Option Investor

Daily Newsletter, Monday, 03/27/2000

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The Option Investor Newsletter                Monday  3-27-2000
Copyright 2000, All rights reserved.
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MARKET WRAP  (view in courier font for table alignment)
       3-27-2000           High     Low     Volume Advance Decline
DOW    11025.80 -  86.90 11170.80 10982.70   884,952k 1,288  1,681
Nasdaq 4,958.56 -   4.47  5022.23  4946.61 1,379,698k 1,887  2,316
S&P-100  830.17 -   2.48   836.11   826.31    Totals  3,175  3,997
S&P-500 1523.86 -   3.60  1534.63  1518.46            44.3%  55.7%
$RUT     573.65 -   0.36   577.80   572.64
$TRAN   2667.81 -  20.34  2706.40  2665.41
VIX       26.75 +   0.94    27.39    26.16
Put/Call Ratio       .42

Spring Break! - Daytraders Hit the Beach?

It's either that, or the OIN seminar currently happening here in 
Denver kept the high volume traders away from their PC's!  How 
else do we explain the glaring lack of volume?  All kidding 
aside, only 885 mln shares traded hands today on the NYSE, while 
the NASDAQ registered its lowest volume so far this year trading 
just 1.38 bln shares.  What are we to make of this?  Probably 
just a slow day thanks in small part to the OPEC meeting taking 
place in Vienna, Austria.  

In case you are wondering, there's no resolution yet among OPEC 
members as to how much of a production increase is in store.  
However, there is plenty of conflict as Saudi Arabia and Kuwait 
have agreed in principle to raise production by 1.5 - 1.7 mln 
barrels per day while Iran, who has older equipment and higher 
production costs, wants no increases at all.  According to 
analysts, Iran is already cheating, thus any "above board" 
production hurts Iran in the wallet.  Anyway, it's already a 
foregone conclusion that there will be production increases, 
agreed to or not, above board or not.  But don't look for reduced 
prices at the gas pump anytime soon even though oil prices seek 
to stabilize in the $25 range over the next few months.  Suppose 
oil stocks suffered?  Only slightly.  'Nuff said.

Microsoft (MSFT -7.63, 104.06) was today's early casualty on news 
that settlement talks broke down when the DOJ rejected MSFT's 
latest proposal.  It seems that turning over source code to 
vendors for the purpose of imbedding applications into the 
operating system isn't enough for the DOJ.  That helped the Dow 
remain in the red along with help from the oil, financial, and 
drug stocks.  Helping to balance things out, IBM (+6.25, 126.88) 
and Hewlett Packard (HWP +3.81, 146.19) made nice advances, the 
former on an upgrade from Neutral to Outperform by Morgan Stanley 
Dean Witter before this mornings open.  Not only that but IBM and 
Quest (QWST +5.50, 52.00) agreed to spend $2.5 bln on each other 
in a zero cost exchange valued at $5 bln. - neat trick; here's 
how it works.  Q receives $2.5 bln from IBM for 25% of the space 
in Q's 28 data centers serviced by Q, while IBM receives $2.5 bln 
from Q to set up and manage the centers - net cost, $0.  

Morgan Stanley took the opposite view on DLJ (-9.56, 56.75), 
downgrading it to Neutral from Outperform.  While DLJ was a 
casualty, the whole sector joined in the profit-taking from last 
month's runup, dragging down American Express (AXP -5.13, 
150.50), Goldman Sachs (GS -9.31, 112), and Morgan Stanley (MWD  
-5.81, 90), plus most of the on-line brokers too.  Yes, even 
NITE, our current call play, lost $2.06 to close at $57, though 
volume remained low.  It just goes to show that even strong 
stocks can't escape the gravity of a down sector.  "These things 
have been white-hot; they're just hosing them down a little bit, 
cooling them off," noted a J.P. Morgan analyst.

