Option Investor

Daily Newsletter, Monday, 02/28/2000

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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 

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


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


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 

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 

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.


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