The Option Investor Newsletter Wednesday 12-1-99 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) ************************************************************ 12-1-99 High Low Volume Advances Decline DOW 10998.40 + 120.60 11000.80 10859.60 907,020k 1,378 1,702 Nasdaq 3353.71 + 17.55 3375.80 3321.57 1,430,791k 1,944 2,126 S&P-100 748.57 + 9.83 748.58 738.04 Totals 3,322 3,828 S&P-500 1397.72 + 8.65 1400.12 1387.38 46.4% 53.6% $RUT 453.67 - 0.41 454.79 451.81 $TRAN 2883.91 - 25.81 2923.47 2871.57 VIX 22.92 - 2.03 24.61 22.90 Put/Call Ratio .53 ************************************************************* Losing Steam or Heating up?? Don't look now but the exuberant and resilient Nasdaq market of November has lost some of its luster. To the tune of 25% of the November gains, in fact. This stellar performer that had 15 record closes during November, is now stair-stepping its way lower. Today's close put the Nasdaq under the 10-dma for the second straight day, showing that perhaps Monday wasn't a fluke after all. But this sell-off is well deserved after year-to-date gains of 52% for this index. 16% of which came during the month of November. What we need here is to take a closer look to pin-point what exactly we need to be watching. First up is the 3320 level on the Nasdaq. This level has held up as support five times in the past week. It first tested that level on Tuesday the 23rd on the initial dip. Then retested that level the next morning before rattling off some gains. Now we have ventured back down to this level, bouncing late yesterday, once midday today and finally in the abrupt sell-off late today. But in each instance we have recovered from this support line. The flip side of the coin is that since last Friday each rally has become progressively lower. Take a look at what the trend has been since Monday afternoon. We see intraday rallies that are coming up shorter each time. That is a negative trend which points to stocks headed lower. So what are we to take away from this? Well, we are likely to answer that question early tomorrow morning as these two trends are on course for a collision. One of these two will have to give way to the other. There seems to be a lot of hesitancy in the markets which can be attributed to any of the eight items listed in the Jim's Market Wrap for Tuesday. You have your choice of multiple worries right now. In reality though, the Nasdaq has earned the right to pull back after November's gains. A 500 point gain has created some profits to take off the table. The Nasdaq closed up 17.55, thanks to a late surge, to 3353.71. Volume was heavy at over 1.43 bln shares. The "other" market had a little more sunshine today. The Dow Jones Industrials closed at 10998.39, up 120.58 or 1.1%. Decliners lead advancers by 17 to 14 and volume was good at 886 million shares. The S&P 500 was up by 0.6% or 8.65 at 1397.72. The Russell 2000 closed fractionally lower. You can see from the chart that the Dow tried to push above the 11,000 level unsuccessfully but did close right near the day high. Notice the steady climb for most of the day too. The critical NAPM report was released this morning at 10:00am ET but did little to really move the markets. The estimate was for a reading of 56.6, which is the same as the number from October. It came out slightly better at 56.2. This helped to bring the bond higher. The closely watched prices- paid component, an inflation measure, slipped to 65.4 from an October level of 69.4. The yield was at 6.33% at the time of the announcement, but recovered to 6.28% shortly after, before closing at 6.30% Remember, a reading over 50 in the NAPM suggests an expanding economy. This positive report for the markets were countered by the always pessimistic Fed Governor Laurence Meyer. He made some comments after the market closed Tuesday that were leaning towards a tightening basis. This has become a common stance for Mr. Meyer who sent the markets reeling last summer when he and Mr. Greenspan teamed up to weigh down the averages. Today's gain in the indices shows that his now standard speech has lost some punch. Moving on to the individual movers, WCOM was the big drag on the Nasdaq today. MCI Worldcom fell more than 5% after rumors began swirling of lower than expected growth. The rumor is that WCOM will lower there top line growth from 16% to 14%. A spokesperson for Worldcom declined to comment on the rumors. WCOM ended at $78.13, down $4.56. WCOM was the number one volume leader on the Nasdaq today. You mean Yahoo wasn't already in the S&P 500? How about that. Something's you just take for granted, but to all long YHOO players, it was a pleasant surprise to say the least. In case you didn't hear the big news from last night, YHOO has been added to the S&P 500. They will replace Canadian Laidlaw Inc (symbol:LDM.TO). They are being removed for a lack of representation. Many analysts