CNN Transcript - Moneyweek: Bond Market Volatility Could Dominate Week's Action on Wall Street

Volatility in the bond market is expected to dominate the action again next week on Wall Street. One of the most powerful rallies in the year swept through the bond market this past week, after the Treasury Department said it would sell fewer bonds.

Now at one point on Thursday, the 30-year bond was up a full three points in price. The Treasury's announcement largely overshadowed a quarter of a point hike in short-term interest rates by the Federal Reserve. The sudden move in bonds was rumored to have created big losses for some banks and brokerage firms this last week.

Joining me now with his insight for the coming week, bond expert David Jones of Aubrey G. Lanston.

David, welcome, good to have you with us

DAVID JONES, AUBREY G. LANSTON: Nice to be with you.

KENNAN: How bad was the carnage?

JONES: Not as bad as it sounded at the time. I think a few trading desks probably got in trouble, got wrong with respect to the bond, maybe were short when the bond yield came down and lost money. But I think in general, companies, we have to remember, have really good capital positions after all the money Wall Street has made. And I don't think they were over-leveraged like they were back in 1990 -- in the fall of 1998 when we had the Long-Term Capital management problem. So there were a lot more rumors than fact, I think.

KENNAN: This is a remarkable week because the Fed raised short- term interest rates, but the key long-term rates on which mortgages and most things are keyed off of actually fell, because of something the Treasury Department did.

Are the Fed and Treasury at odds here?

JONES: I have a feeling there may have been a phone call or two between the two institutions. I don't know, but I think there might have been because it couldn't -- the Treasury's announcement, which was a regular quarterly refunding announcement, could not have come at a worse time for Chairman Greenspan. And the market was expecting some paydowns. After all, we have a budget surplus and we expect it, but not like they announced it.

First of all, the amount of borrowing was much less than the Street thought. And secondly, more paydowns in the longer-term end, perhaps even ending up with no new bonds at all. I'm only assuming that, but they're down to one a year in terms of new offerings, and suddenly somebody said it's a scarce product, buy it. And of course yields plunged.

KENNAN: So we now have a situation where investors are demanding less money to lend money for a longer period of time than they are to lend it for six months or a year or two. Typically, that means a slowdown in the economy is coming. Is it different this time?

JONES: It is different this time. You're absolutely right that normally, when the yield curve flattens or even inverts, the short- term rates higher than long-term rates, it means we're going to turn down. But this time around -- normally what happens, is the Fed tightens aggressively, pushes short-term rates up more than long rates rise. That's an important qualification. This time, it was a story of long-term rates acting on their own and because of cutbacks in Treasury financings falling sharply.

So I'm not going to forecast anything serious for the economy, certainly in terms of the slowdown. We may grow more slowly in the second half of this year than in the first half, but right now the economy is sizzling.

KENNAN: And so too are the Nasdaq stocks. In particular, we had a 10 percent correction culminating in a big sell-off Monday morning, and from there up into record territory by week's end.

JONES: Which I think is based on the idea this economy is still in great shape. Profits are in very good shape, and Alan Greenspan will have to do a lot more than a quarter point of tightening to get their attention. And that's essentially...

KENNAN: A lot more? How much? You mean -- he's already raised a full percentage point four times since last June.

JONES: But I think he just started with that quarter point increase in February. Last year's three rate hikes just offset the three cuts the year before when we were in the global financial crisis, at least that's how I would view it. So the Fed just got back to neutral after the third rate hike last year. Now, they're starting a series of hikes -- I think maybe two more, perhaps three more, will be somewhere between 6.25 and 6.5 percent on the overnight funds rate by, perhaps, mid-year, up from 5.5 where it all started.

KENNAN: Just quickly, we also had some surprising results out of the New Hampshire primary, of the fact that John McCain is coming on strong. Does that change the outlook in the financial markets at all?

JONES: It wouldn't unless we start to see something happening in Congress. Let's take a stretch here and say the president wants to make Al Gore look good by pushing through minimal wage increases or pushing through some significant spending initiatives. That would run them head on into Alan Greenspan, because he said, as the president once said, we should use surpluses to pay down debt. But Greenspan also said the last thing we should do is to start a lot of new entitlement programs or a lot of spending.

And so it depends on how the president and Congress work at this that really counts in terms of market thinking.

KENNAN: All right. Thanks, David as always.

JONES: Thank you.

KENNAN: We appreciate it. David Jones of Aubrey G. Lanston,

Just ahead, our insiders are going to tell us which stocks stand to benefit the most from falling long-term rates.

