Changing landscape-sign of things to come

Forget about the FED, the PPI, the CPI, ABC, CBS, NBC, GE and the rest of the alphabet. The only letters uttered today were: WOW. AOL. TWX. WOW. That pretty much wraps up the news, the markets and overall trading for today. Fears of rate hikes, a false Nasdaq rally on Friday, overall overextended markets, overextended valuations for the Internets, Y2K fears (oops-that one has been taken care of), and when the world will end (see the previous Y2K comment) all slipped into the background this morning. The upstart, fast paced world of the Internet collided with the old-line, blue blood world of mainstream Wall Street. Investors, analysts and traders alike learned of the largest merger ever between two US companies, America Online (AOL) and Time Warner (TMX). The sheer size of the deal, estimated to be between $130-$184 billion dollars is staggering, befitting the two largest players in two of the largest sectors in the market. AOL is the world's largest online service provider, with a subscriber base of over 20 million and new members signing up at the rate of one every 3.5 seconds. As for TWX, they are a juggernaut in the world of media and entertainment. TWX is the largest entertainment and media company in the world. They maintain leading positions in the areas of movies, publishing and music. In addition, they are the largest cable provider in the country, with over 13 million subscribers.

So why the merger of two such titans? The synergy between the two is obvious quite frankly. AOL provides the service and TWX provides content as well as delivery through their cable services. You can analyze the deal and break down the numbers to understand the competitive advantage each receives in their respective sectors through the completion of such a deal, but the real story is what this means and does to the market. First and foremost, the deal with TWX further legitimized AOL, and quite frankly the entire Internet sector in terms of their position and importance to our markets and the overall economy. The adding of AOL and Yahoo (YHOO) to the S&P 500 and Microsoft (MSFT) and Intel (INTC) to the Dow was recognition by the markets and investors of the importance and dominance these companies enjoy within their given sectors. More importantly, it made a statement that these companies (and the sectors they represent) are the new leaders of what many are now calling the "new industrial revolution". Investors are waking up to recognize that the business landscape is changing. At this time, they are trying to identify the new leaders, the next MSFT and AOL. Indeed, we are witnessing the changing of the guard in business and Wall Street, and today marked another step along that path.

The other aspect that deserves mention regarding today's deal is the one concerning valuation. Up till today, the biggest criticism involving the hottest names in the Internet was that of valuation. It's become commonplace to see companyies with no earnings and next to no revenue being bid up to unheard of prices. Valuations no longer calculated on current and future earnings. Instead, they are valued on potential sales for forward years, or the ability to garner market share by being first in, along with any number of other valuation models that, quite frankly, would have seemed laughable just a couple of years ago. The biggest newcomer in valuing a company - Potential. The potential to participate in the coming revolution. New players are joining the fray on a daily basis. Established companies are remaking themselves as Internet players, either through merger or acquisition. In either case, everyone seems to have made the connection that this is where you want, make that, "have to be". That being the case, investors are left judging a company not on traditional valuation alone, but on the potential that they have or will offer to another player. The offshoot of this new phenomenon is the staggering market caps generated by the stock price run-ups. This has become the currency of the new titans. This is what allows for AOL to purchase TWX. Today's announcement was more or less a shot across the bow, warning every company out there that they have to look forward and be willing to identify situations and players, even those that recently wouldn't have made sense.

As for the reaction in the markets, the Dow closed up +49.64, establishing a new record at 11,572.20. The index jumped immediately upon opening (primarily due to the AOL/TMX announcement), adding over 80 points in the first few minutes of trading. It maintained the early gains for a good part of the day, but did sell off some late in the day. The S&P 500 jumped from the opening as well, but managed to hold on to most of the early gains, closing up +16.12 at 1457.59. The Dow transports were strong once again, finishing up +15.78 at 2980.50, while the Utilities closed down -1.41 points at 296.37. Volume was heavy, with over 1.04 billion shares changing hands. Advancing issues once again outdistanced declining issues 18 to 13. Among the winners for the day: TWX +25.44, IBM +5.06, EMC +6, INTC +3.75, MU +3.88, LU +3.63, HWP +7.13 and DIS +4.81. The notable loser in terms of price, AOL, which traded down -2.38 to close at $72.63.

