The Option Investor Newsletter Monday 1-3-2000 Copyright 2000, 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) ************************************************************ 1-03-2000 High Low Volume Advance Decline DOW 11357.50 - 139.60 11522.00 11305.70 931,860k 1,078 2,140 Nasdaq 4131.15 + 61.84 4192.19 3989.71 1,506,920k 2,097 2,196 S&P-100 788.79 - 4.04 798.43 778.20 Totals 3,175 4,336 S&P-500 1455.22 - 14.03 1478.00 1438.36 42.2% 57.8% $RUT 496.42 + 2.26 499.27 498.87 $TRAN 2963.45 + 21.46 2973.69 2934.13 VIX 24.69 - 2.02 28.05 24.58 Put/Call Ratio .46 ************************************************************* Same market, different year It's January 3, 2000, and the market resumed its natural tendency to humiliate as many investors as possible. With not even an inkling of a Y2K meltdown except for that guy returning his rented video 100 years late (due 1/1/1900) and incurring a $93,000 penalty in the process, technology issues rocked, while financial issues got rolled. Of course with Y2K mostly out of the way, bond traders and investors in search of something to worry about turned their attention to the FED. In the past Greenspan has made it clear that he would not touch rates until after the New Year. With that hurdle safely cleared, it is now only a matter of time until the first quarter-point increase is announced, and traders fear that it may come at any time before the next FED meeting in February. That set the tone this morning as bond traders sent the 30-year yield up to 6.558% by the equity markets' open, from where the yield continued its upward momentum to close at 6.598%. The first spark of fire came from the NAPM index release this morning showing a 55.5% rating (over 50% is considered bullish) for the month of December. While the expected number was 56.0%, it still signals further strong expansion of the economy. Making things worse in the middle of the day, Byron Wein of Morgan Stanley Dean Witter essentially said the sky was falling and to expect a full 1-point increase in rates by year end. On the other hand, after the market closed, DLJ's Tom Galvin said that with Y2K over, oil stock piles would show some increase by February, oil prices would begin a descent back to $20 from there, and rates would fall back to the 6% range by year end. Pick your favorite scenario. As believers in the theory that oil prices will determine inflation because it is the main ingredient in the cost of production, we tend to gravitate toward DLJ's theory. Still, bond analysts now point to a 6.75% rate as the next trigger that will cause a sell-off in equities. Sorry, we don't buy it. That argument has been going on ever since rates started their ascent from 4.9% in December of 1998. Every quarter point increase, the experts warned, would cause a mad rush out of equities by investors clamoring to get a piece of that "juicy" treasury return. All the while equity prices skyrocketed (over 80% on the NASDAQ index) on increased profits borne of increased productivity, thanks to a technology boom that rolls on. Until bonds approach that sort of return, our best educated guess says that money stays in equities. Don't look for exodus en masse from equities anytime soon. Anyway, all that said, we had a volatile market like none ever seen before, especially on the NASDAQ. It is presumed that there are two opposing forces at work on this market. The first is that those investors with huge profits would be selling today in order to postpone and recognize the gains in 2000. The second was that with all that cash on the sidelines, it would have to be put back to work, sparking a buying frenzy. The correct answer is both, and the interest rate-sensitive DJIA and tech-heavy NASDAQ reflect that. For its part, the DJIA opened at 11,501, rose 10 points in amateur hour, then sank like a stone to 11,307 by 11:15 ET, as traders painted a big bulls eye on financial issues. Unfortunately, interest rates matter here, unlike with technology issues. AXP was targeted for a $9 loss on the day; JPM was nailed for a $5.19 loss; GE was zapped for -$4.75; and not even the red umbrella could protect C from a $2.69 drenching. These accounted for about 100 points of loss in total despite a strong showing by IBM and HWP (+$8.13 and $3.69, respectively). On the "old resistance is new support" theory, 11,300 is looking like support for this index, but 11,320 made a decent benchmark intraday too, with 11,375 providing resistance. A breakout back over 11,375 would have made us feel a lot better. However, 50 points up from the low of the day indicate that investors are comfortable (for now) at this level. There don't appear to have been any major sell orders at the close. In the end, the DJIA fell 132 points to close at 