And later on, we're going to take a look at two Internet IPO's that are expected to soar when they go public in the week ahead.

So stay with us.

(COMMERCIAL BREAK)

KENNAN: While the bond market will most likely continue to take center stage next week, investors will also be focusing on the tech sector as two of the biggest names in technology report their quarterly results.

Cisco Systems is due out after the bell on Tuesday. A profit of 23 cents per share is expected there.

On Thursday, MCI Worldcom and Dell Computer will report their results. Investors will be closely watching Dell in particular. The stock is already down about 24 percent so far this year.

The Internet stocks, though, have had a much stronger year. The group rallied this past week, as interest rates plunged. Our MONEYWEEK insiders say investors can expect more gains in the week ahead.

Joining me this week, David Simon of Twin Capital Management and Brian Finnerty of C.E. Unterberg Towbin.

And, gentlemen, welcome.

Brian, let me start with you and -- what to make of this crazy week because we were down 10 percent on the Nasdaq on Monday, and bounced right off of that. Is it onward and upward from there?

BRIAN FINNERTY, C.E. UNTERBERG TOWBIN: Fro the second time in the month of January, we've bounced off a 10 percent correction. So I don't know if that is it, but it sure looks like we have a pretty good base built into this market for tech stocks. They did rally very strong, and then the day that the rates were hiked, the tech stocks took off again, on the upside. And they just really seem to have momentum going for them right now. And it seems like people don't want to be left at the starting gate in technology.

You know, it just seems so much is happening there, and, people don't want to be left out, so they're buying them across the board.

KENNAN: David, is that what you saw as well?.

DAVID SIMON, TWIN CAPITAL MANAGEMENT: Well I think there is a lot of pressure of people, like, under performing the market. And so what happens is when they see a movement, everybody just jumps on, and this time of the year, there's a lot of capital that's coming into the market, so you have to put your capital to work if you think it's going to, you know, if the market is going pass you by, you have to perform.

KENNAN: So like on Monday when Cisco and Microsoft bounced down to the $100 level, people just came in and bought.

SIMON: Well, also, I think there was a really big short base in the market at the time because people said, well, if there's a rate rise coming, you know, it's bad for stocks. And everybody says maybe this is the time going to fall apart. And they never do what you think they're going to do, and they're going straight up.

KEENAN: And then we got the Amazon results, and people loved them. I don't know what they loved, but they lost a lot of money.

FINNERTY: It was the biggest loss ever in Amazon's history. But I think, Terry, what people like and what analysts liked about Amazon was the fact that we're saying this seems to be the bottom of the earnings losses, and revenues showing very nice growth, and there are a lot of different areas where growth really took off, in some of their newer businesses, which encouraged investors a lot. And Amazon had been hit hard coming into this report, too, so it was ripe for good bounce. And we got it there.

KEENAN: Any more transparent would be breaking out their numbers.

SIMON: Well, the one thing with Amazon is that, you know, I always thought bricks-and-mortar guys were going to kill them. And I'm still waiting for Wal-Mart to get their act together. So I mean Amazon is out there building and building marketshare. And I'm not a big believer in this, but I don't see anybody coming to compete with them.

KEENAN: Are you playing any of the e-retailers?

SIMON: No, we really don't play high growth. We sort of play more defined situations.

KEENAN: What do you make, David, of what happened in the bond market this week? Because it confused a lot of stock investors as well.

FINNERTY: Well, I think what happened when the government announced their bond buy-back, I think what happened is -- and also the auctions right now, the 30-year auctions are much smaller than they used to be, so there's a shortage of long-term bonds out there. With the pension funds and insurance companies having to keep certain amount of 30-year bonds in their portfolio and the government out there buying back the bonds, it created a shortage a short squeeze with people playing a certain spread, which is people playing a certain spread, which is people playing the middle-term stuff, in short, the longer-term things. And so everybody says, well, if there raising rates, long term is going to back up, and they all got caught. And the market ran.

KEENAN: Brian, you're on the front lines on the trading desks there trading Nasdaq stocks. How closely do you watch the bond market, and how closely should small investors watch it?

FINNERTY: Terry, you have to keep eye on the bond market. The bond market is usually the catalyst for the equity markets, but here's an instance where it's happening a bit differently right now, where you have the Fed raising rates, and then all of a sudden you get a big short squeeze in government market and it takes rates right back down. And I think this was a big catalyst for part of this big move in tech stocks that we saw this week. I really do. I think it's helping to fuel the whole move in the Nasdaq marketplace, and a lot of the Dow and the S&P as well.

