Option Investor

Daily Newsletter, Wednesday, 12/01/1999

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The Option Investor Newsletter         Wednesday  12-1-99
Copyright 1998, All rights reserved.	
Redistribution in any form strictly prohibited.

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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 

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


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 

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. 


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 

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 

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


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