11,357 on heavy volume of 930 mln shares. Given the weakness in the bonds, it should be no surprise that NYSE decliners beat out advancers exactly 2:1, and down volume was nearly twice the up volume. Surprisingly, new lows weren't as plentiful today, with only 142 edging past 113 new highs. In short, the NYSE and the DJIA were unimpressive, but not unexpected given the interest rate environment in the bond pits. Contrarily, NASDAQ did it's same old thing and set another new record, the first one of the year (as if that were a milestone) but not without incredible volatility along the way. At the open, the NASDAQ gapped up to 4192, a 122-point gain from last week's close, but almost immediately began giving it back at a rapid clip. By 11:15 ET, the index tagged 3989 (yes, a scary dip below 4000 representing an 80 point loss), which probably scared a lot of us out (if we were not already stopped out) of our positions. That was good for a 203-point intraday swing, and a new volatility record for the index. But the recovery from the low was pronounced and strong with total volume of 1.51 bln shares. By the close at 4131, the NASDAQ had risen 61 points on the day. 21 advancers fell short of every 22 decliners, however 264 new highs again bested just 79 new lows. Liquidity is alive and well in the technology issues and looks to remain that way for now. Surprisingly, with the exception of INTC (+$4.56) and CSCO (+$0.94), the other 3 generals (MSFT, DELL, WCOM) all suffered losses today and consequently contributed nothing to the cause. What could have caused such a stellar recovery? The answer is "Internet" and "bandwidth". First, despite splitting its stock 2:1 just last week, JDSU announced another 2:1 split before the bell this morning, propelling it $26.69 for the day - incredible until you remember that JDSU is poised to be the Intel of the next 10-20 years. The split is subject to shareholder approval at a special meeting on February 25, and payable on March 10. OCLI, a recent acquisition of JDSU's similarly rose $46.88. From the Internet sector, on a DLJ's announcement that YHOO is on the "Focus List", it too aimed for the stars, gaining $42.31 today (earnings are on January 11 after the bell). CMGI was even more impressive with a $49.75 gain. Volume was big in all these issues tells us that investor interest is running high. And on the bandwidth subject, how 'bout that Globalstar? It gapped up to almost $53 before falling back to close at $46.75, up $2.75 on 15 mln shares (6 times the ADV). Not only are the day traders taking advantage of the low float, this is one issue that fund managers will want to own since it will be the first fully operational CDMA satellite phone system to be available for the masses. It doesn't hurt that QCOM owns 6% either. Remember, these guys are at break even with just 400K customers, which they expect to sign up by the end of this year. ABN AMRO raised their price target on GSTRF today too from $35 to $60, citing the "first to market" advantage and expected revenues of $239 mln in FY2000. System capacity is just over 7 mln users. For those who missed out on QCOM, while we can't guarantee even 1 thin dime in return (let alone 2300% for QCOM), GSTRF has already risen over 70% since we picked it, and is just starting to get noticed by the institutions that don't already own it (191 institutions own about 75% of the float). Check out the full write-up from last Thursday in the tonight's "Play of the Day" section. What about tomorrow and the rest of the week? Look for more volatility resulting from cashing in of big 1999 gains, and putting new cash back to work in big cap technology issues. When liquidity reigns, we need to take advantage of it. Just be mindful of support/resistance and market events. For the remainder of the week, we have construction spending tomorrow (est = -0.1%), initial jobless claims (275K last week) and new home sales (est = 925K) on Wednesday, and non-farm payrolls and unemployment on Thursday. In reality, none of these are likely to be a big deal to you and me. However, they could be a huge deal to the bond market, which will then make it a huge deal for equities, which will make it a huge deal for us. Be on your guard for the unexpected. Still, with this first week of trading into the new year coupled with a liquidity buildup, dips are buyable so long as you wait for the bounce. As always, remember to sell too soon. The corollary is "grow your flowers, pull your weeds". Buzz Lynn Research Analyst *********** STOCK NEWS *********** Everyone Made Money But Me By S.P. Brown What a year. Looking at the major market indices, it appears every equity investor got a lot wealthier in 1999. The S&P 500 (SPC) clocked in with a 19.53 percent gain, the