Option Investor

Daily Newsletter, Monday, 01/10/2000

Printer friendly version

The Option Investor Newsletter         Monday  1-10-2000
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)
      1-10-2000           High     Low     Volume  Advance Decline
DOW    11572.20 +  49.64 11638.28 11532.48 1,064,850k 1,775  1,334
Nasdaq  4049.67 + 167.05  4072.36  3882.63 1,737,058k 2,586  1,607
S&P-100  790.92 +   7.43   794.16   783.49    Totals  4,361  2,941
S&P-500 1457.60 +  16.13  1464.36  1441.47            59.7%  40.3%
$RUT     501.89 +  13.58   505.96   488.31
$TRAN   2980.50 +  15.78  3002.03  2963.59
VIX       22.51 -   0.56    23.91    21.94
Put/Call Ratio       .40

AOL finds a dance partner and the place goes nuts

Ahh, just look at the happy couple. . .Fred Astaire and Ginger 
Rogers have nothing on AOL and Time Warner (TWX) who engaged in 
magic of their own as they took to the floor and danced their way 
into the history books by announcing the largest corporate merger 
ever.  It's official.  For the princely sum of $166 bln in AOL 
stock, TWX will become a part of AOL.  In the details, TWX's 
Gerald Levin will stay on as CEO and AOL's Steven Case will be 
Chairman.  TWX shareholders will own 45% of the new company, 
while AOL shareholders will retain 55%.  Both companies gain 
substantially from the transaction - TWX because it will now have 
distribution to roughly 20 mln (and growing) AOL subscribers; and 
AOL because it will have new content to distribute, not to 
mention some cable properties of its own.  Much like the rooster 
taking credit for the sunrise, AT&T's Michael Armstrong chimed in 
that the merger validates AT&T's commitment to cable as the 
broadband distribution method of choice for the future.  The 
merger also gives AOL the cable access via TWX's system, but 
makes it tougher for AOL to continue to do battle against AT&T 
for free access rights to their cable properties.  Let's see if 
AOL will now let other content delivery ISP's use TWX's cable 
system free of charge - not likely.  When all was said and done, 
AOL gave up $1.25 to close at $71.13 (traded as high as $80 
during amateur hour), while TWX closed up $25.31 at $90.13 
(traded at $102 during amateur hour).

The marriage marks the first big Internet merge with big media.  
Internet chat rooms were rampant today with speculation about who 
would be next.  "Who" doesn't really matter.  Just know that 
consolidation amongst the ISP/Cable/Content companies will 
continue if those industries are to survive in the Internet 
revolution.  With the ceremony out of the way, we can now focus 
on the reception - and Wow!  Whatta party!

The attendance list was impressive.  The first to arrive was 
"Bond", "30-year Bond".  Traders have already priced in a 25 
basis point increase in the February bond futures contract 
following the next FED meeting in February.  Furthermore, they 
have also priced in a 62% probability of 50 basis point increase.  
That rates will rise at the next FED meeting is a foregone 
conclusion.  It's now just a matter of how much, and the market 
seems resigned to it.  Apparently, Mr. Bond isn't as popular as 
he used to be either.  It seems even former "Bond" lovers were 
leaving in a return to equities today, which may have accounted 
for today's yield increase to 6.59%.  Many more traders could be 
jilted as we get closer to the PPI and CPI index release later 
this week.  Aren't we suppose to want to be in bonds when the 
rate gets too good for equity investors to pass up?  Yes, but not 
until the returns approach 25%-80% per year (pick your favorite 
index)!  Using the same logic, wouldn't the yields of the equity 
market get people to sell bonds to buy stocks?  Bingo!  
Additional liquidity from selling bonds also sparks the volume, 
which raises stock prices.  Even conservative bond investors have 
a greed factor.

