The Option Investor Newsletter Monday 2-28-2000 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) ************************************************************ 2-28-2000 High Low Volume Advance Decline DOW 10038.60 + 176.50 10156.50 9842.60 1,026,550k 1,466 1,493 Nasdaq 4577.85 - 12.65 4626.72 4466.42 1,798,067k 2,079 2,167 S&P-100 727.75 + 7.97 736.44 716.75 Totals 3,545 3,660 S&P-500 1348.05 + 14.69 1360.82 1325.02 49.2% 50.8% $RUT 557.68 + 0.94 559.69 548.13 $TRAN 2361.78 + 10.52 2375.53 2340.60 VIX 26.90 - 1.98 29.96 25.92 Put/Call Ratio .45 ************************************************************* Blue Chips get a break while Technology hangs tough. It didn't happen easily, but the beat up, tired, washed out (did we miss one there?) old world, blue chips looked like trophy stocks today, as value investors flocked to their defense. Financial and retail issues really looked good; however drug issues were notably absent. So what happened? A couple of things. For starters, The government released income and spending information this morning that was surprisingly positive. While incomes rose 0.7% (inline with estimates of 0.07%), consumer spending rose only 0.5%. That's the first time since October that we've collectively spent less than we've made. (Hear that Al? We're not out spending our inheritance!). Even better publicized, Abbey Joseph Cohen, Goldman Sach's perennially bullish strategist, noted before the open that the S&P is undervalued and that interest rate fears have already been priced in. Way to go Abbey! Morgan Stanley Dean Witter joined the party too with a bullish view on financial services, while Baron's ran multiple pieces over the weekend noting the relative growth prospects and valuations or retailers compared to other sectors. One little mentioned tidbit that may have helped too was U.S Energy Secretary Richardson's comment that he foresaw oil price stability after OPEC's March 27 meeting. We'll get to technology in a minute. But for now, the question remains, was it real? The answer is we don't know for sure, but we have a few clues. First, we've been trained like Pavlov's dogs to think that as interest rates rise, financials get clobbered. Bond rates rose today, so shouldn't financials have taken it on the chin? Don't let the relationship fool you. With the 30-yr rate no longer a completely accurate reflection of prevailing interest rates, the correlation gets tougher as the 30-yr becomes less meaningful. Bond rates have been steadily declining with prices steadily rising since the 6.75% peak in late January thanks to the "flight to quality" and the Treasury's desire to retire some of the debt. As buying demand grows, prices rise. Lots of profit was there for the taking. In fact, we think today's bond price drop may have been sellers moving some of their profits into the beaten up blue chips - thus the divergence. Look for true interest rates to be less reflected in the 30-yr yield going forward, which is also to say that there is no need to fret that increasing rates portend another down turn. Second, and from a technical standpoint, the DJIA's recovery from its low of 9846 was a real boost. While it reached as high as 10,156 in a 310 point trading range, that it closed back over psychological and technical support of 10,000 at 10,038 is a big plus in our book (at least psychologically in deference to positive sentiment). The fact is that as Kimo alluded to in the Weekend Wrap, GE, Du Pont, J.P Morgan, GM and Ford are the Old World stocks. But those industrial powerhouses were once new at the earlier part of the last century (please no e-mail from the "calendarically correct") in an era when analysts were beginning to think of "agriculture" as Old World. While the DJIA may hold a psychological fondness among investors and traders today, it's still heavily weighted in yesteryear's industrial economy while we transform to an information economy. But we digress. Third, while volume appears to have been on the increase since the beginning of the year as the sellers have stepped in (and today's 1 bln shares traded did nothing to dispel that), the weekly volume has been declining slightly since January 23. While this may seem insignificant, it tells us that sellers are gradually thinking that the damage has been done, and that in the bigger picture, we may not have much further to go. Call it an intermediate term consolidation. Of course this does not rule out a severely nasty day that has the index plunging in complete capitulation only to rebound by the close of the same business day. But the likelihood of people jumping out of windows is very far removed thanks to an ocean of liquidity