The Option Investor Newsletter Monday 11-8-99 Copyright 1998, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Also provided as a service to The Online Investor Advantage Published three times weekly, Sunday, Tuesday, Thursday evenings ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-08-99 High Low Volume Advance Decline DOW 10718.85 + 14.37 10776.05 10650.35 802,412k 1,350 1,697 Nasdaq 3143.94 + 41.68 3148.20 3068.86 1,296,785k 2,101 1,953 S&P-100 724.63 + 5.83 726.61 709.83 Totals 3,451 3,650 S&P-500 1377.01 + 6.78 1380.78 1363.73 48.6% 51.4% $RUT 445.07 + 2.66 445.13 441.34 $TRAN 3031.21 + 27.22 3034.01 2994.75 VIX 22.23 - .90 23.13 21.60 Put/Call Ratio .52 ************************************************************* We want to pump (clap). . .you up! Like a scene from "Hans and Franz" on Saturday Night Live years ago, Investors are pumping the NASDAQ to another new record high. You can almost hear investors yelling in their best Arnold Schwarzenegger accent, "Come on Girly-man with your muscles so puny. . .let's see you do it again!" Of course, following six days of record closes, day seven should have exhausted NASDAQ into some profit taking, especially in light of Judge Jackson's finding of fact that Microsoft is a (mean-spirited, evil, ruthless, competition-smothering, predatory killer) monopolist. Traders were staring at MSFT's incoming comet prior to today's open that could have cratered the tech sector if not the market. Alas, the comet disintegrated in the atmosphere and the market got off one more repetition of an ever-increasing weight, as analysts and traders came to MSFT's and the market's defense. How long can it go on? We don't know for sure. However we can say the odds of this trend continuing diminish geometrically with each new record trading day. On only two occasions this year have we actually seen seven straight days of new records. Those periods were June 28 through July 6, and October 10 through October 18. In fact, according to discount broker, Charles Schwab and Company, the market hasn't given us eight consecutive highs in 1998 or 1999. The likelihood of a eighth day is really slim. That's not to say the market can't advance any further, but that it needs a day off. As it turned out, Microsoft news was no big deal in today's trading of tech issues. While MSFT traded as low as $80 in Europe last night, $84.38 was the low at the open in the U.S market and remained the buzz all day in the pits and chat rooms. By noon, MSFT had found support at $87.50 and moved up to $90.75 in the afternoon, before falling back into the close at $89.94. Total loss on the day - $1.63. While this may seem insignificant in the big picture, this recovery came on 122 mln shares of volume - about 9% of the NASDAQ volume. That's 4.6 times its ADV with 3.8 bln shares in float and 5.16 bln outstanding. To frame this up, investors bid up MSFT's value by $30 BILLION from its low of the day! That's a huge market positive in our book. Also benefiting from the supposed bad news were Microsoft rivals. Take a look at their score cards today: Red Hat software, +$18.06 at $104; Sun Micro, +$2.31 (+$6 at one point) at $112; Apple, +$8.06 at $96.38. For SUNW, and AAPL, theses are new records. You expect bad news from MSFT to rub off positively on the rivals in a zero sum gain where MSFT loses and the others steal its value. Not so. Looks like everybody benefits from the ruling as MSFT's loss is the others gain, leading to MSFT's recovery. How was the NASDAQ overall? How 'bout another new record? It closed at 3143, up over 41 points. Total volume for the tenth day in a row was over 1 bln shares, with over 1.3 bln shares changing hands today. Considering MSFT, INTC, CSCO, DELL, and WCOM make up 40% of the NASDAQ 100, and each of these suffered a loss (except CSCO - +$1.88, probably in anticipation of earnings tomorrow), today's gain of 41 point happened in the other 60% of the index. Can you say "Internet"? Sure, we knew you could. Take a look at AMZN (an unfortunate entrant as a put play over the weekend - hopefully, you confirmed that the trade was not in your direction and avoided the play). On news that they would announce a new alliance in a press conference to be held tomorrow, it shot up $13.06. YHOO was up $13.75; AOL +$4.25; INKT +$5.31; CNET +$4.31; NSOL +$6.12; EBAY +$3.75; PCLN +$9.12. Look at customer relationship management companies too: KANA +$62.44 to $150.50 (!!); EPNY +$39.56 to $120; ALLR +$17 to $119.25; BBSW +$8.06 to $66; EGAN +$14 to $32. These are not misprints. B2B software also performed to similar levels. All told advancers squeaked past decliners 2101 to 1953. New highs remained strong against new lows by 211 to 85. Need more? Even the Russell 2000 index closed up today indicating today's move was market wide. Conversely, comprised of a greater percentage of financials than other indexes, the DJIA exhibited weakness from the start, moving down about 54 points this morning at 10,650. Then within the first hour and a half staged a rally to its high of the day 10,776, a 126-point recovery, but fell back into the close. Other than that, action was lackluster, as the DJIA closed up just 14 points at 10,718. 