The Option Investor Newsletter Monday 2-14-2000 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) ****************************************************************** 2-14-2000 High Low Volume Advance Decline DOW 10519.80 + 94.60 10549.00 10430.80 931,588k 1,452 1,549 Nasdaq 4418.55 + 23.10 4435.96 4355.54 1,600,534k 2,196 2,031 S&P-100 756.80 + 4.76 757.99 749.87 Totals 3,648 3,580 S&P-500 1389.94 + 2.82 1394.93 1380.53 50.5% 49.5% $RUT 539.94 + 2.84 539.94 533.51 $TRAN 2467.28 + 31.15 2472.54 2427.72 VIX 25.79 - 1.13 27.31 25.46 Put/Call Ratio .57 ****************************************************************** Cupid takes aim. . . And misses. While Cupid did a pretty good job of getting some companies hitched over the weekend with new merger announcements this morning, the winged matchmaker soon ran out of arrows. It's not that Cupid is a bad shot. It's just that investors are not in the mood to fall in love and largely dodged his arrows today. Let's dispense with the mergers first, then we'll get to the issue of "dodging arrows". First, Corning (GLW +14.25, $180) announced it would acquire NetOptix (OPTX +20, $156) for $2 bln in stock (payable at 9/10 GLW share per share of OPTX) in yet another consolidation in the photonics business. Corning is setting itself up to become a strong competitor of JDSU. Next came the Healtheon/WebMD's (HLTH +1.63, $56.63) bid to buy both Medical Manager (MMGR +21.75, $86.75) and its subsidiary, CareInsite (CARI +4.13, $72) in a stock swap deal valued at $7.6 bln. While it may seem obvious, a Reuters report noted "Healtheon wants to become a key Web-based link between doctors, patients, drug companies, insurers and other health service companies." (Read that B2B leader in a $1 trillion business). Then came news that Sterling Software (SSW +1.81, $36.25) would be purchased by computer Associates (CA -0.44, $69.31), the third largest business applications software company behind MSFT and ORCL, for $4 bln in stock. Finally, Honeywell (HON +0.38, $43.50) and United Technologies (UTX +1.94, $50.31) formed a joint venture with i2 Technologies (ITWO +19.13, 259.88) aimed at aerospace products and services. You'll love the name: MyAircraft.com - really handy for those days when you just don't have time to call around for the best deal on a new jet engine. From the rumors department, there are rumblings that AOL (-1.25, $55.75) may be negotiating for a controlling interest in Net2Phone (NTOP +12.19, $60.75). Since it's still in the rumor stage, terms have yet to be disclosed. Well, at least one arrow was pure poison. Though also still a rumor, Infosys, the Indian Internet giant making up 20% of India's most followed market index comprised of 30 stocks, may be seeking to acquire Cambridge Technology (CATP +3, $20.44). While Cambridge shares jumped at just the innuendo, INFY lost (gulp) $127.06 to close at $543 - not a happy Valentine's Day for those shareholders. As for dodging arrows, sentiment is leaning on the negative side, which kept many investors sitting patiently just watching for a sign of which direction this market will move. The fact is that there was some bargain hunting happening today on beat up issues, which certainly accounts for some of the 94-point gain on the Dow today. Unfortunately, that's a problem. When investors are hunting for bargains, by definition they are signaling that they are not yet ready to get back in the market with both feet. While the VIX.X spiked up to 29 last Friday, today it dropped a bit, into the 25-27 range, while closing at a very "middle of the road" 25.79. Despite a bounce up following an 11% correction, today's 94-point gain to 10,519 wasn't very convincing. With just 931 mln shares changing hands, slightly short of the 1 bln daily shares we've become accustomed to seeing, there was no broad-based participation that would indicate a definite recovery. 1551 decliners edged past 1453 advancers, while down volume outpaced up volume by 50 mln shares. However, 240 new lows were quite pronounced next to just 55 new highs. This is hardly an enthusiastic recovery. If their was any good news though, it's that the DJIA never fell below 10,450 and remained significantly higher than the 10,379 touched last Friday. The NASDAQ fared slightly better. With the exception of the amateur hour gap open at 4434, it managed to close up 23 points at its high of the day at 4418. 11 advancers slipped past every 10 decliners, and 287 new highs more than doubled the 113 new lows. Volume too was strong at over 1.6 mln shares. Up volume beat out down volume by a 4:3 ratio. Volume was a respectable 1.6 bln shares. Again, not a bad day, but certainly not a strong recovery. The trading lacked any meaningful volatility by trading in and out of positive territory. It was only a final hour push that got the index back into the positive by the close. Most of the 5 generals (MSFT, CSCO, DELL, WCOM) were off fractionally, excluding INTC, which managed a $4 gain partially on news of its new Itanium, Timna and Willamette chips that will be unveiled at an Intel developer forum in Southern California this week. The sentiment just isn't enough to call today a recovery from the lows last week. It was more of a relief from an oversold market. With the price of oil hitting a new high of over $30 today, its highest since the Gulf war, and Greenspan to give his Humphrey Hawkins speech to Congress on Thursday (where traders will be looking for any utterance of future interest rate direction), there is fear among traders that the indices