and the "time compression" phenomenon talked about early in the year. Liquidity is still there and isn't going away. . .it simply may be buying tech stocks until the predictable returns of old world companies look palatable again. After all, just look what happens to some industrial issues when they announce an alliance with, or development of, a B2B commerce site with the help of one of the new world companies (see Sears on news that Oracle would develop a retail B2B commerce exchange). In the end, the DJIA closed up 176 points at 10,038 - back over the psychologically significant 10 K barrier. Up volume of 648 mln shares outstripped down volume of 341 mln shares on just over 1 bln shares traded. That was good. However, despite the advance, decliners on the NYSE barely edged out advancers 1492 to 1467. Worse, 217 new lows put a whoopin' on just 68 new highs. That was bad and unfortunately does not send an upward reversal signal that we've hit bottom. But if there is a silver lining, it's that when the ratio gets this lopsided, a reversal is near. We just need to wait and see. If all these conflicting indicators are making you see sick, we strongly suggest standing aside to wait until the market again establishes direction. In our collective guts though, we think a 16% correction is about enough. If you are thinking really long term, Paine Webber's chief analyst is looking for DOW 25,000 by 2010! Technology, on the other hand (yawn) simply took a breather, but not before putting a scare to us, as the NASDAQ dropped 123 points this morning to 4466. Even so, it was not a broad-based selloff. Lets review a few newsworthy threads that helped turn this day into a market rope. Big theme, big news. . .more on wireless data transmission and the charge to move the PC off your desk and into your hand held wireless phone. Qualcomm (QCOM, +9.69, 93.25) and Microsoft (MSFT +0.25, 91.56) will form an alliance to build a wireless device that, according to their press release, will be a "pocket personal computer". Meanwhile AOL is teaming up with the largest maker of handsets in the world, Nokia, to develop instant message capable phones. This puts 20 mln AOL users in line to buy a new NOK phone/PC just as soon as they are available. Sprint PCS will also deliver AOL content to its wireless customers. Surprisingly, AOL gained only $1 to close at $60.63, despite positive words from BBRS suggesting that AOL is no longer dead money and should begin another move up. Price target? $115. Ericsson also introduced a series of G3 cellular phones (read that, 3rd generation CDMA - Qualcomm strikes again). Rumors abounded today - one believable; one not. Believable is that Rupert Murdoch's Newscorp is reported to be in discussions with Yahoo! to allow Yahoo! to take a stake in Newscorp's satellite news business. Newscorp gets content; Yahoo! gets distribution. Hmmm, sounds like the first echo from the AOL/TWX planned merger. Unbelievable, and later confirmed as unbelievable, EBAY was reported to be preparing an offer to buy Sotheby's. Not so, say sources on both sides. Besides, who'd want to buy into the potential liability of BID's price fixing investigation? While expected to be generally positive for the technology market, BBRS's conference couldn't translate it into a positive close for the NASDAQ. One bright spot is that CSCO announced that they would build an end-end optical network for a 3rd generation ISP. That will allow for a full 1 megabyte of bandwidth to be delivered at a cost of $10 per month instead of the copper dinosaur rate of $1000 per month for a T1 (1.5 megs). If it works well (and it will in short order), telcos could experience copper poisoning. NSM, a current play got a nice boost today too as they noted in their presentation that they would see a sequential revenue gain - a surprise to analysts who were anticipating flat sales this quarter. For those of you who follow George Gilder, NSM is on his ascendant technology list, suggesting that it isn't just a quick momentum play, but a long- term growth prospect (much like TXN was viewed two years ago). Finally, Oracle, as mentioned above is collaborating with Sears and another French retailer to develop a B2B web site. ORCL was the highest volume issue with over 60 mln shares traded. Unfortunately, ORCL gave up $4 in the final hour to close down $2 for the day at $68.63. In short, no new records here for the NASDAQ. Despite giving up 124 points in early trading, touching 4466 in the process, the afternoon comeback was tremendous, as the index recovered 160 points. While it didn't hold, it did finish up 111 point from its low to close down 12 points on the day at 