1697 decliners beat 1350 advancers, while 91 new lows bested 68 new highs. Volume? A measly (comparatively speaking) 806 mln shares. Careful, we're nearing that 10,800 resistance level again. With the PPI out Wednesday morning, it's unlikely we'll see any volume helping the market to break down that door tomorrow. Not helping matters here is that pesky bond rate that has fallen quite a ways in a hurry. As it nears 6% again, investors are starting to notice the previous big move down and wonder if there shouldn't be some backing and filling, or at least caution, in front of the PPI. We don't expect any big moves until the PPI has been fed to bond traders like a sardine to a seal. Then it will be time to jump through the market hoop for the next feeding on November 16, the occurrence of the FOMC meeting. There are other events taking place this week that will affect our trading. First Wal-Mart will report earnings tomorrow. If figures are low, that may lead investors to believe the economy is slowing on the consumer end, which would be good for the inflation outlook. On the other hand, great earnings would likely benefit just WMT and perhaps the retail sector. No matter what, WMT earnings aren't likely to rock the market. However, CSCO (est = $0.23) reports tomorrow after the bell, then DELL (est = $0.18) on Thursday. These two have the potential to rock the tech world, and thus the rest of the market. Also, the American Electronics Assn. Began its conference in San Diego today, which will last through Thursday, and is typically good for tech stocks. Of course, don't forget about the PPI on Wednesday. Just a brief note here to let you know of two new IPOs this week. Normally, we wouldn't mention them, but because of their size, they could have an enormous effect on liquidity. We refer here to UPS which will likely price 109 mln shares between $47-$49, sucking up $5.2 bln of investor cash if all goes well, and Charter Communications (about 150 mln at $17-$19 shares totaling $3.2 bln), a nationwide cable bandwidth service provider brought to you by Paul Allen of Microsoft fame. That's a total of $8.4 bln in liquidity these 2 issues could soak up. It could put a real damper on rising stock prices, at least temporarily. So here's the lineup: for the NASDAQ, more records are statistically unlikely. However, given the strength shown by huge volume, an intraday selloff (or multi-day correction) is buyable AFTER you see the bounce, so long as sentiment remains positive. While the DJIA hasn't set any records lately, it too has some resistance at 10,800, which if it's going to happen, won't likely be broken until after the PPI figures are known and the bond traders get some backing and filling. The wild card for both markets is the PPI, which will affect interest rates, which affect profits, which affect stock prices. Remember Jim's entry strategies as the week unfolds. Target shooting is the key to a good entry and a profitable trade. Buying everything in site after 7 straight new highs (so you won't miss out) is NOT a good approach and assures loss of capital. Plan your trades, trade your plan, wait for the market to come to you, then sell too soon. Buzz Lynn Research Analyst *********** STOCK NEWS *********** Enough Already, It's Not a Monopoly By S.P. Brown With all due respect to U.S. District Judge Thomas Penfield Jackson, Microsoft is not a monopoly. Take it from Webster's dictionary, a monopoly constitutes "exclusive ownership through legal privilege, command of supply, or concerted action." That definition does not apply to Microsoft. Judge Jackson obviously doesn't agree. In a 207-page ruling against the software giant, the good judge attempted to make a case that Microsoft was wielding its so-called monopoly powers in ways that weren't in the "public good." Oddly, though, the ruling does not say whether Microsoft broke the law, nor does it say what the company's punishment will be. Here are a few choice excerpts from Judge Jackson's head-scratching anti- Microsoft diatribe, along with a rebuttal to each. "Microsoft enjoys monopoly power in the relevant market, that is, Intel-compatible PC operating systems." Wrong. Yes, it's true that Microsoft's Windows operating system powers roughly 90 percent of the world's 200 million- plus desktop computers. But that doesn't mean consumers don't have a choice. In addition to Windows, there's Linux, OS/2, Unix, and then there is the Apple operating system for those folks who wish to jettison the PC environment