Option Investor

Daily Newsletter, Monday, 12/13/1999

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The Option Investor Newsletter         Monday  12-13-99
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)
        12-13-99           High     Low     Volume Advance Decline
DOW    11192.59 - 32.11 11250.39 11162.31   977,610k 1,230   1,847
Nasdaq  3658.41 + 37.93  3668.16  3597.98 1,584,533k 2,038   2,163
S&P-100  763.13 -  0.36   767.21   759.00    Totals  3,268   4,010
S&P-500 1415.22 -  1.82  1421.58  1410.10            44.9%   55.1%
$RUT     470.39 +  3.67   470.39   466.33
$TRAN   2895.98 + 21.04  2912.53  2873.67
VIX       23.60 +  0.71    23.85    22.16
Put/Call Ratio      .40

The Great Humiliator strikes again!

What is The Great Humiliator?  It's a nickname for the markets 
coined by Ken Fisher, one of the longest running columnists in 
Forbes Magazine, and son of the legendary investor, Phil Fisher.  
Here it is in his own words from an issue of Forbes Magazine: 

"Well, the market's prime goal is always to embarrass as many 
people as possible.  It can probably best do that now by rising 
smartly for several years, surprising and convincing everyone 
that we really are in a new era and stocks can never again fall 
big.  For the Great Humiliator to fulfill its goal, it must 
simply move in ways that surprise.  A 1998 bear market won't 
surprise half the forecasters.  A modest rise won't surprise many 
folks either.  But three more years of up market is inconceivable 
to almost everyone I hear or read.  So, to me, it's most likely. 
Folks forget, and I've used this many times over the years: The 
stock market simply does not fall in the third year of a 
President's term.  The third year is 1999. The fourth year of a 
President's term is almost as consistent historically.  So, if, 
as I suspect, 1998 rewards, the Great Humiliator is set for a 
three-year run that will surprise everyone."  

Prescient?  You bet, since he penned these words nearly two years 
ago in the January 12, 1998 issue.  Even now, nobody expects this 
market to go higher.  You can't open a trade publication or turn 
on airwaves without hearing someone say how "overbought" the 
"inflated" "bubble" is getting.  Compared to what?  

Briefing.com notes in a recent article that stocks have already 
gone through three phases.  In the first phase from 1760-1960's, 
we actually bought stock for appreciation based on increasing 
dividends.  In the second phase from the 1960's to the 1990's, we 
turned to earnings growth as the key to appreciation.  From 1995 
to October 1999, revenue growth was the key to picking a winner.  
Now, there appears to be a new "paradigm" (tongue and cheek, of 
course) that dictates we should buy because the price is rising!  
Dividends, earnings, and revenue have all been replaced by simply 
price.  Need evidence?  Briefing.com also notes, "after all, 289 
stocks have doubled in the last four weeks.  Nearly half, 128 of 
them, have negative revenue growth rates!  But they have rising 
stock prices."(!!!)

Lots of investors have hit that wall of amazement too.  For the 
last two months, they (us too) have been waiting for the elusive 
pullback to bring things back into kilter (relatively speaking).  
What's the reason for "waiting"?  Not to hunker down and wait out 
the impending gloomy storm to come, but so we can buy into the 
rally on a dip!  Therein lies the key.  The waiting pre-supposes 
we all have cash to put to work; not just us, but the money 
managers and institutions as well.  That is in fact the case. 
Plenty of money is still looking for a home thanks to the robust 
economy.  This two-month rally is all about liquidity!  As long 
as we keep seeing the "buy the dip" mentality, upward progress 
should continue in the indices, especially the tech heavy NASDAQ.

