By Ann Coleman (TMF AnnC)
May 17, 2000

[Stay tuned, BSP fans. Ethan Haskel's Beating the S&P report will run tomorrow instead of today.]

The Federal Reserve Board raised interest rates half a point yesterday. Whew, I'm glad that's over. The continual speculation was driving me nuts. Half a point or quarter point? How hot is the economy, really? Isn't it cooling off a bit?

Watching the market go through ups and downs based on the latest suggestion of a possibility of changes in the economy is like watching a teenager with a crush. Does he like me? Should I cut my hair? What should I wear? Will he be there tonight? Arrrrrgh! Get over it!

These non-events sure make me appreciate the whole buy-and-hold philosophy. You could go nuts (and many have) trying to buy and sell stocks based on where you think the market is going. According to theory, the rate hike should have sent stocks crashing down, but this latest interest rate increase was so widely anticipated that today's mild drop is being characterized as the result of investors taking profits from the recent mini-rally that led up to yesterday's rate hike. (Of course, the threat of a rate hike is supposed to send the market down.)

The increase in interest rates seemed good for our financial stock, J.P. Morgan (NYSE: JPM). Morgan closed up half a per cent while the Dow was down 1.39%. Kodak (NYSE: EK) fared even better today closing up 1.3%.

Kodak seems to be benefiting more from the release of Mission Impossible-2, which features Kodak digital cameras as essential tools of the ultra-cool. Philosophically, I may find "product placement" in movies somewhat distasteful, but as a Kodak shareholder, I think it's brilliant.

Caterpillar (NYSE: CAT) is still napping despite several recent upgrades by analysts. The company is doing everything right and has a solid, if unspectacular, bottom line. The only reason I can see for its continued slump is lack of glamor. The company brought in almost five billion dollars last quarter, is continuing to buy back shares, and is increasing earnings per share. When investors start looking for traditional value again, Caterpillar will be there. I just hope they start looking soon!

General Motors (NYSE: GM) dropped a bit today and General Motors-Hughes (NYSE: GMH) dropped right along with it. These companies' prices are locked together by the terms of the exchange offer that is now in progress. I am surprised that GM hasn't moved up in relation to Hughes, though. The offer closes on Friday, but right now anyone wishing to buy GM-Hughes stock could get quite a bargain by buying GM instead and exchanging the GM shares for Hughes shares.

One hundred shares of GM, which closed at $86.50 today, would cost a buyer $8650. Those shares can be exchanged for 106 shares of Hughes (closing price: $88.25) which would cost $9354.50 if bought outright. You would think that GM would be selling for more than Hughes under these circumstances.

The only thing that explains it is that the market expects the exchange to be heavily over-subscribed. Under the terms of the agreement, if more shares are tendered for exchange than are available, the number of GM shares one can exchange will be limited. (This limit doesn't apply to shareholders who have less than 100 shares. They can exchange them all.)

While I don't have access to the numbers, I would speculate that brokers are seeing a robust response to GM's exchange offer and consequently expect that the offer will have to be prorated. Well, it did sound like a very good deal. Some fly always seems to land in the Good Deal Soup. As we said last week, the Foolish Four portfolio will be holding on to all of its GM stock, but if you are tendering your shares, I hope you get as much Hughes stock as you want.

Fool on and prosper!

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