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Daily Newsletter, Wednesday, 11/17/1999

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The Option Investor Newsletter         Wednesday  11-17-99
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)
************************************************************
        11-17-99           High     Low    Volume Advances Decline
DOW    10883.10 -  49.20 10937.50 10879.10   948,024k 1,204  1,859
Nasdaq  3269.39 -  26.13  3324.24  3268.85 1,646,353k 1,911  2,139
S&P-100  739.77 -   3.12   746.18   739.76    Totals  3,115  3,998
S&P-500 1410.71 -   9.32  1423.55  1410.69            43.7%  56.3%
$RUT     457.07 +   0.19   458.86   456.88
$TRAN   3004.13 -  95.54  3098.82  2998.52
VIX       21.07 -   0.35    21.78    20.34
Put/Call Ratio       .50
*************************************************************

2 Million and Counting

That's right.  2 million trades were counted at the Nasdaq 
today.  It's official...we've done it.  I would like to thank 
all traders everywhere for helping make this a reality.  As 
individuals we are small but united we are "Modern Capitalist 
Mavericks".  (We like to contribute often to the 2 million 
trade record here at the office).  That is the first time that 
landmark has been hit and it is no surprise that is was done 
on the day the Nasdaq set another record volume day.  There 
were over 1.6 billion shares traded today.  This is great to 
see as it reaffirms the increasing interest and sentiment to 
the stock market.  It will probably not be long before we hit 
the 2 billion shares mark and who knows after that.   

Unfortunately, it was on a down day but it's hard to complain 
after the string of record days the Nasdaq has given us recently.  
In fact, a breather is healthy.  The market was probably a 
little over-bought yesterday relative to the movement in the 
bond market.  The 30-year was yielding around 6.01% at the time 
of the Fed announcement before falling close near 6.06%.  The 
stock market ignored this and closed near the highs for the 
day.  On Wednesday, the bond continued its slide to highs on 
the yield at 6.13%.  The markets can't ignore this action forever 
and sold off some today.  Some analysts are now expecting rates 
to trend a little higher in the short-term, not by much though.  
And it is the bond that held the banks and brokers back today 
to weigh on the indices.  MER -2.75, JPM -2.50, BAC -0.94, and 
MWD -5.81.  In truth though, this sector held up pretty well, 
teetering on breakout mode.

The Dow was fairly calm today after yesterday's excitement.  
It traded mostly range-bound between 10,937 and 10,879 but it 
did close down near the day-low at 10,883, down 49.24.  Volume 
was also strong, trading over 938 million shares.  Decliners 
beat advancers 3-to-2.  The other indices finished lower as 
well.  The S&P 500 was down 9.38 to 1410.69 and the Nasdaq 
closed at 3271.40, -24.12.  And to make us feel that not every 
index went lower, we can take comfort in the Russell 2000 and 
it's gain of 0.19 to 457.07.  Wow, I feel better now.  


 


 

You can put a lot of blame to today's downside in two sectors.  
The Financials we mentioned above giving back some of their 
recent gains thanks to the bond market.  But the other one was 
the Oil sector.  Tuesday evening is the release of the weekly 
American Petroleum Institute's inventory report.  This week 
it showed inventories below normal for the first time in awhile 
and sparked crude prices to jump, finishing over $26 a barrel.   
That is a 3-year high but, more importantly, could it trigger 
higher prices and thus more inflation?  I hate to bring this 
up one day after the announcement that was supposed to bring 
rate relief for the next couple months but that is what traders 
are talking about.  Still, one day does not make a trend and 
we mention the oil patch here only in the fact that it caused 
the Transports to fall.  It is tough to rally the indices on 
a day the Financials and Transports are sinking.  

How about the Oracle?  After positive remarks from company 
executives at the Oracle Open World Conference in Los Angeles 
on Tuesday, Merrill Lynch raised their price target to $80.  
This stock has been on fire since late October when it traded 
in the mid-$40s.  The company is reaping the benefits of the 
e-commerce explosion.  ORCL closed at $71, up $6.50.  

