The Option Investor Newsletter Monday 3-20-2000 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) ****************************************************************** 3-20-2000 High Low Volume Advance Decline DOW 10680.20 + 85.00 10727.70 10587.00 920,850k 1,381 1,569 Nasdaq 4,610.00 - 188.13 4822.70 4610.00 1,525,895k 1,293 3,029 S&P-100 785.30 - 1.44 790.12 779.53 Totals 2,674 4,598 S&P-500 1456.63 - 7.84 1470.74 1448.43 36.8% 63.2% $RUT 549.20 - 25.57 574.79 548.82 $TRAN 2599.59 - 24.24 2641.78 2596.68 VIX 24.17 + 0.50 25.17 22.65 Put/Call Ratio .43 ****************************************************************** Market's Weather Conditions Create Tornado. Just as sure as tornadoes form under certain atmospheric conditions, markets can whirl themselves into a vortex when enough events occur to create the right amount of uncertainty borne of "worry". It's often said that stocks must climb a wall of worry in order to advance, and there was enough worry to start a small tornado today. Barron's/burn rate, Microstrategy/revenue recognition, FOMC meeting, and Taiwanese election results formed a dust devil as big as Texas that sucked up and destroyed more than a few recent biotech and Internet high flyers that had strayed into its path. The turbulence took the NASDAQ down in its third largest point loss ever. Meanwhile, continuing its 800-point rally from its low last week, the Dow moved up without seeming to notice the carnage taking place on the high tech plains. First, Barrons' featured an article over the weekend highlighting companies (mostly dotcoms) whose current available cash would soon run out given their rate of startup and operational expenses. Nice try, Barrons. But as was quickly pointed out by a few of Wall Street's elite, Merrill Lynch included, companies' earnings and prospects of future growth do matter. Just like you can't judge all companies by their P/E ratio, you can't judge their demise by their burn rate either. That does nothing to take into account secondary offerings, debt financing, or 50% quarterly revenue growth as these companies build their business. Heck, even the most high performance aircraft ever built, the SR- 71 Blackbird needed refueling immediately after takeoff to complete its mission. Dovetailing into the Barron's article on a related matter, the term "revenue recognition" found its way into investor lingo. Before the market opened this morning, Microstrategy's (MSTR) CEO, Michael Saylor bowing to SEC pressure, announced MSTR would restate 1998 and 1999 earnings such that revenue would be recognized when revenues are received, not when they are earned. Though it does not affect the cash flow one iota (a point driven home by analysts and Mr. Saylor, translating on paper makes the FY99 earnings result look really ugly - a $0.15 profit will now need to be restated as a $0.43-$0.51 loss. For it's troubles, this former high flyer that had traded as high as $333 on March 10, was taken to woodshed where it had $140 spanked out of it by the market's big hand. That was not a misprint - down $140 on the day to close at $86.75 on volume of 43 times (gulp!) its ADV of roughly 400 K shares. Yes, more than the entire float traded hands today. In a related item, Merrill Lynch earns the "Lock- up-the-barn-after-the-animals-have-escaped" award for their not so daring downgrade of MSTR to Accumulate following this morning's announcement - DUHH!! Talk about late to the party!! Unfortunately, speculation that others companies may succumb to the same revenue recognition schedule rubbed off on some Internet companies, B2B and B2C alike. Biotech companies that resumed last week's declines shared their pain. Take a look: VerticalNet (VERT -37.63, 183); Vignette (VIGN -36.63, 199.94); Abgenix (ABGX -112.50, 199.50); Rambus (RMBS -76.59, 317.02) Maxygen (MAXY -51, 99); Silknet (SILK -46.19, 165.38); Infospace (INSP -36.50, 173) and Ebay (EBAY -22.81, 196.12). Starting with the largest $$$ losses, we could list 30 in a row and still be looking at -$23 issues. We haven't even scratched the surface of those that traded for less than a $23 loss. But you get the point. Another factor that had traders on edge (at least early on) was that Mr. Chen won the Taiwanese election on a platform stressing reform and independence from mainland China's thumb. The suspicion was that an overt stand of defiance in defense of Taiwan's independence would provoke