Now don't take this the wrong way.  We are not saying to mortgage 
the estate, back up the truck, and buy all you can.  There will 
be corrections along the way since nothing goes up (or down) in a 
straight line.  The market internals certainly tell a negative 
story.  While a rising tide may float all boats, some recent 
floaters were taking on lots of water.  Here's a list of today's 
big point losers.  Red Hat (-26.56); Whittman Hart (on merger 
news with USWB, -24.75); VA Linux (-19.06); Andover Net (-15.50); 
Akamai (-15); Juniper (-14.38); i2 technologies (-13.69); 
Commerce One (-12.38); JDS Uniphase (-10.19); Brocade (-6.38).  
Big point gainers were led by none other than Qualcomm (+26.06) 
on a spectacular breakout with volume (5.9 mln shares)that 
finally (after three anemic weeks) exceeded the ADV (5.7 mln 
shares) and Foundry Networks (+26.25).  They were closely 
followed by Broadvision (+22.63), Internet Capital Group 
(+22.50), E.piphany (+19.88), CMGI (+17.56 - earnings Wednesday), 
Inktomi (+10.50), and Sycamore Networks (+10.38).  You can see, 
there's a lot of volatility in backing up the truck for high 
flyers.  We must still pick our plays carefully since the rallies 
are relegated to the top tier in a few select categories, the 
categories of which are under rotation almost weekly.  Based on 
the above, looks like the Linux crowd moved to Internet backbone 
issues - a fickle bunch we are.

And so it appears that the humiliation will continue

So what exactly happened today?  Lets start with the DJIA.  Xerox 
warned investors after the close last Friday that they would miss 
$0.67 estimated earnings by 40%, citing product mix, currency 
exchange loss, Brazilian weakness, and other company specific 
items.  XRX actually closed up today at $21.13 from a low on 
Friday of $19, but their problems are far from over and will 
likely continue into the next two quarters.  Thankfully, the 
problems were just company specific and didn't rub off on the 
rest of the markets.  Retailers though came to life on news that 
last week's sales (brick's and mortar and e-tailers) were 
substantially ahead of sales at the same time last year.  You 
might have already guessed that Wal-Mart (+4.62, 67.88) and Home 
Depot (+3.75, 92.75) went on to set new all time highs today.  
The whole index didn't fare as well.  The DJIA closed down 32 
points at 11,192.  If it weren't for a bunch of "sell on close" 
orders hitting the floor in the last 7 minutes of trading, the 
DJIA would have closed in the "plus" column.  Pharmaceuticals is 
one of the sectors losing the most ground today on fears that 
their pipelines would come up a bit empty.  About those negative 
internals we spoke of earlier?  Decliners outpaced advancers 3:2, 
with 472 new lows stomping on 87 new highs.  551 mln shares 
traded down, while just 389 mln traded up.  Volume was a hefty 
977 mln shares, which tells us there was still a whole lotta 
buyin' goin' on, despite the loss.

All gloom and doom?  Cheer up!  Even the all encompassing Russell 
2000 was up today (+3.67 to 470.39).  That indicator represents a 
composite of 2000 stocks indicating the even some of the small-
caps are moving.  The good news is that the NASDAQ did even 

With the NASDAQ 100 undergoing revision on December 20, there 
will be some new winners added to the index, while others will 
get the boot.  Wouldn't it be great to know who the additions are 
and maybe plan some plays around them?  You are in luck!  The 
following are the new additions: MEDI, DISH, MFNX, PMCS, ADLAC, 
to be de-listed are ANDW, ADSK, CBRL, CATP, EFII, FAST, FHCC, 
execute a trade, do your homework.  They may not all go up due to 
their size or further revision to the list.  In a strange twist, 
though not unexpected in a market where only price seems to 
matter, most of those to be de-listed moved up today.  

In addition to the proposed NASDAQ 100 revisions, INTC showed up 
on the radar today because Prudential downgraded the issue to an 
Accumulate from a Strong Buy and moved the price target down from 
$90 to $84.  You think Intel got a major haircut on the news?  
Nope, it was up today by $1.81 and also (fortunately) didn't rub 
off on the rest of the market.  In the continuing saga of "Tale 
of Two Markets", 11 issues finished up compared to 10 down.  New 
highs beat new lows 301 to 143, while up volume was nearly twice 
the down volume with almost 1.6 bln shares traded.