completely. "It is Microsoft's corporate practice to pressure other firms to halt software development that either shows the potential to weaken the applications barrier to entry or competes directly with Microsoft's most cherished software products." Wrong. Here's what happens in the real world: Microsoft wants Apple to abandon development of its multimedia playback software. Apple refuses. Microsoft pressures IBM to stop bundling its SmartSuite program with its PCs. IBM refuses. Microsoft binds small fry like Concentric and EarthLink to stifling quotas, limiting them from shipping Navigator. Concentric and EarthLink violate the restrictions. What does Microsoft do about all this corporate insolence? Nothing. "The AOL coup [in which AOL agreed to use Internet Explorer as its primary browser], which Microsoft accomplished only at tremendous expense to itself and considerable deprivation of consumers' freedom of choice, thus contributed to extinguishing the threat that Navigator posed to the applications barrier to entry." Wrong. The "deprivation of consumers' freedom of choice" statement is ridiculous. Before Microsoft supplied their Internet Explorer for free, consumers had to pay for a browser. Now consumers are in the enviable position of choosing between two fine browsers for free. "Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products. Microsoft's past success in hurting such companies and in stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest." Wrong. Are you saying a company doesn't have the right to defend its market, Judge Jackson? Besides, if someone has a technology that will truly benefit consumers, there is nothing Microsoft, or anyone for that matter, can do to ultimately impede its deployment. As a corporation, Microsoft has no power to force anyone to do anything. "In sum, Microsoft successfully secured for Internet Explorer and foreclosed to Navigator -- one of the two distribution channels that leads most efficiently to the usage of browsing software. Even to the extent that Navigator retains some access to the OEM channel, Microsoft has relegated it to markedly less efficient forms of distribution than the form vouchsafed for Internet Explorer, namely, prominent placement on the Windows desktop." Wrong, or rather, so what? The property rights to Windows and Explorer belong solely to Microsoft and not to potential buyers. Thus, there is no right to force Microsoft to create, or sell, a product the company does not believe to be in its best interest. If Microsoft wants to dictate how Explorer is used, so be it. It's their property. Consumers can take it or leave it. So if Microsoft isn't really a monopoly, why the lawsuit? Basically it boils down to jealous competitors, and bureaucrats needing to justify their jobs, which is unfortunate. One of the most attractive aspects of the software industry is that it remained entrepreneurial, even as it grew to a multibillion-dollar industry. But now, some software businessmen have fallen prey to the temptation of having Washington do their dirty work. It seems they can no longer tolerate the fact that Microsoft has a CEO worth close to $100 billion and that the company operates with 85 percent gross and 40 percent net margins. One particular practice that Microsoft's competitors have taken exception to, and the Justice Department has seized upon, is the infamous demand by Microsoft for restrictive covenants in exchange for its cooperation with other software companies. Microsoft once demanded another company's program set Internet Explorer as the default browser. Janet Reno and her gang deemed that tactic unfair. But unfair only for Microsoft, whose competitors routinely use this same tactic without fear of legal retribution. Because it is the market leader, declares James Barksdale of Netscape, Microsoft should be required to "play by a different set of rules." What about the notion of equal protection under the law, Jim? The government's lawsuit against Microsoft puts the company in a "damned if you do, damned if you don't" position. Microsoft's legal position would be strengthened if it would just wilt in the face of competition. Yet if Microsoft continues to adhere to the virtues that made it successful - continually upgrading its products to meet competitors' challenges and consumer demands -- it faces a greater risk of prosecution. For a market leader to engage in aggressive competition is, in the George Orwell language of antitrust, "anticompetitive." What's Microsoft supposed to do, demonstrate to the powers-that-be that it is not trying to compete, that it isn't trying to succeed? Unfortunately, that is the inane conclusion supported by 100 years of antitrust lawsuits in the U.S. The Justice Department bullied IBM for years with antitrust charges, only giving up when that company was surpassed by Microsoft