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July 20, 2006

Slow Drip

The earning barrage of the last 24 hours has produced an utter lack of consensus as to the state of affairs of U.S. equities. Apple and Motorola beat expectations and saw their shares pop 12% and 7%, respectively. eBay produced mixed results which lead it shares to a 5% pop on the open, but the stock slowly leaked all day and ended with a 3% loss. Lam Research saw its profit double on the back on Intel's inventory build, but its shares were heavy over fears that Intel may finally come to terms with its inventory problem and therefore cut back capital spending.

As for Intel itself, even though the shares fell more than 7%, they were not hit as hard might be expected for a company that missed its revenue figure, grew inventory, announced deep discounts on its product lines, and lowered guidance for the remainder of the year. Perhaps some of the news was already factored in, or perhaps INTC has been battered so much that traders perceive little remaining downside risk. Either way, I believe the bottom fishers will be disappointed because these shares have a lot further to fall in my view. I did not alter my short position.

Another closely-followed producer/supplier pair is Motorola and Freescale Semiconductor, a company spun off from MOT a couple years back. On the heels of Motorola's success, Freescale shares were bid up more than 5% in hopes that this evening's earnings call will produce even more enthusiasm. I do not have much feel for how their report will go, but I do hold a small number of puts on the shares for technical reasons.

Another heavyweight named Google reports this afternoon. Traders have been antsy about this one after Yahoo blew up in such dramatic fashion. Google shares fell 3% late in the session. However, Yahoo's problems were of their own making rather than belonging to the industry, and their revenue shortfall may very well have been to the benefit of Google. We'll find out shortly. I am still holding some poorly-performing GOOG puts, and I suspect that this report will either reward them nicely or finish off the evaporation process

Overall, equities suffered from slow-drip syndrome today, falling steadily throughout the session and going out on the lows. Has this week's rally petered out already? Perhaps, but I'm not convinced. Unfortunately, we probably won't get much useful information out of tomorrow's session since it involves options expiration, so we'll have to look forward to next week for new clues. In the meantime, watching reactions to earnings reports should prove entertaining and informative.

As a side note, Building Materials Holding saw a ratings cut from "Buy" to "Neutral" by a small research firm. While I doubt the downgrade had much to do with the 6% slide in BMHC shares today... the damage was more likely due to more disappointing earnings from builders... I do find it humorous that these guys are just getting around to removing their buy recommendation now that the shares are down more than 50%. I'm sorry to say that I did not keep my latest short on this issue long enough, having closed it late last week. However, BMHC, along with various housing shares, still remains on my list to be traded if I see some compelling setups.

Disclosure: Short INTC, LRCX; Long INTC, FSL, GOOG Puts


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