Also at the party - a host of Internet companies (one of them 
makes headlines and they'll all be there in a show of support), 
including YHOO, who reports earnings and possibly a split 
tomorrow at the kickoff of earnings season (+28.81, 436.06); CMGI 
(+31.50, 306.50); INKT (+15.50, 104.88); NSOL (+21.88, 224.63); 
INSP, a recent splitter (+15.31, 114.50); DCLK (+13.19, 249.63); 
and EBAY (+7.50, 142.25).  Were they not overshadowed by the 
AOL/TWX merger, Nextlink's (NXLK) agreement to buy Concentric 
Networks (an ISP; symbol - CNCX) might have made front-page news 
instead.  CNCX was up $9.63 to $39.63 on the news while NXLK fell 
$1.44 to $77.06.  News that GM was buying the 50% of Swedish 
carmaker, Saab, which it didn't already own failed to even 
register in today's news.  Biotech companies also filled the 
guest list of active market participants.  However Celera 
Genomics stole the show by gaining $55.06 to close at $242 on 
news that they had successfully mapped 90% of the human genome 
almost a year ahead of schedule.  

Meanwhile, back on the dance floor, all this euphoria over a huge 
merger rubbed off on most other participants, which in the end, 
sent the DJIA to a new record high today and moved the NASDAQ 
within 82 points of a new high.  Both the NYSE and the NASDAQ 
displayed stellar volume, telling us that liquidity is alive and 
well.  DJIA 10,938 and NASDAQ 3711, which had the gloomsters out 
in full force predicting 20% correction are a distant memory.  
Tech stocks are back in vogue, and "cyclical rotation" has 
already cycled and rotated.  What we're seeing here is the 
coining of a new phrase, "time compression".  The theory is that 
the markets are moving in much faster cycles now.  Corrections 
that used to take months or weeks now take only days.  With 
increases in volume thanks to electronic trading, action and 
reaction to news takes place much more quickly than it used to.  
Remember when option prices were printed once a day in the 
newspaper only?  Neither do we, but it really use to happen that 
way.  Now we can react in seconds to news that happened just 
seconds before.  If CMRC or YHOO were trading back in the 1970's, 
their wild gyrations would likely have been spread over months 
rather than minutes, thus we wouldn't have noticed the 
volatility.  There is simply more information available on which 
to act and greater ability to act on it without delay than ever 
before in history.  It's not so much that we're compressing time.  
It's that we're accelerating the arrival of new information in 
which to make new trading decisions.  Decisions cause action.  
Action causes volume, and liquidity makes it possible.  But we 

Here's the meat of the DJIA.  It closed at 11,572, up 49 points 
on over 1-bln shares.  Advancers beat decliners by a wide margin 
(1775:1334), telling us that the advance was broad-based and with 
conviction.  For the first time in a while, new highs beat new 
lows by a wide margin (103:60).  Thank the tech stocks in the 
DJIA for today's record.  HWP was up $7.19; IBM up $4.50; INTC up 
$3.75 on a BBRS/Dan Niles price target upgrade to $112; and MSFT 
up $0.81.  All of this is a strong positive in our book, but as 
we're fond of saying, nothing goes up forever in a straight line.  
To that end, the market may take a quick breather giving us a 
buying opportunity.  Just be prepared to take advantage of it and 
remember those stops for a wake up call when you least expect it.  
The nearest support is at 11,525, though we got mild support this 
morning at 11,550.  Resistance is up at 11,637.

The NASDAQ has been amazing too - a 300-point recovery in 2 
trading days.  Gaining 167 points today, its highest 1-day gain 
ever, the NASDAQ closed at 4049 on 1.74 bln shares.  That volume 
would rank in roughly the top 5 of all time.  2586 advancers put 
the hurt on 1607 decliners, while new highs beat new lows by 
almost 5:1.  That's huge.  Tech stocks again ruled the day from 
the chip sector to Internets to biotech.  (See dance floor 
above).  Support was found in the morning at 3963, but 4000 held 
later in the afternoon.  If it falls south of here, 3925, then 
3875 is the next stop.  Don't get complacent.  Just when the 
market seems unstoppable, surprises happen.  Remember earnings 
season begins tomorrow.

The first surprise could be if YHOO fails to announce a split or 
to blast the whisper number when it releases earnings after the 
close.  It could also come as a piece of economic news causing 
equities to once again look for guidance from the bond markets - 
that means investors could lighten up on Thursday morning if the 
PPI numbers greet traders like a 2x4 on the side of the head.  
While all looks rosy thanks to liquidity, there are going to be 
some bumps in the road.  Be ready to buy the dips, but don't 
catch the falling knife - it's tough on financial fingers.  We 
should enjoy the AOL/WBX reception while it lasts, but we won't 
overstay our welcome.  As always, sell too soon.