and Intel -- who quickly became the new antitrust targets. If the IBM case is any indication, the Justice Department wouldn't be satisfied until Microsoft stagnates and gets its clock cleaned by the competition, just as IBM did. You'd think that after two centuries of capitalism someone in the Justice Department would have learned the basic economic tenet that all companies in competitive industries earn zero economic profits in the long-run. Zero economic profits means that there are no additional profits to be made after compensating investors for risk and the time value of money. Right now it's safe to assume that Microsoft is still earning positive economic profits. But one day those juicy profit margins will begin to contract and Microsoft will find itself in the same humble position as other so-called monopolies - IBM, Eastman Kodak, and Xerox -- earning zero economic profits. Finally, and ironically, the only real monopolies are those sanctioned by governments, the very entities who supposedly despise monopolies. Public schools and utilities are two obvious industries granted monopoly power by the government. Maybe if things get a little slow at the Justice Department, they can start filing antitrust suites against state, local, and federal governments. As ridiculous as that sounds, don't count it out. **** United Parcel Service Trucks New Offering to Wall Street By Cindy Christ United Parcel Service is expected to deliver the largest Initial Public Offering ever to Wall Street this week. In a move conveying strong interest, late Friday UPS raised the offering price to $47 to $49 from $36 to $42. The 92-year-old- company hopes to haul in about $5.6 billion from the sale of 109.4 million shares, or about 10 percent of the company, when shares start trading Wednesday. The remaining 90 percent of total common stock and about 99 percent of the voting power will be controlled by the company itself -- including employees and retirees who own two-thirds of outstanding shares -- through a different class of stock. UPS's new offering drives Conoco (COCa), which raised almost $4 billion last year, from the top IPO slot. IPO watchers say UPS will lead the pack of new issues slated to debut this week. With 26 offerings on deck to raise an estimated $8 billion, the next five days could prove the busiest of the year for new issues, according to Thomson Financial Securities Data. UPS has said it will use funds raised to make acquisitions in logistics, distribution and e-commerce and to repurchase some existing Class A shares. Analysts say investors have eagerly awaited the arrival of shares in the world's largest package delivery company since news of the offering was announced in July. Given the company's long operating history, profitability and leading position in e-commerce, analyst expect institutional investors to lead the charge in buying. Last year, UPS earned a $1.7 billion profit from sales of $24.8 billion. Moreover, it's the only transportation company with an AAA credit rating from both Standard & Poor's and Moody's. The company, which delivers more than 12 million packages to 1.6 million customers worldwide each business day, delivers 55 percent of goods purchased over the Internet, according to Zona Research. "We are the industry leader in the delivery of goods purchased over the Internet... We seek to position ourselves as an indispensable branded component of e-commerce," the company says. The company also says it's well prepared to meet the exponential growth in demand that future online sales will generate. According to market research firm Forrester Research, online sales to consumers will rise to $108 billion in 2003 from just 7.8 billion last year. With all the ingredients portending a successful IPO wrapped in the deal, analysts say UPS is bound to fly high. Two days before shares begin trading, demand has driven the offering price up more than 20 percent. The deal also is backed by a group of prestigious investment bankers led by Morgan Stanley Dean Witter. Co-managers are Goldman Sachs and Merrill Lynch. According to Tom Taulli, analyst at Edgar Online and author of Investing in IPOs, one trait shared by all successful IPOs is high-quality underwriting. But despite the positive buzz and power-broker backing, detractors say that investors who jump in on the first day will pay too much for UPS. If shares begin trading around $60 a share as analysts predict, the company would be priced at twice the multiple garnered by chief competitor FedEx (FDX). Supporters say the company's dominant Internet position warrants a higher multiple. What's more, at 14.6 percent, UPS's operating margin is more than double FDX's, they say. Like its rival, UPS earns most of its revenues from business deliveries. And though UPS now delivers to more homes than FDX, RPS, an FDX subsidiary, is set to