In the "where'd he come from?" department, some of you probably 
noticed Alan Greenspan live from Capitol Hill.  He wasn't on any 
schedule of economic events and his presence probably caused the 
mid-afternoon dip.  Fortunately, the live testimony dealt with 
issues of aging related to Social Security and Medicare (which 
probably explains some weakness in the drug stocks).  Though he 
stuck strictly to the script, the uncertainty of the ensuing Q&A 
always causes jitters in the market.  He did however note that he 
saw "no significant threat" of inflation (yet) from oil pricing 
pressures.  In the end, it was thankfully a non-event.

MSFT, OPEC, Greenspan, and financials should have really moved 
the market, but all proved to be inconsequential in today's 

For all the headlines, the Dow lost 86 points to close at 11,025 
on low volume of 885 mln shares.  In short, the Dow remained flat 
and directionless for most of the day, registering 13 stocks up 
for every 17 down.  88 new highs bested 49 new lows, but down 
volume exceeded up volume by 38%.  While we can't read much from 
today's action, it's safe to say that a breather from a 1400 
point run in 9 trading days is acceptable.  Roughly 11,200 is 
providing current overhead resistance.  We saw a few bounces 
today around 11,000, which provides current support, but doesn't 
appear very strong.  Tomorrow will be telling.

NASDAQ, buoyed by (what else) tech stocks traded in just a 76-
point range.  We can't swear it's a record, but it probably ranks 
in the top 5 narrowest of trading ranges this year.  The volume 
on the other hand set a new record low of the year at only 1.38 
bln shares.  23 decliners beat out every 19 advancers.  However 
119 new highs beat out 66 new lows and up volume by 27%.  For the 
lack of volume, support remained at 4950.  4900 is the next level 
of support.  Like the Dow, after nearly a 600 point run in the 
last five days, a breather is due, and we can't be disappointed 
in today's lack of action.  We don't think it portends a 
reversal, but we wouldn't be surprised to see another day or two 
of weakness before picking up again.  Remember Jim's prediction 
of NASDAQ 6000 by April 15?  The market has its work cut out for 

On the positive side, 5000 is acting as overhead resistance while 
the lows have been getting higher over the last 13 days.  Anybody 
recognize that pattern?  It's an ascending pennant, which usually 
portends a breakout to the upside.  But that won't happen on 
wimpy volume.  If it does, start looking for the exit because 
that will be a clue that bulls are running out of steam.  On the 
other hand, we are moving into the heart of earnings season 
(April).  Last week's liquidity injection of $13 bln into mutual 
funds won't hurt either along with the end-of-the-month window 
dressing.  Those three are pretty powerful together and may 
provide the horsepower to send the NASDAQ in search of new highs.

There you have it.  Economic news will be mostly noise this week 
with consumer confidence figures tomorrow, new home sales on 
Wednesday, and GDP and initial job claims on Thursday.  Since we 
are at a critical moment on both the Dow and NASDAQ, you may want 
to hold off placing any trades until you see a clear direction.  
You can always make a profit in an up or down market, but 
sideways will eat into your trading capital.  Remember that old 
Wall Street saying: Never short a dull market.  Wait for a 
direction.  Be selective in your plays, and remember to sell too 

Buzz Lynn
Research analyst


We're Number 1
By  S.P. Brown

That's the refrain the folks at San Jose, Calif.-based Cisco 
Systems were hootin' and hollerin' this past Friday.  Shares of 
the networking giant, which recently split 2-for-1, were 
trading up $1.56 to $79.375 at the close of Friday's normal 
trading session.  On the same day, Microsoft (MSFT) shares 
closed down $0.19 to $111.69. 

At these prices, Cisco had a market capitalization of $579.1 
billion, edging out Microsoft's $578.2 billion market cap, 
marking the first time the software giant had lost the top spot 
since wrestling it away from General Electric (GE) in 1998. 

Cisco's ascent has been as fast as it has been spectacular.   
The company went public in February 1990 with 250 employees and 
a $69 million market cap.  Since then, it's been a rocketship 
straight to the top.  In November 1999, the company passed the 
$300 billion valuation mark.  In February 2000, it passed $400 
billion.  And, of course, last week it passed $575 billion. 

