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October 20, 2006

Carpet Bombing SanDisk

As expected, SanDisk bombed their earnings forecast due to inventory and pricing problems, but I would have never expected to see their shares plunge 20% immediately. Not that I'm complaining, mind you. I sold the batch of puts I purchased Tuesday for a tidy 250% gain. It just seems interesting that when bulls have abandoned ship in recent days (think Micron and Caterpillar, as well) they have done so more fervently than earlier in the year. Is this a sign of impending change? Perhaps. It is something in a long list of indicators to consider.

Antsy traders were quick to take profits on yesterday's gains in miners. A 1% pull-back in metals prices hit miners shares for about 2%. Given the recent carnage, it appears traders are hesitant to commit to longer-term trades. It seems now that any further moves in this sector may be put on hold in front of next week's Fed meeting.

In yet another perversity on Wall Street, today's session witnessed an additional 4% hit to AMD shares while Intel gained 1.5%. No one seems to care that Intel is the one losing market share to AMD, and Intel is the one with the massive inventory problem. This action further illustrates the power of psychology on share prices. Traders have always had a love affair with Intel, and the old axiom that breaking up is hard to do is as true on Wall Street as on Main Street. To extend the analogy, quite a bit of negative turbulence follows a personal breakup, and I expect the same result when reality sets in between Wall Street and Intel.

Here is a one-month chart of the SPX with 15-minute intervals. Think the blue trend line might be important? Notice that each of the prior three occasions where the trend line was challenged, the SPX launched, but the current test has lingered. Control over this line will be the big battle of early next week.

stock chart

As a footnote, the efforts of the Dow to conquer 12,000 seems to have overshadowed another insignificant but entertaining occurrence... in the last few days, Berkshire Hathaway Class A shares became the first listed stock to trade for $100,000 a share. As a testament to Warren Buffet's investment prowess, observe that BRK shares traded at $290 in 1979... approximately one-third the Dow Jones Industrial Average. They now stand at 8 1/3 times the same average. In other words, an investment in BRK in 1979 would have outperformed the Dow by a factor of 25, excluding dividends and transaction costs.

Disclosure: Short INTC; Long INTC, SNDK Puts


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