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 ******************* 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 *********** 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 options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc