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Daily Newsletter, Tuesday, 09/24/2002

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The Option Investor Newsletter                 Tuesday 09-24-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Frustrated Fed Heads
Index Trader Wrap: My "only" fear as a bear
Market Sentiment: Are We There Yet?
Weekly Fund Screen: Low Risk, Cash Heavy Funds


Updated on the site tonight:
Swing Trader Game Plan: Thank You Micron


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      09-24-2002           High     Low     Volume Advance/Decline
DJIA     7683.13 -189.00  7871.23  7666.00 1.99 bln    966/2238
NASDAQ   1182.28 -  2.70  1200.45  1169.04 1.64 bln   1240/2144
S&P 100   410.87 -  6.51   417.99   409.81   Totals   2206/4382 
S&P 500   819.27 - 14.43   833.70   817.38 
RUS 2000  356.58 -  2.10   360.43   355.09 
DJ TRANS 2097.17 - 37.40  2136.26  2246.87   
VIX        45.38 +  0.67    46.77    44.18   
VXN        59.40 -  0.45    62.01    58.25
Total Vol   3,872M
Total UpVol 1,217M
Total DnVol 2,525M
52wk Highs    81 
52wk Lows    916
TRIN        1.73
PUT/CALL    0.86
************************************************************

Frustrated Fed Heads

The Fed met, argued and dissented but left rates unchanged again. 
The markets anguished over their expected decision all day and 
after it was announced there was still confusion of what to do. 
Despite "risks weighted to the downside" the Fed said the economy
was recovering slowly but they would continue to watch for further
signs of weakening. Thanks guys, it is comforting to know you are
in control. Or are you?

Dow Chart


 

Nasdaq Chart


 


The Fed took the unusual step of listing the names of the two 
dissenters in the announcement and many feel this was a weak
attempt to suggest they could cut rates intra-meeting. There is
no meeting in October and the next meeting is Nov 6th. The Fed
still said its posture was accommodative and should be sufficient
to foster an improving business climate. They did caution about
Iraq and the possible impact to the economy. Governor Gramlich
and President McTeer voted for a rate cut. The markets were not
impressed and after several competing buy/sell programs the 
indexes headed to the lows of the day. Those lows for the Dow 
were back to October 1998 levels.

The stock news for today was so plentiful and so bad that I 
hardly know where to start. Cisco CEO John Chambers said last
night that the economic recovery appeared to be receding and 
visibility by their major customers was becoming increasingly
difficult. Translated that means fewer orders and more push 
outs.

Intel rose in early trading after Piper Jaffary and Salomon 
raised estimates for mother boards for September. Ashok Kumar
now sees shipments up +13-14% vs prior estimates of +10%. He felt
the risk of an Intel earnings miss had decreased. This powered 
the SOX all day and allowed it to close up +3.39. This was only
a day after several brokers lowered their chip estimates for
2002 and 2003. Obviously there are several schools of thought
on this topic. NVLS warned last night that orders could be -20%
less than expected for the current quarter. 

Lehman spoiled the pre Fed party early by missing earnings 
estimates of $.85 cents by -15 cents. Trading profits fell from 
$637 million to $234 million. They said the market conditions
from last quarter were getting worse. Weyerhaeuser warned that
economic conditions were going to cause it to miss earnings by
-5 to -10 cents per share. ROH, a specialty chemical maker, 
warned that earnings would miss by four cents. Services company
URS said the economic downturn had eroded city and state budgets
and they would miss estimates by up to -13 cents. Whirlpool 
warned that they would miss estimates on supplier problems and
the reduction of consumer spending on appliances. They said cars
and houses were capturing all the excess money available. I have
been saying that for weeks. 

The two big caps I have been discussing, IBM and GE, were also 
in the news. JPM cut estimates on GE and said they expected them 
to warn that double digit earnings in 2003 was unlikely. GE closed
the day down -.50 at $25.90. JPM cut GE estimates by six cents. 
Morgan Stanley warned that IBM had exposure to its pension plan
and IBM would suffer earnings hits from higher contributions to 
bring the plan into compliance and lower income from investments. 
They also expect IBM's option expense to be 15% of 2001 earnings
and growing. There is an increasing belief that IBM will warn 
within the next week and the stock fell below $60 on the news. 

Consumer Confidence fell for the fourth straight month to 93.3
in September. Although the decline was less than expected the
present situation component fell to 88.5 and the lowest level
since 1994. All of this is relative since most of the survey
was completed before the majority of the current market drop.
The October survey is likely to be significantly lower and could
be the impetus that will cause the Fed to act again. People
planning to buy homes fell to 3.3% from 4.5% last month. Jobs
are seen as increasingly hard to get and business conditions were
seen as getting worse. Maybe the Fed did not see this survey before
making their decision. Respondents planning on buying a car fell
to the lowest level since June-2001. So much for zero financing.

The lack of car buying did not help retailers. The Chain Store
sales index fell to 2.7 from 3.7 last week. This was the worst
reading since April 2002. Were is not for the release of the
Monsters Inc DVD/VHS movie the numbers would have been worse. 
Even the discount stores are seeing red. WMT, TGT and FD all
warned on Monday that sales were under plan again. 

Airlines continued to trend lower on multiple news events about
the health of the industry. There were comments about two new
bankruptcies on the horizon. Over 70,000 workers have been cut
in the last 12 months. 265 planes have been grounded and according
to the AMR CEO the industry has had to take on an additional 
$18 billion in debt to make ends meet. The market loss on airline
stocks has caused a $12 billion deficit in airline pension plans
alone. The push was on in Washington to borrow money but the
representatives appeared ready to let some more companies fail
to eliminate competition and pricing pressure for the survivors.

Oil rose to $31 a barrel and warnings were flying everywhere about
the impact to the consumer and another reduction in retail sales
with gas pumps sucking money out of wallets. Chalk up another
negative for Consumer Confidence in October. 

After the bell Micron posted horrible earnings. They missed 
estimates for a loss of -19 cents with a loss of -97 cents. 
They blamed slowing PC sales, increasing competition and falling
prices for memory chips. They said chip prices had dropped -30%
in the last quarter and they took a huge charge for inventory
write down to current price levels. 

TrimTabs.com warned that all signs pointed to a further market 
drop. They said August saw negative fund outflows and September 
would also. They track buybacks and takeovers and said buybacks 
were running $9 billion a week from June to August but had dropped
to only $1 billion a week over the last four weeks. This drop
in corporate buying indicates that less cash is coming to market,
companies are not confident their stocks will not go lower and
companies are not creating free cash at the same rate as they 
did last quarter. All very negative events for the market. They
said the last time the market outflows were this bad was Oct-1988. 
That is a cheerful thought. 

The Dow closed at a level not seen (on a closing basis) since 
Oct-1st 1998. Now under 7700 a drop to the July intraday lows
of 7532 seems extremely likely. The Dow is on track to post its
worst quarter EVER at -15.7% as of today's close. With all this
negativity you would think the market internals would be off the
scale. Sorry to disappoint you but with the Nasdaq trading in
positive territory most of the day the oversold conditions are
not serious. The sideways movement for the Dow/S&P today relieved
the critical pressure points. The VIX closed up only slightly 
at 45 and the TRIN was only mildly oversold at 1.73. The Put/Call
ratio was actually under 1.0 at .86 for the first time in several
days. 

The internals are not going to stop the drop. However, there are 
significant support levels below us. With the 7532 intraday July
lows only -130 points away we could easily hit that on the open. 
There will probably be considerable program buying in anticipation
of a double bottom in that area. Adding to the close support is
the end of quarter window dressing possibilities for the end of 
the week. Monday is the last day of the quarter and I am torn on
the likelihood of funds buying on Thursday or Monday to dress up
their statements. This assumes they actually have money to spend. 
I doubt Friday would be a buying day with event risk over the
weekend. This means Thursday could be light as well. Traders who
have stock to sell know this pattern and could wait for Monday
to dump their load. 

This brings up the following scenario. With any negative news 
before the open we could see the bids pulled and the July lows
hit in the morning. If double bottom buyers appear then end of
quarter buyers may want to jump in as well to try and get stock
cheap. This could give us an artificial lift through Monday but
after that those same EOQ buyers become BOQ sellers and the October
crash should begin. This is just a possible scenario. Another
scenario making the rounds has a bump at the open on Wednesday
and then a straight dive to levels significantly below 7500 by
next week. About the only thing common in all the available
outlooks is a belief that 7500 will not hold after Monday.  

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Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


********************
INDEX TRADER SUMMARY
********************

My "only" fear as a bear

I'm beginning to think I'm "too bullish" in my Index Trader Wraps 
as I'm not willing to chase gaps lower.  But each day, we 
continue to see the previous day's low taken out and some 1% or 
larger declines in the major indexes.

