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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: TigerPaw who wrote (7339)	9/24/2002 9:47:43 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Schaeffer Research on DELL and EDS schaeffersresearch.com ent/observations.asp?ID=6227 -------------------------------- The Other Shoe Drops? By Ron Taylor 9/24/2002 3:57 PM ET Gretchen Morgenson of the New York Times wrote an excellent article yesterday regarding Dell Computer's (DELL: sentiment, chart, options) derivatives exposure. Just like Electronic Data Systems (EDS: sentiment, chart, options) , Enron, and a host of other technology companies, DELL engaged in put writing to generate income during the bull market. This was similar to printing money when high-flying stocks had only one direction – up. Unfortunately, there are no magical printing presses in the real world and these put writes will probably come back to haunt investors one day. According to Morgenson's article, DELL has a $1 billion liability associated with these put writes. The puts account for 22 million shares with a strike price of $48 per share. They are already 24 points underwater. In other words, every dollar drop in DELL's stock price costs the company $22 million. How about that for a double whammy on DELL shareholders? I'd be willing to bet these puts have a lot to do with the stock trading in a two-year sideways trading range. The article also mentions the company's stock buybacks. To offset options dilution, the firm has bought back 14 million shares for $618 million. I guess there's no chance of DELL paying a dividend. Check out the chart of DELL's trading range below. This thing has gone sideways since December 2000 despite the fact that the Nasdaq Composite (COMP – 1181.7) has lost 59 percent during the same time frame (see the second chart below). Does this not strike anyone as odd? In years past, I would've chalked this up to relative strength and been looking for opportunities to go long. These days, with the shenanigans at Enron, WorldCom, Tyco International (TYC: sentiment, chart, options) , EDS, Qwest Communications (Q: sentiment, chart, options) , and so on, I'm waiting for the other shoe to drop. The fact that DELL has held up despite terribly weak PC demand (á la Gateway (GTW: sentiment, chart, options) , Apple Computer (AAPL: sentiment, chart, options) , or Compaq Computer) has my internal warning signal flashing. The Schaeffer's put/call open interest ratio (SOIR) on DELL is screaming higher and currently stands at 1.16. This reading is the highest one taken during the past year (see the first chart below). I have two possible takes on this. Again, normally I would interpret this signal as bullish instead of bearish. But I feel, in this case, that the huge spike in the SOIR may be smart money. Traders could have loaded up on puts and then fed this information to the media. Or, given the problems with Enron and EDS, traders may have been anticipating that this information would eventually get out and catch up with DELL. In my mind, it doesn't matter how the situation came about. Now that the information has been published in the New York Times, everyone will be gunning for DELL. One look at the monthly chart below, and you can see that the stock is looking heavy. Those put writes are beginning to weigh on the chart itself. All I can say is that my subscribers are short the stock and I think it's going lower.