If you have been to the web site or found an e-mail in your 
inbox today, you know how we feel about QCOM.  Jim got real 
excited when he saw QCOM heading towards the 10-dma at $328, 
which corresponded with where QCOM broke out at the close 
last Thursday, making for a double dose of support.  We got 
out a trading alert as fast as possible but needless to say, 
today's range on QCOM makes it possible to institute many 
different strategies for our high-risk players.  It had entry 
point written all over it.  If you got in at the right time, 
you had an opportunity to profit.  QCOM opened above $360, 
dropped to $328, rebounded to $352, fell back to $335 and 
closed at $342.88.  Today's actions pretty much explain the 
premiums that go along with this stock.  See our write up 
under the call plays section for more insight.  (Otherwise 
I could write a whole wrap on trading QCOM.)  Also check out 
Jim's plays this weekend for further insight. 

HWP is the earnings stock of the day.  They reported $0.73 
after the close, in line with First Call.  The outlook was 
painted as mixed with no quick fix answers but expectations 
of mid-teen growth next year still in tact.  HWP closed at 
$77.44, up $1.31 in the regular session and up $2.50 after-
hours.  HWP will also be spinning off Agilent Technologies in 
an IPO on Thursday.  But they weren't the only one turning in 
a scorecard today with AMAT also reporting.  They earned $0.77 
which is above even revised upward numbers.  The most recent 
First Call number was $0.69.  AMAT closed at $110 and was 
trading down $2.50 after-hours but still way above their mid-
October prices in the $70s.  

In merger news, Kimberly-Clark (KMB) announced after the close 
they would be acquiring Safeskin (SFSK).  It is a stock deal 
worth about $13.30 based on KMB's close and SFSK is at $12.75 
already after-hours. 

The CPI came out this morning as a non-event.  It was at 0.2% 
with a core rate of 0.2%.  This was in line with expectations 
and failed to really move the markets.  Hopefully, traders 
and the Fed are content with the interest rate environment as 
it currently stands and won't feel the need to over analyze 
what was a routine number.  The big movers in the market today 
seemed to be news-related, not economy-driven.  CHINA down 
$22.88 after a meteoric rise, PCLN up $8.13 after signing 3 
new airlines to its Internet ticket service, CMGI up $20.88 
after a Goldman Sachs upgrade, FATB up $7.50 after saying they 
will beat estimates for Q3 revenues and PHCM down $8.25 after 
news of increasing their 'Kiss of Death' secondary offering.  
So it appears that we are somewhat back to playing the stock 
and not the market. 

If you are looking to IPOs to determine investor sentiment, 
then it is safe to say that sentiment is still strong.  There 
were 4 IPOs today and all of them garnered at least a double 
in their share price.  TRRA went to $38.25 from a $13.41 
offering price.  RMKR closed at $18.50 from $8, VRTA ended 
at $26.56 from $14 (not quite a double) and IMAN finished at 
$24.63 from an offering of $11.

Looking ahead is always tricky but there is one thing you can 
expect, more volume.  It is no coincidence that the 5 biggest 
volume days have come in the past three weeks.  Some traders 
were concerned that today's record volume came on a down day, 
signaling a reversal.  It is not that simple and I wouldn't 
lose a lot of sleep over it.  Tomorrow will be an interesting 
day to see if the market rebounds.  The bond has dropped a 
little, the market has dropped a little and we've come a long 
way in the Nasdaq.  But this may just be a breather on the road 
to higher prices.  We would like to see a rebound in the 
Financials, Transports and Bonds.  If you get those ingredients 
then we should be moving higher on what is likely strong volume.  
That is a fairly standard recipe for success.  On the other hand, 
if we see these sectors worsen or begin to act in odd fashion, 
then it may be time to start lightening up some positions.  
The market doesn't usually fall out of bed without something 
starting to taste funny.  With that said, let's continue to 
monitor the market, while placing smart trades at smart entry 
points.  This will help maximize the upside and limit the 
downside.
  