What happens for the rest of the week?  The CPI figures will be 
released tomorrow, wherein the expectation is for a .2% rise.  
Retail sales will also be posted tomorrow.  The expectation is 
for a .5% increase, and only .4% excluding autos.  Perhaps the 
fear of what these numbers will contain drove some into the "sell 
on close" mode on the NYSE.  We think the figures will be benign 
and a real non-event.  Nonetheless, we need to pay attention to 
them for indications of the market's reaction.  One hiccup could 
be the catalyst for a downdraft.  Wednesday, we have the Business 
Inventories and Industrial Production figures, followed on 
Thursday by initial jobless claims.  Oracle and Best Buy report 
earnings tomorrow, followed by CMGI (split candidate) on 
Wednesday.  Be aware of sympathy plays in either direction.  The 
big message?  Based on previous valuations, the market is itching 
for a correction.  However, based on current liquidity, as long 
as you choose your plays carefully, the winners should continue 
to be met with buying activity on any dips.  Yes, a reversal will 
happen sometime, but we don't know when, and intend to take 
advantage of the opportunity this narrow market has given us.  
Use volume, coupled with support and resistance as your guide, 
and remember to sell too soon.  (Whew!  We got through this 
without saying "new record for the NASDAQ".)

Buzz Lynn
Research Analyst


The Fabulous Fabs
By  S.P. Brown

Focusing on core competencies and outsourcing everything else 
seems to be the rage in business management these days.  More 
and more companies are taking a critical look at their business 
operations and coming to the conclusion that not everything has 
to be done in-house.

The semiconductor sector, in particular, has embraced this 
growing trend towards outsourcing non-core activities.  Some of 
the more well-known names in the semiconductor sector, names 
like PMC-Sierra (PMCS) and Rambus (RMBS), operate today under 
what is known as a "fabless business model."  In other words, 
they outsource their chip fabrication operations to third party 
vendors and focus on product design and marketing instead.  

These fabless operators have garnered a lot of Wall Street 
attention this year.  So much so, that many of these lean-
running fabless semiconductor companies are trading near their 
all-time highs.  

But while many people have focused on the advantages of those 
companies that outsource their semiconductor manufacturing, 
fewer have focused on the companies that actually do the 
fabricating.  After all, someone still has to put the chips 

That's quickly changing.  The fabs, those companies that 
actually manufacture the chips, are emerging as a very strong 
growth industry within the semiconductor sector.  The market 
leaders in this industry are Taiwan Semiconductor (TSM), United 
Microelectronics, and Chartered Semiconductor (CHRT).  All are 
located in Southeast Asia, which should come as no surprise 
given the regions comparative labor-cost advantage to the rest 
of the world.

It's easy to see why demand for the fab companies' services are 
growing strong.  For a new semiconductor company, the option of 
purchasing or building a multi-billion dollar fabrication 
facility usually isn't an option at all; the cost is too 

What's more, with the growth in specialized applications on a 
chip, no single semiconductor company can provide an all-
encompassing product line.  For example, integrated circuits 
for digital handsets, the DSPs, are enormously different than 
those used in a personal computer. 

This is were the fabs step in.  With their manufacturing 
expertise, these companies have emerged as a reliable and cost 
effective alternative to in-house manufacturing.  

There services are limited to the fabless companies, either. 
Motorola (MOT) announced that while they are currently 
outsourcing about 5 percent of semiconductor production, they 
expect to increase that number to 50 percent over the next few 
years.  MOT has realized that their core strength is in design 
and marketing rather than manufacturing.  So rather than spend 
the money required to upgrade their existing facilities, they 
would rather spend that money on research and development. 

