Option Investor

Daily Newsletter, Monday, 01/03/2000

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The Option Investor Newsletter         Monday  1-3-2000
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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 

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 

Buzz Lynn
Research Analyst


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 

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 

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. 


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

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