Dow Jones Industrial Average (DJI) ended the year up 25.22 percent and even the much maligned small-cap Russell 2000 Index (RUT) rallied in December to post a 19.62 percent increase. There's no denying that 20 and 25 annual percentage gains equate to an exceptional investing year. After all, compared to the stock market's long-term average annual return of around 12 percent, these returns are downright boast-worthy. That is unless you happen to be comparing returns with those investors sagacious (or lucky) enough to have invested in large-cap high-tech stocks or any one of a number of IPO offerings. The IPO market, in particular, sizzled in 1999. The Bloomberg IPO Index (BIPO), which includes all IPO companies with a market value of at least $50 million at the initial public offering, was up a whopping 256 percent this year. High-tech stocks also had a nice run. The high-tech laden NASDAQ Composite Index (IXIC) was up 85.59 percent. So with all the major indices up in 1999, it was impossible not to make a buck in the stock market, right? Not necessarily. Take the BIPO, for example: Yes, the index was up more than 250 percent for the year. Unfortunately, most investors wouldn't have realized this triple-digit return for the simple fact they wouldn't have been able to get most of the IPOs at their initial offering price. Getting in at the initial offering price makes a world of difference on an IPO's return. Investors need to look no further then the top three IPOs for 1999 to realize how important it is to get a piece of the action from the get-go. In 1999, Red Hat (RHAT), Internet Capital Group (ICGE) and Foundry Networks (FDRY) posted a mind-boggling 2,917%, 2,733% and 2,313% return, respectively. But when investors consider opening price instead of IPO offering price, the returns drop considerably. When opening prices are used RHAT's, ICGE's and FDRY's returns drop to 850%, 2,600% and 480%. Most stocks in the BIPO index show the same dramatic drop-off in return when opening prices are used instead of offering prices. Not getting a piece of the privileged IPO market is one thing, but what about the high-flying IXIC? For 1999, it was up over 85 percent and was wide open to all investors. True, but there's a catch. Unless investors were able to invest in the actual index, or were particularly selective in where they allocated their money, there's a chance that their returns would have been inferior to the nearly 86 percent return the IXIC posted for the year. Here's the math: There are 4,773 stocks in the IXIC. Out of these 4,773 stock, though, only 900, or 20 percent of the stocks in the index, were up 86 percent or more for the year. What's more, over 2,000, or nearly 45 percent, of all NASDAQ stocks posted a loss in 1999. Because of the NASDAQ's narrow advancing breadth, the median gain for all NASDAQ stocks was a paltry 7.5 percent. The primary reason for the outstanding performance of the IXIC is that it's a market-weighted index, meaning the larger the market cap, the more the company affects movement of the index. Currently, the top eight stocks account for over 37 percent of the index's weight. The heavyweights of the IXIC are Microsoft (MSFT), Cisco Systems (CSCO), Intel (INTC), MCI WorldCom (WCOM), Oracle (ORCL), Dell (DELL), Sun Microsystems (SUNW) and Yahoo (YHOO). When investors look at the performance of these eight stocks over 1999, it's easy to see why the IXIC had a record setting year. MSFT, which accounts for roughly 12 percent of the IXIC's value was up over 67 percent for the year. Number two CSCO, with nearly a 7 percent weight in the index, was up 137 percent. INTC, which makes up 5.5 percent of the IXIC was up 39 percent. Next, WCOM, with nearly a 3 percent weighting, was the laggard of the "big eight" posting a 13 percent rise for the year. Sure, the top four had a big year, but it was stocks four through eight that really put the index over the top. DELL, with 2.7 percent of the index, posted a 38 percent gain. ORCL, with close to 3 percent of the index, was up 286 percent. SUNW, meanwhile, with 2.3 percent share, soared ahead 253 percent. The top performer, though, was the number eight stock. Red-hot YHOO, with just over 2 percent of the IXIC's market value, posted a whopping 300 percent gain for the year. So if you were a high-tech or IPO investor in 1999, you had a year of enrichment and mirth. Unfortunately, if you weren't, it was possibly yet another bitter year, especially if you were a value investor. Particularly hard hit in 1999 were the small-cap value stocks, which posted a measly 4.8 percent return in 1999. Unfortunately, values larger brethren didn't fair much better, either. Large-cap value stocks eked out a 6.3 percent gain, while mid-cap value returned