Option Investor

Daily Newsletter, Wednesday, 12/29/1999

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The Option Investor Newsletter         Wednesday  12-29-99
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
MARKET WRAP  (view in courier font for table alignment)
        12-29-99           High     Low     Volume Advance Decline
DOW    11484.70 +   8.00 11543.10 11425.60   574,543k 1,989  1,095
Nasdaq  4041.46 +  69.35  4041.54  3987.88 1,150,170k 2,455  1,800
S&P-100  793.64 -   1.07   797.69   791.85    Totals  4,444  2,895
S&P-500 1463.46 +   5.80  1467.47  1458.74            60.5%  39.5%
$RUT     497.01 +   8.53   497.01   488.48
$TRAN   2941.99 -   2.52  2951.81  2936.52
VIX       24.37 +   0.68    24.92    24.08
Put/Call Ratio       .51

Fourth Time's A Charm

You know what they say, fourth time's a charm.  For the fourth 
consecutive day, the Nasdaq traded above 4000, but this time 
it was able to hold its gains.  This incredible tech-heavy 
index is now up over 83% year-to-date.  Just think, to start 
the year the Nasdaq was barely over 2200 and most analysts 
were hoping for some gains in the first half of the year before 
a dreaded Y2K sell-off in the second half.  Still, no one is 
complaining.  It is one of those rare instances where it feels 
great if you were wrong in predicting the markets.  This is a 
prime example of why you play the trend and not your emotions.  
Today's record close for the Nasdaq was the 60th record of the 
year and if the year ended today, it would be the strongest 
one-year return for any U.S. market in history.  

Let's give credit where credit is due.  The S&P 500, Dow, and 
even the Russell 2000 also closed at record highs.  The record 
close for the Russell was its first in over a year.  So despite 
the lack of volume, stocks have been drifting higher.  Here 
are the closings for the four record indices.  Nasdaq 4041.46 
+69.35, Dow 11484.66 +7.95, S&P 1463.46 +5.80 and the Russell 
finished at 497.01 +8.53.  (The Russell has endured the tax 
loss selling pretty well and may be an area to watch for the 
January effect.)  Volume was light though, make no mistake.  
This was more of a lack of sellers than an influx of buyers.  
The NYSE turned in 573 mln and the Nasdaq traded 1.15 bln, 
which is right in line with what you would expect from the week 
after Christmas and before New Years.  Let's face it, people 
are out and about setting up for their holiday celebration. 

Here is the old visual confirmation of today's action...



The market advance was confirmed by a lower bond yield.  The 
30-year stood at 6.44% by the close today.  That is down from 
the 6.47% of yesterday.  Advancers also helped by trouncing 
decliners by a 2-to-1 margin on the NYSE.  The VIX is in 
check at 24.37.  It has been awhile since we've seen strong 
internals like that.  The little sell-off late in the day on 
the Dow was attributed to investors selling some cyclical 

The driver in today's market was QCOM, once again.  The fire 
was lit under Qualcomm today when an analyst from Paine Webber 
set a $1000 price target for the stock.  Sure, why not?  It is 
a nice even number.  Valuations were tossed out the window a 
long time ago.  This market is all about momentum now.  Or at 
least that is what some would have you believe!  It's hard to 
rationalize how some of these numbers are being crunched.  In 
my opinion, I would prefer if they just came out and said "we 
like the stock a whole lot and aren't planning on selling any 
time soon."  Good enough for me, but these astronomical numbers 
make it easy to become emotionally involved.  Remember, don't 
enter this play without a rock solid game plan.  You don't want 
to be the one left holding the bag when reality sets in.  QCOM 
closed at 656, up $153 today and was already up to 696 in after-
hours trading.  

Other movers included DCLK.  They jumped $28.19 on news that 
DLJ analyst Jamie Kiggin revised his price target of $300, up 
from $190.  The Internet sector was a happening place once 
again with the usual suspects showing the big gains.  VRSN was 
+12.19, YHOO +13.44, JDSU +14.19, and INKT +8.88.  Even NOK 
took off late in the day on big volume.  The stock spiked up 
nearly $15 in the final hour.  

The online brokers got a push today from Charles Schwab.  The 
discount brokerage house told investors that it expects record 
results for the 4th quarter, a positive pre-warning of sorts.  
They said December is shaping up to be their busiest month yet.  
SCH was up $5.50 to $39.81.  In fact, the entire sector pushed 
higher on the news.  EGRP +2.75, AMTD +2.88, and NITE +2.56.  
The one loser of the day was ANTC, who revealed insight to their 
4th quarter as well.  Unfortunately the news wasn't as good as 
Schwab's.  Antec Corp said they would not meet expectations of 
$0.30 cents per share.  The stock fell $8 to $29.94.

