Lehman Bond Analyst Slays Amazon

Caustic comments by a Lehman Brothers bond analyst sent shares of Amazon.com and other Internet leaders lower on Friday.

The ISDEX fell 37 to 707, just above support at 700, and the Nasdaq dropped 91 to 3845, back below its recent breakout point. The Dow gained 28 to 10,404 and the S&P 500 fell 10 to 1441. Decliners led 16 to 12 on the NYSE, where volume declined to 849 million shares. Decliners led 22 to 17 on the Nasdaq, where volume contracted to 1.38 billion shares. Traders awaited the outcome of next week’s Federal Reserve meeting; most analysts think the Fed will stand pat.

Amazon fell 9 to 33, breaking key support at 40, after Morgan Stanley Dean Witter analyst Mary Meeker said the company’s revenues the next two quarters may come in weaker than expected. Merrill Lynch comments weighed on the stock yesterday.

But it was Lehman Brothers bond analyst Ravi Suria who did the most damage, recommending that investors avoid Amazon’s convertible bonds because of risk. “From a bond perspective, we find the credit extremely weak and deteriorating,” Suria wrote. “The company’s inability to make hard cash per unit sold is clearly manifested in the weak balance sheet, poor working capital management and massive negative operating cash flow – the financial characteristics that have driven innumerable retailers to disaster throughout history.” Amazon displays “the operational and cash flow characteristics of a normal retailer, despite its ‘virtual’ pedigree,” Suria said.

“In its current situation of high debt load, high interest costs, spiraling inventory and rising expansion costs, we believe that current cash balances will last the company through the first quarter of 2001 under the best-case scenario,” Suria wrote. The company isn’t expected to break even until the fourth quarter of 2001 at the earliest. A technical comment: Amazon’s long-term chart indicates that if the stock doesn’t hold $30, it could have downside to the low 20s.

eBay fell 4 5/16 to 53 7/8 on a W.R. Hambrecht downgrade from Strong Buy to Buy, but the firm said eBay is still a core Internet holding. eBay was the subject of cautionary comments by Merrill Lynch recently, as was Yahoo! , down 6 1/16 to 125 5/8. Yahoo! turned back at 150 resistance recently.

Shares of Priceline.com fell 3 1/2 to 41 13/16 despite a Strong Buy rating by Thomas Weisel and an $85 price target. The firm said Priceline trades at a discount to other leading e-commerce companies, despite an enormous market and favorable margin trends.

America Online fell 4 1/8 to 52 3/8 after shareholders approved the merger with Time Warner . Most of the questions to AOL Chairman Steve Case focused on stock price; Case expressed confidence that shares will rebound.

Shares of PurchasePro gained 3 7/16 to 42 on news that CS First Boston expects the company to exceed revenue estimates by 20% or more this quarter. Shares of Ariba fell 15/16 to 90 1/2 after finding support at 85 1/8, its recent breakout point.

drkoop.com rose 23/32 to 2 11/32 after the company announced that it had secured a $1.5 million bridge loan and extended its relationship with Dr. C. Everett Koop for an additional seven years.

Clarent rose 7 5/16 to 61 5/16 on a Lehman Brothers Buy rating and an alliance with Dialpad.com.

Shares of Homegrocer.com rose 1 13/32 to 8 3/32 a day after news that WebVan , up 9/16 to 8 11/16, would exceed estimates.

Sequoia Software continued to gain on news of an alliance with Microsoft , rising 3 9/16 to 17 1/8.

Recent IPO Sonus Networks continued its run, up 6 5

/16 to 159 1/16 but down from an intraday high of 169 15/16, after IPO co-manager Lehman Brothers began coverage with a Buy rating and $200 price target. Fiber optics stocks, leaders in the Nasdaq’s recent advance, continued to struggle. Corning was unchanged at 240 and SDL Inc. gained 5/8 to 268, stemming a two-day decline.

Some technical comments on the market: We’ve now broken rising wedges on both the Nasdaq and S&P 500 to the downside, possible signs of a bear market rally running out of steam, and we have a breakout failure on the Nasdaq by virtue of its sell-off back into its previous base, below 3893. Now we must consider the possibility that we are still in a bear market and that the primary trend is still down, and we will watch for continuation or reversal patterns to confirm or negate that view. Important levels below us on the Nasdaq are 3700-3725 and 3600. A rally back to the lower boundaries (3935-3950 Nasdaq, 1475-1480 S&P 500) of our rising wedges is a possibility. The ISDEX is near critical support at 700; a clean break of that number would tip the balance to the downside for Net stocks. Our weak break of the Dow’s bearish diamond pattern at 10,382 has left room for a rally there, although we may have gotten that today; the top boundary of that pattern is 10,750, quite a ways from here. As we said yesterday, the Dow diamond should not be considered definitively broken until we close below 10,070 on rising volume (3% beyond the boundary of the pattern); if we get that break, the downside target called for by the pattern would be 8,400 or lower. And finally, for those of you who still believe in Dow Theory, the oldest school of technical analysis, the Transports’ chart has broken down and could be headed for a retest of the lows. Will the Industrials soon follow? Have a good weekend.

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