FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

Trust and Market Psychology

These days our currency should probably read, "In G we trust, in C we don't." After Tuesday's Greenspan rally, we're now seeing the Clinton double-dip. What should a Fool make of this fickle, uncertain market playing out against the backdrop of a tawdry presidential soap opera? To a certain extent, nothing. As Warren Buffett has said, an investor should go about his or her work as if there were no stock market. While the market participants do their daily voting, you should be doing your weighing, thinking about the value of actual businesses and checking the tape only periodically to see if you can find a pleasing disparity between what the votes and the scales say.

On the other hand, a Fool also needs to be able to conjure up a cognitive map that makes at least a little sense of the apparent chaos. That means we must recognize the legitimate force of something as nebulous as "market psychology." To be sure, I'm not advocating some brand of technical analysis that will predict future price movements from a wiggle on a chart. One doesn't have to be a tea-reader, though, to understand that valuing companies is a prospective affair in which one tries to discount future cash flows back to the present. In times believed to be economically perilous, the uncertainty of such projections becomes magnified.

The markets are experiencing at least a momentary shift in psychology as investors who saw relatively benign conditions that made them highly confident of future corporate earnings now demand a much greater risk premium in order to own stocks rather than risk-free debt. In other words, earnings multiples are contracting as the confidence in those future earnings diminish. When Procter & Gamble's (NYSE: PG) earnings troubles are seen as a sign of a general profit squeeze or Merrill Lynch's (NYSE: MER) Russian losses are taken as an indication of more dirty linen in the financial industry's closet, we may say this is mere contagion, but it certainly has its own understandable logic.

In his speech last Friday, Alan Greenspan spoke eloquently to the fact that this logic is deeply rooted in "human nature" and powerfully present in our real economy with its boom/bust cycles. "When the future becomes sufficiently clouded, people eschew actions and disengage from previous commitments," he said. Driving this process at the present is the deteriorating "confidence or trust in the functioning of a market system" -- think Russia with its debt debacle, Malaysia with its currency controls, or Hong Kong with its government intervention into the stock market.

The Clinton drama in itself is nearly immaterial. As the brilliant film version of Primary Colors reminds us, the ways that Clinton both engages and disappoints should hardly surprise us. He's like an old friend whose foibles we know all too well but mostly choose to ignore. Yet the Starr report matters to the markets in the current context because, at least until tomorrow when we can read it, its evidence isn't fully known. What if Clinton does surprise us? As a result, there's a simply more uncertainty about how long the uncertainty will last. Greenspan's change of heart regarding interest rates was essentially a frank recognition that such market psychology matters, that trust in the future is a prerequisite for us to go about our daily business, and that someone needs to step into the brink to inoculate us against real contagion. "I do not claim that all market behavior is a rational response to changes in the real world," Greenspan said on Friday. "But most of it must be."

UPS

Russian wireless telecommunications company Vimpel-Communications (NYSE: VIP) rose $13/16 to $8 7/8 after Russian President Boris Yeltsin nominated former foreign minister and spy chief Yevgeny Primakov to be the country's next Prime Minister, who will have the task of trying to right the sinking Russian economy. Primakov is expected to be approved tomorrow by the Russian parliament, which twice rejected Yeltsin's former nominee, Viktor Chernomyrdin.

Gold mining stocks gained ground after gold prices rose this morning, helped by the dollar's decline against the yen and other currencies. Since gold is priced in dollars, a slide in the greenback's value means foreign investors can get more gold for their currencies. Newmont Gold Co. (NYSE: NGC) gained $2 1/2 to $22 5/16, Ashanti Goldfields Co. (NYSE: ASL) picked up $13/16 to $6 7/8, Anglogold Ltd. (NYSE: AU) tacked on $2 5/16 to $23 1/4, Barrick Gold Corp. (NYSE: ABX) rose $1 1/16 to $17 8/16, and Placer Dome (NYSE: PDG) added $7/8 to $11 11/16.

The American Petroleum Institute said in a report that U.S. oil inventories dropped by a larger-than-expected amount last week, sending oil prices up this morning. The inventory drop was due to a hurricane in the Gulf of Mexico, which reduced imports into the U.S. Contract oil driller Rowan Companies (NYSE: RDC) gained $1 to $12 3/8, Cliffs Drilling (NYSE: CDG) rose $1 1/2 to $19 7/8, Noble Drilling (NYSE: NE) advanced $1 to $14 5/8, and Transocean Offshore (NYSE: RIG) climbed $1 7/16 to $28 15/16. Oil services firm EVI Weatherford (NYSE: EVI) moved up $1 1/8 to $19 1/2, Cooper Cameron (NYSE: RON) gained $1 15/16 to $28 1/2, and Schlumberger (NYSE: SLB) rose $1 5/8 to $49 11/16.

Networking products maker 3Com Corp. (Nasdaq: COMS) gained $2 1/16 to $27 7/16 as The Wall Street Journal reported that the company will spend $100 million over the next two years to form joint ventures in China, which 3Com expects will eventually be "very significant" to its revenues.

