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September 13, 2005

Tell Me About Your Quarterly Sales

The action in Best Buy over the last two trading days reveals some important clues about the current psychology of the market. The market's eternal optimism was reflected in yesterday's action, as BBY rose over 3% ahead of its earnings report. Traders were expecting a rosy picture that would revive the stock and perhaps take the market up with it. What they got instead was lowered guidance for the next quarter, and the reaction to this revision revealed the second important psychological aspect prevalent in today's market: vindictiveness. Ever-so-slight misses are being punished viciously. Best Buy dropped 11% today in similar fashion to recent disappointments by Dell, F5 Networks, and Yahoo.

Paradoxically, none of these events have dented the eternal optimism psychosis. Case in point, Research in Motion rose $2 today, as has been the result each time they announce service in a new country. Today's lucky bunch were Icelanders. With approximately 191M shares outstanding, Iceland's Blackberry business is being valued at nearly $400M. Well, the bigger the bubble, the bigger the pop when something ignites the vindictiveness of traders.

In the meantime, the media has been putting on a full court press trying to talk up Dell's stock. A full article in this week's Barron's discusses the company virtues (a forward-looking PE of 20 is supposed to be cheap). Barron's also ran a positive analyst review, and TheStreet.com threw in its 2 cents today, saying Dell is 17.4% undervalued. I find perverse humor in efforts to value a stock down to decimal places. Funny bones aside, traders are ignoring the press. Dell is up 35c in the first two trading days of this week (far less than the 17.4% they are undervalued). Performance pressure is bound to force Dell to use the cheaper and better AMD chips before long. Based on recent action in AMD and INTC, traders are starting to figure this story out.

Disclosure: Short BBY, RIMM, INTC; Long YHOO, INTC Puts

 

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