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 others. 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 reversal. 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 reversal. 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 Advertisement ************************************************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millineum with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********** STOCK NEWS *********** 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- demand. 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) stock. 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 business. 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 SEG. 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. ********************** PLAY OF THE DAY - CALL ********************** 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 Wednesday. 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 ******************* 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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