Option Investor

Daily Newsletter, Monday, 02/07/2000

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The Option Investor Newsletter         Monday  2-07-2000
Copyright 1999, All rights reserved. 
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
       2-07-2000           High     Low     Volume Advance Decline
DOW    10905.79 -  58.01 10970.94 10846.22   932,190k 1,232  1,774
Nasdaq  4321.77 +  77.63  4321.96  4244.15 1,626,587k 2,336  1,835
S&P-100  772.89 -   2.62   778.40   768.45    Totals  3,568  3,609
S&P-500 1423.00 -   1.37  1427.15  1413.33            49.7%  50.3%
$RUT     532.39 +   6.87   532.40   525.52
$TRAN   2572.21 -  36.75  2622.15  2569.68
VIX       23.70 +   0.77    25.44    23.36
Put/Call Ratio       .44

Easter Bunny, Santa Clause, Tooth Fairy

NASDAQ 4300?  No longer a mythical figure in search of a reason 
to celebrate, the NASDAQ broke through the resistance barrier 
today to close for the first time over 4300.  First the good 
news.  The gains came steadily throughout the day, as the final 
30 minutes of trade showed the benefits of saving the best part 
for last.  That's when the index powered up to close at its high 
of day at 4321.  Volume was a strong 1.6 bln shares.  The 
technical breakout and the strong volume were a positive in our 
book, but by no means a confirmation that we're moving higher 
from here.  As you might expect, technology stocks, and more 
recently biotech stocks have been the fuel igniting the run.  

Don't look now, but they have also been the source of a lot of 
volatility.  Think way, way back to January 31st (6 trading days 
ago) when the NASDAQ touched a low of 3748.  Since then the 
NASDAQ has tacked on a staggering 573 points, a 15.3% gain for 
the week.  Remember when that was a great ANNUAL return?  Anybody 
think that can be sustained on a weekly basis for long?  Nope, we 
don't think so either.  While on the surface things look good, we 
just passed stochastically (a measure of overbought or oversold) 
to the overbought part of the graph.  That move coupled with the 
gain should serve as a counterbalancing red flag to volume-backed 
breakout above.  And so we find ourselves sitting precariously at 
4300 just like January 24th, the day the NASDAQ began its 
nosedive to the 3750 level.  We are not saying that is going to 
happen again - after all, we had "deer in the headlight" fear of 
the coming FOMC meeting, which prompted traders to take some cash 
off the table beforehand.  However, while we don't face that 
prospect again until March, earnings season is coming to an end 
this week, beginning with Cisco tomorrow after the close.  
MCI/WorldCom reports on Thursday morning, followed by Dell after 
the close.  There are not many events on the horizon that would 
precipitate big gains until April when earnings get interesting 

Anyway, In case those last two sentences scooted on past your 
eyeballs, those three companies, CSCO, WCOM and DELL make up 
three of the top five market cap stocks on the NASDAQ 100 (the 
other two being MSFT and INTC, whom have already reported).  We 
all know what generally happens to stock prices shortly before 
earnings (right, they go up; conversely, they go down after 
earnings).  CSCO was up over $4 today in anticipation of earnings 
results tomorrow, where they are expected to beat the street by a 
penny or two.  WCOM, up $3.56 and who reports Thursday before the 
bell was given a boost this morning by a Merrill Lynch analyst 
noting, "you won't be disappointed".  Intel (+$3.13), who just 
purchased a new plant in Colorado Springs in which they intend to 
make handset chips for NOK, also got a boost on positive news for 
semiconductor association.  It was learned today that 60% of chip 
growth is coming from the communications field.  Oh, so that 
explains the big gains in BRCM, SNDK, LSI, ALTR, CNXT, and TXN.  
Though DELL was off fractionally (they've already warned), INTC, 
CSCO, and WCOM accounted for 12 points in today's move, giving us 
another reason to greet the breakout with caution once earnings 
are over.  Everyone remember why we urge you to sell too soon?  
Right.  Prices generally fall following release of the news.  As 
go the Generals, so goes the index.  Even with these three 
excluded, you still have to take your hat off to the 
semiconductor and biotech stocks for their contribution to the 
six-day run.

On the other hand, the DJIA was a different story.  Rust is 
apparently not in fashion right now.  Just look at the list of 
former beauty queens standing around with real earnings as 
institutional money seeks out those smoldering tech stocks 
offering a lick and a promise.  GE, unquestionably representative 
of the whole market, was handed a loss of $5.06 today.  AA lost 
$2.38.  BA sheared off $2.19.  MMM gave up $1.44.  In all, only 
six of the Dow 30 were up, one of which was HWP, up over $10.  
Were it not for Carly Fiorina, HWP's CEO kickin' hiney and taking 
names (plus positive comments from Lehman Bros.), we'd have seen 
another 40 points lopped off the DJIA.  While only spanked for a 
loss of 58 points to close at 10,905, the 11,000 support level 
appears to have turned to resistance today on the theory that 
what was once support can become resistance if a market (or a 
stock) is rolling over.

Of course, no Monday would be complete without mergers, and boy 
was today a bell-ringer.  First out of the block was Pfizer (PFE) 
announcing that they had agreed to buy Warner-Lambert (WLA) for 
about $90 bln in stock, or 2.75 shares of PFE for every share of 
WLA.  It's estimated that a $1.6 bln savings by 2002 will result 
along with a steady 25% growth rate over the next three years 
from the synergy.  In the process, AHP was left at the altar upon 
the news.  Don't feel too sorry for AHP though.  They get a $1.8 
bln breakup fee as a consolation prize.  Did shareholders like 
the "Oh, Henry" ending?  You bet.  PFE gained $1.25, WLA moved up 
$2.75, and AHP topped them both for a $2.94 gain.

In other M & A activity, we turn back to the tech front to find 
another marriage in the optical networking business with Lucent 
buying Ortel for $2.9 bln. in stock, which equates to about $177 
per ORTL share.  That was followed closely by Akamai's (AKAM) 
announcement that they would purchase Intervu (ITVU), a company 
that transmits audio and video over the Internet for $2.8 bln.  
Finally, Corel (CORL) is buying Inprise/Borland (INPR) for $1.07 
bln in a move that targets the growing market for the Linux 
operating system.

Increased liquidity anyone?

In the end, here are the scores.  The DJIA fell 58 to 10,905 on 
932 mln shares traded in a demonstration of technical weakness.  
Decliners outpaced advancer 17:12.  151 new lows were nearly 
double the 82 new highs, while down volume was 50% greater than 
up volume.  While it doesn't look good and it's not technically 
inspiring, it's also not a surefire signal for a selloff.  The 
next level of support is at 10,850 with resistance at 11,000.  

The NASDAQ gained 77 to 4321.  Volume was impressive at 1.626 mln 
shares.  Advancers beat decliners by a margin of 4:3, while up 
volume was more than twice down volume.  Similarly new highs 
smoked new lows 321 to 61 - an overall impressive day, but we 
still need to watch the 4300 level to see if it holds

In summary, here we sit directionless.  Not only is there M & A 
liquidity, there is still plenty of cash on the sidelines, a 
smidgen of which got put to work today in tech stocks during the 
final 30 minutes of trading.  Thus, we conceivably have a 
tradable technical breakout on the NASDAQ.  Conversely, the DJIA 
gave us a technical negative today.  As Jim noted on Sunday, 
Monday or Tuesday could be the day to watch, and today wasn't it.  
We're going to have to wait until tomorrow to see which side 
these markets fall into.  Keep in mind that with earnings season 
over, there isn't much reason to move up (except that blessed 
liquidity thing) and historically, now's the time during the 
earnings cycle when most issues go to sleep.  We could be 
rangebound for a while, in which case, you may want to stand 
aside until you see the direction emerge.  Rangebound trading can 
eat you alive.

