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April 20, 2006

Earnings Potpourri

Equity traders had a bundle of earnings reports to digest today as well as liquidation in the commodities markets. While I had expected Intel to be a major shaker, reaction to their report was rather muted. The company met earnings expectations while stating that 2006 revenue would come in 3% less than 2005. At the same time, they claim to have stemmed market share loss to AMD. I have my doubts about this latter claim, but it nonetheless appears to have helped ease anxiety among INTC fans. The shares initially popped about 2% in response to the news. Traders later had a change of heart and sent the shares into negative territory by the close.

Intel also admitted that overall industry demand seems to be cooling. I'm surprised such an admission didn't spook traders a bit more because, as I mentioned yesterday, weak demand in combination with inventory build usually leads to a price war. Intel faces the huge risk of sacrificing profit in order to maintain market share. The bottom line: I saw nothing in their report to scare me out of my bets against their shares. In fact if INTC shares bounce a few percent, I will likely add to my positions.

GM shares got a 10% boost after the company managed to lose less than a billion dollars in their latest quarter. The company improved its cash position following two major asset sales and eased fears over their chances of entering bankruptcy. Basically, GM received a reprieve for their recent efforts, but longer-term the outlook is still grim for our nation's largest auto maker. They are going to have to find a way to become more innovative with their product line while getting unit costs under control, and they will need to do it quickly. Any sort of recession in the U.S., which is inevitable, will put a serious crunch on their cash flow and hence liquidity.

Apple Computer shared their latest prospects with us last night, and the market's reaction to them was even more perverse than the reaction to Intel. Apple missed current quarter's earning expectations, saw a big year-over-year drop in shipments of their flagship product, the iPod, and guided lower for the next quarter. Apparently traders were fearing the worst and concluded that what they heard was not the worst. Apple shares popped more than 6% on the open, though they ended the day up only 3%. I continue to hunt for a favorable place to short these shares again, but it won't be soon. Fighting upside gap moves is usually a losing prospect.

Today was a day of reckoning for commodities of all sorts, but especially for white hot silver. The first signs of weakness sent momentum money scrambling for the exits, and silver dropped an eye-popping 17%, taking us basically back to where we started the week. Gold got hit for about 4%. Since I was sitting only on my base position throughout this run, I have made no changes to my metals exposure, and do not intend to do so for a while. Miners, whose shares were lagging the recent run in metals, fell in tandem with them today. Pan American Silver shed 8% while Newmont Mining fell about 4%. I suspect a nice opportunity is being set up in mining stocks, but I will definitely wait until the metals have sorted themselves out before making any moves.

When hot commodities reverse like silver did today, they rarely recover quickly. Therefore, we can expect a basing period and a long wait before we see new highs in this metal. How long of a wait? There is no useful answer, but if history is any guide, it could be months or even years. My strategy now is to be a patient observer and wait for an opportunity to increase my base position down the road.

Disclosure: Short INTC; Long INTC Puts; Long NEM Calls


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