This changing of the guard has surprised few market watchers.  
After all, Microsoft shares have languished amid concerns over 
the government's pending anti-trust case, while Cisco shares 
have powered ahead unimpeded on the strength of Internet 
traffic growth.  Year-to-date, Microsoft shares have eased 11 
percent, while Cisco's shares have climbed 35 percent.  

But beyond the legal woes lurks a greater threat to Microsoft's 
franchise and that's the technological shift from all things PC 
to all things Internet.  Yes, Microsoft's Windows operating 
system runs 90 percent of the personal computers, but the  
market is moving to more mobile server-based computing devices 
that don't require Microsoft's clunky memory-hogging software.  

Unfortunately for Microsoft, it doesn't rule the Internet the 
way does desktop computing.  This is were Cisco shines, for 
more than 80 percent of all Internet traffic runs across the 
company's switches and routers.  

In fact, switches are one of the fastest growing markets for 
Cisco.  These devices route data among networks and account for 
over 50 percent of the company's revenues.  What's more, over 
the next few quarters, the company expects switch sales to grow 
to 60 percent of revenues.  The demand for these switches is 
being driven by a need for greater bandwidth by corporate 
users, a market that Cisco dominates.   

Cisco's other principal offering, routers, contributes roughly 
40 percent to revenues, but an even greater portion of its 
profits.  The company's routers manage and connect local and 
wide area networks (LANs and WANs).  Furthermore, these routers 
use Cisco's proven software technology, Internetwork Operating 
System (IOS), which is poised to become the de facto industry 
standard, much the same Windows has become on the PC.   

Never one to rest on its laurels, Cisco has recently moved into 
converged networks, which is a way for every network to 
communicate with every other network regardless of the 
underlying technology.  An example of this technology in use is 
Sprint (FON), which has built its own network using Internet 
protocol (IP) standards over an asynchronous transfer mode 
(ATM) network.  Previously, such a combination was thought to 
be impossible.

If converged prove to be the future of networking, then Cisco 
will see it's position as the top networking company solidified 
even further.  Thanks to a savvy acquisition strategy, the 
company already has optical, voice, and data products ready for 
a market that is just now realizing that it needs them. 

All of these technology offerings means Cisco can provide the 
industry with the broadest line of networking products 
available, which is no small feat.  Such a diverse product and 
service line is critical to the company's success, as customers 
prefer complete end-to-end networking solutions rather than 
going out on a hunt to acquire the technology piecemeal.  

Due to its unique position within the networking market, Cisco 
has witnesses an acceleration in sales and momentum that has 
been stronger than most analysts have expected.  

And there is plenty of room for sales to accelerate at an even 
faster rate.  Mike Volpi, Cisco's senior vice president of 
business development, recently stated on CNNfn, "We serve a 
market that's probably $250 billion in size, if you take into 
account all the telecommunications and data communications 
systems being built."

Because of such strong market demand for its products, Cisco 
expects to reach $50 billion in sales by 2004, which is nearly 
triple the roughly $18 billion in sales the company is expected 
to post for fiscal year 2000 (ending in July).  

So does Cisco's clear skies mean that Microsoft has permanently 
abdicated its number one spot?  That's hard to say.  Microsoft 
is still a strong generator of corporate profits and cash 
flows.  Moreover, it boasts gross and operating margins that 
even Cisco would die for.   

However, Microsoft's growth is declining.  While the Internet 
has boosted demand for the Microsoft's products, Cisco, whose 
routers carry most of the traffic running over the network, is 
seen as a bigger beneficiary of the explosion in Internet 

To get an idea of just how big a beneficiary Cisco has been, 
its earnings gains have far outpaced Microsoft in recent 
quarters.  Furthermore, Cisco's earnings are growing at nearly 
twice the rate of Microsoft's.  

Given its rate of growth, Cisco is now the odds-on favorite 
among market handicappers to become the first company to sport 
a $1 trillion market cap.  


