<THE RULE BREAKER PORTFOLIO>

The Donald Doesn't Disappoint in Disappointing

By Louis Corrigan (TMFSeymor@aol.com)

ATLANTA, GA (May 7, 1999) -- What a wacky day!

The Dow rallied 84.8 points to close at 11,031.8, topping the new millennium mark for the first time since Monday. The other averages followed suit, with the Nasdaq up 31.3 points (1.27%) to 2,503.6 and the S&P up nearly 13.0 points (0.97%) to 1,345.0. The Rule Breaker, however, stumbled for a 0.43% loss, ending the week down 12.47%, despite some predictably ugly (and thus good) news for Da Donald, the portfolio's one short.

Overall, the gains today came grudgingly, surprisingly so given the expectations by many that "good" (that is, weakish) news on the employment front this morning would, from the get go, trigger both a bond market rally and a serious stock market rally. As it turned out, the markets didn't have a lot of get-go early on and had to really kick to close as well as they did.

The Labor Department's April jobs report was pretty much right on target, with 234,000 new jobs created during the month. That actually nudged the unemployment rate to 4.3%, a slight uptick from last month's 4.2% level, a 29-year low. Investors fearful that an overheating economy would spark inflation fears and thus higher interest rates should have felt some relief from this moderate number. That's doubly true because the closely watched average hourly earnings figure rose just 0.2%.

The 30-year U.S. Treasury bond did initially rally (with interest rates falling), pulling up stocks with it. However, the bonds then turned around and headed lower (pushing rates higher). The 30-year bond closed down 11/32 at 92 1/32, sending the yield up to 5.813%, its highest level in nearly a year. Since rising bond yields make stocks look relatively less attractive, equity investors didn't know what to do. Were the bonds saying "Look out for inflation!" or was there just some magnetic compulsion by traders to push the yield to 6% before possibly backing off? The folks on CNBC spent all day trying to figure out what was up with those bonds.

Adding to the puzzle was the gap between the generally optimistic remarks Fed Chairman Alan Greenspan made yesterday about the Goldilocks U.S. economy and the way bond traders had interpreted his remarks as a signal that the Fed might decide to raise the Fed funds rate sometime in the next few months. Generally speaking, equities react poorly, at least temporarily, to such upticks in rates. With the economy rocking, there have been recurring fears that the benign inflation environment we've enjoyed over the last few years must end, and that Greenspan would have to raise interest rates.

Trouble is, that's not really what Greenspan seems to be thinking. Fed watchers generally believe that Washington Post reporter John Berry has the best seat for making sense of the Chairman's often ambiguous comments. At least on one occasion, Berry was even told by Greenspan's aid what the Chairman had in fact intended to say. And Berry's account today jibed pretty closely with my own yesterday. He argued, in effect, that the bond market had misread Greenspan's speech, and that no rate hike was yet on the table. "The Fed Chairman's sweeping assessment indicated that he believes the U.S. economy can continue to grow, within some limits, more rapidly than in the past without causing inflation to increase."

Some may say bonds schmonds. After all, there's no sign that Greenspan is even thinking of taking back more than one of last fall's three quick quarter points cuts in the Fed funds rate. That wouldn't be the end of the world for stocks. So this is all just short-term investor sentiment stuff that doesn't have any real impact on the decisions you should make as a long-term investor. Still, if you've got time to watch the market closely, these kind of divergences from expectations are rather fascinating.

What's clear, though, is that some of the old market leaders look a little tired. America Online (NYSE: AOL), for example, today lost $2 7/16 to $118 1/4 and Amazon.com (Nasdaq: AMZN) fell $1 to $136 3/8. Yet both had to bounce off their lows to do even that well. Meanwhile, @Home (Nasdaq: ATHM) jumped $4 to $157 3/4, as investors continue to feel upbeat about what AT&T's (NYSE: T) acquisition of MediaOne (NYSE: UMG), and thus @Home competitor Road Runner, might mean for the top high-speed Internet service provider.

This mega-deal, though, has raised some concerns for AOL investors. One possibility is that AT&T may now be in the driver's seat in negotiating terms to allow AOL to market AT&T's cable modem services along with standard AOL access. Clearly, Steve Case and company didn't want things to turn out quite this way.

Looking to shore up its competitive position for the long-term, AOL is reportedly working harder with the Baby Bells to put together a national broadband network using the DSL phone line technology, according to today's Wall Street Journal. America Online already has agreements with Bell Atlantic (NYSE: BEL) and SBC Communications (NYSE: SBC) that will make broadband connections available (at least in theory) to some 15.9 million customers by year end. AOL is reportedly now in talks with the likes of GTE (NYSE: GTE) and BellSouth (NYSE: BLS) to cover other parts of the country. (Yo, Steve, please tell BellSouth that their DSL service department stinks! I want my DSL, but they won't give it to me.)

To show AOL means business -- show business, that is -- the company announced today that Robert Harris will assume the new position of Executive Producer, Broadband. A Hollywood veteran with nearly 30 years experience, Harris has helped produce TV hits like Magnum P.I.; Murder, She Wrote; The A-Team; and Miami Vice. This move ought to remind investors that while most of AOL's revenues come from access fees, its real franchise is in providing content along with community.