4577. Advancers, similar to the NYSE, lost out slightly to decliners 2081 to 2177. Up volume exceeded down volume by 11% on a busy 1.8 bln shares traded. Even better, 278 new highs trounced 145 new lows. Liquidity reigns here too. What happens tomorrow and for the rest of the week? Big moves in either direction are possible for both indices. While technology sentiment remains intact (good for the NASDAQ) and investor/trader money can find a good home in technology issues, NASDAQ can't go up every day. It will be even more difficult if anticipation of the NAPM figures on Wednesday and payrolls/unemployment rate on Friday keeps inflation fears burning. However, sentiment wise, the VIX.X topping out again today at 29.5 tells contrarians that a healthy dose of fear is about to move us again to the upside. We'd sure feel more comfortable with a solid pop into the low 30's (not wishful thinking, but that would be stellar confirmation of a reversal), However, 29.5 to 30.0 has been tested, and it's holding well. The DJIA is still a bit shaky, kind of like a newborn foal. While it could conceivably stand and run, the interest rate fear, and threat of Alphonso the Great raising rates by 50 basis points in late March may keep it a bit longer from running off. At least NASDAQ has CMGI leading off earnings season March 9, while DJIA may go hungry for a while. It's still a stock pickers market, and technology is still poised to lead all others when a trend does emerge. Do not be flustered or embarrassed to stand aside until it does if it better suits your trading style. When it comes to profit, it's better to have it and not need it than need it and not have it. To that end, sell too soon. Buzz Lynn Research analyst **************** PLAY OF THE DAY **************** ATML - Atmel Corporation $43.63 +0.44 (+0.44 this week) Founded in 1984, Atmel Corporation is headquartered in San Jose, California with manufacturing facilities in Colorado Springs, Colorado; Nantes and Rousset, France and Heilbronn, Germany. Atmel designs, manufactures and markets on a worldwide basis advanced logic, mixed-signal, non-volatile memory, and RF semiconductors. Atmel is also a leading provider of system level integration semiconductor solutions using advanced CMOS, BiCMOS, BiPolar and SiGe process technologies. Sunday's Write Up ATML is taking the bull by its horns and riding to a higher ground. Shares of ATML hit a new 52-week high on Friday. Trading in uncharted territory, shares are at the highest they have ever traded. Trading volume on Friday showed that investors were ready to jump aboard once it broke out over resistance at $41.63. ATML had almost 3 times their average volume. Looking at the sector, it continues to stay hot with the $SOX hitting a new high on Thursday before succumbing to market weakness. Semiconductors are in favor with new word this week that demand may be exceeding already high expectations. Financial analysts are predicting ATML will see higher earnings this year and next. They also say ATML will grow at a higher rate than the markets. Great news for those already aboard and a good enticer for those thinking about joining. Support at $41 could be tested in market weakness, but it is more likely the Semiconductor stocks will move higher before they go lower. Deciding when to jump on will be up to each investor and their risk level. In the news, ATML is strengthening their position as a supplier of single-chip solutions. Creating a partnership with Aplio to provide a total system solution enabling manufacturers to launch Internet Phones, E-mail and MP3 Appliances at a low cost and short time to market. BUY CALL MAR-35 AQT-CG OI=8788 at $9.38 SL=7.00 BUY CALL MAR-40 AQT-CH OI=2805 at $5.50 SL=3.75 BUY CALL MAR-45*AQT-CI OI=1273 at $3.25 SL=1.50 BUY CALL APR-45 AQT-DI OI= 137 at $5.75 SL=4.00 Picked on Feb 25th at $43.19 P/E= 108 Change since picked +0.44 52-week high=$44.44 Analysts Ratings 7-5-2-0-0 52-week low =$ 7.50 Last earnings 01/00 est= 0.13 actual= 0.16 Next earnings 04-24 est= 0.17 versus= N/A Average Daily Volume = 3.84 mln /charts/charts.asp?symbol=ATML ************** STOCK NEWS ************** The New Gateway By S.P. Brown Last week direct sales PC vendor Gateway Computers (GTW) announced a make-over of pop-star Madonna proportions. No longer content to be an also-ran in the highly competitive consumer PC market, GTW announced a trio of strategic alliances designed to change the company from a purveyor of PC hardware to a "beyond-the-box" business service and Internet solutions provider. In a conference call held last Wednesday, GTW officials wowed Wall Street analysts with their ambitious plans to take the next rung on