AOL - America Online Inc. $74.44 +2.94 (+3.44)

Founded in 1985 America Online says they are the world's leader 
in interactive services, Web brands, Internet technologies and e-
commerce services. They operate two worldwide Internet services 
AOL, with more than 21 million members and CompuServe with more 
than 2.5 million members. Through its strategic alliance with Sun 
Microsystems, the company develops and offers business operating 
in the Net Economy easy to deploy, end-to-end e-commerce and 
enterprise solutions under the alliance iPlanet brand. Their 
other leading Internet brands include ICQ, AOL Instant Messenger, 
Digital City and the Netscape Netcenter. 

Most Recent Write-up

We'd like to thank our editor, our assistant editor, the research 
staff and everyone else that made this play possible. Our play in 
AOL may not have been nominated for an Oscar, but it very well 
could come in as one of the top plays of the month. The folks 
that should be receiving the accolades are the nearly 2.0 million 
new members that have signed up with AOL since December. Late 
Tuesday AOL reinforced the perception that its momentum remains 
strong by announcing its membership has exceeded 22.0 million, 
marking a nearly 10% rise since the December. News of the 
increase in membership drove the price of AOL $4.50 higher on 
Wednesday. The move was supported by strong volume at 35.5 
million shares. Also in line for a pat on the back, is Merrill 
Lynch analyst, Henry Blodget. Blodget said in a statement 
released Wednesday, that he was raising his subscriber estimate 
for the AOL service to 22.1 million, which is up 300,000 from 
previous estimates. Blodget has earned the respect of investors 
on Wall Street, so when he speaks people do pay attention. News 
that company officials from Walt Disney had been lobbying members 
of the U.S. House and Senate concerning the upcoming merger 
between AOL and Time Warner didn't seem to derail buyers. An 
article on Forbes.com correctly termed the Disney move "petty 
politics" as they are trying to influence Congress regarding the 
government's approval of the $350 billion merger. In a nutshell, 
Disney is worried that the AOL-Time Warner merger could stifle 
diversity on the Internet, thereby blocking all its competitors 
from access to its online subscribers and the 12.6 million 
households with Time-Warner. It's simply not going to happen and 
investors were smart enough realize it, and continued to buy 
stock in AOL. Technically AOL has good support back near its 100-
dma at $69.17, and near $68. AOL has seen about 21% added to the 
price of its stock in the past two weeks. Next week, we could see 
more. If we do see a pullback, have your stops in place, as we 
believe it would only be temporary and would present a chance to 
enter new plays for less. 


While volume of 20 mln shares isn't setting AOL on fire compared 
to the ADV of 27 mln shares, even in today's market, AOL 
continued to advance all day against the market's desire to trade 
flat.  Today's advance during amateur hour was particularly 
strong on heavy morning volume.  Despite the following pullback 
to $72.63, AOL found support there on two separate occasions.  
Considering the strong finish into the close and the positive 
movement in Time Warner today, we think AOL will continue to 
advance as investors put their money into the big cap stocks, 
especially AOL as it moves into its April 18th earnings date.

BUY CALL APR-70*AOO-DN OI=48400 at $6.88 SL=4.75
BUY CALL APR-75 AOO-DO OI=56057 at $4.00 SL=2.50
BUY CALL APR-80 AOO-DP OI=32915 at $2.06 SL=1.00
BUY CALL MAY-75 AOO-EO OI= 3323 at $6.25 SL=4.25
BUY CALL MAY-80 AOO-DP OI= 3051 at $4.25 SL=2.50

SELL PUT APR-70 AOO-PN OI=16019 at $1.88 SL=3.50 (See risks of 
selling puts in play legend) 

Picked on Mar 19th at   $64.38    PE = 173 
Change since picked     +10.06    52 week high=$95.81 
Analysts Ratings   25-13-3-0-0    52 week low =$38.47 
Last earnings 01/00 est = 0.08    actual= 0.09 
Next earnings 04-18 est = 0.09    versus= 0.05 
Average daily volume = 27.2 mln 


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