Thursday, June 17, 1999
DJIA 10784.59 +0.64 (+0.01%) S&P 500 1334.46 +4.05 (+0.30%) Nasdaq 2547.18 +29.35 (+1.17%) Russell 2000 443.50 +2.30 (+0.52%) 30-Year Bond 89 30/32 +1 4/32 5.98 Yield

An Investment Opinion
by Louis Corrigan

Greenspan Calls for Modest Action

In widely anticipated testimony before the Joint Economic Committee of Congress, Federal Reserve Chairman Alan Greenspan said, "Let the summer rally begin!"

Well, he would never say that, but that's how his comments probably will be interpreted by the stock market. Both the bond and equity markets have been under pressure the last couple of months due to troubling signs of incipient inflation, such as the 0.4% spike in April's core Consumer Price Index (CPI). The markets have been preparing for the Fed to start taking back some of last fall's three quarter-point cuts in the Fed funds rate, which were designed to calm panicked investors. Yesterday's benign 0.1% increase in the core May CPI triggered a massive relief rally by assuaging fears that rising inflation would lead to a series of Fed rate hikes rather than simply one or two.

Today, Greenspan sounded like he agreed with this interpretation, talking about the need for "modest preemptive actions" to head off "forces of imbalance before they threaten economic stability." It seems reasonable to conclude that this means the Federal Open Market Committee (FOMC) will raise rates by just a quarter point when it meets at the end of this month. It will probably take a wait-and-see stance thereafter. Notably, Greenspan stated, and repeated, that the underlying goal of monetary policy is to "foster maximum sustainable economic growth." Downplaying inflation, per se, this artful phrase indicates the Fed may tighten slightly, even if inflation continues to remain benign. At the same time, though, the phrase sounds like Greenspan reminding the Fed's vocal inflation hawks that controlling rising prices is really just a means to an end.

Greenspan indicated that the "emergency injection of liquidity" last fall had "ceased to be necessary." But wage and price inflation remained in check earlier this year, so he had seen no reason for taking back any of those cuts. However, demand for labor has reduced the pool of available workers and productivity gains have not been enough to satisfy this labor demand. Such an imbalance can eventually lead to wage increases exceeding productivity growth. "Because monetary policy operates with a significant lag, we have to make judgments, not only about the current degree of balance in the economy," Greenspan said, "but about how the economy is likely to fare a year or more in the future under the current policy stance."

Greenspan indicated that the economy has been growing at a 4% clip the last three years, with two percentage points coming from increased productivity and one point due to the larger working age population. He suggested that such 3% annual growth is sustainable. He blamed the extra point of growth, the unsustainable portion, on the rise in home and equity prices, or what's commonly called the "wealth effect," which contributes to higher consumer spending. Even if the market fell significantly today, more of this wealth is "in the pipeline." And that's partly the problem.

Moreover, he indicated that "asset price values can climb to unsustainable levels even if product prices are relatively stable." In other words, Greenspan has stopped playing market timer by talking about irrational exuberance in the equity markets. Nonetheless, stock prices still worry him because they contribute to unsustainable growth. So indirectly, any preemptive moves by the Fed will be partly in response to the stock market's strength.

So Greenspan would probably be happy to see the stock market burn off a chunk of gains over the next year. But given the generally moderate tone he struck in today's testimony -- especially regarding the imminent threat of inflation, or lack thereof -- just the opposite is likely to occur. The market will likely breathe a sigh of relief, at least until the Fed's August meeting becomes the next concern.


Cable Internet access provider Excite@Home (Nasdaq: ATHM) rolled up $4 13/16 to $52 3/16 after BancBoston Robertson Stephens restarted coverage of the company with a "buy" rating. "We believe the combination of @Home and Excite is a winning formula for growing a leading broadband Internet service," the brokerage's analysts wrote. "In our view, the combination of connection and content will help the company grow and develop deep customer relationships."

Neuropsychiatric drug developer Neurogen Corp. (Nasdaq: NRGN) added $2 15/16 to $15 1/2 after announcing a non-exclusive licensing agreement with Pfizer (NYSE: PFE) for its accelerated intelligent drug discovery (AIDD) technology. The deal is expected to pay Neurogen $27 million over three years with additional payments possible based on Pfizer's success with the system.

Entertainment and consumer products developer and marketer K-tel International Inc. (Nasdaq: KTEL), which announced a series of distribution agreements for its online store, advanced $1 1/16 to $7. Among the partners named are Looksmart.com and Prodigy Internet, a division of Prodigy Communications (Nasdaq: PRGY).

Online new music company Launch Media (Nasdaq: LAUN), which signed on to provide content for Yahoo!'s (Nasdaq: YHOO) music pages, tuned in $2 to $15 this morning. Terms of the agreement weren't disclosed.

Aviation parts distributor Aviall Inc. (NYSE: AVL) ascended $11/16 to $17 9/16 this morning. The shares grabbed $1 3/8 yesterday amid rumors that aerospace products supplier AAR Corp. (NYSE: AIR) was in talks to buy the company for $23 per share with an announcement possible by the beginning of next week.

