Option Investor

Daily Newsletter, Monday, 11/22/1999

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The Option Investor Newsletter         Monday  11-22-99
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)
        11-22-99           High     Low    Volume Advances Decline
DOW    11089.50 +  85.60 11112.80 10978.20   873,570k   906  2,189
Nasdaq  3392.56 +  23.31  3400.23  3357.68 1,374,762k 1,935  2,200
S&P-100  754.35 +   5.05   756.04   747.24    Totals  2,841  4,389
S&P-500 1420.94 -   1.06  1425.15  1412.30            39.2%  60.8%
$RUT     460.77 -   0.50   462.40   459.69
$TRAN   2954.90 -  21.60  3020.13  2920.39
VIX       20.28 +   0.65    20.97    19.83
Put/Call Ratio       .43

Both the NASDAQ and the DJIA posted nice gains today. . .

So how come my stocks didn't advance?  Look no further than the 
advance/decline line, where on the NYSE 2190 decliners squashed 
just 908 advancers - that's better than 2:1 negative, and not 
conducive to profitable trading.  NASDAQ was also negative, 
however much less so with 2205 decliners beating out just 1938 
advancers.  Digging deeper, the real answer lies in the 
performance of specific stocks that make up the indices.  For 
instance the DJIA is comprised of only 30 companies (out of 
potentially thousands that are traded every day) including the 
old "stodgy" variety like Phillip Morris, Coca Cola, General 
Motors, General Electric, even IBM.  Most recently, Microsoft and 
Intel were added to the mix to better reflect the importance of 
technology in the changing world economy.  Is there a theme here?  
Other than membership in the index, the answer is , "not really".  
Let's take a look at some of these.  Each one had its own reason 
for a move today which had nothing to do with movement of the 

First Coca-Cola (KO).  KO announced a price increase for its 
syrup, which it sells to bottlers worldwide.  Say hello to a 
bigger revenue stream.  Analysts, Merrill Lynch in particular, 
upped KO's rating to an Intermediate Buy and named it "a top pick 
for 2000".  With international prices firming, it's assumed the 
worst is over and that they can make price increases stick.  On 
volume three times the ADV, KO moved up $4.88 to $64.38, its 
highest level since June.

Second, AT&T (T).  Here's a communications company that had yet 
to join in the market's enthusiasm for these issues.  Today, a 
Paine Weber analyst noted that in an analyst meeting scheduled 
for December 6th, he believes that T will announce a tracking 
stock for its wireless properties estimated to be worth $20 per 
share.  Adding in a pro-forma value for the wireless division 
gives T an estimated current value of over $70 per share.  
Naturally, volume kicked in at almost 2.5 times the ADV, as T 
traded up $5.44 to close at $52 on the news.

Third, Microsoft (MSFT).  Love 'em or hate 'em, as we noted over 
the weekend, the appointment of a mediator in hopes that MSFT 
would ultimately reach a settlement provided some welcome support 
for this previous non-participant.  MSFT closed up $3.81 at 
$89.81 on 73% greater volume than the ADV.

GM saw an increase of 50% to its ADV, sending it up $3.25 to $73.  
IBM gained $3.94 to $107.88 on 30% excess volume over the ADV.  
GE, while negative early in the day, made a move during and after 
lunch to close up $2.50 to $140.19.

With moves like that, it's clear to see how the DJI could finish 
up 85 points with just six companies carrying the heavy load.  
That's a total of six companies adding roughly 110 points to the 
index.  The other 24 traded flat or negative.  In short, you 
could call it luck or coincidence that it finished up.  There was 
no common theme here.

Need confirmation?  Take a look at the OEX (S&P 100 index), which 
was up 5 points today compared to the SPX (S&P 500 index), which 
actually lost a point.  The Russell 2000 remained flat today too.  
From this we can see the top 100 are carrying the indices up, 
while the balance of the issues trade flat or down.  This is 
borne out in the terrible advance decline line.

Here's the good news though.  Over the last three trading days on 
five separate occasions, the DJIA found support at 10,975 and 
kept bumping its head on 11,050.  Today, on an afternoon volume 
increase, the index broke over 11,100, though it fell slightly to 
11,089 by the close.  Even so, the close over previous resistance 
of 11,050 (yes, a small breakout) is a positive if you are of the 
mind that previous resistance becomes new support.  Take it with 
a grain of salt though; the next longer-term resistance is 
11,150.  The DJIA is up over 5% in the last seven trading days.  
It too may be due for a breather before moving up.  

However, as we've noted in the past, money coming off the 
sidelines is manifesting itself in volume.  Continued volume 
equals continued gains.  No volume equals no gains.  That will be 
the sign that the spigot has been turned off (at least 
temporarily), wherein money managers will take a wait and see 
approach, perhaps harvesting some profits before committing more 
funds to the market.  Once they've spent what they've got, they 
can't buy anymore until they get more funds.  Selling something 
for a profit accomplishes that objective, but also whacks prices.  
Be sure to keep those stops set, or at least know your exit if 
your broker won't let you set stops.  (We're raving over 
Preferred Trade's stop loss system and suggest you investigate 
them if you want to trade with stops).  

As mentioned earlier, NASDAQ also saw a negative A/D line, 
(though not as ugly as the NYSE) as it nonetheless marched on to 
another new record high, closing up 23 points today at 3392.  
That makes 14 new records in the last 17 trading days, tacking on 
640 points with no serious correction.  Near as we can tell, this 
is unprecedented in recent history.  The NASDAQ now trades at a 
27% premium to its 200-dma.  We're not telling you to sell 
everything right now, but this level is unsustainable.  Trading 
at a 25% premium has occurred only two times so far this year.  
On both occasions, the correction was swift and lopped an average 
of 13.5% off the high.  Time frame?  In both previous instances, 
the rallies lasted 4-6 weeks.  We have just begun week six today.  
While it's possible that we could continue to see gains so long 
as volume remains high, we are trading on borrowed time and need 
to position ourselves, and more importantly, psyche ourselves up 
to turn on a dime in a southerly direction once we see the 

Anyway, finishing those NASDAQ stats: Volume was a "mere" 1.37 
bln shares, which probably no longer qualifies in the top ten, 
given the last five weeks of trading.  The good news is that 
there were only 63 new lows compared to 214 new highs.  Again, as 
long as the money flows, keeping the volume strong, prices should 
continue up.  Just remember to CYA (cover your assets) for the 

While we're waving the red flags, how about the price of oil?  
Iraq decided to curtail its production of crude by 2 mln barrels 
per day.  Add to that the already squeezed inventories and the 
astounding OPEC compliance with their targeted production quota, 
and you have a recipe for $27 per barrel prices - a high not seen 
since before the Gulf War.  While it is generally believed in oil 
circles that this is not sustainable (just like lows of $10 per 
barrel weren't either), it is nonetheless taking its toll on the 
bond market, which saw the treasury index rise to 6.19% today.  
This is a problem that won't go away with the wave of a hat.  
Salomon Smith Barney's chief oil strategist thinks these prices 
are sustainable for the next 3-5 months, but not for a year.  
Hmmm. . .just long enough to get us safely on the other side of 
Y2K?  There is the possibility that energy producers are stocking 
up just in case.  But power producers and bulk users alone can't 
account for OPEC unity.  We've said it before that higher oil 
prices are like carbon monoxide on the Western economy (Eastern 
too for that matter).  It insidiously filtrates through every 
aspect of production and consumption, acting gradually to raise 
prices seemingly undetected.  We just don't notice the 
gradualism, much like a lobster starting out in cold water.  
Before he knows it, he's dinner.  Watch the alarm bells go off 
and headlines ring out when economists start to do the math on 
the multiplier effect.

The VIX too remains at trading range lows, registering just 20.28 
at the close today.  "High - time to buy; low - time to go".  
Technically, the index is registering an extreme overbought 
position.  Investors are just too darn comfortable even though 
warning signs are showing up all over.  The last time we hit a 
reversal, the VIX was at 19.77 and went all the way to 33.44 in 
only 5 trading days.

Scared yet?  Take heart.  Capital is still being invested in this 
market in record amounts.  There's not a fund manager worth his 
salt that want's to be left behind on this big move.  As long as 
volume remains strong, the market remains tradable.  That's our 
cue that funds are still buying.  When they stop buying, the 
party's temporarily over.  There are still some hot sectors that 
show no signs of letting up yet either.  Those would be optical 
networking (JDSU, HLIT, GLW, FDRY, BRCM PHCM - electronic 
networking for that matter), and the Internet with its list of 
usual suspects - AOL (splits tomorrow), YHOO, AMZN, EBAY, and 
CMGI (new $1 bln B2B fund).  Investors are already starting to 
show the holiday spirit toward the latter group.

Since this is a short trading week, we'll try to be brief in our 
finish tonight.  Negative - short week insures some volatility; 
VIX at low end of the range; NASDAQ at 27% over 200-dma; negative 
to downright ugly A/D lines; rising oil prices and bond rates.  
Positive - volume remains strong (this is a big one) as a result 
of fund money pouring in; many tech issues remain strong.  
Translation: trade selectively with a heightened sense of 
awareness and a shorter time horizon.  Harvest profits and cut 
losses quickly.  Adhere to support and resistance.  Most of all, 
watch the volume and sell too soon. 

Buzz Lynn
Research Analyst

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Give Seagate an "A" for Effort
By  S.P. Brown

Investors in PC desktop components manufacturers are notorious 
for excluding the disc-drive makers from their portfolios, and 
with good reason:  Pricing power has always been an issue in 
the disc-drive industry, mostly because industry members don't 
have any.  Worse yet, prices for the same capacity class of 
disc-drives usually trend one way - down - while industrywide 
disc-drive capacity increases roughly 60 percent a year, 
resulting in the unenviable need to continually introduce new 
product just to stay even.

The leader in this dog-eat-dog world is Seagate Technology 
(SEG), the world's largest independent provider of mass storage 
computer products.  SEG primarily offers disc-drives with a 
form factor (a measure of the disc size accommodated) of 3.5 
inches, and capacities ranging from two gigabytes to 50 
gigabytes.  SEG also designs, manufactures and markets a range 
of rigid magnetic disc-drives for use in computer systems and 
multimedia applications, such as digital video and video-on-

SEG has a distinct advantage over its disc-drive competitors - 
it occasionally makes money.  For the three months ended 
October 1, revenues rose 8 percent to $1.68 billion from $1.55 
billion from the 1998 period.  Net income totaled $2 million, 
or $0.01 vs. a loss of $30 million, or $0.12 a share for the 
same period in 1998.  Revenues reflected a higher level of unit 
shipments and a favorable product mix.  Earnings also benefited 
from a $193 million gain on the sale of Veritas Software (VRTS) 

On the flip-side, earnings were hurt by a restructuring charge 
of $112 million, as well as $102 million in charges related to 
the it investment in VRTS back in June.  Excluding the two 
charges and the one-time gain, diluted net income per share was 
$0.07 cents.  Going forward, First Call consensus earnings 
estimate is for SEG to earn $0.43 cents a share for its fiscal 
year ending June 30, 2000.

If making money in the disc-drive business is a precarious  
proposition, why, then, has SEG piqued Wall Street interest?  
Well, the company is currently profitable, one of the few disc-
makers that can make such a claim.  But beyond mere 
profitability is SEG's investment portfolio, particularly its 
investment in highflying VRTS, which designs, markets and 
supports enterprise data storage management solutions. In June 
1999, VRTS acquired the Network and Storage Management Group of 
Seagate Software, for approximately $2.2 billion in stock.  As 
a result, SEG now owns 91 million shares of VRTS, or 
approximate 35 percent of the company's stock.  

Since the acquisition, VRTS stock has soared to the point that 
SEG's stake in VRTS is now worth more than the market value of 
SEG's own stock, meaning that the market is currently giving no 
value to SEG's other investments, nor, incredibly, to its own 

Here's the math:  SEG closed today at $40.19, up $1.43 from 
Friday's close, giving the company a market value of $8.3 
billion on the week.  SEG owns 91 million shares of VRTS, whose 
shares have risen almost fivefold this year.  SEG's VRTS stake 
has a market value of $9.2 billion, or about $44 per SEG share 
based on SEG's 208 million shares.

Besides this very profitable VRTS investment, SEG also owns 6.4 
million shares of flash memory data storage designer and 
manufacturer SanDisk (SNKS), valued at $430 million, and 3.8 
million shares of hardware storage area networks (SANs) enabler 
Gadzoox Networks (ZOOX), valued at $277 million.

Based on today's closing prices, SEG's investment in VRTS, 
SNKS, and ZOOX have a market value of $10 billion.  

In addition to this formidable portfolio, SEG also has a clean 
balance sheet with $1 billion in net cash after debt, which 
comes to nearly $9 per share.  The total market value of SEG's 
equity holdings and cash is more than $53 a share. 

It's clear SEG management doesn't believe its stock deserves to 
trade in the low 40s.  To that end, the company has been a huge 
buyer of its own stock, repurchasing 48 million shares for $1.5 
billion, nearly 20 percent of the shares outstanding, over the 
past year.  And recently, the company has authorized the 
repurchase of an additional 50 million shares. 

These management machinations are finally starting to make a 
difference.  For the year, SEG is up over 30 percent.  But 
that's not enough.  Alec Cutler, a managing director at 
Brandywine Asset Management believes that SEG is worth at least 
$70 a share.  His analysis puts a conservative valuation on 
SEG's disc-drive business and accords no value to the company's 
business-intelligence software division and its 35 percent 
stake in the private Dragon Systems, a leader in the hot field 
of voice-recognition technology.

