Option Investor

Daily Newsletter, Monday, 05/15/2000

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The Option Investor Newsletter              Monday  5-15-2000
Copyright 2000, 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)
       5-15-2000           High     Low     Volume Advance Decline
DOW    10807.80 + 198.40 10811.50 10605.30   851,159k 1,753  1,143
Nasdaq 3,607.65 +  78.59  3607.77  3445.13 1,155,352k 2,148  1,883
S&P-100  776.53 +  14.86   776.54   756.17    Totals  3,901  3,026
S&P-500 1452.36 +  31.40  1452.39  1416.54            56.3%  43.7%
$RUT     497.81 +   6.87   497.81   483.73
$TRAN   2838.04 -  35.98  2891.29  2837.44
VIX       27.45 -   2.50    30.14    27.14
Put/Call Ratio       .53

The Rally Before the Rally

With investors expecting a rally following the FOMC meeting 
tomorrow, the very act of taking an early position sent the Dow 
and the NASDAQ markets ahead today.  Does that limit the upside 
tomorrow once the announcement of higher rates (foregone 
conclusion) hits the airwaves at 2:15 ET?  Not in our opinion.  
Today's rally came on extremely low volume indicating more a lack 
of sellers than "bucket-o-buyers".  In fact, based on the last 
three days of gains, sellers have all but evaporated leaving only 
a few active but brave soles in charge of buying.  It's the same 
old story - nobody is willing to lead the bullish herd out of the 
current trading range until Cowboy Al (Alan Greenspan) pulls the 
trigger on interest rates.

Here's the deal.  It's a foregone conclusion that rates are going 
to rise with the consensus of investors expecting a 50 bp (basis 
point) hike.  That expectation is already priced into the market.  
Most have lined up behind that notion leaving a scant few 
thinking that a 25 bp hike is the maximum increase now, followed 
by another in June.  The latter group is being treated as though 
they are the last of the believers from "Church of the Flat 
Earth".  Their reasoning is that the Fed generally operates in 25 
bp increments and hasn't done a 50 bp hike since 1994.  
Unfortunately, there are signs of inflation in housing prices, 
wage increases and energy costs, which pretty much assures a 50 
bp rate hike.  Figuring this is nearly the Fed's last chance to 
hike rates prior to the November election, the consensus expects 
the Fed to make it count this time since the Fed will not want to 
take the blame for cratering the economy by meddling with rates 
later on.  We fall into 50-bp hike camp too.  

Enough about the background.  What about tomorrow going forward?  
It really won't matter if the hike is 25 or 50 bp.  Huh?  
Wouldn't a 25 bp hike create more uncertainty by leaving the door 
open for another hike on June 27, the next FOMC meeting, and 
crater the market tomorrow?  That's one possible outcome.  But in 
the bigger picture, what really matters is how the Fed views 
inflation GOING FORWARD.  No matter what the value of the rate 
hike, Investor's reaction to the hike is really predicated how 
good a job the Fed does at minimizing interest rate fear and 
inflation uncertainty for the future.  

If Alphonso the Great, in addition to a 50 bp hike says something 
like "today's action may not eliminate the need for future rate 
hikes" or "we are prepared to act decisively to keep the 
destructive forces of inflation in check, blah, blah, blah. . .", 
we may not see as much of a rally as we hoped for since that 
would mean that more hikes are not only possible, but likely.  
While we aren't predicting it, it is also possible that that kind 
of language could induce disappointed sellers back into the fray, 
sparking another decline, despite the 50-bp hike.  We don't want 
to think too much about that scenario.

On the other hand, if the Fed's outlook is that "wages are 
rising, but under control, energy prices appear stable, and 
productivity gains are exceeding our wildest expectations", then 
another rate hike in June is less likely to occur and would give 
the markets the green flag to rally.  In this more likely 
scenario, we'd expect the see the greatest interest in high 
quality issues, like chips, chip equipment, networking/telecom 
equipment, and the biggest cap B2B infrastructure/commerce 
issues.  This action would likely attract momentum players back 
into some tier-two issues.  