Other indicators?  The VIX moved up today to over 23 from a low 
of 21 on Friday.  When it hits 20 on the downside, that's 
generally a sell sign.  However, with a six-point gain on the 
Russell 2000 today, losing issues are narrow by comparison and 
could spell r-a-l-l-y for the broader market.  It's a coin toss 
folks.  Keep your running shoes handy and be ready to find "new 
cheese" (see January 24 Market Wrap).  Of course, no Wrap would 
be complete without a reminder to sell too soon.

Buzz Lynn
Research analyst


UAL (put)

With the Dow Jones Transportation average on the skids resulting 
from higher fuel costs and tight labor markets, not to mention 
earnings season coming to an end, we think it smarter to play the 
downside if you feel you must play.  United Airlines fits neatly 
into both categories and has no support south of its current 

UAL - UAL Corp $55.50 -0.50 (-0.50)

UAL is a holding company whose principal subsidiary is United 
Air Lines, the world's largest airline.  They engage in the 
commercial air transportation of people, property, and mail.  
Notably, UAL is one of the world's largest employee-controlled 
companies with its employees owning 47% of the stake.  

The airline sector as a whole has been in a general downtrend 
since January.  The skyrocketing fuel costs have put quite a 
squeeze on their bottom-line.  UAL added insult to injury when 
it abruptly announced on January 13th its fiscal 200 financial 
forecast would be well below analyst expectations.  The shares 
stumbled significantly losing 13% in one day.  Despite solid 4Q 
earnings on January 19th, UAL continued its descent.  The flight 
disruptions on January 25th resulting from the east coast 
blizzard was the straw that finally broke the camel's back.  
You've got to realize too that consumers have been less than 
satisfied with airline's customer service.  There is a constant 
stream of complaints about delays and rude treatment.  It seems 
investors have taken this sentiment to heart and are putting 
their money in other equities.  First UAL slipped under firm 
support at $60, then quickly flirted with $57.  Now the $56 
support level has been shattered.  Currently the 5-dma is at 
$57.30.  Look for a bounce off this indicator if you want an 
entry into this put play.  But still the question remains. 
Where's the bottom?  Honestly at this point it's hard to 
determine so let's not guess.  Be prepared with stops and pay 
close attention to stock and market direction.  In the news this 
week, UAL announced its January traffic decreased by 2.8% versus 
a comparable month in 1999.

***February contracts expire in two weeks***

BUY PUT FEB-60*UAL-NL OI= 777 at $6.25 SL=4.25
BUY PUT FEB-55 UAL-NK OI=1037 at $2.31 SL=1.00

Average Daily Volume = 704 K


Kana and Silknet Announce $4.2 Billion Merger
By Cindy Christ

Shares in e-business application provider Silknet (SILK)
soared as much as 41 percent Monday after the company agreed
to be acquired by Kana Communications (KANA) in an all-stock
deal valued at $4.2 billion.

Under terms of the agreement, each outstanding share of
Silknet common stock will be exchanged for 0.83 shares of Kana
common stock. Kana also will assume all outstanding options
and warrants for Silknet stock.

The exchange ratio represents a 21 percent premium over
Silknet's average closing price for the last 30 days.

On Friday, Silknet shares closed at $138.50.

Kana will issue about 16.4 million shares to make the
purchase, equaling about 33.7 percent of the combined company.

"Kana and Silknet share a common vision in building an 
e-business platform that focuses on the customer," said Jay
Wood, Silknet CEO, in a statement.

"The combined products will provide the platform for linking
business-to-consumer and business-to-business functions within
an e-business," he added.

Directors, officers and certain affiliates representing about
43 percent of Silknet's voting power and holding around 51
percent of Kana's voting power have agreed to vote shares held
by them in favor of the merger and against competing
proposals, the companies said in a joint statement.

The deal is subject to shareholder approval and is expected to
close in second quarter 2000.

Redwood City, Calif.-based Kana, which makes customer service
software, said the agreement represents one of the largest 
e-business software mergers to date.

The companies will join their technologies to provide 
e-businesses with software used to answer customers' questions
and manage customer communications via e-mail, Web sites,
real-time messaging and Internet telephony.

By integrating their products, customers can help themselves
get information from e-businesses, including support requests,
sales quotations and order status, the companies said.

The combined company's client list will include 450 
e-businesses, including Microsoft, Williams-Sonoma, E-Trade and
eBay, among others.

Both Kana and Manchester, N.H.-based Silknet went public in
1999 at a $15 per share offering price.

In recent months, Kana has been on a buying spree to beef up
its product offering, acquiring privately held Connectify, BEI,
and NetDialog.

Shares in Kana, which split 2-for-1 Jan. 28, declined on the
news, trading down $18.38, or 7.1 percent, at $240.50.

Silknet finished up $44.81, or 32.4 percent, at $183.31.


Semis Fly on Strong Industry Outlook
By Cindy Christ

An upbeat report citing record sales ignited shares in
semiconductor companies, sending the Philadelphia
Semiconductor Index up almost 35 points to a new, all-time

The Semiconductor Industry Association said Monday that
worldwide sales surged to $14.7 billion in December and hit a
new industry record during 1999.

"Today's global sales number represent an 18.9 percent growth
rate for the semiconductor industry in 1999," said George
Scalise, SIA president, in a news release.

"With year-end global sales reaching $149 billion, 1999 broke
all predictions and industry sales records and was an
exceptional year of record growth and productivity for our
industry," he added.

Led by strong seasonal demand for communications products and
personal computers, microprocessors grew 9.8 percent in 1999,
totaling $27.2 billion.

"We witnessed across the board growth in all markets and
product demand was strong in all regions of the world," said
Scalise. "Sales were extremely strong for flash memory,
chipsets and DRAM due to demand for Internet infrastructure,
e-commerce and wired and wireless communications."

The SIA said demand for flash memory chips, which increased 83
percent, showed the strongest gains driven by booming growth
in wireless communications.

The trade group's forecast calls for semiconductor growth to
exceed last year's record level in 2000 and 2001, with sales
improving 20 percent per year fueled by expansion in mobile
phones and the Internet.

Sales of cellular phones are projected to quadruple from more
than 200 million units in 1999 to more than a billion by 2003,
according to the SIA.

The association also said that sales in Asia helped the
industry reach record-breaking sales.

"We saw a strong rebound in 1999 in the Asia Pacific market
and Japan is finally showing signs of recovery from an eight-
year recession," said Scalise.

Japanese and Asia Pacific markets grew 26.7 and 28.9 percent
respectively year over year.

If economic recovery continues in the region, Asia Pacific
will resume its role this year as the fastest growing market
for semiconductors, supported by telecommunications build-out
in China.

Shares in semiconductor companies moved up across the board on
the industry's strong outlook.

TriQuint Semiconductor (TQNT), a supplier of high-performance
gallium arsenide (GaAs) integrated circuits, rocketed $14.28,
or 7 percent, to $219.63.

TriQuint shares split 2-for-1 after the close on Feb. 22.

Shares in Micron Technology (MU), which designs and
manufactures semiconductor memory products and personal
computer PC systems, shot up $6.63, or 9.8 percent, to $74.

Programmable chipmaker LSI Logic rose $8, or 8.7 percent,
to $99.50, an all-time high.

Other programmable logic device makers, which make chips that
can be programmed to perform specific tasks, were also higher.

Altera (ALTR) gained $3.94, or 5.4 percent, to $76.44. Xilinx
(XLNX) advanced $1.94, or 3.3 percent, to $60. Lattice
Semiconductor (LSCC) jumped $4.46, or 7.6 percent, to $63.22.

Broadcom (BRCM), which makes semiconductors for cable TV set-
top boxes, hit a new 52-week high, rising $28.31, or 9.1
percent, to $339.31.

Intel, the world's No. 1 chipmaker, bucked the trend all day
but lit up near the close to finish up $3.19, or 3 percent, at


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