The market's inefficiency in valuing SEG has led professional 
rumor-monger, and oft-contrarian indicator, Business Week 
magazine, to recently print that SEG may be the target of 
Japan's Fujitsu and International Business Machines (IBM).  
According to the business rag, one nameless investment 
professional, who has been accumulating SEG shares, said that 
Fujitsu has expressed interest in SEG and is discussing a 
buyout for at least $55 a share.  This nameless SEG shareholder 
also believes a move by Fujitsu will trigger a move by IBM for 

Admittedly, the Business Week story reeks of unsubstantiated 
chat-room gossip.  

Still, SEG is doing enough of the right things to make the 
company a compelling investment for either another corporation 
or for the individual investor.  In addition to its core disc-
drive business and its investments, SEG continues to broaden 
its strategy to more fully address the markets for the storage, 
retrieval and management of data.  The company offers a 
complete line of mini-cartridge and DAT tape drive products 
used primarily for system backup purposes.  Through its fast 
growing Seagate Software unit, the SEG provides information 
management software solutions

But even if SEG's own business were to go to hell-in-a-
handbasket, there's still that VRTS investments.  Donaldson, 
Lufkin & Jenrette (DLJ) recently doubled its price target on 
VRTS 18 months out to $200 from $100 previously (before today's 
3-for-2 stock split). The new price target is eight times the 
brokerage's preliminary 2003 revenue estimate of $5.0 billion.  

DLJ analyst Joe Farley admits the task of a setting price 
target VRTS is tricky due to difficulty in estimating the 
ultimate size of company's market opportunity.  He notes the 
company's new distribution strategy, a research and development 
budget that dwarfs rivals' efforts and consistent strong 
results have built a premium valuation for VRTS.  If the DLJ 
prediction comes to fruition,  SEG's investment would then be 
valued at $12 billion, or $58 an SEG share. 

SEG managers must be scratching their head.  Given the 
company's investment portfolio, balance sheet, share buybacks,
and profitable operations, it's difficult to imagine what more 
they can do to enhance shareholder value, sans putting the 
company up for sale.  Maybe that's the only option left.


BVSN - Broadvision $109.63 +12.13 (+12.13)

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.  
Trophy Customers include Oracle, American Airlines, Credit 
Suisse, Ernst and Young, Hewlett Packard, Home Depot, Motorola, 
Vodafone and WalMart.  Insiders own 46% of the company.

Once again, here's an issue where volume has overtaken 
intelligence.  Mind you, we're not complaining about a profit- 
just noting that there is no substitute for volume when it comes 
to moving a stock's price.  Friday's stellar gain came during 
amateur hour and is considered highly unusual, except on option 
expiration Friday when contracts get exercised.  The action puts 
immediate buying pressure on the stock, as thousands of contracts 
were exercised following the recent run.  In the process, BVSN 
broke $96 resistance and held it to set yet another new high.  On 
the theory that old resistance becomes new support, $96 appears 
to be a new support level with new resistance way at $99 (a new 
intraday high).  With share value up over 1500% this year, BVSN 
just executed their first split (3:1) in October.  The 
announcement came when the stock traded at $133.  We're getting 
there, but not yet.  The first hurdle will be clearing resistance 
at $99, then the psychological barrier of $100.  If that's not 
enough, consider that the NASDAQ has risen over 600 points in the 
last 15 trading days, setting 12 new records on extraordinary 
volume along the way, without any correction.  Anyone see a red 
flag here?  Charting history and a good story are things we see 
in the rear view mirror that would spur us to take a new 
position.  However, instead, we would encourage you to look 
through the windshield this week.  Confirm market direction 
before making the play.  GDP and jobless claims are reported on 

In the news, Friedman, Billings, Ramsey reinstated their Buy 
rating with no other details.  Careful.  GEOCapital, Lou 
Navellier and Pilgrim Baxter (all large institutional holders of 
BVSN) have sold over 3 mln shares according to September filings 
and declined comment on their moves.  Navellier was a bit more 
forthcoming: "It's frothy; I trimmed it and stand ready to trim 
more.  I'd like its earnings momentum to pick up.  It's 
officially a Hold on my system."  Piper Jaffrey also reiterated 
their Buy rating this week.

BUY CALL DEC-100 BDV-LT OI= 790 at $17.00 SL=13.25
BUY CALL DEC-105 BDV-LI OI= 173 at $14.13 SL=11.25

Picked on Nov 7th at   $83.50     P/E = 615
Change since picked    +26.13     52-week high=$112.00
Analysts Ratings   5-16-1-0-0     52-week low =$  4.81
Last earnings 09/99 est= 0.13     actual= 0.16
Next earnings  1-27 est= 0.16     versus= 0.08
Average Daily Volume =   1.4M
Chart = http://quote.yahoo.com/q?s=BVSN&d=3m


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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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