Not many have mentioned the wild card, the CPI numbers, which 
come out tomorrow morning at 8:30 ET.  The expectation is for a 
0.1% increase in the CPI, with a core rate increase of 0.2%.  If 
it gets much beyond that to the upside, the rally most traders 
are looking for will likely turn to dust since a large CPI number 
would put investors on notice to expect further hikes.  That's 
just a "what if", and another minefield to dodge.  If it's a non-
event, look for CPI news to quickly fade from the radar screen.

Let's take a look at the action in today's market to gauge the 
sentiment.  Can you say "low volume"?  Sure, after 30 days of it, 
we knew you could.  While we like to see gains on the indices, 
this low volume stuff does not inspire confidence for any 
breakout of the trading ranges anytime soon.  All that may change 
tomorrow if the Fed provides some future visibility.  But we've 
learned not to count on Greenspan for clarity.  The point is that 
trading volume is going to be the key for reversing the trend.

Volume aside, the Dow had a great day tacking on 198 points to 
close at 10,801.  After the open at 10,606, the ascent was steady 
thanks to strength in a few key issues.  MO got a big boost 
(+3.06, 27.38) from Goldman's and Morgan Stanley's favorable 
comments this morning that MO is undervalued.  Financials like GE 
(+1.75, 54.00), AXP (+1.94, 52.19), JPM (+1.50, 132.00), and C 
(+2.69, 62.88) led the charge for the advance, while 
surprisingly, HWP (-2.19, 129.38) provided the biggest drag.  
Manufacturers including AA (+2.66, 67.88), GM (+1.43, 86.44), and 
MMM (+1.06, 85.94) all did heavy pulling too.  Internals were 
decidedly positive with 1757 advancers beating out 1140 
decliners, while up volume trumped down volume by more than 3 to 
1.  While this all looks good, not enough believers are putting 
their money where their mouths are as evidenced by the scrawny 
851 mln shares traded.  We won't be convinced the market is ready 
for a leg up until we see the volume return.

Does the market cause you to have trouble sleeping?  NASDAQ was 
so quiet, Sprint could have done a "pin-drop" commercial today.  
Only 1.16 bln shares traded hands today, the lowest volume this 
year.  Nonetheless, internals were good with advancers leading 
decliners here too, 7 to 6.  Up volume led down volume by a 
factor of 2.5.  In the end, NASDAQ gained 78 points to close at 
3607, slightly above historical support of 3600 and mercifully 
back over the 200-dma of 3594, which should also provide support 
going forward as long as there are no CPI or Fed surprises.  The 
next resistance is at 3750, so there's room to run.

Before we wrap it up, let's touch on a few of news items.  First, 
there's a food fight breaking out over Nabisco (NGH), 80% owner 
of Nabisco Foods (NA).  NGH is the deal, but carries tobacco 
liability, while NA trades at a higher multiple but has no 
potential tobacco liability.  Carl Ichan already owns 10% of NGH, 
but "significant" interest is coming from a French food 
conglomerate.  MO and RJR (Nabisco's former sister company) are 
also reported to be interested.  No numbers available yet.

On the tech front, CA (Computer Associates) put to rest the 
negative speculation of an earnings miss by announcing earnings 
today of $1.13, in-line with estimates.  Recall that their 
earnings postponement last week sparked talk and a price hit 
based on fear of an earnings miss.  Not so, they just need more 
time, thanks to changing auditors.

Ciena (CIEN), who reports earnings on May 18th was added to DLJ's 
focus list, replacing Young and Rubicam (YNR).  CIEN was up $4.19 
on the news. 

Next, Wit Capital (WITC) will acquire E*Trade's E*OFFERING unit.  
EGRP shareholders will get 25% of WITC equity and Wit's retail 
brokerage business, while Wit will become the exclusive source of 
IPO's, secondaries, and other investment banking services.  Both 
were up over $1 today.

One tidbit we found interesting was a news item this morning that 
according to DLJ, DRAM prices in the Asian spot market fell $0.10 
to $6.20.  They cited that demand was weak, and dealers are 
looking to turn over inventory at cost.  Perhaps that's why we 
saw the semiconductors gasping for air throughout most of the 
trading day until a nearly 50 point spurt in the last hour and a 
half of trading today.