are predicting that this will lead to other changes which will incorporate more Internet names into the indices. The change will be effective after the close on Tuesday, Dec 7th. YHOO closed +16.13. Sun Micro and Lucent are in a pact to create infrastructure needed to support Internet business applications. The deal requires Lucent to use up to $500 million of Sun's servers over 7 years as the platform for Lucent's wireless network architecture. This charged both stocks higher initially but SUNW ended lower by $2.06. LU managed to hold its gains to close up $3.25. Shares of Exxon Mobil (new symbol: XOM) rose $3.19 to $82.50 on their first day of trading after the two oil giants combined to become the world's largest publicly traded oil company. The New York Times reported Wednesday that FTC staff has concluded the proposed merger with the U.K.'s BP Amoco violates antitrust law and is recommending the full commission block the deal. ARC went down on that news, closing at $92.06, down $3.88. Oil prices also closed above $25 a barrel. Oil surged near the end of the day after Venezuela said they would remain in compliance on their production quotas. This helped the Dow close near its highs for the day. The largest of companies reporting earnings today was Analog Devices, who checked in with a $0.40 profit for their fourth quarter. This was compared to a First Call estimate of $0.35. They also predicted a strong first quarter. This powered ADI higher to $60.50, up $3.00. The VIX dipped back down today after a small spike during the last few sessions. It closed at 22.90 after reaching as high as 25 on Tuesday. It is right in the middle of the road relative to where it has been lately. You just get the sense that most traders are content to wait for Friday's November Employment report to signal which way to go. That is not a bad stance either. It is better than wasting money on commissions and suffering through time decay only to watch your portfolio bleed down for no reason. With that said, traders are known to try and jump the gun on these economic reports and rally the market higher. If the momentum returns, there should be some decent plays available for the brave of heart. The one scenario that would keep us gun shy is a market that continues to sink into the sunset. Especially if it takes the Nasdaq under the 3320 support level. If that is the case, sidelines are your friend. We would wait and see if Alan, Larry and the other fed members will have a new weapon (negative employment numbers) to fight the markets with before opening new positions. Ryan Nelson Asst. Editor *********** STOCK NEWS *********** The Skinny on Dell's Thin Internet Appliance By S.P. Brown PC maker Dell Computers (DELL) has officially entered the world of the thin Internet appliance. Yesterday the high- octane box maker introduced the WebPC, a little 10-pound device that supposedly occupies a third of the space of the traditional desktop PC. By working with Microsoft (MSFT) to streamline Windows 98 and by pre-installing the Internet service registration, DELL says it will take no more than 10 minutes from opening a WebPC box to cruising the Internet. Emulating a strategy pioneered by Apple Computer (AAPL), the WebPC is being offered in five festive colors and will come replete with a monitor, a printer, and a year of DellNet Internet access. The unit also features buttons on the keyboard that give users quick access to e-mail and search engines as well as online support from DELL. The nifty support connection allows DELL to remotely check the computer for problems and offer solutions to the user over the Internet. What's more, the WebPC does away with the old technology such as ISA ports and built-in floppy drives. Instead, the new machines will depend on "plug and play" USB ports and optical drives, such as CD-ROMS. DELL's use of the term "Internet appliance" for the WebPC is something of a misnomer. When most folks think of an "Internet appliance" they think more of Internet-only devices, such as MSFT's WebTV or 3Com's (COMS) PalmPilot. It's a stretch to call a device that starts at $1,000, sports an Intel (INTC) Celeron chip, and can run as high as $2,400, depending on how its configured, an Internet appliance. However, that didn't stop DELL chairman and CEO Michael Dell from gushing that the WebPC is the best Internet appliance in the world. By offering a complete package in the WebPC, the Texas-based PC giant has broken with many of its traditions, such as offering a la carte pricing that allow consumers to mix-and- match computer chips and other components, hard disk drive and peripherals to create a customized PC. The WebPC also breaks with DELL tradition by being the company's first serious stab at thin appliances for consumers. With sales to corporations and the government slowing down, DELL hopes that consumers will provide a much-needed