military intervention. In our opinion, that scenario isn't too likely. China can be counted on to rattle its saber prior to an election, not so much to scare Taiwanese or international heads of state, but to intimidate voters into electing someone more docile and conciliatory toward China's dictatorial government. By the end of the trading day here, Taiwan's election was the least of the concerns. Finally, we save the best for last. What wrap would be complete without bringing up the likelihood of a 25 basis point rate increase from the Fed at tomorrow's FOMC meeting? Investors and traders both have been speculating since the end of 1999 that there would be rate hikes in March. As of today's close on the bond market, bond futures reflect a 100% probability of just such a hike. There is only a 30% chance priced into the market of a 50 basis point hike. There are no signs of inflation, not even wage inflation that would justify such a Fed move. For those interested, the 30-yr treasury, though no longer as important a measure of long-term rates, slipped quietly below 6% to 5.975%, a level not seen since last November. The only wildcard is oil. . .or maybe was oil. . .since Mexico, Venezuela, Saudi Arabia, and Iran have so far stated that they will increase production. Prices dropped $1 per barrel in today's trading. Most analysts expect oil prices to move back down and stabilize in the $24-$27 range in the wake of OPEC's meeting to start March 27. While the steep fuel price increases have sparked protests in the trucking industry, surcharges for air fares, and postal rate hikes, not to mention bug-eyed motorists following a peek at their gas receipts, the effect on the rest of the economy has been minimal so far. With President Clinton's jawboning of foreign oil producers to increase production, and his pestering Congress to give him power over the strategic oil reserves (the latter, a bad idea in our opinion), we'd expect that pressure to ease. In summary, that's really the long way of saying investors were nervous today and took the opportunity to sell into any strength in front of tomorrow's FOMC meeting. So what about market specifics, you ask? The Dow traded up 85 points to 10,680, but on only 921 mln shares. We chalk up the reduced volume to investors' desire to limit exposure and buy cautiously in front of the Fed meeting (almost a ceremony prior to a Fed meeting anymore). Nonetheless, that it held up and actually rose was a great sign. Last week's Dow rally looks like it has legs, especially on the bounce back over the 10,600 level, which offered solid support before it started its next leg up during last November. Internals on any other day wouldn't look so hot though. Decliners edged out advancers by an 8:7 margin, while down volume exceeded up volume by 8%. New highs beat new lows 44 to 35. 35 new lows on the NYSE is something we haven't seen for a while, and tells us that most issues are holding up well from their 52-wk lows. For all the damage done today on the NASDAQ, it happened on slightly over 1.5 bln shares. MSTR and collateral damage aside, that tells us traders were again looking for a way to reduce exposure and to exercise a typical dose of caution prior to the FOMC meeting. If the selloff happened on 2 bln shares, we'd be worried. As it was, the methodical descent in the index was a result of pressure in the biotech, some software, and Internet sectors. Remove those three sectors, and the results change. In fact, INTC's gain (+5.13, 135) offset MSFT's (-2, 97.38) and CSCO's (-0.88, 134.13) losses. DELL (+1.25, 57.69) and WCOM (-0.56, 43.63) cancelled each others vote. Underneath the surface though, investors were feeling the pain. In the end, the NASDAQ finished down 188 points at 4610. Bandwidth enabling components (SDLI, JDSU, MRVC, QCOM, FDRY, SCMR, BRCM, RFMD, AMCC, ANDA, TERN, etc.) also experienced sharp losses. Internals tell the story. 