Business software consultant and services provider Intraware (Nasdaq: ITRA) took $2 1/2 to $21 after signing an agreement to provide its SubscribNet service for electronic software delivery to enterprise software maker PeopleSoft (Nasdaq: PSFT).

Online Santa eToys (Nasdaq: ETYS) bagged gains of $3 5/8 to $41 1/8 after Merrill Lynch opened coverage of the company with a near-term "accumulate" rating and a long-term "buy."

Financial services giant First Union (NYSE: FTU) deposited $2 1/8 to $44 7/8 as Warbug Dillon Read raised its rating on the stock to "strong buy" from "buy" with a 12-month target price of $51 per share.

Scalable Internet search and caching software developer Inktomi Corp. (Nasdaq: INKT) scaled itself up $9 3/8 to $118 3/16 after Volpe, Brown & Co. rated the stock a new "buy."

Database software firm Oracle Corp. (Nasdaq: ORCL) added $1 3/8 to $34 5/16 today. The shares raced ahead $7 13/16 yesterday after the company turned in fiscal Q4 EPS of $0.36, beating year-ago and Wall Street numbers. Oracle surprised market watchers with the report, unexpectedly reversing troubling license sales trends set in Q3.


Freight railroad operator Norfolk Southern Corp. (NYSE: NSC) derailed for a $13/16 loss to $32 1/8 after acknowledging late yesterday that some customers are experiencing shipment delays due to integration problems and rail car backlogs in Conrail's Northern region, which the company began operating earlier this month. "The cost of the Conrail integration may be higher than we anticipated, but the investment will pay off in efficiency and service enhancements on our expanded system,'' Norfolk Southern chairman, president, and CEO David Goode said.

PC and computing products maker Compaq (NYSE: CPQ) was whacked for a $1/8 loss to $22 1/8 after saying PC pricing pressures and a "non-competitive" cost structure will result in sequentially flat to lower Q2 revenues and gross margins and a loss of up to $0.15 per share in the quarter. The First Call mean estimate had called for earnings of $0.20 per share. The company said it plans to cut $2 billion in operating costs by realigning its business into three operating groups centered on enterprise solutions and services, PCs, and consumer areas.

Chip giant Intel Corp. (Nasdaq: INTC) slid $2 to $57 after Credit Suisse First Boston reduced its fiscal 1999 EPS estimate for the company to $2.25 from $2.32 and its fiscal 2000 estimate to $2.55 from $2.65, citing falling average selling prices (ASP) and unit shipments for the firm's chips.

Hospitality, broadcasting, and cable company Gaylord Entertainment Co. (NYSE: GET), which runs the Opryland hotel, sank $1 1/2 to $29 after saying it expects to report second-quarter earnings of about $0.02 per share, well off last year's $0.22 profit and missing the $0.14 estimate four analysts gave First Call. Gaylord attributes most of the shortfall to troubles at Opryland, where average room rates are down slightly and food and beverage sales have disappointed. For more details, see this morning's Breakfast With the Fool.

Dental care practice management firm Coast Dental Services (Nasdaq: CDEN) was drilled for a $1 3/16 loss to $4 7/8 after saying that expenses related to its conversion to a new software system and its earlier-than-expected addition of operations in Virginia will hurt gross margins and lead to Q2 EPS between $0.07 and $0.09, shy of the First Call mean estimate of $0.16. On the bright side, revenues in the period are expected to come in ahead of current expectations.

Omnicare (NYSE: OCR), which provides pharmacy services to nursing homes, slumped $3 7/16 to $12 5/8 after saying that the reluctance by skilled nursing facilities to admit Medicare residents due to reimbursement concerns from Medicare's new prospective payment system (PPS) is hurting occupancy levels at its client facilities. As a result, Omnicare is forecasting Q2 EPS between $0.25 and $0.30, short of the $0.33 to $0.34 the company said analysts had been expecting.

Drug and medical supplies distributor Bergen Brunswig Corp. (NYSE: BBC) was handed a $3 3/4 loss to $15 1/8 after warning that Medicare's new prospective payment system (PPS) may have a "greater than anticipated" negative impact on the results of its recently acquired PharMerica nursing home pharmacy unit. The company said it is "evaluating" how the Medicare changes will impact its upcoming fiscal Q3 and Q4 results.

Commercial office and warehouse space owner TriNet Corporate Realty Trust (NYSE: TRI) lost $2 5/16 to $26 7/8 after agreeing to be acquired yesterday by commercial real estate finance company Starwood Financial Trust (AMEX: APT) for $1.8 billion in stock and assumed debt. This morning, Salomon Smith Barney cut its rating on TriNet to "neutral" from "outperform" and Donaldson, Lufkin & Jenrette chimed in with a downgrade to "underperform" to "market perform."

Gear production machines and machine tools maker Gleason Corp. (NYSE: GLE) slipped $1 1/16 to $16 5/16 after saying work stoppages at its Italian plants and soft demand in its major markets will result in Q2 EPS between $0.30 and $0.35 (excluding charges), short of the First Call mean estimate of $0.49.


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