Finally, just when you thought "old world" stocks were again 
losing their luster, especially metal stocks, fourteen of the 
world's largest mining and metal stocks including AL, NEM, ABX, 
N, AA, and PD are creating a B2B exchange of their own to cut the 
industries estimated $200 bln procurement bill.  At 10% savings, 
that's $20 bln of newfound profits.  Gold stock fever anyone?

OK, let's wrap it up.  While we appreciate a good rally as much 
as the next guy (or gal), without volume it doesn't mean much and 
won't get us out of the trading range.  We're at support on the 
NASDAQ and have another 100 points to go on the Dow until it hits 
resistance at 10,900, which we expect to hold unless volume picks 
up for a breakout.  The only way that will happen is if Greenspan 
provides forward visibility after the rate hike.  Some of that 
speculation could be removed on lack of surprise in the CPI 
numbers tomorrow before the open.  But the Fed meeting outlook is 
the focus.  The amount, 25 or 50 bp almost doesn't matter.  Our 
job is to listen for how the Fed views the future.  That will be 
the key.  If the status quo is met, expect a trading rally at a 
minimum.  If it's better than that, and volume picks up 
substantially (like over 2 bln shares on the NASDAQ), we would 
have much more confidence in a sustained rally.  Helping matters, 
but overlooked is that this is also options expiration week, 
which could offer some upward bias.  

Dust off your running shoes and get prepared to find new cheese 
(see January 24th, 2000 Market Wrap).  Confirm the market 
direction, and as Jim says, don't buy too soon.

Buzz Lynn
Research Analyst


Pioneer Sold to Italy's UniCredito Group
By Matt Paolucci

UniCredito Italiano Group, Italy's second largest banking
group, said it would buy U.S. investment management firm
Pioneer Group Inc (PIOG) for $43.50 per share in cash, or a
total of about $1.2 billion.

Unicredito plans to merge its own EuroPlus asset management
unit, which has roughly $80 billion of assets under
management, with Pioneer's asset management operations, which
has $24 billion of assets.

The newly created Pioneer Global Asset Management would be the
holding company for all Unicredito's global investment
management business and would operate under the Pioneer name
from Milan, Dublin and Boston.

Completion of the acquisition is subject to approval by
Pioneer's shareholders, Pioneer's mutual fund board of
trustees and fund shareholders, and various regulatory
agencies. The transaction is expected to close in the third
quarter of 2000.

Pioneer will distribute to shareholders all of the company's
interests in non-funds management assets, which include its
Russian financial services operation, its natural resource
businesses and its interests in venture capital and real

John F. Cogan, Jr., President and CEO of The Pioneer Group,
Inc. said, "We are very pleased to be joining an organization
with the reputation and breadth of UniCredito. UniCredito's
EuroPlus division has approximately $80 billion of assets
under management. This transaction provides Pioneer
shareholders with a premium on their investment and positions
the combined company to play a leadership role in asset
management throughout Europe and within the United States."

Pioneer's other assets will be spun-off into a new limited
duration company called Harbor Global Company Ltd. Pioneer
shareholders will receive certificates of ownership in the new
company, which will operate the businesses with the purpose of
liquidating the assets and distributing the proceeds within
five years.

Pioneer CEO John F. Cogan Jr. would become Pioneer Global
Asset Management non-executive Deputy Chairman, while EuroPlus
CEO Fabio Innocenzi would become the new group's CEO.

News of the deal spurred gains in several other publicly
traded money management companies, including T.Rowe Price
(TROW), State Street Corp. (STT), Franklin Resources (BEN),
Gabelli Asset Management Inc. (GBL), and Kansas City Southern
Industries (KSU, owner of Janus Funds).

Mr. Pietro Modiano, Head of Treasury, Investment Banking and
Asset Management of UniCredito Italiano Group said, "The
combination of Pioneer and EuroPlus will create one of the few
asset management groups with strong bases in both the U.S. and
Europe, and a presence in eight countries. We see significant
opportunity to leverage Pioneer's and EuroPlus's product and
distribution capabilities in Europe and the U.S. Pioneer will
benefit from a strong commitment of UniCredito to realize
fully what we perceive to be enormous potential of our
combined asset management businesses both in the U.S. market
and globally."