introduce a new, nationwide home-delivery service using independent contractors next year. Analysts say UPS also faces increasing competition from upstarts like Webvan (WBVN) and Streamline (SLNE), whose next-generation warehouses and delivery systems are customized to meet the needs of e-commerce. "Established giants like United Parcel Service and FedEx won't necessarily dominate this market," writes Red Herring Magazine's Justin Hibbard. "Although traditional shipping companies have been handling the delivery of most online purchases, residential delivery isn't their forte. A handful of startups are seizing the opportunity to address the unique requirements of delivering online purchases to homes." UPS also competes with many other companies on a local, regional, national and international basis, including government-subsidized postal services here and abroad. Besides competition, other risks UPS investors face include slowing growth in the domestic market, rising oil prices, strikes and work stoppages or slowdowns, non-Y2K compliance, and economic turmoil in other countries, where UPS earns about 13 percent of revenues. In addition, the company warns that foundations and trusts created by UPS founders and their descendants could take advantage of the new public market by selling large blocks of shares after the lockout period ends. What's more, an unfavorable ruling handed down in August has left the company with an estimated $2.353 billion liability for back taxes. With an end-to-end delivery system that carries an estimated 6 percent of the U.S. gross domestic product and an early lead in the booming e-commerce industry, UPS just might be one of a few conservatively priced Internet plays. But before jumping on the truck, be sure to read the offering's prospectus, which delivers all the goods on this well-respected industry leader. **************** PLAY OF THE DAY **************** BVSN - Broadvision $83.50 (+9.88) Broadvision's software helps companies become e-commerce powerhouses. Their depth in One to One Internet software provides the tools for all facets of the online transaction, including ordering, payment, fulfillment, customer service and billing. It also allows users to collect, track and manage customer visits, then create customer profiles accordingly. Customers include Oracle and Cyberian Outpost. Insiders own 46% of the company. On Tuesday, BVSN launched a secondary offering in Europe by offering 2.7 mln shares at $72. On Monday, BVSN traded in the U.S. at $80. Why pay $80 when you can buy them for $72? Right, neither did anyone else. BVSN was pounded back to around $74 to close at its low that day. The good news is that once investors shook it off, the issue continued climbing the rest of the week on strong volume, culminating in a new high on Friday. Technically, the chart couldn't look better, and volume at more than twice the ADV couldn't be stronger either. But that's the rear view mirror look. Looking forward, if volume keeps up we should get more of the same - nice gains. However, since the NASDAQ has been up 6 days in a row, "immediately" is not the time to take a position. We need to wait for a pullback and let the market digest some of its gains before it continues to move up again. Decent support appears at $76 on intraday dips, though Friday, the dips only got us a buying opportunity at $80. Check the chart for yourself to see where you fit on the risk scale. Given the big market rise, our leaning is to wait for the lower digits when the market decides to take its profits. Otherwise, so long as volume remains heavy, a breakout over $85.25 (resistance=$84.88) is buyable too, but we still prefer the dips for a better entry. Earnings were on October 20, and they surprised 23% to the upside. News? Other than 2.7 mln shares in a European secondary offering, from CBSMarketWatch on Monday, "The partnership between New Era and BroadVision will allow businesses to integrate existing systems with Internet applications to perform business- to-business and business-to-consumer e-commerce, according to a statement from the companies." ***November strikes expire in 2 weeks*** BUY CALL NOV-80*BDV-KP OI= 884 at $13.00 SL=10.50 BUY CALL NOV-85 BDV-KQ OI= 388 at $ 9.38 SL= 7.00 BUY CALL NOW-90 BDV-KR OI= 303 at $ 3.63 SL= 2.00, risky!! BUY CALL DEC-80 BDV-LP OI= 404 at $17.25 SL=13.50 BUY CALL DEC-85 BDV-LQ OI= 178 at $14.38 SL=11.25 BUY CALL DEC-90 BDV-LR OI= 166 at $11.88 SL= 9.25 Picked on Nov 7th at $83.50 P/E = 556 Change since picked +8.50 52-week high=$92.50 Analysts Ratings 4-19-1-0-0 52-week low =$ 4.81 Last earnings 09/99 est= 0.13 actual= 0.16 Next earnings 01-27 est= 0.16 versus= 0.08 Average Daily Volume = 1.2 mln Chart = http://quote.yahoo.com/q?s=BVSN&d=3m ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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