Option Investor

Daily Newsletter, Monday, 02/14/2000

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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 

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 

Buzz Lynn
Research Analyst


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 

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

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

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

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 

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.


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

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