Ryan Nelson
Asst. Editor



***********
STOCK NEWS
***********

Long Live the French
By S.P. Brown

Investors believing that MCI Worldcom's (WCOM) $115 billion 
takeover of Sprint (FON) marked the end of the consolidation 
trend in the telecom sector need to turn their attention 
across the Atlantic.  Takeover fever has hit Europe with a 
vengeance.  Vodafone Airtouch's (VOD) recent blockbuster bid 
for Mannesmann (MNNSY) likely marks the beginning of a feeding 
frenzy in the European telecom sector that will rival its 
American counterpart.  

If VOD is able to claim MNNSY as its own (as of now, a deal is 
far from certain), VOD will become the dominant phone company 
in Europe.  Other European phone groups, notably Deutsche 
Telekom (DT)and British Telecom (BTY), will undoubtedly take 
action if they feel their turf is seriously threatened by 
VOD's position, as will ugly Americans with a strong European 
presence, such as WCOM and AT&T (T). 

Naturally, then, any European empire-builder would look 
to that European fountain of culture, France, when seeking to 
expand his holdings. 

To say the Franco-centric telecoms are ripe for a takeover, or 
at least a major restructuring, wouldn't be an understatement. 
French telecoms operate in a much more bureaucratic, 
socialistic economy than the other European and American 
telecoms.  This excessive insulation and regulation has 
severely retarded French telecom growth, profitability, and 
market valuations. 

Now because of global market pressures, the French telecoms 
are forced to streamline their bloated telecom operations.  
Unfortunately for the French, markets demand streamlining 
sooner rather than later. 

The most obvious candidate for a makeover is France Telecom 
(FTE), the $27 billion former government monopoly.  Takeover 
rumors began to swirl around FTE in early October when WCOM 
announced that FON would withdraw from Global One, a worldwide 
telecom venture owned by FON, FTE, and DT.  The WCOM 
announcement sent chills through FTE's Parisian offices, as 
FTE had been counting on FON as a key part of its global 
strategy.  

After the FON pull-out, no one became more aware of FTE's 
precarious position in the world telecom arena than its own 
chairman, Michael Bon, who understatedly declared, "I fell 
insecure."

He should.  Competitors now control 13 percent of France's 
fixed-line phone traffic, which is growing at a 10 percent 
annual rate, against a 2 to 3 percent annual rate in the mid-
1990s.  The fixed-line growth is due mainly to a big push into 
the faster-growing parts of the telecom business--Internet, 
wireless and international services, which Bon predicts will 
account for 40 percent of FTE's consolidated revenues next 
year, against 6 percent in 1995. 

But competition is only one of many hurdles FTE faces.  The 
company is hamstrung by bureaucracy.  88 percent of FTE's 
155,000 employees are classified as French civil servants, 
whose jobs are protected by law.  Of these "servants," 92 
percent are FTE shareholders.  On top of that, the French 
government still holds 63 percent of the company's stock and 
by law can't cut its shares below 51 percent.  Thus any deal 
that would involve buying or merging with a major foreign 
company would instantly become politicized. 

So given that FTE's employees are protected by law from being 
axed, it's difficult for FTE to cut costs.  So instead of 
shrinking the work force, Bon has redeployed a quarter of them 
to revenue-generating parts of the business, such as sales.

But that's not going to be enough to make FTE competitive on 
the world stage.  To avoid being marginalized as the telecom 
industry consolidates, FTE must outgrow the competition, or it 
will have to put itself up for sale.  Whether the company will 
have a chance to do that before WorldCom or some other big 
suitor comes calling remains to be seen.  Without a major deal 
with someone, it's difficult to see FTE going anywhere. 

http://www.OptionInvestor.com/charts/index.asp?image=sn32
 

Another French company with telecom interests that's in good 
need of a shake-up is Vivendi (VVDIY), a wildly dispersed  
conglomerate that owns the country's second largest phone 
network.  VVDIY enjoys a dominant position in the European 
telecom sector through its 44% holdings in Cegetel.