Over at the Nasdaq, techs and Internets benefited from the AOL news and the index benefited from investors buying up those stocks. The composite finished up +167.05 at 4049.67. The point gain for the day set a new record for the Nasdaq and moved the index back into striking distance of a new closing high. Volume was extremely heavy and dominated by buying, as over 1.7 billion shares traded hands, with up volume accounting for 1.3 billion shares while down volume came in at 421 million. Advancers trounced declining issues by a margin of 26 to 16. 290 new highs were set on the day vs 61 new lows. The index has now regained over 300 points in the last two trading days. Among the standouts: SUNW +6.81, CSCO +3.94, AMAT +9.44, CMRC +10, ORCL +12.38 and YHOO +28.81. Interestingly, two Nasdaq issues (Dow components MSFT and INTC) accounted for more than half the gains in the Dow mid-way through trading. The guys over at Nasdaq have to love that kind of news.

The SOX finished extremely strong today, adding +50.94 points to finish at 741.69. The Russell 2000 closed up +13.58 to finish at 501.89. As for the bond, the price declined -18/32, leaving the closing yield for the 30-year bond sitting at 6.59%.

There was in fact other news affecting trading in the markets today, the first of which came out of Alcoa (AA). The Company reported their quarterly and year ending numbers today, beating expectations for the quarter by $0.12. Earnings for fiscal year 1999 increased by over 24%. More remarkable was the fact that the Company broke the $1 billion mark for earnings in a year for the first time in their 110-yr history. In addition to announcing their earnings, the Company's Board of Directors approved an increase of the quarterly dividend by 33.3% and a 2:1 stock split for the outstanding shares to be affective in early June. Despite the good news, the stock traded down -0.25 to finish at $84.38.

The Hambrecht & Quist annual healthcare conference got under way today, highlighting many of the brightest biotech players in the sector. Over the course of the conference there will be approximately 300 companies presenting. The attention brought on by the conference once again helped the sector to lead the broader markets. Among those companies benefiting from the spotlight: BGEN +4.38, GENZ +0.94, MEDI +8.69, AMGN +4.13 and HGSI +17.25.

There were a number of companies reporting today, the most prominent of which was AA. In addition, EPNY came out before the market, beating expectations by +$0.08 on an adjusted basis. AMCC and VTSS both reported after the market, with AMCC coming in ahead of street expectations by +$0.03 and VTSS matching expectations at $0.14. EPNY traded up +24.75 for the day, while AMCC added +25.13 and VTSS managed a gain of +3.56. Look for numbers out of YHOO, ETEK, IP, ARBA, JWEB, SEG, HB and AKLM tomorrow. The obvious one to look for in terms of market reaction will be YHOO, where the expectation on the street calls for earnings to come in at $0.15.

On the calendar for tomorrow in the way of economic news is the Wholesale Inventories number. The previous period number came in at 0.3%, but analysts and economists are looking for an increase to 0.6%. The biggies are still to come, with the PPI due out on Thursday, followed up by the CPI on Friday.

Investors certainly were taken aback by today's announcement involving The Deal. This was good for companies in the high tech arena, the Internets and media related issues. More than that, the news was good for the market in that it gave us something to focus on besides the economic picture and coming economic reports that promised to garner most of the attention this week. This deal highlights the changing markets and the potential of new and existing businesses. The lines are blurring between ISP players and media players, old-line companies and the new kids on the block. As CEO Case of AOL put it " This merger will launch the next Internet revolution, building on those technological advancements and making the most of them to benefit customers". This is inspiring stuff to a market looking to justify where it has come from and where it might go. Yes, the problems that we and everyone else have detailed regarding the overextended situations in our markets, combined with the real possibility of an overheating economy are real and right at our doorstep, so caution must be advised for the short term. For the longer-term outlook, the excitement generated by today's news may well be a sign of things to come.

Louis Horkan
-Chief Editor