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July 21, 2006

System Failure

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Equities felt more pressure in today's session after Dell dropped a bomb on shareholders, revealing an inability to control costs and lowering guidance. Dell blamed intense competition from Hewlett-Packard for a large part of their troubles. The news bodes poorly for Intel because HP sells a large percentage of their machines with AMD chips, especially in the high-end server category. I can personally vouch for HP's products since they are used in our web hosting facility. Traders now fear a further price war between the two competitors and sent HPQ shares lower by 4% along with Dell's 10% clubbing.

AMD also reported weakness due to a burgeoning price war. Given the levels of inventory being floated by Intel, the situation is certain to get worse before it gets better. The fact that AMD offers superior products is not likely to bolster its finances until the market gets cleared and some pricing power is restored. At that point I expect to be acquiring large blocks of AMD shares.

Since I promised to mention when I started building a significant short position in Research In Motion, consider this notice. I have spent the last two days acquiring more puts and am pondering an outright short of its shares. Why now? The overall market is failing to show any backbone at a point where the bulls should be making a stand. With the disillusionment being injected into psychoses via earnings bombs, it seems the market could crack and cascade downward. RIMM shares are also sitting right on top of a very important support level ($60) from which it has rallied four times in the last two years. Perhaps it will find support there again, but given the ominous market backdrop, I perceive the risk/reward to be favorable for taking a shot at a potential breakdown.

The drag of earnings on the market is further evidenced by the performance of SanDisk. SNDK shares sagged 6% today, and they don't even report until Monday. Bulls seem to finally be conceding a wider margin for risk. As I mentioned yesterday, it would be dangerous to read too much into the action during options expiration, but if bulls fail to get any traction come Monday, I will think hard about building up my shorts again.

Disclosure: Short INTC; Long INTC, RIMM, SNDK Puts


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