Besides being in the phone business, VVDIY also owns a hodge-
podge of businesses ranging from energy to homebuilding to 
cable television to waste management. 

Whether it likes it or not, VVDIY is getting the once over  
from the world's telecom sector.  The company's shares have 
risen 21 percent over the past few weeks on takeover rumors.  
The usual suspects mentioned include VOD, BT, DT, and WCOM.  
To date, none of them has managed to get into the French 
telecom market in a meaningful way, so VVDIY would be a prized 
catch.   

A significant hurdle facing any suitor, though, would be VVDIY 
management.  If the company were bought, it would surely be 
dismantled.  All the telecom bidders would want is VVDIY's 
phone operations and possibly its cable holdings.  The 
remaining mishmash of businesses would most likely be sold 
piecemeal.  VVDIY could circumvent this forced dis-aggregation 
if it were willing to spin off the phone operations first. 

http://www.OptionInvestor.com/charts/index.asp?image=sn33
 

Though not technically a true telecom, Alcatel (ALA) may be 
feeling a little insecure these days, too.  ALA is a 
diversified telecom equipment manufacturer whose stock has 
performed miserably this year. 

Admittedly, a takeover of ALA is a long-shot.  Unlike FTE and 
VVDIY, ALA is actually decently-run and is one of the better 
positioned global players in the telecom equipment market. One 
favorable aspect of ALA is it can be a one-stop shop for its 
client base.  The company's product lines have vast long-term 
potential and cut across all communication sectors including, 
optics, switching, wireless, cabling, local and wide area 
networking.

Today, there are a few major players in the European telecom 
world and ALA is the recognized market leader followed by 
Siemens, Ericsson (ERICY), and Nokia (NOK).  The leading North 
American players are also making some headway in Europe. 
ALA has completed a number of strategic mergers over the past 
year that has vastly expanded its product portfolio and 
significantly sharpened its leading technology industry 
position.

Unfortunately for ALA, it has been labeled with the same 
inefficiency tag as its French compatriots.  The company 
trades at a fraction of the multiples of the more visible 
equipment makers such as CISCO Systems (CSCO) and Lucent 
Technologies (LU), even though it is no slouch in the telecom 
equipment market.  ALA has a worldwide presence that generates 
over $24 billion in annual revenues, which is nearly twice the 
revenues of CSCO.  Amazingly, investors give ALA a market cap 
of only $32 billion, a mere fraction of CSCO's $279 billion. 

Any potential investor, or suitor, interested in ALA would be 
getting a market leader at a discount to market multiples. 

http://www.OptionInvestor.com/charts/index.asp?image=sn34
 



**********************
PLAY OF THE DAY - CALL
**********************

SFE - Safeguard Scientific Inc. $121.06 -4.19 (+8.56 this week)

Safeguard is an Internet-centric holding company that finds, 
acquires, operates and manages business-to-business companies 
engaged in e-commerce, e-communications, and e-business software 
and services and has interests in several private equity funds.  
Safeguard generally acquires ownership interests in companies 
that allow it to have a significant influence over their 
direction and management over the long-term.  Safeguard assigns 
a dedicated team to each partner company and actively assists 
its partner companies in their management, operations and 
finances.  Safeguard seeks to maximize shareholder value by 
actively providing operational assistance and expertise to 
help its partner companies grow and develop and by giving its 
shareholders the opportunity to participate in the initial 
public offerings of its partner companies while retaining a 
significant ownership interest after the initial public 
offering.    

