I. Market News: Bonds Fuel Explosive Rally
II. Heroes: LSI Logic, Knickerbocker, Digital Equipment, Xeta
III. Goats: Morrison, Helix, PHP Healthcare, American Eagle, Exar
IV. Investment Perspective: Tax-Loss Selling
V. Calendar: Tuesday's Economic Events

MARKET CLOSE

DJIA: 5139.52, up 52.39 (RECORD)
S&P 500: 613.68, up 6.70 (RECORD)
NASDAQ: 1069.78, up 14.47 (RECORD)

MARKET NEWS

With low inflation, a slowing manufacturing sector, and the increased prospects that the Federal Reserve could lower short-term interest rates in the near future, the bond market had a strong rally today, almost driving the yield on the 30-year bond to 6%. Stocks weren't to be denied today either as the technology sector rebounded, dragging Blue Chips along with it. All three major market indices recorded new closing highs, the first time since September that the Nasdaq has joined the other two in their record-breaking ways.

HEROES

LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %> is the latest company to ride the Internet wave, up $4 1/2 to $45 on brisk volume today after the company announced that it will manufacture a chip for the latest concept in technology, the "Internet box." Called the "Internet on a chip," LSI Logic brings closer to reality a vision that has been propounded by Oracle Corp. CEO Larry Ellison and Sun Microsystem CEO Scott McNealy. Both executives have a common vision because they share a common foe---Microsoft Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MSFT)") else Response.Write("(NASDAQ:MSFT)") end if %>, which rules the current dominant Internet platform, the personal computer. LSI has been a market leader in putting multiple functions on a single chip, enabling consumer applications like the Sony PlayStation and the Thomson SA set-top box for digital satellite broadcast. LSI Logic's "Internet on a chip" integrates a Silicon Graphics microprocessor with digital-signal processing, a high-speed modem, video/audio transmission and 3-D graphics. This chip brings the Internet box one step closer to reality, confounding the bevy of critics in the PC industry. Prudential added to the flames by putting LSI Logic on its list of "Single Best Ideas." Integrated Silicon Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISSI)") else Response.Write("(NASDAQ:ISSI)") end if %>, an LSI Logic competitor, was down $1 3/8 to $20 1/4 on this news.

It has been a while since L.L. Knickerbocker <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KNIC)") else Response.Write("(NASDAQ:KNIC)") end if %> has set fire to the stock exchange, but it was up $2 1/4 to $7 1/2 on rumors that the company's CEO is meeting with Lowell "Bud" Paxson, a Florida-based entrepreneur who helped found the ailing Home Shopping Network. L.L. Knickerbocker retails various celebrity knickknacks on national television and via its website, capturing the imagination of a near-cult following of retail investors, with merchandise ranging from Annette Funicello Teddy Bears to Farrah Fawcett posters. Essentially, the company offers a range of retro-70s kitsch and lame pseudo-Internet junk, like Camelot's much-ballyhooed Internet phone (which has only *four* major competitors). Paxson is the CEO of Paxson Communications Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:PXN)") else Response.Write("(AMEX:PXN)") end if %>, which has not been quite the disaster Home Shopping Network has been, down quite a bit, though, from its early 90s high of $47.

Digital Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DEC)") else Response.Write("(NYSE:DEC)") end if %> rose $4 5/8 to $62 1/2 on no news in particular. The company has been announcing solid revenue enhancing deals for more than a year, however, completing a turnaround as dramatic and fraught with peril as IBM's over about the same period. One year ago you could have picked up shares of ailing Digital Equipment for about $32, coming off of three straight years of losses. Now after a major reorganization of the company and a new set of workstations and servers based on the company's powerful Alpha chip, which has even Microsoft's attention, DEC has booked three solid quarters of profits with accelerating margins. With consensus estimates of $4.97 for fiscal 1997 and a long-term growth rate of about 15%, the shares only now seem to be getting into the fairly priced area.

Xeta Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XETA)") else Response.Write("(NASDAQ:XETA)") end if %> blasted ahead to another 52-week high, up $3 3/4 to $17 3/4 on heavy volume. Company officials and market watchers are unaware of any news to explain this, although investors have been increasingly interested in the company since the early-November issue of Forbes named it one of America's 200 best small companies. Xeta markets phone-call accounting systems, automated reservation services, long-distance telephone service and other telemanagement devices to the lodging industry. The company is not followed by any analysts and has only two million shares outstanding, making it dangerously volatile.

GOATS

Morrison Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RI)") else Response.Write("(NYSE:RI)") end if %> continued to plummet today, down $2 3/8 to $13 1/8 on news that its fiscal second quarter would be 40-50% lower than the same quarter the year before, the result of a lower same-store sales trend. Morrison is a diversified food services company with operations in specialty dining (Ruby Tuesday), general cafeteria operations (Morrison's Kitchens) and hospital food service. The company announced an ambitious break-up into three publicly traded companies scheduled to take place in about two or three months, possibly driving investors to reassess the value of the whole enterprise. MF Templar has done some analysis on the company in his Neocontrarian folder and believes it has a break-up value in the $15 range, yielding about 2.8% right now. He thinks investors should look for tax-loss selling to take this stock lower in the near term, though. You can get to his folder via the Master Message Board button in the Let's Talk Investment Approaches area.

Helix Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HELX)") else Response.Write("(NASDAQ:HELX)") end if %> closed down $2 7/8 to $30 1/2 after gapping down at the open a whopping $5 3/8. With 26.04% of the company's shares held by insiders, there are only 7,231,000 shares available in the "float"---the shares that can be traded by individuals and institutions. For the purposes of computing the float, insider holdings are removed since these cannot be traded without first alerting the Securities and Exchange Commission. The reason why Helix opened down so dramatically this morning is that a block trade of 15,000 shares, worth about half a million bucks, tipped the buy-sell equilibrium. Currently yielding 3.3%, with consensus estimates of 43.7% growth over the next five quarters, Helix Technology has a PEG of 0.50. Helix manufactures cryogenic equipment for "clean rooms," dust-free rooms where high-tech goods are manufactured.