You can I both "know" some type of short-covering rally is 
coming, but it is the "when" that is so perplexing.  For those 
that don't think a short-covering rally is possible, as earnings 
warnings and broker downgrades abound, the a quick check of my 
July 31st establishment of the "Beetle's Balanced Benchmark" fund 
hints that there are some meaningful profits currently found in 
the bond markets, and with stocks down some 11% since our July 
31st benchmarking (after the release of Q2 GDP data) I'm still a 
cautious bear on new entries.

Here's just a quick look at the "Beetles Balanced" fund I put 
together using some "baskets" of different asset classes in short 
to longer-term Treasury maturities, a little corporate bonds and 
then the different stock indexes as depicted by the DIA, SPY and 
QQQ.

It may be "staggering" to some to see the Lehman 20+ Treasury 
Ishares (AMEX:TLT) $90.68 +0.64% on the day, currently carrying a 
9.98% gain from our benchmark data of July 31.  

Please remember, this is a non-strategic allocation based on a 
hypothetical $1,000.00 placed in each security as of the July 
31st close.  I had added the US Dollar Index (dx00y) 107.50 
-0.33%, for various reasons.  Not necessarily to represent an 
asset class, but to try and "track" foreign capital in/out flows 
to US-based assets and also get a feel for any erosion/strength 
in purchasing power by U.S. consumers for foreign goods and 
services.

Beetle's Balanced Benchmark - From 07/31/02 close


 

Wow!  The Lehman 20+ year maturity Ishares (TLT) have gained a 
whopping 9.87% since their July 31st close.  On July 31st, the 
30-year Treasury YIELD ($TYX.X) was trading with a 5.30% YIELD 
and today's closing YIELD was a new multi-year low of 4.635%.  

Stocks on the other hand, as depicted by the DIA, SPY and QQQ are 
lower on a fairly evenly distributed basis.

With the technicals of bonds looking so bullish and stocks so 
bearish, my "only concern" as a bearish index trader right now is 
that there would be some type of "asset allocation" program take 
place, whereby institutions would re-balance their portfolios, 
taking some profits in bonds (SHY, IEF, TLT and LQD) and 
reallocating those gains into stocks (DIA, SPY, QQQ).

I point out the above as it relates to tonight's wrap, to instill 
in traders the need for disciplined stops in new bearish trades.

In recent wrap updates in the Dow Industrials (INDU) 7,683.13 
-2.4%, S&P 500 Index (SPX.X) 819 -1.7% and S&P 100 Index (OEX.X) 
410.87 -1.5%, we've looked at regression channels from the recent 
August highs.

With the Dow Industrials (INDU) beginning to violate the lower 
end of our shorter-term regression channel, I'm going to now take 
a step back and begin studying a regression channel from this 
spring's highs, like we've used with the NASDAQ-100 Index (NDX.X) 
843 +0.06% and QQQ $21.03 +0.04%.

Dow Industrials Chart - Daily Interval


 

My current thinking becomes ... "I traded my bearish target of 
8,045, but have seen the Dow continue to fall.  If I keep waiting 
patiently and a rally doesn't take place, is the Dow going to 
keep falling lower?"  

I'm starting to think the Dow is going to have one heck of a time 
getting back above the 8,045 level near-term and looks further 
vulnerable to the downside.  I priced some DJX puts at both OCT 
and NOV expiration for at the money $77.  With volatility high 
and premiums jacked up, would only purchase 1/2 position.  Then, 
if Dow continues to fall apart lower, then at least a bear has a 
position.  I would prefer the November expiration currently.  
This way, if we do see an asset allocation take place and the Dow 
Industrials rally back near 8,050-8,200 range, can look for 
consolidation, then break lower from consolidation and "average 
in" to the November $77 again.  

I have NO PROBLEM averaging down in 1/4 or 1/2 positions.  I DO 
HAVE A PROBLEM with averaging down in an initial FULL position.

S&P 500 Index Chart - Daily Interval


 

I would think a bear that established a bearish position near 900 
and closed out that position yesterday at our initial target of 
835 might be talked into re-establishing another position with a 
tight stop back above 835.  Just as the Dow had some "problems" 
all day around the 7,750 level, the SPX didn't see the light of 
day above 835 today.  

I actually like the SPX as a short/put play better than I do the 
Dow Industrials as I can control my risk better with a tighter 
stop right now.  I also like the S&P 500 Bullish % ($BPSPX) and 
can tie in current levels of bullishness with those found in 
early July.  Remember!  Early July is depicted by a "red 7" on 
the S&P 500 Bullish % Chart. 

S&P 500 Bullish % Chart - 2% box 


 

Last night we looked at the very narrow Dow Industrials Bullish % 
($BPINDU) from www.stockcharts.com.  Here's the broader S&P 500 
Bullish % ($BPSPX).  On a QUANTITATIVE basis, we can say that the 
SPX is just as weak (column of O at 34%) as it was in July (red 
7).  Using the previous bar chart and regression channel, we see 
the SPX starting to drift a bit below its mid-regression channel.  
As long as a bear doesn't OVERLEVERAGE in a bearish trade, I 
still like the SPX bearish.  I also like the same type of trade 
management with an SPX bearish trade, just in case we were to get 
an asset allocation shift near-term.  If not, the so be it.

Now... OEX traders know that the OEX looks "just like" the SPX 
does as it relates to regression taken from this spring's highs 
on the daily interval.  So lets stick with our shorter-term 
regression channel, but tonight, lets look at the 60-minute 
chart.

OEX and SPX traders should be monitoring both OEX and SPX charts, 
even if you're just trading one of the S&P's.  As such, lets use 
the OEX regression channel, which is still shorter-term from the 
08/22/02 relative high.  If nothing else, it will let an OEX 
trader understand risk to OVERLEVERAGING in a bearish trade, as 
weak as the technicals are.

S&P 100 Index Chart - 60-minute Intervals


 

The 60-minute bar chart of the OEX (identical to 60-minute SPX) 
is still hugging the lower end of our short-term regression.  
Notes can be taken as to how the 21-pd SMA (pink SMA) has served 
as resistance near the "rally" at 442 and how the 50-pd SMA (blue 
SMA) seemed to "cut the head off" of the OEX on September 17th's 
rally near 900.  If futures are higher in the morning, then I'd 
let the MARKET rally the OEX as close to 430 as possible.  Heck, 
I've been waiting for a rally entry point in the markets.  Under 
such a rally condition, I'd like a trade setup short and look for 
the MACD, which is trying to turn higher on the 60-minute chart 
to begin flattening out and starting to roll, just below the zero 
level for MACD.  If stochastics reach "overbought" then good 
bearish entry in OEX of 430, stop 450, target 400.  If OEX breaks 
today's lows, the short/put, stop 422, target 387, which was a 
level of "monthly support" from Sunday's work we did with the OEX 
open interest.

Kind of interesting... I just looked at the open interest for the 
October puts.  The highest open interest in the OEX puts are at 
the 440 strike (OXBVH) still (OI= 4,900), while the 400 strike 
(OXBVT) (OI=4,372 dv=1,366) with last trade at $12.30.  Hmmmm.... 
400-12.30=387.70.  That's still pretty close to the $387.10 
monthly support we calculated Sunday in these puts. Good lesson 
perhaps in why an option trader SHOULD NOT BE BUYING OUT THE 
MONEY PUTS when VOLATILITY IS HIGH as it is often a losing man's 
game.  Remember, institutions sell out the money and will buy in-
the-money to hedge a portfolio/position.  

In today's 11:00 AM EST Update, I profiled a bearish trade in the 
QQQ's near the $21.00 level, stop $21.52 and targeted $20.20 on a 
negative FOMC reaction.

Well... the Q's found support all day at the $20.75 level and 
resistance at our retracement resistance of $21.44.  Since 
today's trading range $20.65-$21.45 is just about identical to 
Monday's range lets look at the 60-minute chart tonight.

NASDAQ-100 Index Tracking Stock (QQQ) - 60-minute Interval


 

The Q's traded tough today, no doubt about it.  There was "rumor" 
circulating that a large institution was buying baskets of 
technology stocks.  However, the QQQ had a tough time getting 
much above our $21.44 level of retracement.  One think I "pick up 
on" from the 60-minute chart is something I haven't seen from 
stochastics, which is similar to a bit of a "hick up," where in 
the past, stoch's have just rolled lower.  I'll use this as a 
"reason" to stick with a stop just above $21.44 level as outlined 
in today's intra-day update of $21.52 and last night's wrap stop.  

QQQ traders are perhaps still monitoring Qualcomm (NASDAQ:QCOM) 
$27.54 +0.25%, which traded a day high of $28.10 and still finds 
some sellers at $28.00 along with Microsoft (NASDAQ:MSFT) $45.64 
+0.9%, which didn't look to me like a "tech buy program" was all 
that active.