3032 decliners twisted just 1300 advancers into little pretzels. Up volume was overshadowed by four times the down volume, and the 80 new highs couldn't hold a candle to the 117 new lows. Guesses on the Russell 2000? Negative 25 points to 549. Ouch! While not voluminous, it was broad-based. Tomorrow should be trickier yet because we're sitting right on support at 4610. A dip below that could take us to 4550, or worse, under 4500 again. While the NASDAQ picture looks bleak, remember the volume was low, and it isn't unusual to expect some backing and filling from a 300+ point move from Thursday and Friday of last week. The FOMC meeting tomorrow is a double-edged sword too. While it kept lots of pressure on NASDAQ issues today, it would be just as plausible to see the index run after the Fed announcement into the close tomorrow. Either way, expect twitchiness in the index until the 2:15 ET announcement. For tomorrow, Jim said it best in the weekend edition. "Even though the FOMC meeting this week is not likely to have any real impact on the markets it will still be the focus of the news until it is over. T he 2:15PM announcement may cause a big market move in one direction or the other but the impact will only be temporary without serious negative language in the release. Since the FOMC meeting is the only major economic incident for the week maybe the markets will start focusing on the real story, April earnings." Be patient; wait for your entry, and sell too soon. Buzz Lynn Research Analyst *********** STOCK NEWS *********** Lehman Brother Crushes Earnings Estimates By Cindy Christ Lehman Brothers Holdings (LEH) posted first-quarter earnings Monday that blew past earnings estimates by 81 cents a share amid blazing growth in equity underwritings and trading volume. A red-hot IPO market and booming mergers and acquisitions activity sparked a near double in Lehman's net revenues to more than $2.2 billion for the quarter ended Feb. 29. Lehman's first-quarter net income totaled $541 million, up 156 percent from $211 million in the year-ago period. Earnings per share increased to $3.69 per share from $1.57 last year, a 135 percent leap. Analysts polled by First Call/Thomson Financial estimated the fourth-largest securities firm would earn $2.88 per share. "Our businesses across the board performed extremely well this quarter, with equities and investment banking posting record revenues, and fixed income and private client services producing very strong results," said Lehman CEO Richard Fuld in a statement. "The firm is clearly hitting on all cylinders." The company said the results were the best in the firm's 150 -year history in terms of revenues, net income, operating margin and return on equity. ROE hit a record 36.8 percent, or more than twice the 17.2 percent rate a year ago. Pre-tax operating margin also topped 36 percent versus 27.6 last year. Despite the glowing report, investors shrugged off the news sending Lehman Brothers shares down $3.63, or 4 percent, to $87.81. Intraday, shares traded as high as $94.50, a new 52 -week high. Analysts said the positive earnings surprise was priced into the stock. "Over the last three weeks, the stock has seen a more than 20 percent move," said Guy Moszkowski, brokerage analyst for Salomon Smith Barney, in an interview with CNBC financial television. "It's been anticipated that they would have a very strong quarter." Moszkowski said that investors could look forward to strong results across the board for brokerage firms this year. "I think we are going to have strong earnings for the sector in 2000," Moszkowski told CNBC. Analysts say investment banks are reaping huge rewards from a worldwide surge in mergers and acquisition, record trading volumes on the Nasdaq and New York Stock Exchange, and insatiable investor demand for shares of start-up companies. Recently, analysts have been upping their earnings estimates for traditional brokers. Last week investors got an earnings preview for the sector when Bear Stearns Cos. (BSC) reported a 20.6 percent gain in quarterly net income. Earlier, J.P. Morgan (JPM) told the Street that results for January and February are running well ahead of last year. Shares in traditional brokerage firms have been rising ahead of earnings reports this week for the sector's premier players. On Monday, Goldman Sachs (GS) hit a new 52-week high of $123 intraday, but finished lower $3.06, or 2.6 percent, at $113.44 ahead of its first-quarter earnings report Tuesday. Morgan Stanley Dean Witter (MWD), which reports Thursday, also hit a new intraday high of $91.88, but closed down $1.19, or 1.3 percent, at $87.69 during a broad market sell-off. Analysts expect Goldman Sachs to earn $1.48 a share and Morgan Stanley to post per-share profits of $1.06. Analysts also expect to see sizable earnings surprises from online brokers thanks to record trading levels. In a research note Friday, Robertson