We're also tickled to report that former Fool Editorial poobah Randy Befumo may have also had some market-moving impact today. Randy is now an analyst at Legg Mason, where he works for noted value investor Bill Miller. Miller manages the general U.S. equity fund with the best five-year record (a market-crushing 37.1%). TheStreet.com quoted Randy today, indicating that AOL is worth just $60 to $80 based on a discounted cash-flow analysis, or $50 to $115 based on other metrics. In other words, AOL looks a little ahead of itself. That's news not just because Randy's a smart guy but because Miller's funds are major and long-standing AOL shareowners. Of course, as a buy-and-hold investor (how else could he do so well!), Miller will probably be holding AOL in his funds a decade from now.

The only other significant news today for the portfolio came from Da Donald. Given that Trump Hotel & Casinos (NYSE: DJT) failed to release its March quarter results pronto, our own Paul Larson (TMF Parlay) predicted that Mr. Trump's gambling empire probably came up snake eyes. And... he was right! Trump was trumped today, losing $5/8 (or 12%) to $4 5/8 after reporting lousy first quarter results. Since we're short the stock, Trump's bad news is our good news.

The company's results appear to have deteriorated slightly across the board. Revenues dipped a bit to $316.1 million from $316.6 million in the year-ago period. EBITDA, or earnings before all the bad stuff (interest, taxes, depreciation, amortization, etc.), declined to $50.6 million from $52.5 million. Since there's a lot of bad stuff -- like $55.5 million in interest payments thanks to the company's mass o'debt -- chez Donald lost $20.2 million, or $0.91 per share before one-time charges. That wasn't just worse than the $17.7 million, or $0.79 per share, gambled away in the year-ago period. It was also a lot worse than the $0.58 per share loss analysts expected.

Looking at specific properties, the only one to show higher revenues and EBITDA was tiny Trump Indiana, where sales jumped to $36.9 million from $28.3 million a year ago and EBITDA rose to $5.0 million from $3.1 million. The only other positive news was that results improved during April, leaving revenues for the first four months of the year up over last year and pushing year-to-date EBITDA to $74.4 million from $65.9 million.

Of course, the company may have held off reporting earnings until now so it could conjure up some ameliorating good news. Da Donald has been trying to pull off such Jedi mind tricks to distract investors for a while. Paul may have more to say about Trump next week, but the results look predictably bad to me.

In the meantime, be sure to check out our Stocks for Mom feature and Yi-Hsin Chang's excellent reporting on the activities this week at Warren Buffett's annual shindig. And have a great weekend!

05/07/99 Close

Stock  Change    Bid 
------------------ 
AMGN  +2 1/4     63.63
AMZN  -1        136.38
AOL   -2 7/16   118.25
ATHM  +4        157.75
CAT   -2 3/16    63.19
CHV   -2 15/16   94.88
DD    +1 7/16    74.13
DJT   -  5/8      4.63
EBAY  +1 3/16   176.69
GT    +2 1/8     66.75
IOM   -  1/16     4.81
SBUX  -  5/8     34.63
TDFX    ---      17.31

                  Day     Month  Year   History   Annualized 
      R-BREAKER  -0.43% -12.47%  42.13% 1326.61%  74.93%
        S&P:     +0.97%   0.74%   9.74%  206.97%   26.61%
        NASDAQ:  +1.27%  -1.54%  14.18%  247.64%   29.97%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    118.25   12910.95%
   9/9/97  1320 Amazon.com     6.58    136.38    1972.81%
  5/17/95  1960 Iomega Cor     1.28      4.81     275.86%
  12/4/98   450 @Home Corp    56.08    157.75     181.29%
  2/26/99   300 eBay         100.53    176.69      75.76%
 12/16/98   580 Amgen         42.88     63.63      48.40%
  4/30/97 -1170*Trump*         8.47      4.63      45.39%
  2/23/99   290 Goodyear T    48.72     66.75      37.02%
  2/23/99   300 Caterpilla    46.96     63.19      34.54%
  2/20/98   260 DuPont        58.84     74.13      25.97%
   7/2/98   470 Starbucks     27.95     34.63      23.86%
  2/23/99   180 Chevron       79.17     94.88      19.84%
   1/8/98   425 3Dfx          25.67     17.31     -32.55%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 260150.00  $258150.53
   9/9/97  1320 Amazon.com  8684.60 180015.00  $171330.40
  12/4/98   450 @Home Corp 25236.13  70987.50   $45751.37
  2/26/99   300 eBay       30158.00  53006.25   $22848.25
 12/16/98   580 Amgen      24867.50  36902.50   $12035.00
  5/17/95  1960 Iomega Cor  2509.60   9432.50    $6922.90
  2/23/99   290 Goodyear T 14127.38  19357.50    $5230.13
  2/23/99   300 Caterpilla 14089.25  18956.25    $4867.00
  4/30/97 -1170*Trump*     -9908.50  -5411.25    $4497.25
  2/20/98   260 DuPont     15299.43  19272.50    $3973.07
   7/2/98   470 Starbucks  13138.63  16273.75    $3135.13
  2/23/99   180 Chevron    14250.50  17077.50    $2827.00
   1/8/98   425 3Dfx       10908.63   7357.81   -$3550.81

                              CASH   $9924.87
                             TOTAL $713302.68

Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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