Traders that will take a moment and pull up a 60-minute chart of 
QCOM will see the stock sitting right on its 21-pd SMA of $27.55, 
so I think a QQQ bear would like to see the stock back below on 
the 60-minute time frame.  MSFT finds resistance at its 21-pd SMA 
of $46.20.  In essence, both stocks together create a near-term 
"neutral" type observation with the QQQ, but good correlation 
nonetheless as it relates to the QQQ 60-minute chart interval.

QQQ semiconductor components Applied Materials (NASDAQ:AMAT) 
$11.74 +4.73% traded down 20-cents from their close in after-
hours trading, while Intel (NASDAQ:INTC) $14.33 +1.4% edged down 
8 cents after Micron Technology (NYSE:MU) $12.95 +1.48% missed 
estimates by 9 cents, with a loss of $-0.27 per share.

Jeff Bailey


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****************
MARKET SENTIMENT
****************

Are We There Yet?
by Steven Price

This morning's consumer confidence numbers came in slightly 
better than expected, however showed a fourth straight monthly 
decline. This number is a measure of consumers' assessment of the 
present economic situation and bleeds over into their spending 
and investing habits.  The index fell from a revised 94.5 reading 
in August, to 93.3 in September.  When consumers are feeling less 
confident in the economy, they generally spend less of their 
disposable income and stay away from the stock market.  
This is bad news for the market, as there has been little 
positive data on the economic front and apparently consumers have 
been paying attention.  

Contained within the report were several details that shed light 
on specific areas.  The number of consumers that felt jobs were 
harder to get rose 1.7%, reflecting the increased pace of 
layoffs. "Weak labor market conditions continue to erode 
confidence," according to the director of the Conference Board's 
research center, which issues the report.  However, there was 
improvement in optimism over current business conditions. The 
report often offers "Alice in Wonderland" type data, such as 
fewer consumers expecting the business environment to improve in 
the next six months, but also fewer consumers expecting the 
business environment to worsen.  Also, the percentage of those 
rating business conditions as "good" increased, but so did the 
percentage of those rating business conditions as "bad."
These responses are combined to form the big number, which in 
this case, showed a decline.

The event most traders were waiting for was the announcement on 
interest rates.  The FOMC left rates unchanged, however, two of 
the twelve governors voted for a reduction of the Fed Funds rate.  
This dissention in the ranks already has traders looking to the 
November 6 meeting for a cut.  While some are speculating it 
could be as much as 50 basis points, there is a lot that can 
happen between now and November 6.  In the explanation for why 
the FOMC left rates unchanged, the statement reads as follows:

"Over time, the current accommodative stance of monetary policy, 
coupled with still robust underlying growth in productivity, 
should be sufficient to foster an improving business climate. 
However, considerable uncertainty persists about the extent and 
timing of the expected pickup in production and employment owing 
in part to the emergence of heightened geopolitical risks."  

However, the committee did leave the easing bias unchanged, 
stating, "Consequently, the Committee believes that, for the 
foreseeable future, against the background of its long-run goals 
of price stability and sustainable economic growth and of the 
information currently available, the risks are weighted mainly 
toward conditions that may generate economic weakness."

The Dow has been finding intraday resistance at successively 
lower levels, and today continued that trend.  After fighting 
7800 throughout much of the afternoon,  the  post announcement 
sell-off cracked support at 7700 and stayed there, closing at 
7681.33.  We are now below the July 23 closing low of 7702.34.  
The next test will be the July 24 intraday low of 7532.66.  That 
is less than 150 points away, and could easily be taken out in 
the first hour of trading.  However, if there is going to be a 
bounce, this would seem like a logical point for it to take 
place.  If we don't see a rebound and actually close below that 
7532 level, we could quickly test the downside target of just 
under 7200, based on the head and shoulders pattern that I 
outlined in the OI Market Wrap on Monday.

Remember that on the morning of July 24, we had just set a new 
recent low the day before and the Dow started the day out down 
170 points.  Things looked bleak and the Dow appeared on its way 
to testing the September 1998 low of 7401.  Then we got a 658-
point turnaround by the end of the day.  This was the beginning 
of a rally that ended at 9077 on August 22.  There was not any 
significant change in the business environment, and yet we 
rallied more than 1500 points in less than a month.  it didn't 
make much sense then, but it still happened.  While I've been 
bearish for a while now, I'm starting to get a little nervous 
about my short positions, as we have now re-tested the July 
closing low that was our target over the last month.  

The economic data has been mostly bad and Micron missing earnings 
estimates by a long shot is certainly more bad news for the 
techs. The Nasdaq Composite broke its July intraday low of 1192 
yesterday, closing at 1184.93, and today's drop of only 2.76 
looked as though it might have found a consolidation level, 
especially considering the 189 point drop in the Dow.   We'll see 
how Micron's news affects the index in the morning, but if the 
rebound in the Semiconductor Index (SOX.X) is an indication, 
after all of the semiconductor downgrades over the last week, we 
may finally be seeing a level of support.  I am going to be 
playing with very tight stops in the morning, in case we get a 
July 24 repeat.  My guess is that by the end of the day on 
Wednesday, we'll have a good indication where the long-term trend 
is headed.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7532
Current     :  7683

Moving Averages:
(Simple)

 10-dma: 8151
 50-dma: 8457
200-dma: 9570



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  819

Moving Averages:
(Simple)

 10-dma:  866
 50-dma:  889
200-dma: 1043



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  843
Current     :  843

Moving Averages:
(Simple)

 10-dma:  891
 50-dma:  941
200-dma: 1263



-----------------------------------------------------------------


The Semiconductor Index (SOX.X): Have we found the bottom?  
Today's rebound in the SOX followed a week's worth of downgrades 
that ended the day on Monday with a 35% loss in the index over 
the last month.  Tuesday saw a rebound of 3.39 to close at 
239.58.  The intraday low was just over 230, and the rally came 
in spite of the Dow giving up 189 points and the Nasdaq Composite 
losing only 2.76.  The techs have been plummeting and closed 
below July's lows for the first time on Monday.  With today's 
rebound, we may be seeing signs of a bottom.  Micron Technology 
(MU) missed their earnings estimates after the bell and saw 
estimates lowered for 2003 and 2004 by CSFB. much of micron's 
problems stemmed from lower chip prices.  RF Micro Devices, 
however, raised its expectations for earnings and revenue.  Many 
of the other techs were trading up after hours, so we may have 
found at least a temporary bottom.

52-week High: 657
52-week Low : 236
Current     : 239

Moving Averages:
(Simple)

 10-dma: 263
 50-dma: 312
200-dma: 469


-----------------------------------------------------------------

Market Volatility

The VIX is creeping upward, and seems to be moving slower than it 
should after a 189 point drop in the Dow.  My guess is that 
traders are willing to take a chance that we've found a bottom 
and collect the high premiums from option sales.  At these 
levels, premium decay is high and requires quite a bit of 
movement to justify the price.  The last time we traded at this 
level in the Dow, however, the VIX was over 50, so we could still 
see an increase if the market continues to fall.


CBOE Market Volatility Index (VIX) = 45.38 +0.67
Nasdaq-100 Volatility Index  (VXN) = 59.40 –0.45

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.86        548,103       468,973
Equity Only    0.65        430,482       280,406
OEX            0.97         21,796        21,122
QQQ            0.37         52,178        19,530

-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          34      - 4     Bull Correction
NASDAQ-100    21      - 7     Bear Confirmed
Dow Indust.   20      -13     Bull Correction
S&P 500       31      - 8     Bear Confirmed
S&P 100       25      -10     Bear Confirmed

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

-----------------------------------------------------------------

 5-Day Arms Index  1.56
10-Day Arms Index  1.63
21-Day Arms Index  1.51
55-Day Arms Index  1.36

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when they do, they can signal significant market turning 
points.

-----------------------------------------------------------------

Market Internals

        Advancers     Decliners
NYSE        795          1167
NASDAQ     1949          2061

        New Highs      New Lows
NYSE         32             248
NASDAQ       13             248

        Volume (in millions)
NYSE     1,971
NASDAQ   1,660


-----------------------------------------------------------------

Commitments Of Traders Report: 09/17/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercials Increased long positions by a whopping 50,000 
contracts and shorts by 33,000.  Small traders followed suit with 
large increases, but leaned toward short position increases more 
heavily.