Shares of Pioneer Group were up $11.19 at $42.19 in afternoon


DNA - Genentech $131.38 +2.38 (+2.38 this week)

Genentech, is a leading biotechnology company that discovers,
develops, manufactures and markets human pharmaceuticals for
significant unmet medical needs.  Thirteen of the approved
products for biotechnology stem from Genentech science.  
Genentech markets seven products directly in the United States.
The company has headquarters in South San Francisco, California.

Most Recent Write-Up

Their stock has been under the weather lately, but may now be on
the road to recovery.  Since early March, Genentech has suffered
like many of the biotech issues, dropping 60% from its recent
highs.  Besides profit taking and a change of investor sentiment,
DNA has attempted to fight off some bad press.  Late last week
concerns hit the trading floors over the safety of a drug called
Herceptin, which is used in the treatment of breast cancer.
Genentech warned U.S. doctors about 15 deaths from allergic
reactions linked to Herceptin.  They went on to say there had
been 62 serious reactions reported among the 25,000 patients who
had been given the drug.  Analysts at SG Cowen rushed to the aid
of DNA saying that the Herceptin news was not new, noting that
adverse events have occurred in less than 1% of those treated.
Besides the obvious, why all the fuss?  Herceptin's sales rose
72% in the first quarter helping Genentech achieve better than
expected earnings.  On Wednesday, DNA got another dose of bad
news.  A U.S. Appeals Court denied Genentech's motion for an
injunction against Bio-Technology General Corp., pending the
outcome of its appeal of a court decision earlier this year.
It's more in-depth than we will go here, but could be viewed as
another stumbling block for the company.  Amazingly, with all
its had to face in the past six sessions, DNA has managed to gain
about 13%.  So how do we approach our new play?  After putting in
a bottom at $97, Genentech has formed good support between its
200-dma at $116.33 and $118.  In the midst of recent negative
sentiment, DNA has continued to find buyers.  Intraday support is
also found near $121.  With the renewed interest seen in Genetech
and the biotech sector, we would view further advances as an
opportunity to buy calls.


Genetech managed to break out above $130 and held a nice trend 
into the close.  This looks like a good opportunity to pick up 
some calls.  Watch the sector for bullish signs tomorrow to 
confirm the move and don't forget about the Fed either.  The 
rate decision will be coming at 2:15pm EST.

BUY CALL JUN-120 DNA-FD OI= 50 at $18.13 SL=13.50
BUY CALL JUN-125 DNA-FE OI=237 at $15.25 SL=11.25
BUY CALL JUN-130*DNA-FF OI=336 at $13.00 SL= 9.75
BUY CALL JUN-135 DNA-FG OI= 33 at $11.75 SL= 8.25
BUY CALL SEP-125 DNA-IG OI=116 at $22.88 SL=16.50

SELL PUT JUN-120 DNA-RD OI=700 at $ 7.63 SL=10.00
(See risks of selling puts in play legend)

Picked on May 14th at   $129.00    PE = N/A
Change since picked       +2.38    52 week high=$245.00
Analysts Ratings      4-6-4-0-0    52 week low =$ 58.25
Last earnings 04/00   est= 0.26    actual= 0.28 
Next earnings 07-12   est= 0.29    versus= 0.28
Average daily volume = 1.37 mln


Learning Is A Process, Not An Event
Austin Passamonte

Why do new traders often expect instant success and riches? 
Is the allure of wild claims we sometimes read about 
really that strong? They sure are... I'm tempted to buy the
newest "hot method" every time one of those junk mail flyers 
hit my PO box. Wendy just rolls her eyes when I open one up
and share those testimonials with her. "Look here Wen, this 
guy drives a milk truck for a living and made six figures 
last month trading options". "Oh really," she replies. "Maybe 
you should apply for a job driving milk trucks, it sure couldn't
hurt your six-figure monthly success"! Very funny... just the type 
of spousal support a trader needs these days.

Are you tired of hearing about traders who ran accounts to
literal fortunes during the gravy days of straight-up bull
markets only to give too much back recently? Well, it's 
happened since the markets' inception. History repeats 
itself with amazing accuracy when it comes to human behavior.

How about new traders trying their very best to put methods and
tactics learned in books, videos and internet chatrooms to work?
Are they sometimes discovering with real money that there is 
more to this game than pundits proclaim? 