Stephens analyst Scott Appleby said trading volume in March "is tracking as the strongest ever, with an average weekly volume of 8.6 billion, a 36.6 percent increase from last quarter." Appleby also boosted his transaction growth estimates to 40 percent over the fourth quarter. *************** PLAY OF THE DAY *************** CALL **** INTC - Intel Corporation $135.00 +5.13 (+5.13) Intel Corporation designs, develops, manufactures and markets computer components and related products at various levels of integration. Intel's principal components consist of silicon- based semiconductors etched with complex patterns of transistors. The Company's major products include microprocessors, chipsets, embedded processors and micro-controllers, flash memory products, graphics products, network and communications products, systems management software, conferencing products and digital imaging products. Intel sells its products to original equipment manufacturers (OEMs) of computer systems and peripherals; PC users (including individuals, large and small businesses and Internet service providers) who buy Intel's PC enhancements, business communications products and networking products. Most Recent Write-up - Take a look at a 3-month chart of INTC. On January 31st, INTC had an intraday low of $92.88. And that's the last INTC saw of those levels. From there, it's been a steady and strong climb to it's current level of $129.88, which is a new 52-week high. Notice that it traded off its 10-dma for most of this uptrend, and when it violated the 10-dma, it was for a brief moment. In one case, the 30-dma provided a bounce. It has been an impressive run and it appears to be getting better. Throughout this volatile trading week, INTC volume remained strong and it held smartly as the NASDAQ withered and revived. During the major NASDAQ sell-off on Wednesday, INTC did not break. And on Thursday, INTC found good support at $120. With a little luck from the Irish on Friday, INTC established intraday support around the $127.75-$128 level. INTC got a little help from its friends as well. In the news, CS First Boston reiterated a Strong Buy for INTC and repeated its 12-month price target of $150. Robbie Stephens came out and upgraded INTC from a Buy to a Strong Buy. Also, INTC acquired Denmark's GIGA A/S, a manufacturer of network components, such as high speed communication chips used in optical networking and in directing Internet traffic. According to a company press release, there is "explosive internet growth behind the GIGA buy." So the technicals are strong and the news is good. Next week should be an interesting one as we watch INTC closely. Support is at $128-$127.75 and below that, $125. Resistance will be psychological as INTC attempts new highs. Keep these levels in mind when looking for entry points. Word on the Street is that INTC is having a stellar quarter and may pre-announce that it will exceed earnings estimates. Maybe that's why these brokers have been talking this past week. We'll have to see. Comments- The NASDAQ falters 188 points and Intel powers forward another $5+ on steadily increasing volume (28% greater than the ADV today). INTC appears to be back under accumulation by funds as a result of its new focus on broadband enabling products. Even their "old" designs are geared to more than just spreadsheets and word processing. Check this out from Reuters: "Intel Corp. on Monday introduced two new Pentium III processors designed to boost the delivery of audio, video, animation and 3-D graphics over the Internet. The new Pentium III processors run at clock speeds of 850 and 866 megahertz -- faster than their predecessors but slightly slower than the landmark one gigahertz chip Intel unveiled earlier this month." Despite disappointments in the past, INTC is firing on all cylinders. BUY CALL APR-130*INQ-DF OI=12175 at $10.88 SL=8.25 BUY CALL APR-135 INQ-DG OI= 9895 at $ 8.25 SL=5.75 BUY CALL APR-140 INQ-DH OI= 7545 at $ 5.88 SL=3.75 BUY CALL JUL-150 INQ-GJ OI= 2870 at $ 9.75 SL=6.75 Picked on Mar 19th at $129.88 P/E = 62 Change since picked +5.13 52-week high=$137.38 Analysts Ratings 20-12-6-0-0 52-week low =$ 50.13 Last earnings 01/00 est= 0.63 actual= 0.69 Next earnings 04-12 est= 0.68 versus= 0.57 Average Daily Volume = 26.03 mln /charts/charts.asp?symbol=INTC ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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