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Friday, March 14, 2008

Gone fishing.

You're on your own today.

Thursday, March 13, 2008

Is the Fed's exchange policy slowing foreclosures or accelerating them?

There's a number of articles and headlines about levered hedge funds on or past the brink of shutting down due to over-leverage and illiquid markets. Carlyle is the one getting all the air time on CNBC but there's another handful that are in dire straits.

The Fed is encouraging banks to put up any old piece of paper as collateral to borrow treasuries. By foreclosing on a fund that may or may not be able to exit their positions in a timely fashion, the bank immediately realizes the market value of the portfolio and gets treasuries (which are cashable) on the spot.

There's been a hedge fund bubble of sorts the last few years. A friend of mine had a theory that it made it much harder to make money in stocks -- that we were all in the same ones, we all had the same stories, we were all doing the same thing... and we'd all fall all over each other getting in and out. He called it "rule 8000", referring to the 8000 hedge funds reportedly in existence at one point.

"Why is AAPL down on such good news?" I'd ask him.
"Rule 8000" was the inevitable response.

I wonder if that becomes rule 4000 before this is all said and done.

It almost seems like the Fed is accelerating the problem near-term... and maybe that's a good thing. The sooner we deal with the consequences of all the excess the better. We can't move on without moving through it.

Rackable Systems (RACK) owns $9mm auction rate securities

... the headline says they had an "auction-rate security auction failure".

The 10K says they owned $65mm short-term investments that consisted of student loans and federally backed securities. As of February, they have $9mm in auction rate securities. They may need to take an impairment charge associated with them.

This is totally non-operational and they've already addressed most of the problem. Stock is trading down 10% in pre-market on the headline. I bought a little at $8.

Sigma Designs (SIGM) 4Q:2007 Results (2)

Gross margins were about 100 bps light and operating margins came in significantly lower (300 bps) due to R&D and legal expenses.

Motorola, the company's largest customer, has too much inventory. Shipments to Motorola are expected to go from roughly 23mm (30% of total) this quarter to 6mm (10% of total) next quarter. This is the entire shortfall relative to consensus.

Broadcom will enter the market soon and is obviously a competitive threat as they are well capitalized and diverse.

As there's no clear indication of the depth of the Motorola inventory problem, there's no near-term catalyst.

The chart suggests the stock is going to $19 near-term and there's risk that could become $14 if that level doesn't hold. My guess is the short interest will drive covering at the $19 level and it will hold there for a while.

I think you get some larger companies kicking the tires as they're in some attractive growth markets but that's just me talking, I don't know of any companies exploring acquiring the company.

Bottom line: I like it but there's no near-term positive catalyst and its probably going lower so hang back for now.

Wednesday, March 12, 2008

Sigma Designs (SIGM) 4Q:2008 Results

Ok. This stock is down from $70. They guided quite a bit lower for next quarter -- 60mm versus expectations of 76mm. They took the bar for the year down to 300mm, street is at $337mm. The short interest is over 35% of the float. The stock is down another $2 in the post-market.

It's one of the few pure play names in digital television and they've got a decent leg up in the Blu-Ray player market at present. I so want to tell you to buy the stock here at $23 because "its a bottom" but I can't do that. The chart is shattered and the momentum is broken.

I'm sure I'll come back to this one at some point. I think this stock will trade $35 again later this year... but not any time soon.

DRAM still sucks

Contract pricing dropped another 3% in the first half of March. Credit Suisse is raising the possibility that Hynix could cut capex yet again (after cutting just 2 months ago). S&P is looking at downgrading Micron credit ratings.

Expect to see an awful lot of red this quarter. I have to remain negative on semicaps with a lot of exposure to memory -- Mattson (MTSN), Lam Research (LRCX), and Varian Semiconductor (VSEA) have more than 50% of their business leveraged to memory spending and look particularly vulnerable to downward earnings forecasts.

Financial engineering at the highest level

In a pretty bold move, the Fed opted to expand their off-off balance sheet financing efforts to help hide more mortgage paper choking the system. Another 100 billion goes into the bad loan buyback program. The Fed will exchange treasuries for mortgages. The spin is this will create liquidity specifically in the mortgage market where tight credit conditions are undermining the lending chain without further weakening the dollar. As treasuries are about as close to currency as you can get and are easily convertible to cash, I don't really see how it protects the dollar.