Commercials   Long      Short      Net     % Of OI 
08/27/02      425,982   469,087   (43,105)   (4.8%)
09/03/02      431,755   468,529   (36,774)   (4.1%)
09/10/02      426,230   470,537   (44,307)   (5.0%)
09/17/02      476,224   503,268   (27,044)   (2.7%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
08/27/02      153,152    72,408    80,744     35.8%
09/03/02      158,262    80,130    78,132     32.8%
09/10/02      166,696    85,259    81,437     32.3%
09/17/02      182,243   116,377    64,866     21.7%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Commercials increased long positions by 35% and shorts by 29%.  
Small traders increased longs by only 1,000 contracts, but 
increased short positions by 4,000, or 34%


Commercials   Long      Short      Net     % of OI 
08/27/02       45,354     50,634    (5,280) ( 5.5%)
09/03/02       46,712     53,287    (6,575) ( 6.6%)
09/10/02       53,309     58,745    (5,436) ( 4.9%)
09/17/02       72,522     75,815    (3,293) ( 2.2%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
08/27/02       10,156     8,040     2,116    11.6%
09/03/02       11,150     7,720     3,430    18.2%
09/10/02       14,024    10,494     3,530    14.4%
09/17/02       15,288    14,142     1,146     3.9%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:   8,460  -  3/13/02

DOW JONES INDUSTRIAL

Commercials increased their long positions by 4,000 contracts, 
while increasing shorts by 7,000.  Small traders increased longs 
by 6,000 contracts, almost doubling the position, while 
increasing shorts by only 1500, or 15%. 


Commercials   Long      Short      Net     % of OI
08/27/02       21,023    14,328    6,695      18.9%
09/03/02       21,161    13,792    7,369      21.1%
09/10/02       22,946    14,936    8,010      21.1%
09/17/02       26,863    21,187    5,676      11.8%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
08/27/02        6,825     8,438    (1,613)   (10.6%)
09/03/02        6,395     7,966    (1,571)   (10.9%)
09/10/02        7,568    10,129    (2,561)   (14.5%)
09/17/02       13,393    11,637     1756       7.0%

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

-----------------------------------------------------------------


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******************
WEEKLY FUND SCREEN
******************

Low Risk, Cash Heavy Funds

This week we search for conservative stock funds with high cash 
balances as of last month-end, using MSN's deluxe fund screener.  
Our aim here is to identify diversified equity funds that share 
two things in common.  First, they're rated as being "low" risk 
relative to their category peers per Morningstar.  Second, they 
have cash allocations in excess of 15% per Morningstar's latest 
fund report.  In most cases, that means August 31, 2002, but in 
some cases, the portfolio composition information may be older.

To screen funds based on this criterion, we will be using MSN's 
deluxe fund screener found at moneycentral.msn.com.  Below is a 
summary of our initial screen criteria:

 Percent Stocks > or = 40%
 Percent Cash = High as Possible
 Morningstar Risk = Low as Possible
 Morningstar Return = High as Possible
 Morningstar Rating = High as Possible

In other words, we are looking for partial or full equity funds 
that have at least 40% of net assets invested in stocks and are 
also cash heavy.  We use Morningstar's ratings to isolate those 
funds that have low risk, high return, and high overall ratings 
when compared to their category peer group.  

One of the nice features of MSN's deluxe fund screener is it'll 
rank funds based on your criteria, providing you with "best-fit" 
matches.  In the next section, we'll take a closer look at this 
week's results to see which ones are worth further consideration.

Best Fit Matches

Using MSN's fund screen results, we isolated the following stock 
funds with low or below average risk and heavy cash allocations, 
excluding specialty, market neutral and other funds which invest 
in derivatives (futures) and thus may look to be cash heavy.

 Adhia Twenty (ADTWX) 48.8% Cash, 51.2% Stocks
 Quaker Aggressive Growth A (QUAGX) 44.9% Cash, 53.9% Stocks
 Hennessy Leveraged Dogs (HDOGX) 35.1% Cash, 62.5% Stocks
 Franklin DynaTech C (FDYNX) 44.2% Cash, 55.8% Stocks
 MainStay MAP I (MUBFX) 25.9% Cash, 71.3% Stocks
 Wisdom Inv (WSDVX) 23.7% Cash, 76.3% Stocks
 Loomis Sayles Provident Fund (LSCGX) 21.3% Cash, 78.7% Stocks
 Bear Stearns Balanced (BBACX/BBAYX) 20.6% Cash, 49.1% Stocks
 Auxier Focus (AUXFX) 20.2% Cash, 62.0% Stocks
 
 FBR Small Cap Value A (FBRVX) 19.5% Cash, 80.5% Stocks
 UMB Scout Worldwide (UMBWX) 19.4% Cash, 76.4% Stocks
 Royce Special Equity (RYSEX) 18.7% Cash, 81.1% Stocks
 Bear Stearns Alpha Growth (Mult.) 18.3% Cash, 81.7% Stocks
 Fidelity Small Cap Stock (FSLCX) 18.3% Cash, 80.7% Stocks
 Fidelity Growth & Income II (FGRTX) 18.1% Cash, 75.5% Stocks
 Kayne Anderson Small Mid Cap (PKSFX) 17.3% Cash, 82.7% Stocks
 First Eagle SoGen Overseas I (SGOIX) 15.3% Cash, 72.4% Stocks
 Value Line Income (VALIX) 15.1% Cash, 66.9% Stocks
 Janus Advisor Growth & Income (JADGX) 16.5% Cash, 74.8% Stocks
 FAM Value (FAMVX) 16.0% Cash, 84.0% Stocks

At this point, since our list was starting to get rather large, 
we opted to make the screen criteria more stringent as follows:

 Percent Stocks > or = 40% (unchanged)
 Percent Cash > or = 15% (versus High as Possible)
 Morningstar Risk = Low (versus Low as Possible)
 Morningstar Return = High as Possible (unchanged)
 Morningstar Rating = 5 Stars (versus High as Possible)
   
That narrowed the screen results list in a hurry to 17 choices, 
including one or two funds that weren't previously isolated as 
follows (excluding specialty, market neutral, other funds, etc):

 Auxier Focus (AUXFX) 20.2% Cash, 62.0% Stocks
 Osterweis Fund (OSTFX) 15.3% Cash, 71.0% Stocks
 Quaker Aggressive Growth A (QUAGX) 44.9% Cash, 53.9% Stocks 
 First Eagle SoGen Overseas I (SGOIX) 15.3% Cash, 72.4% Stocks
 Value Line Income (VALIX) 15.1% Cash, 66.9% Stocks
 FAM Equity Income (FAMEX) 15.0% Cash, 84.4% Stocks
 FBR Small Cap Value A (FBRVX) 19.5% Cash, 80.5% Stocks
 Mason Street Growth Stock B (MGSBX) 15.2% Cash, 84.8% Stocks
 MainStay MAP I (MUBFX) 25.9% Cash, 71.3% Stocks
 Kayne Anderson Small Mid Cap (PKSFX) 17.3% Cash, 82.7% Stocks
 UMB Scout Worldwide (UMBWX) 19.4% Cash, 76.4% Stocks

We loaded these eleven funds into Morningstar's "Fund Compare" 
tool, found at www.morningstar.com, to get updated performance 
information through September 23, 2002 and to compare returns, 
risk, and costs/expenses.  

Three funds (Osterweis, First Eagle SoGen Overseas and MainStay 
MAP) have minimum initial purchase requirements of $100,000 or 
more.  However, First Eagle and MainStay also have retail class 
shares (A,B,C), so we loaded those symbols into the Morningstar 
Fund Compare tool as well.  We found that the Class A shares of 
First Eagle SoGen Overseas (SGOVX) was also 5-star rated, so we 
opted to leave that fund in, but the retail class shares of the 
MainStay MAP Fund were only 3-star rated, so we have decided to 
rule them out.  Osterweis Fund, because of its high minimum, is 
also ruled out.

We evaluated these remaining funds based on their relative cost 
structure, management/manager tenure, and 2000 YTD performance, 
as well as other factors such as long-term performance and risk 
levels versus category peers.  We also checked to see how these 
cash heavy fund winners are graded in Lipper's system for total 
return, return consistency and preservation since Lipper grades 
funds against their broad peer group (all U.S. stock funds, all 
international stock funds, etc) over the trailing 3-year period.

In the next section, we tell you which funds we favor the most.

First Eagle SoGen Overseas A (SGOVX)

Our favorite fund on the finalist list is the First Eagle SoGen 
Overseas Fund Class A Shares (SGOVX).  This Morningstar highest 
rated international stock fund has been co-managed by Jean-Marie 
Eveillard and Charles de Vaulx since its inception (August 1993).  

These veteran co-managers with Societe Generale Asset Management 
(Paris) apply a time-honored value discipline to foreign markets 
that doesn't always capture current market trends but has proven 
effective over time, reports Morningstar.  Their cautious value-
driven style, as recent numbers indicate, will sometimes lead to 
higher-than-average cash balances, when compelling opportunities 
don't exist in the foreign markets.    



 

This "conservatism" has done well for shareholders in 2002, with 
the fund up 2.1% since December 31, ranking in the top 1% of the 
Morningstar foreign stock category.  That compares to a YTD loss 
of 21.3% for the benchmark MSCI EAFE index and YTD loss of 20.3% 
for the average foreign stock fund.

