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December 8, 2005

No Confidence

Semi-conductor stocks received a firm vote of no-confidence today. The SOX index slipped about 2% on the heels of Texas Instrument's mid-quarter update, although it's hard to say whether today's weakness was directly caused by the TXN report. Tech stocks already seemed ripe for a sell-off.

TXN's conference call initially excited some bulls in the after-hours, but the shares got a 3% whipping in regular trading today. Peering at notes from the conference call, it seems like the folks at TXN said a whole bunch of nothing. The company did little more than narrow its previous revenue and earnings forecasts. As usual, the company did not address any serious questions such as how they will respond to potential margin pressure from a saturated cell phone market. But then nobody asked.

I imagine the weakness in TXN's shares spooked some Intel bulls ahead of their own mid-quarter update this evening. Intel slipped 1.5%, and put option volume went through the roof, trading over 150,000 contracts for near-strike December and January contracts. The market's ultimate reaction to Intel's report will be invaluable in deciphering the current mood of the collective.

Earnings reports from a couple of homeys, Hovnanian and Toll Brothers, provided a small amount of support for the sector today. Both companies reported record earnings, and although the numbers were below forecasts of a few short months ago, traders seemed to be relieved that they weren't even worse. It will be interesting to see if the sector can gain any upside traction from the reports or if today's strength will fizzle. Given the relative weakness of today's gains and for various reasons discussed here previously, I expect a fizzle.

Overall, equity markets spent another day in the red. We saw some strength in the indices during the final 90 minutes of trading, but not enough to sway my belief that we have begun a new downtrend. Perhaps tomorrow will change that view, but we'll just have to wait and see.

Disclosure: Short INTC; Long INTC Puts


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