A conglomerate of member banks will try to value the mortgages the Fed will take as collateral -- in effect, Goldman Sachs and others will now be dictating the exchange rate of dollars to mortgages. Considering half of these member banks haven't been able to value these properly on their own books, this doesn't seem like a very sound method. What the Fed is accidentally doing is indirectly tying the dollar to mortgages, which is an extremely dubious and potentially catastrophic move if the mortgage market does not stabilize.

Markets responded by having their best rally since 2003. Go team.

Motherboard data somewhat weaker

BofA cuts motherboard estimates slightly. Desktop units declined more than expected in the month of February (down 23% m/m versus estimate of down 9%). Notebooks were slightly stronger but are a lower volume segment of the overall data. Their overall quarterly shipment estimate goes from down 10% q/q to down 11% q/q. They say it's not demand related -- they're blaming it on snow storms in China and on a fire at an LG Electronics battery plant that's constraining Hewlett Packard's units -- HP is cutting some production forecasts to better get in line with their battery availability.

Tuesday, March 11, 2008

Texas Instruments (TXN) lowers guidance - sell Nokia (NOK) too

Last night on their mid-quarter update, Texan indicated a major customer had cut back on orders last week. This makes some sense chronologically as just last week Rick Templeton spoke at conferences and sure didn't sound like he knew lower guidance was coming. It's a total surprise to them.

Texas Instruments has very elongated cycle moves. This is the beginning of the reduction in the growth and it likely telegraphs 2-3 quarters of slower growth going forward. Expect the bar to continue to fall. I'd stay short.

If they had said it was the aggregate Chinese market that slowed, I would have believed that too -- in fact, that shoe still has to drop. As they're blaming it on a single customer, though, that pretty much points to Nokia.

Nokia has tacked on multiple quarters of above industry growth rates by flooding the third world with low cost handsets and trades at a premium. It sounds like there's going to be a shortfall in the current quarter. Inventories at Nokia have been running somewhat above historical averages, so it's likely the slowdown is not a one quarter phenomenon.

I'd be shorting Nokia down 5% at $31.3 where it's trading now. This stock has been luring a lot of growth seeking money managers for a year now -- it'll take a while for them to get out of it.

Monday, March 10, 2008

Take Two takes a few more

In their proxy filed Friday, Take Two, led by ZelnickMedia, further filled their contingency coffer with shareholder coin. They financially protected a number of employees against layoffs. This comes on the back of tripling their payout in the event of a buyout. It's really kinda sad that they can legally do this. How is jacking their payoff in the event of a buyout after a takeover bid has already been received any different from backdating options? They're increasing their compensation retroactively – it's the same slimy spirit, regardless of the legalities of the move.

The view from Asia

Asian companies have a tendency to disclose a lot more about the ebbs and flows of business intra-quarter due in part to their lack of Regulation FD. As much of the supply chain produces and procures product from Asia, this research tends to be enlightening.

Citigroup just completed a 20+ company tour and these were the key takeaways:

  1. PC market picked up in February and was better than expected. March is "pretty stable" with build plans unchanged. Notebooks are healthy. Sell through is fine. Inventories are lean. Nvidia may be losing some share to new products from ATI.
  2. Handset pushouts are emerging. "Major customer" set an aggressive forecast but coming in below plan – not sure who this is yet. Motorola still poor but not worse. Texas Instruments is not having success with Ecosto platform and they remain cautious on the stock into the mid-quarter update tonight.
  3. PLDs are seeing a strong ramp in March due to 3G and high definition broadcast equipment ramps – both Altera and Xilinx are seeing this strength.
  4. DRAM vendors built inventory since year end and inventories remain "pretty high." Companies are expecting DRAM shortages in Q3 – this sounds preposterous right now. NAND pricing is worse than expected. There may be a pickup in iPod orders.

Overall, this is pretty in line with my thinking. If anything, I'm surprised PLDs are so strong (though I've recommended buying Altera) and that PC continues to chug along with no real logjam. If there were ANY iPod orders it would be a pickup, Apple has been completely dead all quarter.

They're having a conference call at 10:30am to discuss this data further.


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