Commerce One gave us the example of why buying up at lofty levels 
can prove hazardous to your portfolio's health.  CMRC was up to 
$330 at 2pm on Tuesday before rolling over to close under $210 
today.  There was a lot of momentum players that may not have 
understood the situation.  CMRC has a huge chunk of shares that 
are past the lock up period and are now available to sell.  
This has pressured that stock.  CNBC reported some confusing 
news on this story and stock went on a roller coaster ride which 
obviously derailed today.  

One pre-market report to tell you about for tomorrow.  Leading 
Indicators for the month of November will be released.  The 
expectations are for an 0.2% increase during the month.  Other 
than that it will be pretty quiet on the economic front.  On 
Friday we will see the Chicago Purchasing Managers report and 
preliminary 4th quarter GDP numbers.  That should liven things 
up a little, especially if the numbers are not what is expected.  
You can imagine what that may do to a thinly traded market. 

So what's your prediction for next year?  Are you more bullish 
than the you were heading into 1999?  Things do look good in 
what some are calling the "new economy", but I still cringe to 
think that I just wrote the Nasdaq 3000 Market Wrap last month.  
That's right, November 3rd.  Who would have guessed that it was 
such a short journey to 4000?  So enjoy this market euphoria 
while you can.  There are definitely profits to be made here.  
In truth, we are starting to see a lot of window dressing that 
is typical of this time of year.  The mutual funds want to show 
only the brightest of up and coming stocks in their portfolio, 
especially since it is becoming more and more difficult to 
beat the indices.  This should keep the markets trending up 
for the rest of the week.  If there are any Y2K sellers left, 
they are probably waiting for the final hour on Friday to catch 
any potential upside. 

One final note, the average P.E. on the Nasdaq is at 140.  Even 
if you only account for the profitable companies, the P.E. is 
above 40.  These are just some more examples of astronomical 
numbers.  Don't get lulled into thinking this can continue 
indefinitely and sell too soon.

Ryan Nelson
Asst. Editor  


Qualcomm: So let it be written, so let it be done.
By Cindy Christ

Investor hopes for Qualcomm (QCOM) soared to biblical 
proportions Wednesday after PaineWebber launched coverage 
of the wireless communications company with a "Buy" rating 
and set a 12-month price target of $1,000.

In a research note analyst Walter Piecyk said he believes
Qualcomm "represents an appropriate way to invest in the long
-term growth trends of wireless and data."

Qualcomm, which developed and owns the patent on the fastest-
growing wireless technology, Code Division Multiple Access, or
CDMA, sells more than 90 percent of the application specific
integrated chips (ASIC's) used in CDMA handsets and collects
royalties for all CDMA phones.

Piecyk predicts that by the end of the next decade, 85 percent
of phones sold will use CDMA technology, up from 18 percent 
today.  This would create a 45 percent compound growth rate and
up to a $20 billion royalty stream for Qualcomm.

Qualcomm could also get a boost from wireless communications
system build-out in undeveloped areas in China and Brazil,
driven by chip demand from dominant cell phone manufacturers
Nokia, Motorola and Ericsson, Piecyk said.

In addition, the analyst touted improving business metrics at
the San Diego-based firm, which recently announced the sale of
its unprofitable handset business to Japan's Kyocera Corp.
After the sale is complete, Piecyk estimated Qualcomm's pre
-tax margins should improve to more than 40 percent in 2000
and above 50 percent in 2001, versus less than 20 percent this

"Our 12-month price target of $1,000 implies 175 times and 55
times our 2001 profit and revenue estimates but is based on
$800 for the present value of its royalty stream, $170 for 60
times its ASIC profits and $30 for other assets," Piecyk said,
according to CBS Market Watch.

Investors didn't hesitate to study the logic of the premium
valuation and jumped head first into Qualcomm before the bell.
In pre-market trading, Qualcomm shot up 15 percent to $578 on
the upgrade, rising as much as $159.06 to $662.06 intraday. At
the close, shares finished up $156, or 31 percent, at $659
on more than two times average daily volume.

The upgrade came less than one week after Banc of America 
raised its fiscal 2000 EPS estimate on Qualcomm shares to $4 
from $3.85 and set fiscal 2001 at $5.15.

On Dec. 21, J.P. Morgan Securities raised its price objective
on Qualcomm to $570 from $460.

In its November earnings report for 4th quarter 1999, Qualcomm
reported profits of $170 million, or 91 cents per share, on
sales of $1.1 billion.  First Call estimated the company would
earn 88 cents a share in the quarter. 

In November the company also announced a 4-for-1 stock split
that takes effect after the market close Thursday.  Shares
split 2-for-1 in May.

