between $1.65 and $1.70, short of the Zacks mean estimate of $1.77. Also, Q1 EPS is expected to be only "slightly" better than the $0.19 posted last year, meaning the current analysts' estimate of $0.26 is too high.

Tractor mounted mowing equipment maker Alamo Group (NYSE: ALG) surrendered $1 1/8 to $10 5/8 after announcing that it has mutually agreed to terminate its proposed merger with privately held Woods Equipment Co. Alamo also said its 1999 sales and profits will be adversely affected by "weak agricultural markets."

Independent oil and gas exploration and production firm Stone Energy (NYSE: SGY) was drilled $2 to $23 3/8 after announcing that it will record an $89 million charge in Q4 to reduce the book value of its oil and gas properties as a result of low commodity prices.

Drugmaker Forest Laboratories (AMEX: FRX) was felled for a $2 3/8 loss to $50 5/8 following a PaineWebber downgrade to "attractive" from "buy."

Antibody humanization technologies developer Protein Design Labs (Nasdaq: PDLI) slid $1 1/8 to $17 3/4 after reporting a Q4 loss of $0.28 per share, which was a bit worse than the loss of $0.26 per share expected by the seven analysts surveyed by First Call.


Please see the Motley Fool's Conference Calls page for call information and links to synopses.


Click here for continually updated Portfolio Numbers.

Make a Living Foolin' Around.

See something moving a stock that we didn't cover?
E-mail the Fool News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.

Contributing Writers
Brian Graney (TMF Panic), a Fool
David Marino-Nachison (TMF Braden), a new Fool

Brian Bauer (TMF Hoops), another Fool
Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last