SoGen's performance in 2002 shouldn't surprise anyone, since the 
portfolio co-managers were named Fund Manager of the Year (2001) 
in the international equity fund group by Morningstar.  In 2001, 
Eveillard and de Vaulx posted a 5.4% annual total return, +26.8% 
to the benchmark MSCI EAFE index, ranking SoGen Overseas Fund A 
in the foreign stock fund category's top percentile (top 1%).

The fund's trailing 5-year average total return of 7.6% through 
September 23, 2002 also ranks in the category's top percentile. 
Over the same period, the benchmark MSCI EAFE index declined by 
an annual equivalent rate of 5.7%, as the average foreign stock 
fund lost an average of 4.6% a year.  

Patient investors seeking a foreign stock fund that finds value 
in "out of favor" companies abroad should like the fund and its 
conservative ways.  The fund's a Lipper Leader for total return, 
consistency of return and capital preservation, and a perennial 
favorite of Morningstar.  For more information, go to the First 
Eagle Funds website at www.firsteaglesogen.com.  SoGen Overseas 
Fund Class A shares have a minimum initial investment of $1,000, 
a front-end sales charge of 5.0%, and an expense ratio of 1.50%.

Auxier Focus (AUXFX)

Another value-driven strategy we like is the Auxier Focus Fund 
(AUXFX) managed by Jeff Auxier since fund inception, July 1999.  
While it does not have the long-term track record that Societe 
Generale does, Auxier's relative performance has been superior 
since 1999 relative to other large-cap value funds, using data 
per Morningstar.  At $20 million, Auxier Focus Fund isn't well 
known (yet) but over the last three years, it has beaten about 
97% of its large-cap value fund peers, using Morningstar data.

Since December 31, the fund has lost 11 percent, considerably 
better than 25.8% YTD decline for the benchmark S&P 500 index, 
and strong enough on a relative basis to rank it in the top 2% 
within the Morningstar large-cap value category.  The average 
large-cap value fund has fallen in value by 23.5% so far this 
year.     

Auxier's trailing 3-year average total return of 2.2% through 
September 23, 2002 ranks the fund within the category's top 3%.  
Over the same period, the S&P 500 index declined by an annual-
equivalent rate of 13.1% and the average large-cap value fund 
lost an average of 6.1% a year.  

Like SoGen's co-managers, Auxier follows a value-driven style, 
and will put money in cash when conditions are unfavorable or 
multiples/valuations don't justify the stock's purchase price.  
According to Morningstar's report, the fund's largest holding 
through July 2002 was the Huntington Money Market Fund, which 
represented 29.4% of assets at July 31, 2002.  

It's that kind of conservatism that has helped Auxier's Focus 
Fund to preserve capital far better than its large-value peer 
group through the market downswing.  Also contributing to the 
fund's good relative performance has been its multi-cap value 
strategy, with mid-cap value and small-cap value stocks doing 
better in recent years than large-cap value stocks.

Investors looking for a multi-cap value strategy may find this 
relatively new offering to be appropriate for their investment 
goal.  The fund is a Lipper Leader in four categories: 1) total 
return, 2) consistency of return, 3) capital preservation and 4) 
tax efficiency, making it suitable for both taxable and deferred 
accounts.  

For more information, go to the Auxier Funds website, located at 
www.auxierasset.com.  Auxier Focus Fund has a minimum investment 
initially of $2,000 ($500 for IRA accounts), and is offered on a 
no-load basis.  The expense ratio was not shown, so you may want 
to call 800-862-7283 and speak with a fund representative to get 
that information.

Conclusion

We've profiled two value-driven strategies that have done a good 
job of preserving capital in down markets, and are not afraid to 
move into cash for defensive purposes or when they can't isolate 
growth opportunities at reasonable prices.  Because of their pro 
value bias and their high cash balances, these funds may lag the 
market when growth stocks are in favor and stocks are advancing.  
However, over time they have the potential to do relatively well.  
Sometimes, it's not how much you make, but how well you preserve 
assets in down markets. 

We showed you the approach we used to identify these "cash heavy" 
winners and what we did to skinny the list to a select number of 
funds, which one could then evaluate further.  So, if you want a 
fund that is cash rich, you may want to go back and look at some 
of the other funds the screener identified as "best match fits."

Remember that fund screen results and independent ratings should 
be used as starting points in your search process.  Your process 
should include a review of the fund's website and the prospectus 
applicable to the fund in question.  After reading over the fund 
materials, you may want to take time to call the fund family and 
speak to a representative, to answer any questions that you have.  

Generally speaking, you should do all that before investing your 
hard-earned money to make sure that the fund's style/strategy is 
consistent with your goals, time horizon, and tolerance for risk.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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***********************
SWING TRADER GAME PLANS
***********************

Thank You Micron

The news after the bell was ugly for the huge memory chip maker. 
Prices falling -30% in the quarter, sales down -75% from last 
year, PC sales slowing. They missed their earnings with a loss 
five times bigger than expected. Nasdaq futures are down strongly. 
Thank you Micron!   


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The Option Investor Newsletter                  Tuesday 09-24-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Stock Picks: NVDA
Dropped Calls: AZO, MMM
Dropped Puts: MXIM, BBOX, LTR
Daily Results
Call Play Updates: ABT
New Calls Plays: LLL
Put Play Updates: BSC, MAR, AIG, BRL, JCI
New Put Plays: FISV, BGEN, CI


***********
STOCK PICKS
***********

NVDA - NVIDIA Corp. - $8.88 
Strategy: Long stock with put insurance 

It seems like forever since we've seen any concerted bullish
action in the Semiconductor sector, with the SOX index tagging
new multi-year lows on a nearly daily basis.  The environment
for IT spending continues to deteriorate and in that environment
investors will be rewarded for ferreting out the values still
buried in the Technology arena.

NVDA was one of the great momentum stock plays last year, as it
rocketed as high as $70 per share.  Since then, a combination of
slowing demand and accounting issues have served to deflate the
share price to the point where it looks like a solid value.  With
$5.40 in cash for each outstanding share, a very low debt-equity
ratio and real earnings, NVDA appears poised to benefit from any
improvement in the IT spending picture.

It appears that we aren't the only ones to notice the value here,
as the stock continues to find buying interest every time it
nears its $8.50 July lows.  So far, we haven't seen the catalyst
that will drive the stock substantially higher, but the primary
factor that we want to watch for is an increase in PC sales, as
that will directly drive demand for NVDA's industry-leading
graphics processing technology and products.

It is probably a safe bet that NVDA will also need to see some
improvement in the overall Semiconductor sector in order to put
together any meaningful rally, but its relative strength in
recent weeks as the SOX has been posting new lows is certainly
encouraging.  Due to its relative strength, NVDA should
outperform to the upside on any rebound in the broader
Technology market.  Once that move gets started, NVDA will meet
its first challenge near the $11.50-13.00 area.  The 50-dma is
currently at $11.65 and falling, and then there is recent
resistance between $12-13.  Once clear of that obstacle,
investors will be targeting the $15 level (top of the July gap).
If we see improvement in the IT spending environment, then it
is entirely conceivable that NVDA could move back up near the
$22-24 over the next 12 months.

The play is to go long NVDA stock at our target of $8.50-9.00
and go long one contract of the Jan-2003 $7.50 puts UVA-MU at
$1.45 for each 100 shares you are long.  There is no requirement
to go long the put but it does prevent all but a very minimal
loss should something unexpected happen to NVDA. 

Option 1: If NVDA is not above $11.50 by Jan 2nd, close both
positions and exit the play.

Option 2: If NVDA is below $8 on Jan 2nd then you have the
option of closing the put for a slight profit and lowering your
basis in the long stock play by the amount of the put premium
received or closing both positions and exiting the play. 

Option 3: If NVDA is above $13.00 by Jan 2nd then close the put
position for any remaining premium and set a stop loss on the
stock at your entry point of $8.50-9.00 plus any short fall on
the put premium. ($10.50 max) 



 


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

AZO $73.05 -1.73 (-2.80 for the week) Autozone has been resilient 
during the recent market decline.  It has actually posted a loss 
of only 1.8%, as the Dow gave up 7.5%, since we picked it on 
September 13. As of this morning, the stock had actually posted a 
gain before this afternoon's sell-off.  The stock has not been 
able to crack the $77 barrier, however, as the weight of the 
market has held it back. A break above that level could help AZO 
achieves $83 quickly. The company releases earnings tomorrow, so 
we are closing the play, as is our policy.   While we are taking 
our call money and investing it elsewhere, this is still a stock 
to keep an eye on in the future.

---

MMM $113.13 -4.36 (-6.33) The bulls stubbornly defended support
in MMM throughout the past week, but finally this afternoon lost
the battle as the stock fell under the $115 level.  That ushered
in a fresh wave of selling and MMM ended the day just above the
$113 level, as investors began selling the stronger stocks in the
market.  With our violated stop and the DOW closing at a new
multi-year low, it should come as no surprise that we're dropping
the play tonight.