SIMON: I think a lot of people feel its (UNINTELLIGIBLE). For my money, it's 6 percent long bonds. You know, let's get back in market.

KEENAN: OK, we're going to take a quick break. But just ahead, predictions from our MONEYWEEK insiders.

And find out why Brian says that he is still hot on JDS Uniphase.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

TIMOTHY GHRISKEY, DREYFUS CORP.: Long term, Nasdaq technology stocks are certainly one of the places to have a significant percent of your money. It's certainly where the growth is for this country, and really for the world. These are great stories. They're stories that people want to own. They want to talk about technology stocks. So investors should certainly have a presence there, but not to exclusion of other sectors.

(END VIDEO CLIP)

KEENAN: Time now for predictions with our MONEYWEEK insiders. And we're joined, as always, by CNN's financial editor Myron Kandel.

Myron, let me start with you. It's been wild week. What do you see for the week ahead? MYRON KANDEL, CNN FINANCIAL EDITOR: Well, I'm still looking for the Dow go up another thousand points before it bottoms out and then pulls back, maybe 10 or 15 percent.

But just a moment on the week just past. We had a roller coaster in the bond market. The bond market used to be the most stable place around. And you had those huge swings during the past week, and certainly in the 30-year bond. So when the bond market goes crazy, what about the stock market? People were talking about the technology bubble and so on. What about the bond market bubble? I think despite all that the market is headed higher, the stock market is headed higher.

KEENAN: And you are not concerned about all the dislocations in the bond market that we saw?

KANDEL: I am concerned. But frankly I haven't been able to figure them out. You know, what is the bellwether bond? Ever since I got into this business, there was the -- well, it was 20-year bond. Then the 30 came in.

KEENAN: You're dating yourself, Myron.

KANDEL: That's right. And now they're talking about the 10-year being the bellwether.

KEENAN: OK, David Simon, your predictions.

SIMON: Yes, I think the Nasdaq is going to continue to outperform the Dow. I think that the Dow is still made up of a lot of value old names, and the public's conditioned now to buy the big growth names. I think the growth names are going to keep going up. Momentum is going to keep coming in, because the money keeps coming into the market. I think if the money flows slow down, I think you'll see market correct. I think that it's all a function right now of flows, and this is a good season to have for money flows into the market.

KEENAN: Yes, the flows have been good, even though it was a rocky January.

SIMON: They've been great. People just start conditioned now.

KEENAN: Brian, your predictions?

FINNERTY: Terry, I think technology is changing and evolving so quickly that the money is going to continue to flow into the tech sector, and therefore, the Nasdaq is going to, again, greatly outperform the Dow and the S&P this year. And when you look at it, it kind of makes sense. Yes, valuations are very high, but things are changing so rapidly, and when you look at some of these companies -- and not -- you know, they ebb and flow, and they rotate within themselves.

But right now, the telecommunications sector is extremely hot. And these are the guys that are building the information flow into Internet. And, therefore, companies like JDS Uniphase, which is becoming one of the classic momentum stocks -- but it's going to continue, because these guys are -- they've become the Intel of fiber optics. They're dominating the marketplace -- they along with Nortel. Those stocks are going to continue to go up because they're increasing the pipe. They're widening out the pipe of the information flows into the Internet. That's going to continue.

And the semiconductor stocks, this whole cycle that has rebounded tremendously, it's probably just either the beginning or middle stages, but we're nowhere near the end of it. So you've got a long way to go in chip stocks, in telecom stocks, and obviously, in the whole Internet sector.

HOPKINS: OK, that's going to have to be last word. Thanks, Brian. Thanks as well to David Simon, and of to course Myron Kandel.

And when we return, the inside track on some of next week's hottest IPOs. IPO expert David Menlow will tell us which stocks he expects to skyrocket.

(COMMERCIAL BREAK)

KENNAN: Next week is shaping up to be another big one for the IPO market. Thirty-two companies are expected to debut and raise more than $2 billion. The majority, no surprise, are Internet related.

Some of the names to watch for: retailer Pets.com. It hopes to raise almost $100 million. Organic, it's a consumer-to-business Internet service company. b-to-b software provider, Webmethods and Vicinty, that's an Internet-based marketing company.

Webmethods and Vicinity are expected to be especially hot, that according to David Menlow, president of IPOfinancial.com.

And David, welcome to MONEYWEEK.

And you like this Vicinity offering, most of all, right?

