Option Investor

Daily Newsletter, Monday, 03/20/2000

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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 

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 

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 
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


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

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

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.


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.


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

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