PHP Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PPH)") else Response.Write("(NYSE:PPH)") end if %> had its first down day in a while, losing $2 5/8 to close at $25 5/8. The Reston, Virginia-based health-care systems operator reported earnings of $0.10 per share last week, compared to $0.01 in the year-ago period. The stock rallied about eight points last week to hit its all-time high of around $28. The lone analyst covering the company expects it to earn around $0.40 a share for the entire year, which puts this stock at about seventy times next year's earnings, with a long-term growth rate of around 12% over the next five years. Is the guy covering this stock crazy or is it a great short in an era when HMOs are having major gross margin problems?

Two high-profile resignations shortly before the annual shareholders' meeting have put shares of American Eagle Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AEOS)") else Response.Write("(NASDAQ:AEOS)") end if %> under substantial pressure, losing $3 1/4 to $6 3/4 today. Chief Operating Officer Robert Lynn and Chief Financial Officer Adam Monks called it a day this morning and got the heck out of Dodge, leaving American Eagle in a serious lurch. The ailing retailer has been booking abysmal earnings on top of tragic same-store sales decreases. The analysts were out with the scissors today as well; Dean Witter cut the stock to Neutral and Gerard Klauer slashed the company's shares to Sell---a rare rating in the brokerage industry. Gerard Klauer reduced fiscal 1996 estimates to $0.40 a share from $1.00, citing a lack of near-term earnings visibility and a lack of faith in the company's future operational direction.

Exar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EXAR)") else Response.Write("(NASDAQ:EXAR)") end if %> lost $4 3/4 to $16 1/4 today after reporting that its revenues for its fiscal third quarter would be about 7% below the same period last year. In response to this, the company is "tightening cost controls" but has promised not to touch engineering and research and development. The sagging revenues were due to cancellations by some major OEM clients as well as other clients asking the company to "push out" the sales into a future quarter. Prudential cut the company's rating to Hold from Buy on this news. Exar designs and develops analog and mixed-signal integrated circuits for use in telecommunications, data communications, microperipherals and consumer electronics products and took part in the rally in semiconductor shares last summer. This is just another sign that the broad-based rally in semiconductor shares is done; the easy money has been made and investors will have to get much more careful in choosing what companies they invest in.

INVESTMENT PERSPECTIVE: Lock In Those Losses Now

Tax-loss selling is a time-honored investment tradition that may accelerate this year in the face of a change in the way capital losses can be counted against regular income. With all sorts of proposed capital gains tax cuts on the table, probably the one most significant for investors looking to take losses this year is the way that capital gains losses can be counted against normal income.

Right now, each dollar in capital losses can be used to offset a dollar of income in any given tax year, up to $3000 in losses above and beyond your capital gains in the given year. If you cannot use all of your losses in a given year---no worries. You just carry them forward into the next year, using up to another $3000 there. Although some investors are in the unfortunate position of having more losses than they could ever possibly use, other savvy investors are in a singularly bizarre position where it has become fairly attractive to take a loss this year to get the $1 to $1 correspondence between losses and regular income to avoid the $2 to $1 ratio that comes into play next year.

In any given year, you can take a loss to offset an equal amount of gain. This is not going to change and is one of the tax incentives existing to encourage an entrepreneurial society. The additional incentive that we are talking about, however, deals with using capital losses to offset regular income. Say you make $50,000 in taxable income a year and after all is said and done, you have $3,000 in extra losses above and beyond the gains from your winners. Under the current system you could just deduct the $3,000 from you $50,000 of taxable income and only be taxed on $47,000. You will need $6000 in next year's losses to get the same tax benefit as $3,000 in this year's losses.

What does this mean for individual investors? With all of the capital gains changes impending, the normal suppression of loser stocks that occurs in the November-December time period might accelerate, meaning that anything that is a loser in your portfolio for the year might go dramatically lower, and any contrarian bargain you have your eye on could go appreciably lower as well; it might be worth your while to wait it out.

As for investors who have losses built up in the technology stocks, they could probably stand either to get out of the stocks for 30 days in order to lock in the loss since it's likely that from here to January 5th, they are not going anywhere if they are down right now. Also, investors are always free to "switch" out of a stock into a similar company, lock in the loss and have exposure to a similar name. Someone who has lost money in Lam Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LRCX)") else Response.Write("(NASDAQ:LRCX)") end if %>, for instance, might want to swap into Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %> for the next thirty days or longer, lock in the loss and move on. Another example is swapping Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> for Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %> or shares of Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DELL)") else Response.Write("(NASDAQ:DELL)") end if %> for Gateway 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GATE)") else Response.Write("(NASDAQ:GATE)") end if %>. Each "switch" needs to be evaluated on its own merits, but some sensible moves in order to maintain similar exposure to an industry or a product while getting the tax advantages might prove highly Foolish.

As always, talk to someone who is an expert at this kind of thing before you go off the deep end worrying about tax laws. Our own Tax Strategies Folder---hosted by MF Taxes in the Let's Talk Investment Approaches message boards---is a great place to start.

CALENDAR: Tuesday's Economic Events

---Mitsubishi/Schroder Wertheim Weekly Chain Store Sales (9:00)
---Johnson Redbook Survey of Retail Sales (12:55)
---November Ford Auto Sales

Byline: Randy Befumo (MF Templar)