Of course, a good thing rarely goes unnoticed for long by Wall 
Street's omniscient glare.  The stocks for the two leading 
publicly-traded fabs, TSM and CHRT, have outperformed the 
broader market this year.  TSM is up 230 percent year-to-date 
versus the S&P 500's relatively languid year-to-date run of 15 
percent, while CHRT, which began trading on 10/29/99, is up 60 

With overall market growth forecasts being as bullish as they 
are - the  semiconductor market is expected to grow at a 20 
percent annual clip through 2001 - companies like TSM and CHRT 
stand to benefit tremendously from the growing trend towards 
fabrication outsourcing. 


GE - General Electric $148.81 +1.81 (+1.81 this wk.)(+11.69)

One of the most profitable companies in the world, General 
Electric has been able to make money in all kinds of different 
industries.  The company is engaged in developing, marketing 
and manufacturing of a wide variety of products involved in 
generation, transmission, distribution and utilization of 
electricity and other goods.  It produces aircraft engines,
transportation equipment such as locomotives, appliances (both 
kitchen and laundry equipment), lighting, generators and 
turbines, nuclear reactors, medical imaging equipment, and 
plastics.  GE is also a large player in the financial services 
field as well as information services.  With ownership of NBC, 
General Electric is one of the largest broadcasters in the 
world.  With this diversity and reach, it is no wonder 
they count their profits in the billions.

GE is the largest capitalized stock on the U.S. exchanges.  
Because of this fact it is a very widely held stock.  This fact 
is important to understanding why GE's stock might be a strong 
performer in the next couple of weeks.  The biggest news item 
influencing our decision to profile GE has not been announced 
yet.  The Board of Directors are meeting on December 17th.  It 
is widely anticipated that GE executives will spread a little 
holiday cheer by announcing the first split of the company's 
stock over two years.  GE shareholders have had an excellent 
year.  A stock split would be the star on top of the Christmas 
tree.  The main question that remains is whether the Board will 
decide to split 2:1 or 3:1.  GE typically has announced good 
news in December.  The shares of GE have done very well this 
year, trading over 50 points higher than last January's low of 
$94.  Because of this we anticipate very little selling pressure 
on the stock for the rest of December.  Why take a profit and 
pay tax on it in April when you can wait till next year to take 
a profit and delay paying taxes until April of 2001?  Technically, 
GE had an excellent week.  Since July, GE's stock has broken 
above six double tops.  The stock is in a very strong up trend, 
and on Thursday it broke into new high ground again.  With the 
lack of overhead resistance and possible good news coming we 
feel GE has a chance to continue rising.  Support is at the 
recent breakout point of $141.  A more cautious investor may 
try and wait to see if there is any market weakness next week 
and attempt to add a call position at the support point.  More 
aggressive investors can buy calls on any strength.

>From the NBC news desk, well actually from many sources, GE 
announced that it had received a $1.98 billion Air Force engine 
contract on Tuesday.  Also in the news, GE was named the world's 
most respected company for the second straight year in a  
worldwide survey of chief executive officers conducted for the 
Financial Times.  GE Chief Executive Officer Jack Welch, who 
probably voted for himself and his company, was selected as the 
world's most respected business leader in the survey.  Further 
proof that GE is perhaps the most ubiquitous company in the 
world, last week the National Christmas tree was lit up with 
70,000 GE lights. 
BUY CALL JAN-140 GE-AH OI=5664 at $12.13 SL= 9.50
BUY CALL JAN-145*GE-AI OI=5925 at $ 8.88 SL= 6.75
BUY CALL JAN-150 GE-AU OI=6605 at $ 6.38 SL= 4.25

SELL PUT DEC-140 GE-XH OI=3349 at $ 0.54 SL= 0.00
(See risks of selling puts in play legend)

Picked on Dec 9th at    $143.56    P/E = 47
Change since picked       +5.25    52-week high=$149.25
Analysts Ratings     9-10-1-0-0    52-week low =$ 86.19 
Last earnings 10/99   est= 0.79    actual= 0.80 
Next earnings 01-20   est= 0.92    versus= 0.80
Average Daily Volume = 4.99 mln 
Chart = http://quote.yahoo.com/q?s=GE&d=3m

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