PUTS:
*****

MXIM $24.19 +0.65 (-0.01 for the week) The semiconductors seem to 
have found a consolidation point, after giving up 35% of their 
value over the last month.  We had originally targeted 250 as a 
bounce point and when that level failed, we piled on.  This 
morning's low of 231 looks like 230 served as the bounce point.  
Maxim bounced along with the rest of the group, and for now we'll 
get out of the way, after playing them short for a while.  The 
sector still looks weak, but any bear market experiences some 
rallies.  If this rally rolls over, we'll look at these stocks 
again, but for now we'll move to the sidelines.

---

BBOX $32.31 +1.66 (+2.31) With the broad markets sharply lower
the past two days, the strength in BBOX is a warning to complacent
bears.  If the strong market-wide selling isn't prompting selling
in the stock, then a short-covering rally could really propel BBOX
higher.  Rather than take this risk, we're dropping the play
tonight before our $33 stop is violated.  There are plenty of
other attractive put candidates and that is where we want to
focus.  Use any opening weakness tomorrow to exit open positions.

---

LTR $44.87 -0.80 (-1.10) After the sharp selloff in shares of LTR
last Friday, it looked like the stock was destined to retest its
July lows.  The price action this week has actually looked bullish
in light of the sharp drop in the overall market.  The DOW slid to
a new multi-year closing low on Tuesday, but LTR only fell to just
below the $45 level.  While the stock could continue to slide
lower, it appears that the risks are now to the upside.  Rather
than risk giving back our gains on a short-covering rally, we're
dropping the play tonight to make room for better put candidates.


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

ABT      42.10   -0.11   0.40  Good medicine
AZO      73.05   -0.72  -1.73  Drop, earnings
LLL      56.79    1.10   0.69  New, reloading
MMM     113.13   -0.41  -4.36  Drop, stopped


PUTS               

AIG      53.99   -0.70  -1.26  Still rolling
BBOX     32.30    1.19   1.66  Drop, SOX rebound
BGEN     29.08   -1.35  -0.31  New, bad medicine
BSC      56.18    0.39  -1.21  Sympathetic drop
FISV     29.60   -0.62  -0.99  New, support break
JCI      73.01   -1.23  -2.51  past support
LTR      44.87    0.37  -0.80  Drop, profits
MAR      27.55    0.09  -0.70  no visitors
MXIM     24.19   -0.49   0.65  Drop,  Sox rebound


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********************
PLAY UPDATES - CALLS
********************

ABT $42.10 +0.40 (+0.30 for the week) Abbott has held steady as 
the market has given up its gains and fallen through previous 
levels of support.  The recent news that its  Vysis PathVysion® 
fluorescence in situ hybridization (FISH) test was approved as a 
means for determining whether breast cancer patients will benefit 
from  Herceptin, has no doubt kept investors happy and prevented 
a sell-off during the broad market decline.  The fall is 
generally the best time of year for drug stocks, as there is a 
plethora of medical conferences, which give them the opportunity 
to offer up data in support of their products. The stock has held 
up ever since its gap up on July 25, which is more than the 
broader markets can say. Abbott got some recognition today as one 
of the top users of information technology in its field from 
Information Week magazine, for the third year in a row.  While 
this probably does not mean much to the bottom line, it at least 
lets investors know the company is at the leading edge in this 
area. ABT will also be presenting some new data showing the 
effectiveness of a new Quinolone (class of antibiotic) against 
several different microbes this weekend at the ICAAC conference 
in San Diego.  The recent triple top point and figure breakout 
has held in ABT and in spite of the sag in the Pharmaceutical 
Index (DRG.X) and Biotech Index (BTK.X), ABT just keeps adding 
green candles to its chart. The PnF pattern also looks like a 
bullish flag breakout.  More conservative investors may want to 
wait for a break in the bearish resistance line, which would 
require a trade of $43, to initiate long entries.  However, OI 
sees the current level as a long entry point and we will keep the 
long position open on ABT.


**************
NEW CALL PLAYS
**************

LLL - L-3 Communications Holdings $56.79 +0.69 (+1.84 this week)

Company Summary:
As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

Why We Like It:
Despite a brief respite last week, war fears ticked upwards again
in recent days.  An increase in the tensions in Israel got the
ball moving over the weekend, and then Britain's Prime Minister
added to the rhetoric with his speech on Tuesday, indicating that
his country shares the United States' concerns about Iraq's Saddam
Hussein.  While the overall Defense Industry index (DFI.X) has
remained essentially flat this week, that is a sign of underlying
strength when compared to the heavy selling that has been seen in
the broad market.  It was only a couple weeks ago that we
successfully played the upside in LLL before profit taking forced
us to drop the play.  Well, the necessary consolidation appears to
have taken place and buyers have been driving the stock higher
over the past few days.  In fact, it looks like the bulls could
try for a breakout over its recent high ($58.45) in the near
future.  Solid support has been built up in the $53.50-54.00 area,
further supported by the 200-dma ($53.22) and the 20-dma ($53.58).
Any drop near these levels should provide for attractive entries
into the play, although with the heightened war tensions, we may
need to be less aggressive and target a rebound from the $55
intraday support level.  Momentum traders can consider new
positions on a rally through the $57 level or wait for a push
through $58.50 before playing.  We are initiating coverage of LLL
with our stop set at $53.50.

BUY CALL OCT-55 LLL-JK OI=2143 at $3.80 SL=2.25
BUY CALL OCT-57*LLL-JY OI=2750 at $2.40 SL=1.25
BUY CALL OCT-60 LLL-JL OI=2170 at $1.30 SL=0.75
BUY CALL NOV-60 LLL-KL OI=   7 at $2.65 SL=1.25

Average Daily Volume = 1.99 mln



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*******************
PLAY UPDATES - PUTS
*******************

BSC $56.18 -1.21 (-1.54 for the week) Bear Stearns rallied this 
morning on conflicting data from Lehman Brothers and Goldman 
Sachs.  Lehman missed earnings by a wide margin.  Goldman 
actually posted increased profits due to strength in bond-
derivative and currency trading, which offset declines in 
investment banking revenue.  This was the exception to the rule, 
however.  August saw a withdrawal of more than $5 billion from 
mutual funds, the first time in 14 years that funds saw a net 
decline, in spite of gains in the stock market.  Those gains 
reversed themselves in September and we will most likely see a 
much greater outflow when this month's numbers are reported.  
Things still look shaky for the brokerage stocks, as Lehman said 
its quarterly profit fell sharply as underwriting and trading 
revenue fell off amid a weak environment for stocks and bonds.  
Consumer sentiment declined for the fourth straight month, and 
although the number was higher than expected, the trend is still 
down.  As consumers lose confidence in the economy, investment in 
the stock market usually remains low.  BSC rallied with the rest 
of the market after the confidence number was released, and on 
Goldman's news, but that rallied was short lived.  The stock 
rolled over as investors digested the comments from Lehman and 
the fact that confidence is still waning.  BSC finished down 1.21    
on the day, and we have lowered our stop loss to $59.00.  Until 
the economy sees some reassurance from stocks, rather than a 
steady stream of warnings, it is not likely that trading revenues 
will pick up any time soon.

---

MAR $27.55 -0.70 (-1.05 for the week)  Marriott has been in a 
slow decline since breaking below $30.  Slow is fine, as long as 
we head in the right direction fast enough to justify the option 
premium.  The stock has had each intraday rebound stopped at 
successively lower levels.  Monday found resistance at $28.50 and 
Tuesday found resistance at $28.00.  With hotel revenues down, 
and the airlines seeking additional aid from Congress because of 
fewer passengers (as well as other expenses), the immediate 
future for the hotel industry looks weak.  Marriott's spread 
triple bottom breakdown on the point and figure chart coincides 
with the breakdown from a 5-week consolidation pattern.  The 
initial target of $25 continues to be a likely short-term target 
with the bearish vertical count of $26 looming below, as well.  
We expect hotel revenues to take another dive this month, after 
the 9/11 anniversary hit travel hard, as evidenced by the 
airlines complaints.  The slowdown in business spending also 
affects business travel as more companies are keeping their 
workers home.  This may have been on the minds of analysts at 
J.P. Morgan, who recently lowered their rating on the stock from 
a long-term buy to a market perform.  Our stop loss on MAR will 
be lowered to $30.50, just above the high of the day on September 
19, when it broke down.