shot in the arm for both its top line and its stock price, which has flat-lined recently after a decade as the best-performing stock in the PC industry. The biggest tradition breaker, though, was that WebPC developers bypassed Dell's vaunted factories. Everything from design to production was done by outside suppliers to save time and money. Though the WebPC is DELL's first attempt at a so-called thin appliance, it isn't the company's first attempt at the consumer market. In the mid-1990s, DELL offered PCs at the retail level briefly, but pulled out because of disappointing sales. Although DELL does sell PCs directly to individuals through its Web site, the company hasn't put much effort into it, and the result is that non-corporate consumers will account for only 15 percent of the company's projected $26 billion in revenues this year. To help the neophyte DELL purchaser along, the WebPC will have its own Internet site that allows purchases to be completed in three to four clicks. DELL hopes the Web site, with plenty of color photos showing how to assemble and use the WebPC, will overcome the resistance of some buyers who might prefer to see the product in a store. This direct-sales model has been an unqualified hit with corporate customers, making DELL the top PC seller in the U.S. But consumers historically have preferred to shop at retail stores for computers and other big-ticket items. AAPL sells the majority of its iMacs in stores, and even though Gateway (GTW) uses the direct approach, it gets people interested in its computers at its Gateway Country Stores, which serve as showrooms for its products. But even if the direct sales model isn't an immediate success, DELL has given itself time to work out the kinks by beating its rivals similar Web-centric PCs to market. Compaq (CPQ) unveiled its $499 iPaq model in November, and Hewlett-Packard (HWP) showcased its e-PC product at the recent Comdex trade show in Las Vegas. But the CPQ and HWP contraptions won't be available until early 2000, and they'll be targeted to corporate users rather than consumers. Nevertheless, Michael Dell has expressed confidence that consumers will embrace the company's direct-sales model. "The WebPC is breaking new ground for our industry as we take our one-on-one relationships with customers to a new level of helpfulness." And at least one analyst thinks DELL faces a challenge in trying to get consumers to embrace the direct model. "This is an issue for Dell going forward," says Stephen Baker of PC Data in Reston, Va. "They've got to do a lot of extra education here." Challenges aside, Baker concedes the WebPC will probably be a success for DELL. "They've done well at everything they've touched in the last couple of years," he says. But even if the company doesn't make a killing, Baker says it needs something like the WebPC in its product line because the entire industry is going that way. "You don't always do this kind of thing just because you think there's a sales opportunity," he says. "Sometimes you do it just to show you can." Still, an aggressive "do it to show you can" attitude helps in getting product out the door, but investors need to consider whether DELL's foray into the lower-end consumer computer market will do anything for its slipping margins. For the latest quarter reported ending 10/31/99, DELL came in with gross margins at 20 percent and operating margins of 9.6 percent, about a 2 percent points lower than historical norms. Of course, it's possible that the recent slip in margins is an aberration caused by the spike in DRAM chip prices brought on by the recent Taiwan earthquake. That's little consolation, though, if you're a DELL investor. Year-to-date, DELL is up only 17 percent compared to 50 percent for the tech-heavy NASDAQ index. But such concerns may be much ado about nothing. After all, DELL is the company with the Midas touch. One analyst, Van Baker, a consumer PC analyst with industry research firm Dataquest, even speculated DELL's decision to bundle the various elements of the WebPC in a single package may be an artful way around the company's recent shortage of certain components, including memory chips and flat-panel displays. And unlike its two closest competitors, DELL was able to again flex its development and manufacturing muscle to get its thin appliance out before year end, which should put the company first on the market in a very competitive position. But to capitalize on holiday season sales, DELL needs to get the word out about the WebPC quickly and effectively. To do so, DELL will eschew its historic appeal to PC enthusiasts via PC magazines. Among the plans: A billboard in Times Square, ads in Rolling Stone and on Internet sites such as iVillage. "If DELL executes in the consumer and small business market alone this could add an addition $10 billion in revenue over the next several years," Michael Dell