Sunday's Write Up

Whew!  Did anybody see a bounce off $117, $116 of $114?  Neither 
did we.  That was a pretty powerful downdraft all the way to 
$110.50 before a large buy order picked SFE up off the floor.  
It spent the rest of the day nursing its wounds and bouncing 
north of $112.50 on three occasions, where it ultimately closed.  
The bounce looks good; the close doesn't, especially when the 
rest of the market is in rally mode.  Volume was about 200% of 
the ADV for the day and moving up into the close as the price 
was falling.  So why keep this play?  The reason still stands - 
higher-lows converging with resistance indicates a probable 
breakout to the upside if typical chart patterns hold.  The 
resistance is $120, which we expect will be blown right through 
with any volume to back it up; support just over $110.  If it can 
hold $110 and bounce with volume, we have a play.  If it breaks 
south with volume backing it up, you probably ought to cross it 
off your play list (you do have one, don't you?).  Frankly, our 
timing could have been better.  ICGE, a competitor reported 
earnings Thursday after the close and sold off Friday, pulling 
the sector down with it.  With that out of the way, perhaps SFE 
has given us a better buying opportunity.  Wait for your entry.

No news on Friday, but the previous news is still relevant.  On 
November 4 (not September 4, for those having read Thursday's 
write-up), CS First Boston issued a Buy rating.  While there is 
no great detail, there have been many articles lately about B2B 
Internet growth in which SFE is nicely positioned.  Much like 
CMGI, SFE has numerous companies in the pipeline, which they 
plan to take public in 2000.  Only SFE has a reasonable p/e 
of 47.  By definition, it's profitable.

Tuesday's Write Up

Finally, the homework pays off.  We noted that higher-lows 
converging with resistance of $120 was setting SFE up for the 
breakout.  Sure enough, we found little bits of support at 
$114 and $117 on the rebound, only to see SFE bump its head 
on $120 minutes before the FED's announcement.  After the rate 
hike notice hit, SFE cranked up the volume and powered right 
through $120 to set a new all-time high.  Closing on a high 
note, the move should continue as long as volume remains intact 
and the market wants to party.  While we've noted them as a 
possible splitter, the last one to actually occur was back in 
1996 (2:1) in the $60 range.  SFE has been above $60 for most 
of the year and still no announcement.  If you are holding 
your breath, you'll want to keep breathing for now.  They have 
100 mln authorized shares with only 37 mln outstanding, so they 
have the ability to split 2:1 again, but seem to lack the will.  
Next earnings date, which would also be a likely split 
announcement date, is not until February.  If the theory that 
old resistance becomes new support holds water, $120 is the new 
support level.  Blue sky smiling at SFE - nothing but blue sky 
does it see.  Nonetheless, use a trailing stop to protect your 
profits - today was a big move subject to some back-filling.

BUY CALL DEC-110 SFE-LB OI=614 at $16.63 SL=12.50
BUY CALL DEC-115*SFE-LC OI=456 at $13.88 SL=11.00 
BUY CALL DEC-120 SFE-LD OI=236 at $11.00 SL= 8.75

Picked on Nov 11th at  $118.75     P/E = 51
Change since picked      +2.31     52-week high=$125.88
Analysts Ratings     8-3-1-0-0     52-week low =$ 24.50
Last earnings 10/99  est= 0.14     actual= 0.26  surprise = 85.7%
Next earnings 02-17  est= 0.16     versus=-0.23
Average Daily Volume =   439 K
Chart = http://quote.yahoo.com/q?s=SFE&d=3m



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***********
DISCLAIMER
***********

This newsletter is a publication dedicated to the education 
of options traders. The newsletter is an information service 
only. The information provided herein is not to be construed 
as an offer to buy or sell securities of any kind. The 
newsletter picks are not to be considered a recommendation 
of any stock or option but an information resource to aid the
investor in making an informed decision regarding trading in 
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editor and staff of The Option Investor Newsletter may own, 
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