The S&P 500's best performing stock this year, Qualcomm shares
are up a phenomenal 2,332 percent, trading in a range of
$25.31 in January to today's new 52-week high.  In recent
weeks, the stock has continued its winning ways as mutual fund
managers added leading stocks to their portfolios in a year
-end phenomenon known as "window dressing."

Market watchers were quick to compare Piecyk's four-figure
price target on Qualcomm to last December when then CIBC
Oppenheimer analyst Henry Blodget lifted his price objective
on Amazon.com to $400 from $150.  Just as Blodget foretold,
Amazon.com hit his target Jan. 6.

Qualcomm's astounding rise this year proves investors have
called an early winner in the race to set the standard for
next-generation digital wireless systems.

But if you could find one, Qualcomm detractors would tell you
that although CDMA is growing faster than older GSM, or Global
Systems for Mobile Communications, and TDMA, Time Division
Multiple Access, technologies, it's not the dominant protocol.

That distinction belongs to GSM, which is less costly to build
and has better roaming capabilities than CDMA. Estimates show
that together GSM and TDMA hold about 60 percent of the
wireless market.  GSM in particular has a huge installed base
in Asia and Europe.

Although the jury's still out on which protocol will become
the de facto standard, the addition of Sprint PCS, whose fast
-growing digital service is based on CDMA technology, puts
ballast in Qualcomm's corner.

To most, CDMA's ability to deliver data and Internet content
at broadband speeds over wireless devices renders the protocol
debate a fait accompli.  What's more, the competitive landscape
matters little in a market where investors take analysts'
predictions as gospel.


PMCS - PMC-Sierra Inc $148.94 +6.69 (+3.69 this week)

PMCS designs, develops, markets and supports high-performance 
semiconductor system solutions for advanced communications 
markets.  PMCS provides customers with Internetworking 
semiconductor system solutions for high-speed transmission 
and networking systems that enable the restructuring of the 
global telecommunications and data communications infrastructure.
The company intends to achieve this by providing its customers 
with world-class products, quality, service and technical 

Sunday's Write Up

Since the 15th, PMCS has rebounded off their support of $105.00 
and closed off an intraday 52 week high of $148.25, settling at 
$145.25.  This is a gain of $6.00 for the day and $23.94 for the 
week.  The catalyst for this incredible run was the announcement 
that as of December 20th PMCS will be added to the NASDAQ-100 
Index.  Volume peaked after being added to the Index to over 
3 million shares but has now settled into its norms of just shy 
of 1 million share a day and the price continues to climb.  A 
pullback to $130 would be ideal but it may be unlikely unless 
the market takes a breather.  This is mainly a momentum play, 
but PMCS also has earnings in January and should continue to 
move up in anticipation of a strong report.  

Another catalyst was the upgrade from Salomon Smith Barney.  
They raised its rating on shares of PMCS to a Buy rating from 
Outperform on December 17th. 

Tuesday's Write Up

The Semiconductor industry got off to a slow start Monday, but 
recovered into the close.  PMCS has struggled a bit in the first 
two sessions of the week.  As for our play in PMCS, we were 
looking for a pullback to enter.  PMCS did retrace back to 
$137.88 today, and moved higher near the end of the session.  
Honestly with the lack of liquidity it's hard to tell whether 
the move back up late in the session is for real.  PMCS lost 
-1.31 today on volume of 568K, which is only about one-third 
its ADV.  If you entered this play we would keep you stops 
fairly close as we believe there may be more room to the 
downside before PMCS resumes it upward trend.  PMCS shows 
solid support near the $130 level and a bounce off that area 
accompanied by strong volume would certainly give us more 
confidence in our play.  More money will continue to flow into
the markets and may take PMCS on to new highs.  With the lack
of liquidity in the markets this week, we would prefer to be
cautious as day trading and hedge funds can add to the 
volatility this week. 

BUY CALL JAN-140 SQL-AH OI=352 at $17.88 SL=14.00
BUY CALL JAN-145*SQL-AI OI=126 at $15.00 SL=12.00
BUY CALL JAN-150 SQL-AJ OI=  4 at $12.63 SL= 9.75 Low OI
BUY CALL JAN-155 SQL-AK OI= 23 at $10.38 SL= 8.00 Low OI

SELL PUT JAN-135 SQL-MG OI= 79 at $ 6.38 SL= 5.00
(See risks of selling puts in the play legend)

Picked on Dec 2nd at    $145.25    P/E = 129
Change since picked       +3.69    52-week high=$149.50
Analysts Ratings     15-6-2-0-0    52-week low =$ 30.06
Last earnings 10/99   est= 0.24    actual= 0.25 surprise=+4.17%
Next earnings 01-20   est= 0.27    versus= 0.30
Average Daily Volume = 1.74 mln
Chart = http://quote.yahoo.com/q?s=PMCS&d=3m

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