said. He may be right. And if he's not, it's still tough to bet against a man whose company historically doubles sales every two years. **************** PLAY OF THE DAY **************** MSFT - Microsoft Corp $93.19 +2.16 (+2.06 this week) Microsoft is the #1 software company in the world. They develop, manufacture, license, and support a broad range of software products including Windows operating systems, server applications, the popular MS Office suite, and a Web Browser. The company is presently involved in anti-trust issues with the government. CEO and co-founder, Bill Gates still owns 15% of Microsoft. Sunday's Write Up Our call play is based on the recent move by US District Judge Thomas Penfield Jackson to appoint a mediator, Richard A. Posner, Chief Judge of the 7th US Circuit Court of Appeals in the government's antitrust case against Microsoft to negotiate an out-of-court settlement. Jackson didn't want "divergent views" to destroy the current rapport "between the states and the Justice Department so far has been, I think enormously helpful. And I would like to see it continue. I would not like to have to deal with divergent points of view." Investors were pleased too that talks would likely resume and started to put their money back into MSFT. The first sign of MSFT's renewal was on Friday November 19th when it traded up $1.06 (1.3%) on strong volume after succumbing to a monopoly and bully lashing. The stock hit bottom as it played tag with the 200-dma (then @ $85-$86), but this week's rise places it firmly at the first line of defense. The next battle maybe a tough one. MSFT finally cleared all of its moving averages only to land at the bottom of a lot of congestion. Looking at the chart, we could see a move to $95 or $96 but beyond that may require an out-of-court agreement with the gov't. The recent sessions have provided lots of intraday action extending many different opportunities for entry into this news-driven momentum play. As the Nasdaq rages on and the end of the monopoly skirmish seems to be coming to a timely close, MSFT is poised to go higher in the near-term as long as the good news keeps on coming. The New York Times reported on Thursday that Microsoft and its government opponents have been called to appear in Chicago this Tuesday to begin private settlement talks. A source close to the case said Judge Posner is "expected to assess quickly the chances of a settlement between the two sides" and that an agreement would most likely happen "by the end of January, or it won't happen". Many know Microsoft has been accelerating its investments into the cable TV industry both on the domestic front and internationally. Presently the company is negotiating a deal to acquire a 60% stake in Titus Communications Corp, Japan's 2nd largest cable TV operator, which is owned by MediaOne Group (UMG) for approximately $957 mln. It's likely an agreement will be reached quickly. In other news, Microsoft and partners Softbank and Global Crossing (GBLX) announced the completion of a joint venture company, Asia Global Crossing. Together they will construct an undersea network called East Asia Crossing to link Japan, China, Singapore, Hong Kong, Taiwan, South Korea, Malaysia, and the Philippines to provide advanced network-based telecommunications services to businesses and consumers throughout Asia. Tuesday's Write Up Despite the strong downdraft in the tech stocks MSFT managed to maintain its current position above the 10-dma ($88.67). This is a bullish sign especially considering the Nasdaq tanked 85 points today. So far this week support is still firmly established at $90, a level that represents an entry to this play. But remember this momentum play is purely driven by positive news events surrounding the anti-trust case. A strong bounce on volume would give better evidence of a run towards $95 or $96. Talking of news, today marked the first day MSFT met with mediator, Judge Posner, to discuss negotiations regarding the anti-trust issues. The talks are private so "mums the word" and no comments were released. BUY CALL DEC-85 MSQ-LQ OI=15532 at $9.00 SL=6.75 BUY CALL DEC-90 MSQ-LR OI=27681 at $4.88 SL=2.75 BUY CALL DEC-95 MSQ-LS OI=38914 at $2.06 SL=1.00 BUY CALL JAN-90 MSQ-AR OI=35234 at $7.63 SL=5.75 BUY CALL JAN-95 MSQ-AS OI=24950 at $5.00 SL=3.25 SELL PUT DEC-85 MSQ-XQ OI=15810 at $0.50 SL=0.00 (wait for dip) SELL PUT DEC-90 MSQ-XR OI=13546 at $1.44 SL=0.50 (See risks of selling puts in the play legend) Picked on Nov 21 at $86.00 P/E = 60 Change since picked +7.19 52-week high=$100.75 Analysts Ratings 14-17-3-0-0 52-week low =$ 54.62 Last earnings 09/99 est= 0.34 actual= 0.38 surprise +11.8% Next earnings 01-19 est= 0.42 versus= 0.36 Average Daily Volume = 26.8 mln Chart = http://quote.yahoo.com/q?s=MSFT&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. 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