Periphonics Corp. (Nasdaq: PERI) gained $1 9/16 to $7 3/16 after the designer of automated call center products said it expects to report fiscal Q1 revenues of $30 million, up 35% from a year ago. The firm also forecast EPS between $0.07 and $0.09, up from $0.01 last year and above the $0.08 loss expected by the Street. The company said the better-than-expected results were due to strength in its domestic and international businesses.

Thrift holding company Calumet Bancorp (Nasdaq: CBCI) moved up $3 to $29 1/2 after privately held bank holding company FBOP Corp. agreed to buy the company for $111.6 million in cash, or $32 per Calumet share (excluding merger-related charges). The purchase price represents a 17% premium to Calumet's closing price of $26.50 per share yesterday.

Pharmaceutical document management and network integration services provider Integrated Systems Consulting Group (Nasdaq: ISCG) rose $1 1/8 to $11 1/2 after agreeing to merge with healthcare information management services firm First Consulting Group (Nasdaq: FCGI). Under the deal, each Integrated common share will be converted into 0.77 of a share of First Consulting common stock. The merger is expected to be accretive to the companies' fiscal 1998 earnings.

Biopharmaceutical company Immunex Corp. (Nasdaq: IMNX) climbed $2 5/8 to $58 1/2 on reports that Phase III trials of its Novantrone drug had a "statistically significant impact" on the relapse rate of patients with progressive multiple sclerosis. The company is hoping the FDA will approve the drug for use sometime late next year.

Drug abuse diagnostic products maker Biosite Diagnostics (Nasdaq: BSTE) advanced $9/16 to $6 3/8 after announcing a 1 million share buyback plan after the bell yesterday.

Income tax preparation and financial planning services firm Gilman + Ciocia (Nasdaq: GTAX) advanced $7/8 to $9 after announcing a 100,000 share repurchase plan.

DOWNS

Loral Space & Communications (NYSE: LOR) nose-dived $5 to $13 1/16 after 42%-owned Globalstar Telecommunications (Nasdaq: GSTRF) said 12 satellites were destroyed when a rocket carrying them crashed shortly after launch in Kazakhstan. Globalstar plunged $6 1/16 to $11 13/16. Globalstar, which is building a satellite-based worldwide telecommunications network, says it still hopes to have the network operating by the end of next year (the initial target was mid-1999), possibly using 32 satellites instead of 48. Other Globastar investors also fell: Qualcomm (Nadsaq: QCOM), which has a 6% stake, dropped $5 1/2 to $44, and AirTouch Communications (NYSE: ATI), with a 5% stake, lost $2 1/4 to $58 1/8.

Investment banking giant Merrill Lynch (NYSE: MER) was cut $5 3/8 to $53 7/8 after saying its start-up brokerage operations in Japan could cost $65 million, or 50% more this year than originally planned. Other banks also lost ground as uncertainty over overseas markets loomed. Morgan Stanley Dean Witter (NYSE: MWD) slid $2 3/16 to $47 7/8, Citicorp (NYSE: CCI) sank $5 3/8 to $87 11/16, its merger partner Travelers Group (NYSE: TRV) was down $2 1/8 to $37 15/16, Chase Manhattan (NYSE: CMB) tumbled $3 3/8 to $41 1/4, NationsBank (NYSE: NB) tanked $4 3/16 to $49 9/16, NationsBank merger partner BankAmerica (NYSE: BAC) dropped $4 5/8 to $54 3/4, and American Express (NYSE: AXP) lost $5 3/16 to $71 1/2.

Consumer products giant Procter & Gamble (NYSE: PG) shed another $2 7/8 to $69 after the company said it expects a "mid-single digit" increase in fiscal first quarter earnings per share. Analysts had been expecting about an 8% rise in EPS.

Agricultural and construction equipment maker Case Corp. (NYSE: CSE) was ditched for a $4 3/16 loss to $23 9/16 after the company warned it expects Q3 earnings (before restructuring charges) to be "moderately below" those of the year-earlier period and earnings for the year to be roughly 25% lower than last year due to lower demand for agricultural equipment. The company also foresees the market declining next year by 15% in North America and 5% in Western Europe. In response, Case plans "to lower production schedules and aggressively reduce costs" by cutting 1,000 jobs by year-end, which will result in a charge of $70 million to $80 million.

Ciena Corp. (Nasdaq: CIEN) dropped another $2 9/16 to $17 3/16 after the telecommunications equipment company lost out on a wavelength division multiplexing equipment deal worth at least $100 million with privately held Digital Teleport. This again throws into doubt the company's proposed merger with Tellabs (Nasdaq: TLAB).

Trident International (Nasdaq: TRDT), which markets proprietary impulse ink jet technology, plummeted $2 1/4, or 21.4%, to $8 1/4 after warning that it expects fiscal Q4 EPS between $0.19 and $0.21, short of analysts' mean estimate of $0.30. The company blamed the shortfall on the weak economies in Asia and the launch of the new UltraJet II family of printheads, which has created "product transition issues" with its original equipment manufacturing (OEM) customers.

Teen casual apparel marketer dELiA*s Inc. (Nasdaq: DLIA) was ripped for a $7 1/16 loss to $6 13/16 after reporting a fiscal Q2 loss of $0.01 a share, down from a profit of $0.03 for the year-ago period and compared with analysts' expectations of breakeven results.

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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool Editing Brian Bauer (TMF Hoops), another Fool Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last