The Option Investor Newsletter Monday 11-29-99 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) ************************************************************ 11-29-99 High Low Volume Advance Decline DOW 10947.92 - 40.99 10987.38 10886.15 866,140k 994 2,118 Nasdaq 3421.47 - 26.44 3468.32 3421.36 1,544,588k 1,797 2,341 S&P-100 749.29 - 4.28 754.23 747.07 Totals 2,791 4,459 S&P-500 1407.83 - 8.79 1416.62 1404.15 38.5% 61.5% $RUT 456.95 - 1.99 459.93 456.47 $TRAN 2900.19 - 8.97 2915.20 2896.82 VIX 23.69 - 0.46 24.31 22.82 Put/Call Ratio .49 ************************************************************* Another day, another 1.5 bln shares traded on the NASDAQ. . . No record this time. The first day of trading following the Thanksgiving weekend saw investors turning their prize winning birds into turkey soup. The high flyers in the tech sector put up a heck of a fight, but could not escape the boiling interest rate caldron. First Merrill Lynch, then Warburg Dillon Reed predicted another FED rate hike, possibly by year end as a result of strong initial holiday sales reported by retailers and e- tailers alike. To give you an idea of the negative sentiment in the bond market, even news that existing home sales fell 6.6%, which would normally have traders jumping for joy and chanting "yippee, the economy is cooling off", got the cold shoulder in the bond pit. The focus is clearly on the NAPM numbers (wholesale producer sentiment) scheduled for release on Wednesday, and the non-farm payroll and jobless rate scheduled for release on Friday. While we still contend that inflation is a non-issue thanks to productivity gains, right or wrong, the market doesn't care what we think and could remain in defensive mode most of the week. Also, despite a slide in oil prices today, the prospect of generally higher prices until April still weighs heavily on the bond rate too. Anyway, profit taking was the order of the day as higher interest rates finally put the brakes on the runaway equity train. The DJIA broke below 11,000, a technical development that Jim alluded to Sunday, which could take us to 10,750. If there is a silver lining in this, the lows of the day were at least getting higher indicating buying interest on dips is still intact. Despite interest rate fears weighing heavily on equities, the technology issues initially kept the NASDAQ afloat until the last two hours when it shed almost 50 points to close at the low of the day. That too is an ugly development until you realize that it is still above last Wednesday's close. As we've said before, as long as there is money flowing into equities, a day or two off isn't going to kill this bull market. It is healthy to have a day to regroup in light of the gains we've seen over the last 4 weeks. So, is this just standard profit taking (a.k.a. buying opportunity) or a genuine reversal? Only time will tell, but let's look at today's action for some clues. First, the DJIA sank like a stone right from the open all the way to 10,886 before finding the strength to immediately recover to 10,950 - nonetheless a clear violation of the 11,000 support level. However, the gap down from Friday was severe enough that technical analysts might want to fill that void. The heavy morning volume as the price was rising is indicative of nobody being in a hurry to unload. There was good support at 10,900 and rising by the end of the day with volume. Chalk it up to profit taking with underlying strength. That is a positive in our book. The final score was not that bleak - down 40 points to 10,947. However, pessimists will note the horrific internals, with the A/D line showing just 10 advancers for every 21 decliners, and 404 new lows besting just 56 new highs. The deterioration doesn't look good. Of course, there are many more financial and utility companies traded on the NYSE (than on the NASDAQ), the likes of whom really took it in the shorts today on the negative bond sentiment. Only 326 mln shares traded up while 513 mln traded down. Total volume was about 830 mln shares, which we characterize as "busy". NASDAQ was a bit stronger in appearance until the final two-hour profit taking session into the close. It finished down 26 points at 3421. Advancer here too trailed decliners, but by "only" a 23:18 margin. Still 254 new highs were way ahead of just 81 new lows. Volume was the third highest in history clocking in at 1.55 bln shares. Yes, down volume slightly outpaced up volume in the final two hours, but overall, the index nonetheless ended the day with about 800 mln shares trading up and about 700 mln shares trading down. Note again the huge volume - NASDAQ is highly