DAVID MENLOW, PRESIDENT, IPOFINANCIAL.COM: Vicinity is really one of the more unique offerings that are out there, because they're taking what might appear just to be a regular Web site, and they're saying, here is what we're going to do. We know what you like, or you've indicated what you like, we're going to tell you now where you can buy it, and where it's closest to you. But if you have a size issue, let's say you have a 8 triple A shoe, what they're going to tell you where the store is closest to you that has this size.

KENNAN: But -- the size of any shoe? Or if I want a particular shoe? You're getting close to something I'm really interested in. If I want a particular shoe, Dave, can direct me to that exact designer?

MENLOW: In a simplistic form, yes, that's exactly where it is.

KENNAN: How do they make money, though?

MENLOW: Well, they make their money, obviously they're going to be collecting fees from the people that they work with, but also, advertising model reigned supreme throughout Internet.

KENNAN: Pets.com, it has a catchy name, but you don't really like the offering. Why not?

MENLOW: No, I really don't think that this is a company that should be coming public. It's somewhat similar in many respects to the Drugstore.com offering that came out last year. It really didn't have a lot of time online, so to speak, but because Amazon.com, in this particular case, owns 43 percent of the company, this is now going to be incorporated very directly into the Amazon dot site as was the Drugstore.com.

So that's an immediate door opener, it's immediate business and the stock will do well, but it's not on the top of my picks.

KENNAN: You -- you think it may be a dog?

MENLOW: No, no, no, I didn't -- oh, -- did I walk into that one?

KENNAN: Yes.

What about last week? We had Avanex, the huge IPO on Friday -- opened to great reviews. Is it too late to get into that stock?

MENLOW: The difficulty with a stock like Avanex is that the memory of the IPO market investors seems to be of a very short duration. Last August, September, we had a very strong period where just about every Friday, you had a stock opening up 100, 200 points higher. And the fiber optic networking and all the equipment and anything that had to do with infrastructure buildup was the key area. Here we go, nothing happening for about six months in that area, we get this Avanex and the stock just ran away. It's still about the infrastructure of making everything move faster through, hopefully, a smaller pipe.

KENNAN: OK. Thanks a lot, David. We appreciate it.

MENLOW: Thank you.

KENNAN: David Menlow.

And just ahead, we're going to tell you why the tech world will be focused on Palm Springs in the week ahead.

(COMMERCIAL BREAK)

KENNAN: One hundred sixty technology companies will be heading to Palm Springs next week.

Susan Lisovicz won't be going there, but she is here with the last word of what's coming up in the week ahead -- Susan.

SUSAN LISOVICZ, CNN CORRESPONDENT: Regretfully, I'm not going. They have yoga, tennis, golf, and -- oh, yes, business

Goldman Sachs is once again hosting its widely anticipated annual technology conference. This year, Goldman decided to move the conference from chilly New York to the much more pleasant climate of Palm Springs, California.

Now, just about every conceivable tech company will be represented, from Hewlett-Packard to Amazon.com. Many will be making presentations, and investors will certainly be keeping an eye out for market-moving news and announcements.

Among the top speakers: Michael Dell. As you mentioned, Dell will also be reporting its quarterly results next week. Microsoft's CEO, Steve Ballmer, and Hewlett-Packard's CEO, Carly Fiorina delivering keynote speeches as well.

Terry, you mentioned shares of Dell were down quite a bit this year. Microsoft also having a tough 2000. Its stock is off about 11 percent, so it will be interesting to see if Ballmer says anything that could give the stock a lift next week.

KENNAN: You got quite a lineup because it's going to be a pretty quiet week earnings wise and in terms of economic numbers. The Goldman people also have some entertainment.

LISOVICZ: Yes, none other than Dana Carvey. You want to talk about a blue chip entertainer. He's going to be there, maybe doing his George Bush "wouldn't be prudent" Church Lady.

KENNAN: OK, thanks a lot, Susan. We'll be watching for some news out of those 160 companies

Also this programming note: Please join Bill Tucker, Daryn Kagan and me for "IN THE MONEY." That's weekdays at 11:00 a.m. on CNN and CNNfn.

Next week, we're going to talk with the University Heights Investment Club and tell you how they managed to turn a profit of 100 percent in a year.

Also be sure to tune into "THE MONEYLINE NEWS HOUR" with Willow Bay and Stuart Varney.

On Monday, President Clinton releases his latest budget and Willow Bay will be there. She will speak with the president at the White House. That's on "MONEYLINE" at 6:30 Eastern weeknights on CNN and CNNfn.

And that's going to do it for "MONEYWEEK." I'm Terry Keenan. Thanks for joining us and have a great weekend.

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