only 6.2 percent. With value performing so miserably over the past few years, is the time right to rotate out of tech and into value as a contrarian play? According to TheStreet.com's resident know- it-all James Cramer, investor sector rotating at the beginning of the year isn't a prudent move. Cramer says the winners will just keep on winning, while the losers will most likely keep on losing. Cramer's reasoning is that the mutual funds that invested in tech trough 1999 will continue to put new money to work in these winners in 2000. The losers, on the other hand, will keep on losing because continued redemptions from the value funds will put increasing pressure on value stocks. Looking at the bullish start the NASDAQ's "big eight" got for 2000, Cramer might be on to something. The IXIC closed up today at 4131.15, yet another record. **************** PLAY OF THE DAY **************** GSTRF - Globalstar Telecommunications $46.75 +2.75 (+2.75) The difference between GSTRF and Iridium, the most recent flop in satellite communications can be described in four letters: CDMA. Globalstar will use it as the medium of transmission, instead of the TDMA technology used by Iridium. GSTRF will be able to transmit not just crystal clear quality voice calls, but data, messaging, paging, and GPS services. GSTRF uses 48 satellite in low orbit above the earth in conjunction with a ground-based system. Thousands of beta users already report fantastic results. Though commercial service has already begun, it will be available for the rest of us by the end of the first quarter in 2000. Loral Space and Communications owns 43% of the venture, while QCOM and others own the balance. Bank of America Securities - Zero; George Gilder - One. Not even the B of A analyst's "short" call (twice picked up by CNBC over two days) could keep GSTRF grounded on terra firma (Earth) forever. The CDMA technology wins in the end. The $0.05 cost basis, including operating costs provides an 85% cash flow margin, while even $25 mln of wholesale time was pre-sold at $0.47 per minute for resale to the consumer (estimated at roughly $1.00 per minute initially). The venture, 6% owned by QCOM and 41% owned by LOR breaks even at only 400 K users. Unlike its doomed TDMA counterparts, Iridium and Teledisic, GSTRF's CDMA technology will likely be able to transmit at high data speeds too within 24 months. The superb economics and CDMA technology have yet to be fully grasped by analysts whom we think will soon award GSTRF higher multiples. While we're not saying you'll get an 1800% return in one year if you get in now, GSTRF still represents a significant opportunity for those who missed out on QCOM twelve months ago. This could be your next chance. Technically speaking, $30 is solid support; $32 is pretty good too; and $34 provided strong support on Thursday. For you moving average watchers, keep an eye on the 10-dma of $28.25 even though we don't think it will see that level any time soon, given the strong volume of this issue. Even Thursday, the last full trading day of the year (and historically low on volume), GSTRF traded just under three times its ADV. Nonetheless, if it trades under $30, stand aside until the smoke clears. Otherwise, pick a comfortable entry for what we think will be a strong January At least the first week). GSTRF has yet another great link to a terrific company. Yes, Vodafone-Airtouch (VOD) has the exclusive rights to sell the Globalstar services in the United States. Beta users are already testing the system, which will be available on a limited retail basis in January. Thursday, the FCC granted a license to GSTRF to officially sell the service in the U.S. For us closet propeller-heads, this is going to be a cool toy. But more importantly and contrary to the popular belief that the international businessperson is the target customer, GSTRF is actually the wireless solution for those who need coverage in the 90% of the land mass of the country where PCS and cellular don't reach. We bet there are far more than 400K of them right here in the U.S., let alone internationally. BUY CALL JAN-40 YVQ-AH OI=1912 at $10.25 SL=7.75 BUY CALL JAN-45 YVQ-AI OI= 645 at $ 7.50 SL=5.75 BUY CALL JAN-50 YVQ-AJ OI=1159 at $ 5.38 SL=3.50 BUY CALL FEB-45 YVQ-BI OI= 290 at $10.13 SL=7.75 BUY CALL FEB-50 YVQ-BJ OI=1057 at $ 8.13 SL=6.25 Picked on Dec 23 rd at $28.19 P/E = N/A Change since picked +19.56 52-week high=$53.75 Analysts Ratings 4-7-1-0-0 52-week low =$12.63 Last earnings 10/99 est=-0.35 actual=-0.19 surprise = +84% Next earnings 01-11 est=-0.75 versus=-0.19 Average Daily Volume = 2.6 mln Chart = http://quote.yahoo.com/q?s=GSTRF&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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