unlikely to experience a severe sell-off as long as volume remains high. In the overall scheme of things, and as we've noted before, volume will make up for and gloss over lots of problems. When the volume dies, look out below. That will be the clue that the buying has come to an end (or been temporarily suspended). Then just the sellers will be left, in which case all of us will be making hasty retreats. Need proof that money is coming into the market? $20.4 bln flowed into mutual funds in October. The biggest month on record was January, 1997 with $28 bln of inflows. November's figure is expected to blow that record away. While close to home we have reason to be cautious (VIX continues its climb over 23; interest rates are moving up; oil prices on the rise; the market climbed to high too fast; index levels grossly exceed 200-dma; etc.), the perhaps bumpy ride is cloaked in the greater positive force of liquidity. According to TrimTabs (the research firm headed by Charles Biderman), an average of $6.8 bln weekly flowed into mutual funds over the past 4 weeks. Though margin debt climbed to an all-time high of $2.9 bln, the drop to just 1.15% of total market capitalization is a bullish sign. That capitalization has risen by $1 trillion (with a "t") with IPO's shrinking going forward is testimony to the largesse of the inflows. The net result of the research is that Biderman upped his stance to CAUTIOUSLY BULLISH, though in his own words, he runs the risk of "being the last guy on the train before it wrecks". This is a guy whose model portfolio is up 81% this year and 1836% since July 12,1993, compared to 16% this year and 256% since July 12, 1993 for the S&P 500. He's credible. Okay, so despite the bond market making gloomy sounds, what do we need to know about today's trading? As noted earlier, retailers are off to a great start and are seeing trading volume increases in front of what is expected to be a record sales season. Hot items this year are mostly electronics from digital handsets, digital cameras, and DVDs to plain old PCs (funny - not a peep about Poke Mon). Unfortunately despite YHOO reporting online transaction volume up 400% over last year, and AOL reporting a 300% increase with over 4 mln users making a purchase last week, Henry Blodgett threw cold water on the e-tail rally which began earlier this morning by noting that AMZN's expected revenue of $633 mln this quarter is "a strong number, but not amazing". Internets finished the day mostly negative, even though the Yankee group noted that 18 mln homes would spend $18.3 bln in online sales this coming year. On the positive side, Redback Networks agreed to acquire privately held Siara in a $4.3 bln stock trade. Siara is the former sister company of Cerent (started by the same group of engineers before parting ways in 1998), which was recently purchased by CSCO for $7.2 bln. Siara is an optical equipment maker (what else?) supplying local communications companies with IP over optical equipment. RBAK was up almost $14 today. Back from the dead too, AMD announced the release of its Athlon chip running at 750 Mhz, besting Intel's best P-III running at 733 Mhz. AMD was up $2.81. Drug stocks too got a big push at the end of the day with prices rising across the board on increased volume in the sector. In summary, liquidity and volume still rule, but market internals are suffering a slight breakdown (more so on NYSE than on NASDAQ). Despite a much needed profit taking, there are still plenty of profitable opportunities, but you must pick your entry points carefully - not all factors are currently in our favor, and may not be until the bond market works itself out of despair. On the positive side, a healthy dose of fear can provide that wall of worry for the market to scale. We can't say whether or not this is a buying opportunity. Today's close makes it suspect for tomorrow. NASDAQ support is at 3400, then 3350. DJIA support is mild at 10,900, then stronger at 10,750. Watch the market tone, make your move. Of course sell too soon. Buzz Lynn Research Analyst *********** STOCK NEWS *********** IPO Calendar: The Party's Not Over By Cindy Christ As 1999 draws to a close, the red-hot IPO market isn't showing any signs of cooling off. In fact, as the market heads into December, a traditionally weak month for new issues, roughly nine companies are slated to go public, including two Internet- related offerings already seeing high demand from institutional investors. 1999 has been a phenomenal year for the new issues market. In November alone, 57 companies went public, up 200 percent from last November's level, according to Thomson Financial Data. With the release of United Parcel Service (UPS), November also saw the launch of the biggest IPO ever. Looking ahead to December, it looks like Santa Claus is coming to town with two hot issues in his bag of goodies for lucky institutional and well-connected investors, who for the most part are the only ones with access to hot IPOs at their offering price. This week's forerunner is Agency.com, an Internet services company that helps companies get online. The New York City-based firm's litany of services includes interactive business and marketing consulting, e-commerce services, brand management, and web site design. Advertising giant Omnicom owns about 50 percent of Agency.com. Analysts say that the unprecedented push by businesses worldwide to establish a web presence is creating explosive growth for Internet Services firms that help businesses build e-commerce sites, integrate back-office and web-based computer systems and software, and devise e-commerce marketing strategies. Growth in Internet and e-commerce services is projected to mushroom from $7.8 billion in 1998 to $78.6 billion in 2003, according to market research firm International Data Corp. AMR Research estimates there are now more than 75 companies specializing in e-commerce solutions. Street estimates have Internet services companies exceeding expectations across the board in the third and fourth quarters. After Y2K spending ratchets down in 2000, prospects get even stronger. Since its founding in 1995, Agency.com revenues have expanded 12 times. In its inaugural year, the company reported revenues of $2.16 million. Last year revenues exceeded $26 million. During the first nine months of 1999, Agency.com earned $74.8 million in revenues, a 34 percent increase over the year-ago period. For 1998, the company posted total revenues of $71 million and a net loss of $10.63 million. Agency.com has a strong foothold overseas in major markets such as London, Paris, Amsterdam and Singapore. Its 200-member client roster includes garment maker Bennetton, British Airways Plc., Columbia/HCA Health Care Corp., Compaq Computer Corp., Hewlett -Packard Co. and Sprint Co. Analysts warn investors not to be overly impressed by its Blue Chip clients, since the company earns most of its revenue from a small number of customers. British Airways, for example, accounts for more than 13 percent of revenues, and 42 percent of sales are generated by 10 of its biggest accounts. Agency.com is expected to price 5.9 million shares at $10 to $12. The lead underwriter is Goldman Sachs. Shares are set to begin trading Thursday or Friday on the Nasdaq under the proposed symbol "ACOM." Analysts have high hopes for ACOM, based on the performance of Internet services and design firm Razorfish (RAZF), which went public in April at on offering price of $16 per share. Shares now trade around $75.50 per share. Company executives say they'll use the money from the offering to pay down debt, expand operations and make strategic investments or acquisitions. In addition to RAZF, Agency.com will face competition from Scient (SCNT), AppNet (APNT), Sapient (SAPE) and USWeb Corp.(USWB). McAfee.com Analysts predict that McAfee.com will be this week's other top new issue. The well-known Santa Clara, Calif.-based computer virus protection provider is a wholly owned subsidiary of Network Associates. Though more than 90 percent of McAfee.com's revenues come from the virus protection software offered through its online store, McAfee.com continues to boost online application hosting, repair and other services. McAfee Clinic helps users protect their systems from viruses and diagnose and fix configuration problems. Consumers can also access year 2000 services and technical support, according to Hoover's Online. In 1998 McAfee.com posted sales of $6.3 million and a net loss of $2 million. Year-over-year sales increased 148.7 percent. For the nine months ended Sept. 30, the company had a net loss of $21.8 million versus an $0.8 million loss in the year-ago period. Lead underwriter for the offering is Morgan Stanley Dean Witter. Shares are expected to price on Thursday and begin trading Friday on the Nasdaq under proposed symbol "MCAF." The expected offering price is $6 to $8 per share, and the company hopes to raise almost $40 million. Company execs say it will use offering proceeds for working capital and general corporate purposes. After the sale, Network Associates' stake in the company will exceed 85 percent. Only Fools Rush In IPO experts warn investors that unless you can get in at the offering price, you shouldn't speculate on shares during the first trading day. In