Buzz Lynn 
Research Analyst

Register at http://fncentral.com for a chance to win a free Palm 

fnCentral offers benefits of traditional financial management 
software, recurring bill reminders, Palm VII entry, and 
synchronization with Microsoft Money and Intuit Quicken. 

In addition, fnCentral connects members with independent 
consultants and allows them to securely share portions of their 
data with investment and tax consultants.


Alcoa Announces Record Operating Results and Share Split
By Cindy Christ

For the first time in its 110-year history, Alcoa (AA) earned
more than $1 billion in earnings for the year, the company
said Monday.

For 1999, Alcoa's net income was $1.054 billion, or $2.82 per
diluted share, up 24 percent over 1998 and beating analysts'
estimates by 13 cents.

Net income for fourth quarter 1999 was $333.9 million, or 89
cents per diluted share, up 53 percent from the year-ago

Revenues for fourth quarter 1999 were $4.3 billion, versus
$4.2 billion in the year-ago quarter. For the year, revenues
hit a record $16.3 billion, compared with $15.3 billion for
1998, a 6.5 percent increase.

The Pittsburgh-based company said that reductions in inventory
and in its effective tax rate from 32 percent to 29.9 percent
improved results by $31 million.

Return on shareholder equity also improved to 17.2 percent for
1999 from 16.3 percent in 1998.

Alcoa said its strong performance is the result of a cost
cutting initiative and rising global demand for its products.

"Our processes are more efficient, with improved cycle time,
less waste, and reduced inventories as we strive to produce
what the customer wants, when it's wanted," said CEO Alain
Belda in a statement.

At the end of 1999, Alcoa said the initiative had cut costs by
$728 million annually. Launched in 1998, the program aims to
trim expenses by $1.1 billion by Jan. 1, 2001.

Alcoa, the world's largest aluminum maker, also said Monday
its board of directors approved a 2-for-1 stock split and
raised its quarterly base dividend to 25 cents a share.

Annually, dividends now total $1 a share compared with 75
cents before the increase. The increased dividend is payable
Feb. 25 to shareholders of record on Feb. 4.

The split, which is subject to shareholder approval May 12, is
payable June 9 to shareholders of record on May 26.

The company also announced it is maintaining its variable
dividend, linked to financial performance. The variable
dividend is 30 percent of the company's annual earnings above
a stated threshold. The current threshold was raised to $3 per
share from $2.25 per share. 

Alcoa pays its variable dividend in the next year in four
payments with the base quarterly dividend.

Last year, Alcoa was the Dow's best performing component,
gaining more than 100 percent. Some analysts think it could
repeat its stellar run in 2000.

In December Merrill Lynch put the company on its U.S. Focus
List 2000 with an $87 price target, noting the company's
strong balance sheet and attractive variable dividend policy.

In addition, analysts say worldwide demand for aluminum is
improving, due to strengthening economic conditions in Asia,
Europe and the Americas.

"Prices for aluminum seem set to rise, which ought to boost
earnings," analysts wrote in a December report. "Earnings
could advance at a 15 percent annual rate for the next five

A possible downside for Alcoa, and other cyclicals making
positive moves lately, is that investor enthusiasm for tech
stocks or other hot sectors might overshadow the value in
basic materials shares.

Merrill Lynch forecasts that earnings for basic-materials
companies should rise 39 percent in 2000, compared to 5
percent last year.

"There remains a risk that, despite the apparent value
embedded in the sector, it fails to be acted upon because of
the general perception or more interesting situations
elsewhere in the market," analysts wrote.

Merrill Lynch chief quantitative strategist Richard Bernstein
is advising investors to take some of their tech sector gains
and put them in energy and basic materials shares, where
fundamentals are improving.

Citing declining fundamentals, Bernstein is predicting a tech
shakeout in 2000. He also thinks value stocks will outperform
growth shares this year. So far, he said, investors have
ignored the specter of rising interest rates and accelerating
earnings estimates for cyclicals and other value stocks.

