Option Investor
Market Wrap

I think I can, I think I can, I think I can.

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        WE 12-10         WE 12-03         WE 11-26        WE 11-19
DOW     11224.70 - 61.48 11286.18 +297.27 10988.91 - 14.98 +234.57
Nasdaq   3620.24 + 99.61  3520.63 + 72.82  3447.81 + 78.56 +148.10
S&P-100   763.49 -  3.99   767.48 + 13.91   753.57 +  4.27 + 18.21
S&P-500  1417.04 - 16.26  1433.30 + 16.68  1416.62 -  5.38 + 25.96
RUT       466.71 +  2.13   464.58 +  5.64   458.94 -  2.33 + 11.58
TRAN     2874.94 - 53.86  2928.80 + 19.64  2909.16 - 67.34 -113.07
VIX        20.92 +   .10    20.82 -  2.13    22.95 +  3.32 -  2.05
Put/Call     .45              .49              .42             .47

I think I can, I think I can, I think I can.

It was touch and go at the open and it took almost all day for the Nasdaq to build up steam and pull itself out of a -33 point deficit but the result was the same. Another record high close on the fourth largest volume day ever for the Nasdaq. The index with the can do attitude struggled to climb that mountain of overvalued worry but the Nasdaq rolled right over the shorts and the bears. The Dow actually came along for the ride, closing up +89.91 points and only 102 points from a new high. From my vantage point it is looking like the start of a December rally and nothing has been able to hold it back. Do not get me wrong. We will have some serious profit taking someday but with only the CPI and a lame duck Fed meeting between us and Christmas, it may be January before the big one hits.

The PPI report was very tame at only a +0.2% increase overall but the core rate at unchanged was even better. Analysts had been predicting a +0.1% increase. The bond market continued its rally and yields dropped to 6.16%. Already analysts are forecasting sub 6% yields next week if the CPI is as benign as the PPI. The main factor behind the decrease was lower prices for cars, trucks and computer components. There are no economic reports on Monday but Tuesday starts a big list beginning with the CPI, Retail Sales and Real Earnings. Wednesday has Business Inventories, Industrial Production and Capacity Utilization. Once over the CPI hurdle the next big event is the Fed meeting the following Tuesday. With the market in rally mode the CPI would have to be a disaster to put any serious crimp in the sprint to Y2K. After the PPI today the Fed is even more out of the picture. With the massive amounts of cash they have been putting into the system in preparation for Y2K, it would be out of character for them to try and crimp its use by raising rates with Y2K only 10 days away. Some analysts were calling for a bias change to tighten but after the PPI even that has dropped from discussion.

Another market mover today was the drop in oil prices. IRAQ got approval to extend its oil for food program and the prospect of that supply coming into the market again, crude dropped to $25.20. Airlines rebounded and the transportation index gained +59 points to end the slide, which started Wednesday.

The tech bears were out in force today. Led by another Niles downgrade of Intel and Dell just as the Nasdaq broke into positive territory around noon. Citing falling sales from Y2K freezes, slow chip production and falling PC prices, he said Dell would have trouble meeting top line estimates. Intel is unable to make chips fast enough on the top end and PC prices on the low end just keep falling. He feels fourth quarter profit margins will shrink. This one - two punch comes only a day after IBM reminded analysts that the Y2K event was slowing mainframes and PC sales and they would only meet the already lowered fourth qtr earnings. Intel finished down -$1.00, Dell -1.19 and IBM -4.38.

Just in case you forgot, earnings start in four weeks. Do you remember what comes before earnings? Confession. The four weeks before earnings is confession season. That is when you confess to your stockholders and the world that your sales plan is not working, new products were flops and management does not have a clue. Of course they don't actually say all of this, they just issue an earnings warning and let you make your own deductions. Just to get things started off right Xerox volunteered to be the scapegoat and fired off their warning at 4:01 PM Friday. It was an attention getter. They estimated they would miss earnings by -40% and blamed it on everything except late deliveries by Santa Claus. Bad product mix, Y2K, slow sales, high priced systems not moving, etc, etc. It was really ironic that they choose today since today was the only up day their stock has had since November 19th. I can see the fund managers now. Let's get some XRX today boys. Tech is so high and XRX has been beaten up so bad it just can't go any lower. Looks like an entry point to me. Wrong! Those lucky buyers that bought in at $25 and change just before the close, saw their recent acquisition dropped by -20% to $19.88 before the trade confirmations even arrived.

The Gloom and Doom team was out in force today. As soon as the Nasdaq broke into positive territory the airwaves was full of tech bears preaching immediate crash. The tech bubble theory has reached the point where the bears and air personalities have said it so often they think it is true. Now they can't understand why it continues to expand. Nothing says a market cannot continue up. Does anyone not think that the mere mention of Linux should double or triple a companies value? You don't think that $300 for a $30 stock on the first day is out of line? Surely I jest, but in reality technology is driving productivity gains faster than at any point in human history. Look at where we were just ten years ago before the Internet. People actually talked at the supper table, watched hours of boring TV and then went to bed. People did not check their email or S&P futures during bathroom breaks in the middle of the night. (I know some of you really do this) The majority of you only moved into the Internet generation within the last two years. That is really scary.

With the permanent bulls quoting Nasdaq 4000, 5000, even 10,000 in the next three years and the Dow sharing space in orbit with the Hubbell telescope, there has got to be some tremendous rallies in front of us. Yes, the techs are overvalued. They are overvalued compared to previous historical values like a Mercedes is overvalued compared to a covered wagon. Both are four wheel vehicles but from different ages. Techs are changing daily. Products in production now will be scrap eighteen months from now. The world as we know it is changing so rapidly that even us tech savvy, Internet junkies have no comprehension of where we will be ten years from now.

A news article out today said that Nokia will be the leading personal computer maker by 2002. Think about it. The news is full of new Internet capable devices from pagers, cell phones, digital assistants, all miniature PCs. Your cell phone has more computing power now than a 286 desktop just five years ago. So is Nokia just a phone company and should have a PE of 25 or the largest computer manufacturer in the world with a PE of 78. Things change. In the Internet economy we are being exposed to on a daily basis the only rule is "change or die". Websites are forced to reinvent themselves daily to keep their visitors coming back. This kind of change previously took years to evolve, then months and now days in some cases. Why did I take you down this evolutionary path today? Simply to prove a point. Tech valuations today are subjective at best. Who knows what the value of today's ideas will be tomorrow. We are investing today in tomorrow's hopes. In reality by the time tomorrow comes those ideas will be old and stale. How do you value that? Are techs overvalued, correctly valued or perhaps undervalued when you take the last five years changes and project the same changes over the next several years? Mankind's knowledge is doubling every eighteen months. (fact) The rate of increase is exponential. In three years, we will know 300% more than we know now. What will Intel be worth? Or HGSI, AMGN, BVSN, SUNW, EXDS, ARBA, RHAT or all four Microsofts?

We will not continue to go up in a straight line. There will be pullbacks and profit taking. All the whining and posturing on CNBC is noise. As option traders we are privileged to be able to make money quickly in either direction. Our only challenge is to pick the right direction and hang on until the direction changes. The next five weeks should be very profitable. We have the year-end rally as people who were waiting for a Y2K sell off race to catch up with those who stayed invested. We will have the January rally as those who did stay out rush to get back into the market along with the cash investments from year end retirement contributions. There maybe a pullback or two between now and January but the trend should be solidly up. Every pull back should be viewed as a buying opportunity. Just remember when buying the dips over the next two weeks that there may be a Y2K pothole in the road ahead. Nobody has seen it yet but you don't know if that next dip between now and Y2K is the real thing. On any dip WAIT for the bounce before starting new positions. In any event, trade hard for the next six weeks and take February off.

Have a safe week in the market. Watch for buying opportunities, pick your entry points VERY CAREFULLY and sell too soon.

Jim Brown
Editor

Circumstances prevented me from doing an Options 101 article this week but I will pick up again next Sunday.

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