may have further to fall. $30 crude is certainly alarming for the long-term trend, but most traders think that is extreme and can't last. Using Ken Fischer's Great Humiliator Theory that states that it's the market's job to humiliate as many people as possible, $30 oil could be a major negative factor a few months down the road. Thursday is also the day for release of the PPI numbers for January, followed by the CPI on Friday. In short, there is a lot that can go wrong before investors and traders alike think that things will get better. The good news is that there has been relief in site two days prior to recent "Greenspeakings" and there is still a boatload of liquidity just waiting to buy something if we can get a one-week horizon with few speed bumps. That's the time when we may collectively allow ourselves as traders to be nailed by an arrow or two from Cupid and fall in love with the market again. After all, corporate profitability borne of innovation and productivity gains continues unwavering. As Jim said over the weekend, keep your seatbelts fastened, it could get bumpy. Watch the VIX.X and remember that when fear is the highest, prices are probably about to head back up. Pick your plays carefully this week, or stand aside until the dust clears. For you cheese seekers out there, keep your sneakers on - some time premiums on volatile issues that have already experienced a pullback (AMCC, EMLX, ISLD) are juicy for the selling (see risks of selling Naked Puts). As always, sell too soon. Buzz Lynn Research Analyst ********** STOCK NEWS ********** Here Comes Windows 2000 By S.P. Brown Here we go again. This coming Thursday Microsoft (MSFT) will introduce the latest incarnation of the its famous (or infamous) Windows operating system, as well as launch a two- year $200 million marketing campaign to support the new software. The opening gala - to be held in San Francisco - promises to be a memorable event, as the company plans to wow the media with guitarist Carlos Santana and a slew of corporate bigwigs, among them Michael Dell of Dell Computers (DELL) and Michael Capellas of Compaq Computers (CPQ). Obviously, MSFT is sparing no expense to make sure Windows 2000 is a hit. And why not? The company has already spent four years and $1 billion to get the new operating system to market. Still, despite the effort, MSFT is expending to generate enthusiasm, don't look for computer geeks around the globe to storm their favorite software outlet the way they did for Windows 95. Initial consumer zeal will likely be tepid because Windows 2000 is first being marketed towards corporations looking to upgrade their Windows NT operating system. Another factor contributing to widespread consumer indifference, is that older computers simply lack the horsepower and space to run Windows 2000. Minimum requirements include a 133 MHz or higher Pentium-compatible microprocessor, 64 megabytes of memory and a 2 gigabyte hard disk with 650 megabytes of free space. Since MSFT already has a stranglehold on the PC environment, an immediate desktop coupe isn't all that important. What is important though, is that Windows 2000 quickly broaden MSFT's server-software market and stem the tide of rival operating systems. MSFT currently rules the low-end server market; the software that runs small network systems. In fact, according to International Data Corp., MSFT's Windows NT operating system runs 38 percent of this market. However, the Linux operating system, which was virtually unknown just two years ago, has quickly grown to a 25 percent of the market. But MSFT isn't satisfied just being a big fish in a little pond. Even though the company commands the lion's share of low-end server systems, it's only a minor player in the enterprise systems market - those systems that run Web sites and large corporate networks. As of the 1999 third-quarter, Windows NT held just 13 percent of this larger, fatter-margin market. Ruling this lucrative niche are the Unix providers, who command a 67 percent market share. Big names include Sun Microsystems (SUNW), International Business Machines (IBM) and Hewlett-Packard (HWP). What's more, these guys aren't waiting for MSFT to storm the beach. In anticipation of Windows 2000, Unix leader SUNW recently introduced its latest operating system, Solaris 8, to compete with both Windows 2000 and the Linux systems. What's more, Solaris 8 is free via the Internet or $75 for a CD version (customer service is extra). There's no such bargain awaiting Windows 2000 users. Upgrades for Windows 98 and NT will cost $219 and $149, respectively. Other additions are even pricier. Windows 2000 Server and Windows 2000 Advanced Server, which are multi-seat versions of the basic operating system, will start at $999 and $3,999. Okay, so its not the bargain Solaris 8 is. Nevertheless, MSFT is counting on Windows 2000 to make it competitive, if not dominate, across the board in the server operating system market. Windows 2000's Advanced Server can run a computer with up to eight processors (based on Intel's architecture), and two eight-way boxes can be hooked together to create a 16- processor server. Later this year, Microsoft will add its DataCenter Server to the Windows 2000 lineup, making it possible to run the system on a server with 32 processors. If that's not enough to put the competition on its heals, MSFT officials claims that in any networking situation, a Windows 2000-Intel system will cost one-third as much to run as a SUNW server running the Solaris 8 operating system. Of course, with