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January 16, 2007

Price War

Today's session was so much a bore, I decided to delay my post until after the earnings news from Intel so I would have something to write about. Before delving into the details, it is worth noting how biased the news media were regarding Intel's prospects. Bloomberg, MarketWatch, and all ran articles describing how the warning from AMD last week is good news for Intel. The basic thrust of their hopeful banter was that AMD's woes meant Intel was simply beating them. They ignored the root of AMD's dilemma: a price war. Price wars are never good for any party involved.

So, given the upward bias being pushed in the face of poor fundamentals, I was tempted to increase my put positions in INTC today, but ultimately decided I had heavy enough exposure for this round. In any case, I had to chuckle when I read a line from a WSJ post on the Intel earnings release: "An ugly price war seems to have hurt profitability for both companies, as AMD warned last week its earnings and revenue for the fourth quarter would be lower than expected." Surprise, surprise.

As for the release, I did not expect any surprise in the way of past guidance, and, in fact, Intel brought revenue in close to the high end of their forecast. The important piece of the puzzle is what Intel tells us, directly or indirectly, about the future. The most intriguing bit of verbiage to come from them was a comment from their CFO, who described "excess inventory" in their channels. The CFO also forecast a competitive pricing environment for 2007 (hint: the price war will deepen) and decline to comment on whether or not Intel lost market share to AMD. These sidebars to their report may be cluing us to impending write-offs and could indicate that Intel will issue some warnings of its own in the coming quarter.

At the time of this post, INTC shares were down about 2% in after-hours trading, so the initial reaction to Intel's news is mild distaste. Tomorrow's action will be more telling.

Oil was hit for another buck or so today, and I can only imagine the pain being felt by all the money managers who have been chasing energy. While I believe energy assets may experience a corrective bounce in coming days, it will be a while longer before we see the capitulation which will give us neutral bulls our sweetest buying opportunity in years.

On the housing front, Centex added its name to the list of homeys taking massive write-offs on land options. CTX shares were hit for 3%, but the news didn't seem to have much of an effect on competitors. I have yet to delve back into shorting this group, but I don't expect to wait very much longer.

We get news on inflation over the next two days, with the CPI being published tomorrow morning and the PPI, Thursday. A deluge of earnings will also rain down upon us. Let's see how all those reports are digested and make plans from there.

Disclosure: Long INTC Puts


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