---

AIG $53.99 -1.26 (-2.36) As the broad markets have continued to
grind lower, AIG has followed suit amidst concerns about both
earnings and the potential impact of another terrorist-type
incident.  Monday's weakness send the stock down to the $55
level, which is the 62% retracement of the rally off the July
lows.  Buyers stepped in at that technical level this morning,
pushing the stock up near the $56.50 level, but there was no
follow-through.  Following the Fed's decision to leave interest
rates unchanged, the sellers piled back on, pushing the stock
down to $54 by the closing bell.  The next possible level of
support is down near $52.50 before AIG takes aim on the July
intraday low near $47.60.  Like most of the broad market, AIG is
now deeply oversold and we need to see a failed rally to give us
a prudent entry point.  Resistance is firming up near the $57.50
level, and a failed rally near that level would make for a great
entry point.  Given the unrelenting weakness in the broad market
though, we may have to settle for entries on a rollover in the
vicinity of today's intraday highs ($56.50) or even as low as
today's broken support at $55.  Lower stops to $58.

---

BRL $61.07 -0.76 (-2.58) Our BRL play has been the story of a
series of breakdowns, as first the $66 and $65 levels gave way,
followed by the 50-dma on Monday.  While the trend is clearly
still down, we're starting to see a slight change in investors'
behavior.  The gap down opens of the past 2 days have been met
with buying interest, indicating that we could be faced with an
oversold bounce in the near future.  Judging by the $51 bearish
price target on the PnF chart, that bounce will likely be
short-lived and will provide our next high-odds entry point.
The intraday highs have defined overhead resistance just below
$62.  A failed rally near $61.75 would make for a solid entry
ahead of the stock breaking below the $60 level.  Due to the way
the stock has been bouncing back from its morning lows of late,
we want to be very careful about trying to enter on a breakdown
below support.  If you prefer to enter on a breakdown below $60,
make sure the breakdown comes on heavy selling volume.  To
protect gains in open positions, lower stops to $62 tonight.

---

JCI $73.01 -2.51 (-4.03) If there was any doubt that the rush of
auto sales has slowed significantly, then the huge breakdown in
shares of GM on Tuesday should have removed that doubt.  While
the company's announced SUV recall may have played a part in the
more than 8% decline in price, the heavy selling in shares of F
and DCX confirm that it is an industry-wide problem.  And that is
a big part of what is going on with our JCI put play.  The
company is dependent on the Automotive industry to keep buying
parts for new cars.  If those cars aren't selling, then JCI is
going to have a hard time regaining its footing.  Apparently
investors have already figured this out, as the stock is
continuing to see heavy selling.  Buyers managed to hold the
stock above $75 yesterday, but with the persistent weakness in
the broad market as well as the price weakness from the likes of
DCX and GM, JCI plunged below more important support at $74 on
Tuesday.  The July lows near $72 are the only thing standing
between the current price and a breakdown below the $70 level.
The PnF chart is growing uglier by the day, with the vertical
count now pointing to an eventual price target of $49.  Target
new positions on a failed rally below $75 (the new location of
our stop) or on a breakdown below the July lows.


*************
NEW PUT PLAYS
*************

FISV - Fiserv, Inc. - $29.60 -0.99 (-1.90 for the week)

Company Summary:
Fiserv, Inc. is an independent, full-service provider of 
integrated data processing and information management systems to 
the financial industry. As a leading technology resource, Fiserv 
serves more than 13,000 financial service providers worldwide, 
including banks, broker-dealers, credit unions, financial 
planners/investment advisers, insurance companies and agents, 
mortgage banks and savings institutions. (source: company 
release)

Why We Like It:
Firserv has seen it shares fall as the fortunes of the financial 
industry have fallen.  The company provides information services 
to broker-dealers, banks, financial planners, etc.  Many 
brokerage firms are cutting back on staff and expenditures as 
trading and investment banking revenues have dried up.  Financial 
planners are seeing a drop off in business as investors have 
pulled money out of the stock market in record numbers. Over $50 
billion was withdrawn from stock funds in July and that was 
followed by withdrawal of $5 billion in August.  August was the 
first time in 14 years that stock funds saw net redemptions in a 
month in which the stock market showed a gain.  That trend should 
worsen once again in September as the market has tanked. As 
FSIV's clients find themselves out of work, or with fewer clients 
themselves, the need for FISV's services has declined.  While the 
company also provides mortgage software, the demand in that 
market has not been great enough to spare the company from a 
sell-off.

The stock found support just over $30 in July, but has now broken 
that level.  A look at the intraday chart suggests that $30 could 
now serve as resistance to the upside, as attempts to hold over 
that price were made throughout the day and were overwhelmed by 
selling pressure each time.  The stock established a new sell 
signal on the point and figure chart with the trade of $30.  FISV 
tested PnF support at $32 and $31 numerous times in the last two 
years, before today's breakdown and a trade of $29.00 would break 
$30 support from early 2001.  The current bearish vertical count 
is $22, but the count is being calculated from the current column 
of "O"s and could be extended with each additional box to the 
downside.  The daily chart shows some support just over $25 and 
again at $22.50, but we have to look back to April and May 2000 
to find that support.  Our initial target on the play will be 
$25, however a break in this level could lead to $23 in a hurry.  
Our stop loss will be $32.50, which will give us some bounce room 
underneath the 10-dma and coincide with a level just above 
Friday's high.  More conservative traders can look for entry on a 
bounce and failure below $30, or a trade of $29, which will break 
the current level of PnF support.

BUY PUT OCT-30*FQV-VF OI= 105 at $2.10 SL=1.20
BUY PUT NOV-30 FQV-WF OI= N/A at $2.80 SL=1.40

Average Daily Volume = 2.05 mil


---

BGEN - Biogen - $29.08 -0.31 (-1.86 for the week) 

Company Summary:
Biogen, Inc., winner of the U.S. National Medal of Technology, is 
a biotechnology company principally engaged in discovering and 
developing drugs for human healthcare through genetic 
engineering. Headquartered in Cambridge, MA, the Company's 
revenues are generated from worldwide sales of AVONEX® 
(interferon beta-1a) for treatment of relapsing forms of multiple 
sclerosis and from the sales by licensees of a number of 
products. Biogen's research and development activities are 
focused on novel products to treat inflammatory and autoimmune 
diseases, neurological diseases, cancer, fibrosis and congestive 
heart failure. (source: company release).

Why We Like It:
Biogen recently announced that U.S. regulators would review its 
experimental psoriasis drug, Amevive, within the next six months.  
That time frame was longer than analysts were expecting. The 
problem with the extension of the time to approval is that rival 
Amgen currently has a drug called Enbrel, which is approved for 
psoriatic arthritis, a disorder that combines the symptoms of 
both psoriasis and rheumatoid arthritis.  Doctors have wide 
discretion to prescribe a drug once it has been approved for a 
similar use.  Right now, Amgen does not have the production 
capacity to supply the demand for Enbrel, but that should change 
by the end of the year.  Once a doctor begins prescribing a 
medication for a patient that has success, there is no reason to 
switch.  Therefore, the delay in bringing Amevive to market could 
have much longer lasting effects on its sales. Coverage was 
initiated on the stock today by Lehman Brothers, as an Equal-
weight, and by CSFB as an Underperform, neither of which are 
positive ratings. 

Biogen has had a rough ride since failing at its 50-dma ($34.95 
at the time) on September 11 & 12. The stock found support at $31 
in July and again in September.  It had no such luck on the 
recent break. With support at that level gone and round number 
support at $30 also non-existent, the next landing looks like 
$25.  However, the support at that level is back in 1998 and 
holders from that period may have sold out long ago. The current 
bearish vertical count on the point and figure chart is $20, and 
this would serve as a secondary target on the play. The stock 
gave a fresh sell signal at $30 and the trade of $29 only 
reinforced that signal by an additional box.  The failed rebound 
under $30 looks like a good short entry point, as the current 
column of "O"s was somewhat extended and a bounce was likely at 
some point.  

BUY PUT OCT-30 BGQ-VF OI= 41448 at $3.00 SL=1.50
BUY PUT NOV-30*BGQ-WF OI=    21 at $3.80 SL=1.90

Average Daily Volume = 3.67 mil


---

CI - CIGNA Corporation $71.55 -2.03 (-1.22 this week)

Company Summary:
CIGNA is an employee benefits organization in the United States.
The company and its subsidiaries are major providers of employee
benefits offered through the workplace, including healthcare
products and services, group life, accident and disability
insurance, retirement products and services and investment
management.  