I will politely suggest that many from these two groups of
traders have yet to learn the profession. How can this be?
Some from the first group made zillions of profits in a short
period of time. So what? What's done during times when one simply
bought high and sold much higher isn't a complete example of
market success. Sadly, gravy days are not when we learn life's 
lessons... it's the challenging times when knowledge and wisdom
become ingrained.

We all need to remain flexible, open, willing to learn.
Learning only comes from mistakes. Want proof? What do you 
recall clearer, 99 answers you had right on that test in 
school or one mistake which kept you from perfection? I 
thought so. Mistakes are an inevitable part of our natural
learning curve no matter what endeavor we try. Why should
trading be any different?

Have you caught on by now that there's just a little more
to option trading than what we read about or saw on video?
I mean, those tools do an excellent job of teaching us all
they can but there's no substitute for live fire. The problem
is that every new lesson learned comes at a price costing
real dollars to learn when money is risked. How many 
new lessons can any of us afford before we get them right?

Here's my point: if you're new at the trading game, terrific!
Welcome to the party. Keep in mind that you & I are tossing 
our money in the ring out there with experts and veterans
of the game who're thrilled to usher us a seat at the table.
We need to be nimble and learn fast when our money is on the
line in order to survive long enough to win.

May I share my thoughts with you on what steps new traders
might take in order to keep their bankroll intact long enough
to prosper and thrive? 

First off, don't be in a great hurry to learn everything with
your money in real-time trading. Even after years of experience 
trading futures and stocks I knew options would be a bit 
different. Now there's one thing I've been very accurate about,
for sure. I compiled a collection of books and videos when 
squeezed together eat up three rows of a wide bookshelf in my
office. I've scoured them all repeatedly to boot, but there were
plenty of things never written about I've learned on my own since! 

You aren't even close to prepared for tossing your hat in the
options ring until you can pick up most any book at random,
read through it and say, "I didn't learn a whole lot of 
fundamentals from there". Until that point arrives for you, most
of your time should be spent devouring such books. Don't like
to read? Watch videos. No time for either? Rest assured your
free time won't be spent trading profitably for long, either. 

Once you are comfortably competent about option trading,
it's time to begin following the markets - on paper. Not 
green money paper, I'm talking notebook paper. You have no idea
how many $1,000s of Wendy's hard-earned dollars I didn't lose
while getting started trading options. I began paper trading
and held myself honest to the results. Naked puts, credit spreads, 
LEAPS, calls & puts - try 'em all in virtual trading and be very
honest with your results. I can tell you truthfully that I crashed
and I mean flat-bottom crashed my first few tries on paper because
I didn't know what I didn't know. 

The markets taught me quickly and if I had used real money 
instead of Mead Composition notepads we wouldn't be sharing this
time together now. Do you think there might be others who should 
have begun the way I didn't but are too impatient to miss out
on hitting it big? 

I don't understand why everyone doesn't begin testing themselves
on paper first. Even today I continue to try new theories and
methods on paper myself. Currently I'm working on the use of
trailing stops trading the OEX to greatly reduce losses. Also 
another method of position-trading the OEX and SPX to give 
part-time traders staying power to catch imminent moves without
the risk of massive draw downs. If either or both prove unfavorable
it cost me nothing to find out. Should they profit wildly on paper
from day one, the results will give me the confidence needed to
work them effectively.

Once I began live trading it was with one or two option
contracts at a time. Loading up on big plays may seem macho, but
it's much easier to learn the nuances of hitting entry points,
splitting bids and taking small losses instead of monstrous ones
when only a fraction of your risk capital is at stake. A great
many traders who jump in with both feet quickly have them cut off
at the knees or worse in short order.

Think about it... trading financials is a zero-sum game for the
most part. Every time a trader profits, someone else sits on 
the other side of that trade. Which do you think has the better
chance of winning, a prepared student of option trading or
the one who's sure they can simply "wing it" to success. Your 
choice in either case, but rest assured you can only be one or
the other.

I completely understand the impatience everyone has to get 
started. Option trading is fun, thrilling and can be as lucrative 
as we all hoped it would be. Still, the markets moved before
we arrived, they're moving now and will continue to for eons 
down the road. They will be ready when you are... the key
question is, are you ready for them?

Trade the right direction when well-prepared. 

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