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 better. 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, ITWO, BVSN, NTAP, LGTO, NXLK, SDLI, AMCC, NSOL, and QLGC. Those to be de-listed are ANDW, ADSK, CBRL, CATP, EFII, FAST, FHCC, LNCR, MUEI, RTRSY, RXSD, ROST, STEI, TECO, and WTHG. Before you 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 *********** STOCK NEWS *********** 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 together. 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 prohibitive. 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 percent. 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. **************** PLAY OF THE DAY **************** 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 ************************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. 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