Why We Like It:
Insurance stocks were already under significant pressure before
last week's downgrade from Fitch.  The ratings agency lowered its
outlook on a basket of Life Insurance stocks last Thursday,
unleashing a fresh round of selling.  Before that downgrade,
shares of CI had looked to be firming near the $76 level, but
after falling below that level, the stock has continued its slide.
Not only that, but the selling volume is on the rise.  The bears
handed the stock a 2.75% decline on Tuesday, bringing it to rest
right at the level of its closing low from last September.  While
this level could provide the impetus for a mild bounce, the PnF
chart tells a different story, with its vertical count now
pointing to the $62 level as an eventual resting point.  Intraday
resistance is now looming overhead at the $74 level and a rollover
near that level could provide for an attractive entry into the
play.  But with the broad market deeply oversold, we want to leave
room for a bit more of a bounce.  A rally to and failure near the
$76 level (the site of the recent breakdown) could provide an even
better entry into the play.  Should the $70 level fail to provide
support, then momentum entries would be in order in anticipation
of a rapid drop to the next level of support near $64.  Set stops
initially at $76, as any short-covering rally should be unable to
crest this level.

BUY PUT OCT-75 CI-VO OI=331 at $5.30 SL=3.25
BUY PUT OCT-70*CI-VN OI=565 at $2.80 SL=1.50

Average Daily Volume = 978 K



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Contact Support
The Option Investor Newsletter                  Tuesday 09-24-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.
http://www.OptionInvestor.com/htmlemail/x24c_3.asp

In Section Three: 

Play of the Day: PUT - CI
Traders Corner: Yield Curve

*********************
PLAY OF THE DAY - PUT
*********************

CI - CIGNA Corporation $71.55 -2.03 (-1.22 this week)

Company Summary:
CIGNA is an employee benefits organization in the United States.
The company and its subsidiaries are major providers of employee
benefits offered through the workplace, including healthcare
products and services, group life, accident and disability
insurance, retirement products and services and investment
management.  

Why We Like It:
Insurance stocks were already under significant pressure before
last week's downgrade from Fitch.  The ratings agency lowered its
outlook on a basket of Life Insurance stocks last Thursday,
unleashing a fresh round of selling.  Before that downgrade,
shares of CI had looked to be firming near the $76 level, but
after falling below that level, the stock has continued its slide.
Not only that, but the selling volume is on the rise.  The bears
handed the stock a 2.75% decline on Tuesday, bringing it to rest
right at the level of its closing low from last September.  While
this level could provide the impetus for a mild bounce, the PnF
chart tells a different story, with its vertical count now
pointing to the $62 level as an eventual resting point.  Intraday
resistance is now looming overhead at the $74 level and a rollover
near that level could provide for an attractive entry into the
play.  But with the broad market deeply oversold, we want to leave
room for a bit more of a bounce.  A rally to and failure near the
$76 level (the site of the recent breakdown) could provide an even
better entry into the play.  Should the $70 level fail to provide
support, then momentum entries would be in order in anticipation
of a rapid drop to the next level of support near $64.  Set stops
initially at $76, as any short-covering rally should be unable to
crest this level.

BUY PUT OCT-75 CI-VO OI=331 at $5.30 SL=3.25
BUY PUT OCT-70*CI-VN OI=565 at $2.80 SL=1.50

Average Daily Volume = 978 K



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**************
TRADERS CORNER
**************

Yield Curve 
By John Seckinger
jseckinger@OptionInvestor.com

Ever wonder why the yield curve steepens or flattens following a 
news event or economic report?  Are the words “steepener” or 
“flattener” part of your nomenclature?  Ever wonder what a graph 
of the yield curve looks like?  Soon, all these questions will be 
answered, and hopefully a new trading tool will be added to your
tool belt.  

Why is the yield curve brought up today?  Well, the biggest 
influence on the yield curve is the Fed, and what better time for 
a yield curve article than after an FOMC announcement.  The yield 
curve not only changes based on monetary policy, but on market 
expectations regarding future fed policy as well.  When the Fed 
wants to lower the fed-funds rate, they increase the money supply 
essentially by buying Treasuries from banks and brokerages 
(increasing the amount of available cash that banks/brokerages 
hold).  

Since the Fed held rates steady on Tuesday and kept the 
Federal Funds rate at a 40-year low (1.75%), the yield curve can 
then be used for expectations going forward.  By Tuesday’s close, 
five-year futures were higher by 6 ticks, while the 10-year note 
was up only 5 ticks.  This is called a “steepening” of the yield 
curve, since yields within five-year notes fell relatively 
greater than yields within 10-year issues did.  Expectations, via 
yield curve interpretation, are most likely for the Fed to remain 
concerned about the weakening economy and could possibly lower 
rates by year’s end.  

As far as long-term interest rates are concerned, inflation 
expectations usually is the primary force behind yield movement.  
Why?  If investors think that the Fed will fight inflation, 
expectations about inflation is lower and there would only be a 
small premium in longer term rates over shorter.  If the Fed is 
not responding well to inflationary concerns (as perceived by the 
market), investors will want to be compensated for their risk and 
demand a higher interest rate when buying 30-year bonds.  

What are some other factors that influence the yield curve?  One 
is economic growth, since a struggling economy will have banks 
loaning less to investors and leaving them with excess capital.  
What do these banks do with such capital?  Usually put it in the 
bond market, particularly shorter maturities.  This will steepen 
the yield curve.  If the economy is strong, investors will seek 
more risk and stay away from short-term bonds; flattening the 
curve.  

Taking things to a global perspective, the possibility of a 
country going bankrupt will have investors seeking safety in 
shorter-maturity bonds; thus steepening the curve as yields fall 
faster in the five-year sector than 10 or 30-year bonds.  A 
country in trouble (large budget deficit) can also steepen the 
curve from the long end.  Why?  There is more risk in holding 30-
year bonds than 5-year notes, and countries generally issue more 
long-term bonds (increasing supply, price falls, yields rise) 
than shorter-term bonds.  

Another factor that influences the yield curve is the U.S. 
Dollar.  Foreign investment in the U.S. still remains relatively 
high (owning a significant number of U.S. Treasuries), and 
foreign central banks that must sell their own currency to buy 
dollars (in order to buy bonds) certainly looks at currency 
fluctuations as a variable in owning or selling fixed-income 
securities.  If foreigners stop buying bonds (or if that 
expectation increases), yields on longer-dated bonds will rise 
faster than shorter-term issues; thus steepening the curve.  

How about corporations in trouble?  Using Enron as an example, 
investors head towards shorter-dated maturities and try to 
minimize exposure to risk.  This, of course, steepens the yield 
curve.  The reverse is true as well.  If corporations appear 
healthy, investors do not mind taking more risk and buying 
longer-term bonds.  The yield curve would then flatten. 

What about the Treasury buying back over $30 billion of 30-year 
bonds?  Less supply, more demand.  More demand, higher prices.  
Higher prices, lower yield.  Lower yields (falling faster than 
yields on shorter-dated bonds) means a flatter yield curve.    
In fact, it was not that long ago when the yield curve was 
inverted, meaning longer-dated yields were below yields of 
shorter-maturity notes.  

So, where do we stand now?  Well, the word “steepener” does come 
up quite a bit, and rightfully so.  Looking at a chart of the 
5/10 year yield curve, the rise (or steepening) has been 
relatively steady since January 2001.  Just like any chart 
pattern, trends are found and can be used to trade either 
equities or the curve itself.  



 

With the curve steepening on Tuesday, the upward trend which 
began back in March is holding true.  What does this mean to 
equities?  Let’s think of this from a portfolio managers 
perspective.  If a manager is defensive, it makes sense to look 
for shorter-dated maturities; thus steepening the yield curve.  
The above chart illustrates this, since equities falling and the 
yield curve steepening has gone basically hand-in-hand during 
2002.  

How could one trade the yield curve?  The chart above is based on 
the difference in yields in the cash market (found below).  
Looking at current yields on five and ten-year bonds (2.68 and 
3.63, respectively), the current spread is 95 basis points.  



 

Note:  The 52-week and 5-year high is at 110, while the 5-year 
low is at -33.  

Another way to trade the yield curve is via futures market.  


 

By just tracking the net change, a trader can effectively put on 
either a steepener or flattener.  How?  Example:  Once futures 
account is opened, a call would be made, “Buy 6 December five-
year notes and Sell 4 December Ten-year notes, at the market as a 
spread.”  What did this trader just do?  This trader just put on 
a steepener, since more five-year notes were bought and 
expectations are for yields to fall relatively faster (or rise 
relatively slower) than 10-year bonds.  If a flattener was to be 
put on, the call would be this, “Sell 6 December five-year notes 
and Buy 4 December Ten-year notes, at the market as a spread.”  
Why 6 and 4?  This is a way to weight the curve and has been a 
popular ratio on the floor of the Chicago Board of Trade for many 
years.  For entry and exit levels on a longer-term timeframe, 
feel free to use the difference in yields within the cash market.  

In my opinion, the yield curve is a great tool that can forecast 
both Fed policy and equity movement on a short and long-term 
basis.  Remember, there are only two capital markets: Bonds and 
Stocks.  After reading this article, you are one step closer to 
completely understanding how the bond market works.  And when you 
do completely understand the fixed-income market, please explain 
it to me.  


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and clicking on the link to the book on its home page.

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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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