any new product, there are always skeptics, some of which say Windows 2000 is just another a big bloated operating system coming to market at a time when the computer industry is moving towards smaller devices and applications that can be run over the Web sans an elaborate operating system. Other skeptics say that MSFT will have trouble pushing Windows 2000 into the high-end server market because it's still perceived by the computing world as being unstable. Contributing to concerns that the software may be a little shaky is a recent report from the trade publication Smart Reseller that sited an internal MSFT memo acknowledging the software contains 63,000 possible defects. MSFT has countered reliability concerns by stating Windows 2000 has had ample time to get feedback from some 750,000 beta testers, and due to this rigorous testing, the company has spent $160 million to increase reliability. According to MSFT officials, the new software contains no "show-stoppers," meaning bugs that cause lost data or crashes. Despite the challenges ahead, many Windows 2000 supporters believe it will become a huge revenue generator. According to David Readerman, an analyst with Thomas Weisel Partners, the server versions of Windows 2000 will likely contribute more than $3.5 billion in revenue in fiscal year 2000. Much of this initial server success could come at the hands of the Linux distributors. According to International Data analyst Dan Kusnetzky, MSFT sells more operating systems before breakfast than all Linux distributors combined sold last year. And with Windows 2000, he says MSFT will increase its dominance. By 2003, Kusnetzky predicts the software giant will have more than twice the market share of the No. 2 player. Another reason Windows 2000 is destined for success is the Microsoft name. It's amazing how many investors and analysts forget what large corporate cultures are all about, and that's keeping your rear-end covered. When an IT manager is asked by an executive to recommend an new operating system, what's the safe recommendation? Finally, here's a thought for Oracle (ORCL) investors. Once the large-scale migration to Windows 2000 takes place, and it will take place because no business is better at applying Say's Law (an economic postulation that states supply creates demand) than MSFT, look for the software giant to go after the enterprise software application market with a vengeance. Company officials have already stated once Windows 2000 takes hold, server applications will be the next market to be put in the cross-hairs. Some things never change. ********************** PLAY OF THE DAY - CALL ********************** PCMS - P-COM Inc $19.53 +0.78 (+0.78)) Their company logo says they are the Leading Supplier of telecom distribution equipment and services for end user access to the World-Wide Network. The company's products are based on common system architecture and are designed to carry various combinations of voice, data and video traffic and to be easily configurable based on the needs of its customers. PCMS contracts out the majority of its manufacturing, and also provides related software and networking support. Most of PCMS's revenues come from outside the United States. If you look at the price of this stock you might wonder why we've included PCMS in our newsletter. PMCS made our list of favorites for several reasons, not the least of which is the potential profit offered in this play. PCMS is an inexpensive stock compared to what we normally put in the newsletter, but don't let that fool you. Early in February PMCS broke through the $16 level which had provided resistance on several different occasions. The company had just reported earnings that were in-line with analysts estimates. The day after reporting earnings, no less than four different brokers either reiterated or upped their rating on PCMS. Analysts at CIBC raised their 12-month price target from $17 to $35. What are the analysts seeing in P-Com? The company's fixed wireless technologies are gaining increased prominence as a high-speed alternative to laying cable. Basically the stock is viewed as broadband at a discount and has certainly attacked investors attention. Tuesday PCMS hit a new high at $19.69 and retraced to form an intraday base at $17.50. Friday PCMS ended the day with a gain of $0.75, which isn't bad considering the profit-taking seen at the Nasdaq. Technically PCMS has formed a beautiful channel since late December and almost double in price since the first of the year. How many of the larger cap companies have doubled in price since the first of the year? Ok, maybe a few but you get the idea. Look for bounces of support at $18.25 and $17.50 should we see a retracement before PCMS moves higher. The most recent news on PCMS is the numerous upgrades seen late in January, but they seem to have drawn investor attention back to a company that many ignored in the past. BUY CALL MAR-15 PQP-CC OI= 618 at $5.38 SL=3.50 BUY CALL MAR-20*PQP-CD OI= 632 at $2.88 SL=1.00 BUY CALL MAY-15 PQP-EC OI=1592 at $7.00 SL=5.25 BUY CALL MAY-20 PQP-ED OI= 199 at $4.63 SL=2.75 Picked on Feb 13th at $18.75 PE = N/A Change since picked +0.78 52-week high=$19.69 Analysts Ratings 3-4-3-0-0 52-week low =$ 3.69 Last earnings 01/00 est=-0.10 actual=-0.10 Next earnings 04-27 est=-0.06 versus=-0.27 Average daily volume = 1.98 mln /charts/charts.asp?symbol=PCMS ************************Advertisement************************* Tired of waiting on trades to execute? 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