fact, when it comes to trading IPOs, patience is clearly a virtue. Research shows that most IPOs decline after their first trading day, and can underperform the market by 30 to 50 percent over three to five years, according to Ivo Welch, a UCLA finance professor who tracks IPO performance. Other experts say investors should watch the stock during its "quiet period," which begins on the day the company registers its S-1 filing with the SEC and continues for 25 days after the offering is completed. During this time the company and the offering's underwriters can't say much about its business prospects, and share prices can weaken as a result, according to Tom Taulli, author of "Investing in IPOs." Taulli also advises IPO investors to wait for general market weakness or any bad news on inflation, which can hurt new IPOs more than other stocks. On the inflation front, this week investors are awaiting the release of the November payrolls report due Friday. In a research note this morning, Merrill Lynch chief economist Bruce Steinberg said that a decline in retail payrolls might spur another interest rate increase by the Fed because it would indicate that the economy is running out of workers. Steinberg said he expects the Fed to raise interest rates again at its March 21 policy meeting, although it could act sooner if economic data show that inflation is heating up. Although higher interest rates are generally bad news for stocks, they might work wonders for bloated share prices of hot IPOs inflated beyond reason by a "get-rich-quick" investor mentality. ********************** PLAY OF THE DAY - CALL ********************** SNE - Sony Corp $191.75 +5.81 (+5.81 this wk.) Sony is a consumer electronics and multimedia entertainment company. It sells products like TVs, VCRs, MiniDisc systems, stereos, digital camcorders, DVD video players, and the PlayStation home video game system. It is also in the process of strengthening its position in the music and image-based software markets. Some of Sony's entertainment assets include Columbia TriStar Motion Picture, Columbia TriStar Television, Sony Pictures Studio, and Columbia and Epic record labels. Other high-tech products include flat-screen TVs, digital TVs, CD-ROMs, and digital cellular telephones. Sony is the gift that just keeps on giving! After Sony finished it's bout with the profit takers in the week before last, it resumed its beautiful positive momentum run with ease. Sony gained over $9 for the week and closed on Friday at the high of the day, posting nice volume for the shortened trading session. Therefore, we look to be very well positioned heading into next week. The problem, of course, is finding an entry point! If you aren't in yet, your best bet is to wait for intraday dips to hop on board. Sony has support at it's 10-dma of $180. There is no resistance in site, as SNE closed just pennies short of its all time high set Friday. There was plenty of good news for Sony last week. The Sony Electronics Unit has given the go ahead for authorized dealers to resume Internet sales, including televisions, DVD players and camcorders. There had been a restriction placed on such sales while Sony went through and reviewed various service and support issues. Sony debuted their redesigned PlayStation Web site last week, which promises to have more, new and better features for PlayStation fans. Sony also announced plans to increase their digital camera production output by an approximate 30% by launching production in Shanghai. The Federal Trade Commission has asked for additional information from both Sony and Time Warner in regards to the proposed merger between Columbia House and CDNow. Sony has stated that they remain committed to the deal and are working to provide resolutions to any issues raised by the FTC. When the merger is completed, Sony and Time Warner will own 37% each of the newly formed company. And of course, there is that yearly phenomenon known as holiday shopping, which Sony is sure to benefit from. BUY CALL DEC-180 SNE-LP OI=361 at $14.38 SL=11.50 BUY CALL DEC-185 SMW-LQ OI= 27 at $10.38 SL= 8.50 BUY CALL DEC-190 SMW-LR OI= 0 at $ 7.38 SL= 5.50, new strike BUY CALL JAN-185 SWM-AQ OI= 10 at $15.50 SL=12.00 BUY CALL JAN-190 SWM-AR OI= 2 at $12.75 SL=10.25 Picked on Nov 7th at $164.69 P/E = 57 Change since picked +22.12 52-week high=$192.00 Analysts Ratings 0-1-0-0-0 52-week low =$ 65.50 Last earnings 10/99 est= N/A actual= N/A Next earnings 01-00 est= N/A versus= N/A Average Daily Volume = 172 K Chart = http://quote.yahoo.com/q?s=SNE&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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