the evolutionary latter. To get there, the company has formed new business partnerships with server powerhouse Sun Microsystems (SUNW), business products retailer OfficeMax (OMX) and Linux-based Internet connectivity enabler eSoft (ESFT). The most intriguing of the three alliances is undoubtedly the one with SUNW. Here, GTW and SUNW sales forces will work together to offer both companies' customers one-stop shopping for total e-commerce solutions. SUNW sales reps will refer customers to GTW desktops and notebooks for their client computing needs. In return, GTW will pay an agent fee for SUNW as well as pre-load its own personal computers with the Sun Portal Pack, SUNW's Web-top application software that includes the StarOffice productivity suite, Netscape Communicator and a variety of Java-based utilities. Teaming with SUNW, a company with a huge presence in the lucrative corporate network computing market, will allow GTW to leverage the server giants strong dot-com presence and gain instant credibility for its PC boxes within the high-end commercial market. Even though the SUNW deal has been getting most of the press, that's not to say GTW isn't looking to garner some value from its alliances with OMX and ESFT. With OMX, GTW announced an exclusive 5-year partnership to rent space in the business retailer's 1,000 locations throughout the US. This move will more than triple GTW's current retail presence. The terms of the deal call for GTW to pay OMX monthly rent based on GTW sales. In addition to paying rent, though, GTW will need to spend $50,000 to $100,000 per location to create its store-within-a-store concept. However, an additional benefit of this arrangement is that GTW will gain access to OMX's Web site, essentially making GTW the PC vendor of choice for all OMX's online shoppers. Rounding out the deal-making triumvirate is ESFT. This alliance will enable GTW to provide small-business Internet solutions. The deal calls for GTW to take a $25 million stake in ESFT. In return, ESFT will provide software applications which enable small and medium-sized business to get online and run their Web sites efficiently. GTW plans to bundle its hardware with ESFT's software to offer its business customers a one-stop Internet connectivity solution. Of course, announcing a set deals is one thing, guiding analysts on how these deals will impact the income statement is quite another. In no uncertain terms, GTW is expecting big returns from its three new alliances, which is the primary reason the company's stock soared over 23 percent last week. Because of the new affiliations, GTW officials believe it's likely the company will do $30 billion in annual revenue by 2004. That's one aggressive prediction, to say the least, considering most analysts are expecting revenues of only $10 billion for 2000. To get from $10 billion to $30 billion in four years means GTW will have to grow revenue at a 31 percent annual clip - double the company's recent annual revenue growth rate of 15 percent. Nevertheless, many analyst believe the new GTW and its revenue growth goals are the real deal. Non-PC sales (such as in networking and Internet solutions) are already becoming a larger part of GTW's business. In fact, in 1999, GTW's non-PC sales grew 102 percent to $800 million, according to investment bankers A.G. Edwards. What's more, GTW has indicated it will likely maintain that growth rate in this segment for the foreseeable future. More importantly, though, it appears that the new corporate strategy will add as much to the bottom-line as it will the top. According to GTW chief financial officer John Todd, "beyond-the-box" income is likely to reach 30 percent of total pre-tax profit by the second-quarter of 2000, two quarters ahead of the company's original schedule. As a result, GTW expects its "beyond-the-box" income to grow to 40 percent of total pre-tax profit by the end of fiscal year 2000. What's more, Todd said GTW was on track to post $2.45 billion in revenue for the upcoming first-quarter of 2000, up 16 percent from the $2.1 billion posted a year ago. It appears company-wide sales are recovering from the Y2K slowdown that hit some of the hardware companies in the fourth-quarter of 1999. Based on the GTW's improving operations and new business direction, Salomon Smith Barney recently reiterated a strong buy on the company, bestowing a price target of $85 a share, a 22 percent premium to its current price of $69.50. FREE TRIAL READERS ****************** 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 www.OptionInvestor.com 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. 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