Alcoa, which is the first Dow component to report,
kicked off earnings season Monday. Shares in AA traded higher
on the split and earnings news, rising to $87.25 in morning
market action. Later, shares backed off to close down $0.25,
or 0.30 percent, at $84.38.


CSCO - Cisco Systems $109.81 +3.81 (+3.81)

Cisco is the number one electronic/Internet networking and 
equipment company.  If you surf the Net, mine for data, or 
just exchange e-mail, somewhere in the transmission is likely 
a Cisco switch or router.  While they are slightly behind 
in the move into optical networking, purchases of Monterey 
Networks, Cerent, and most recently Pirelli Optical Networks 
are helping to bring Cisco into the competitive arena with 
Nortel Networks and Lucent.   

CSCO hit a new high on Monday in excess of $110 before falling 
back, wherein it tested $97 on Thursday, then came roaring back 
on Friday on 1.5 times its ADV of 20.5 mln shares.  Buyers were 
stepping up to the plate in droves.  While CSCO is a great 
company and already known as a leader in the field, news that 
Lucent would fall short of its earnings initially tarred CSCO 
with the same negative brush, sparking a wave of investor 
selling without stopping to think of the ramifications.  Almost 
immediately CSCO defended itself by announcing they would not 
change any of their guidance to analysts.  Translation:  what 
ills Lucent doesn't ill CSCO.  In fact, it gives a window of 
opportunity for CSCO to muscle into Lucent's turf while their 
guard is down.  February 8 is the next earnings report 
(confirmed).  In CSCO's refusal to change its guidance to 
analysts, there may be an earnings surprise that they'd currently 
like to remain a surprise.  CSCO is also in split territory 
again and may announce at the same time.  Assuming the market 
cooperates, look for a run to take place prior to that date.  
Support is at $102; resistance at $110.  Target shoot where 
your comfort level lays or wait for the breakout over $110 
with volume.

The news is contained above.  Just know that Lucent's misfortune 
is its competitors' gain, including CSCO's.

***January contracts expire in two weeks***

BUY CALL JAN-105*CWY-AA OI=18846 at $ 6.75 SL=5.00
BUY CALL JAN-110 CWY-AB OI=14546 at $ 3.75 SL=2.25
BUY CALL FEB-105 CWY-BA OI= 2928 at $10.50 SL=8.25
BUY CALL FEB-110 CWY-BB OI= 3645 at $ 7.50 SL=5.75
BUY CALL FEB-115 CWY-BC OI= 2625 at  $5.25 SL=3.50

Picked on Jan 9th at    $105.88     P/E = 176
Change since picked       +0.00     52-week high=$110.25
Analysts Ratings    22-16-0-0-0     52-week low =$ 44.94
Last earnings 11/99   est=  N/A     actual= 0.24 
Next earnings 02-08   est= 0.23     versus=  N/A
Average Daily Volume = 20.7 mln
Chart = http://quote.yahoo.com/q?s=CSCO&d=3m

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.
Move your trading into the next millennium with Preferred Capital

Anything else is too slow!



If you like the results you have been receiving we 
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.

We would like to have you as a subscriber. You may 
subscribe at any time but your subscription will not 
start until your free trial is over.

To subscribe you may go to our website at 


and click on "subscribe" to use our secure credit 
card server or you may simply send an email to

 "Contact Support 

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the 
information over the phone.

You may also fax the information to: 303-797-1333


This newsletter is a publication dedicated to the education 
of options traders. The newsletter is an information service 
only. The information provided herein is not to be construed 
as an offer to buy or sell securities of any kind. The 
newsletter picks are not to be considered a recommendation 
of any stock or option but an information resource to aid the
investor in making an informed decision regarding trading in 
options. It is possible at this or some subsequent date, the 
editor and staff of The Option Investor Newsletter may own, 
buy or sell securities presented. All investors should consult 
a qualified professional before trading in any security. The 
information provided has been obtained from sources deemed 
reliable but is not guaranteed as to accuracy or completeness.
The newsletter staff makes every effort to provide timely 
information to its subscribers but cannot guarantee specific 
delivery times due to factors beyond our control.


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives