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Thursday, March 20, 2008

JP Morgan downgrades Sandisk

Citing profit warnings from Intel, Toshiba and Sony Ericsson, JP Morgan cuts Sandisk from outperform to neutral. They say this call is late.

Another log on the cell phone fire

National Semiconductor (NSM) makes a lot of sense on the short side as their business is very tied to cell phones and their gross margins seem to have peaked in the last couple of quarters. Order guidance was better than expected when they reported but the cell phone market has clearly deteriorated over the last several weeks. They're not going to hit the 440-460 mil guidance they have out there and margins will likely disappoint. The stock could decline 10-20% by the time they've reported this quarter's results.

I still really don't like Texas Instruments (TXN) as I expect several quarters of underperformance. They're a lagging indicator and they're not seeing the pronounced weakness that's coming… yet.

I also don't like Nokia (NOK) and I'm an ass for trying to trade around the position. Expect them to miss margins and probably have to reset the bar when they report.

Still liking Corning

Jeffries out on LCDs:

Demand remains robust and is expected to continue strong into the Beijing Olympics in August. The channel continues to build in anticipation of a strong June quarter – inventories are rising, but they're coming off 6 year lows so don't worry about it yet. Corning's glass supply is tight and expected to remain so.

Lehman out on semis

Tim Luke out with a summary of his recent trip to Asia, there's a conference call @ 10:30am.

Notebooks remain strong, desktops and servers are weaker; he thinks Intel's second half numbers look conservative. Broadcom and Nvidia could have lowered numbers for the quarter but he believes there's valuation support – I agree there. Not from Lehman, but I've read more than once that a fire at an LG battery plant is constraining notebook builds for HPQ for the quarter and they've ratcheted down their plan for the quarter to get in line w/ their limited battery supply.

Cell phones are weak with inventory adjustments at Nokia and difficulties at Sony Ericsson and Motorola weighing on growth. Totally right, Nokia has been pulling back at the high end at a couple of their supply chain partners.

He cites some slowness in Xbox and PS3. My observation is that following the initial pop following console price cuts, PS3 picked up some share but the data has been moderating. Xbox, which enjoyed an early lead in the market has held up but definitely has been slowing. Halo 3 drove some good console uptake around the holidays but last month's data was showing some sluggishness. The Wii continues to dominate the category. It seems like the only thing keeping Nintendo's console shipments capped is limited supply – it's amazing to me that over a year after it's release one still can't walk into a store and walk out with a Wii.

Apple is still not around and NAND remains weak. Samsung thinks they'll be back in April, Hynix thinks June. I think Apple is symptomatic of the problems in the NAND market. Sure, they're a big portion of the sales. Sure, they matter. At CES I saw literally a hundred different NAND players that no one will buy. That to me is the bigger problem… too many marginal players that don't really belong in the marketplace have created an overestimate of how much NAND is needed. This will take time to correct.

Wednesday, March 19, 2008

Sandisk continues to languish

Toshiba blew up this morning -- there wasn't a lot of new information there. HD-DVD is a failure and NAND pricing remains a drag on profits. As Sandisk is Toshiba's NAND fab partner, I might as well reiterate my dislike of the shares.

The good news is their product costs are declining. The bad news is retail pricing for cards continues to deteriorate. The cell phone market is seeing incremental weakness (TXN and ERIC, for example) which will further pressure the add-in and OEM card market.

I remain negative on Sandisk and the semicaps levered to memory such as KLAC, LRCX, MTSN and VSEA.

Too cute in Nokia

I'm watching the stock bleed lower and wondering why I had to try to trade sell siders defending a stock I don't think is correct to defend.

I already regret saying to take it off short-term.

Making a sale JP Morgan

After the Bear deal was announced I suggested JP Morgan would be bought on the thesis that the Fed was anointing them savior and would make sure they were successful.

The stock is up 20% since. I'm taking 20% of my position off here.

Bear Stearns trading at $7

I've been staring at the stock for two days wondering why it would do that. It seems crazy. People are buying a stock that's being taken out for $2.

This article in Fortune attempts to explain it, so take a look if you're as confused as I was.

The gist is that investors short Bear Stearns credit swaps are buying the stock to lock in their gains and to vote in favor of the deal. Debtholders, who would get a significant pop in the value of their debt as it's exchanged for JP Morgan's more highly rated debt, are also buying stock to vote in favor of the deal.

In the event the deal doesn't go through, Bear Stearns likely winds up in bankruptcy and bondholders have to fight with other creditors over the remains.

This makes me glad I don't do arbitrage or financial stocks. Buying a $2 stock for $7 to vote in favor of a deal at $2! I'm glad I don't have to make these decisions.

Sony Ericsson plays a weak handset

Ericsson on the tape this morning blowing up in mid-high priced handsets. Specifically, it appears the K850, their first phone with HSPDA (real 3G) and a 5 megapixel camera, is sucking wind.

This confirms some speculation that Ericsson was the weakness at Texas Instruments. I am still aware of weakness in the higher end of the Nokia supply chain so I wouldn't count the possibility of a Nokia margin miss out.

Nokia is down a couple pre-opening, trading below where I suggested shorting it. I think Nokia is struggling also but I think it's the best house in a bad neighborhood.

It's likely that the sell side will defend the stock down here. I'd take the Nokia short off for the time being and let them do it.

Tuesday, March 18, 2008

Fed on tap

Yesterday I was moving some money around, trying to diversify my financial institution risk. I really felt like a coot doing it but I'd rather feel like a coot than an idiot if this house of cards really is collapsing. I was told the bottom is coming this week a half a dozen times. An investment advisor at JP Morgan implored me not to buy treasuries because they yield nothing. I don't care about yield, I told him. I'm trying to protect the base. I tried to steel myself under his slightly alarmed and condescending gaze that seemed to imply I was nuts.

Expectations seem to be for a 1% reduction in rates today from the Fed -- I know because I heard it on TV. Lehman and Goldman seem to have alleviated some liquidity concerns with their quarterly reports. Maybe it'll all be fine. The dollar's reaction and subsequent direction will likely dictate the tape for the afternoon session -- if it collapses, so will the market.

Major policy changes at the Fed are not the sign of a bottom to me. It's a sign that things have continued to deteriorate at an alarming pace. The Fed typically moves in small increments so as not to jar the system. A full point reduction in rates is not indicative of a resolution -- its indicative of the magnitude of the crisis.

It would amaze me if the Fed were not tested on their resoluteness defending non-primary financial entities. I want it to be over... I just don't think it is.

Capex estimates coming down yet again

This time Lehman lowers their memory capex estimate from down 15-20% for this year to down 20-25%. They say consensus is down 15 but I think its probably lower than that.

I think people underestimate the amount of memory capex that has gone in over the last 3 years -- order books have never been so memory-bloated and business mix hasn't been this skewed to memory spending in over a decade. So I agree with Lehman directionally. I just think it goes a lot lower than they do.

I think it's a mistake to try to pick bottoms in capex with memory producers building inventory due to a reluctance to sell below cash cost. Lehman says they like LRCX and VSEA due to limited downside and low expectations. There's still downside left, stay away.

PC supply chain weakening, says UBS

In a vaguely worded recap of their Asian bus tour, UBS indicates PC component sales have slowed thus far in March. Desktops and servers are the primary weak spot.

DRAM is very weak with prices below cash cost for many vendors. Some of these vendors won't even make sales below cash cost. PC makers have built inventory, exacerbating the weakness.

The iPod Touch demand has fallen off sharply and builds are running 100-300k a month down from a peak of 1.2 mil units at one part supplier. I think the Touch is a silly in between product and I don't see why anyone would get one instead of the iPhone. I'd speculate others are figuring that out. I see no indications that the current model iPhone is picking up steam so it's not upselling driving the iTouch weakness.

Cell phone parts, which took a dive in mid February, seem to have stabilized and UBS says there's some better order activity. I don't want to buy cell phone parts -- I think the weakness there is likely to persist for a while.

They also came away negative on Nvidia but didn't really get into why. Curious.

Monday, March 17, 2008

I want my two dollars.

JP Morgan buying Bear Stearns for $2 a share is just terrifying. It calls into question the valuation of everything in the financial sector. Bear Stearns was a $60 stock on Thursday. It's a $2 stock today. The Fed has chosen once again to defend valuations -- but this time they've put a significant low-ball price out there. They're effectively financing the Bear Stearns deal for JP Morgan.

My gut reaction is this is a windfall deal for JP Morgan as they'll now be a galvanizing symbol of the bailout and their success reflects directly on the Fed from now on. In full disclosure, someone managing one of my accounts bought JP Morgan for me a while ago and I still own it.

The Fed expanded the crap-for-money window from 30 to 90 days and are now accepting any paper deemed "investment grade" -- anything rated above junk is eligible as collateral. Again, this diminishes the value of the currency. Your dollars are now tied to paper just above junk. Congratulations.

There's danger of a run on the banks here as people lose confidence in their institutions. The markets aren't even open yet and I hear speculation of Lehman and Citigroup next in line for meltdown.

War, tax cuts, federal bailout of the banking system. Never in our history have all the spigots been turned on at once without any effort to offset the leakage. We are in uncharted territory and it looks like a savage and untamed land.

The Fed is quickly running out of options and has backed themselves into a corner. This action resolves nothing and fosters confusion. The questions raised are profound: How do they not bail out the next broker? If they don't, what will people think then? Where do they draw the line? How is the Fed making these enormous decisions so quickly and without oversight? Where the hell is congress?

Extended credit is effectively a confidence game -- it's offered if the other party thinks it will be paid back. How does the Fed restore confidence to the markets? I don't think it's by declaring that Bear Stearns is worth two dollars. That drives a belief that things are worth less than they seem. If they're setting a bottom, they're setting it well below current market values.

I leave you with some dialogue from the iconic film Better Off Dead.

Four weeks. Twenty papers. That's two dollars... plus tip.

Gee, Johnny, I don't have a dime. Sorry!

Didn't ask for a dime. Two dollars.

In the microcosm of this scene, you can see Fed policy (papers for money), poor credit conditions (Lane can't pay), and a failure of a creditor (Johnny) to come to terms with reality. Ironically, despite Lane the deadbeat's suicidal nature, it is the paperboy creditor Johnny who dies later in the film. Ok, ok. It's got nothing to do with the Fed. I just wanted to show it because he keeps saying "Two dollars!" over and over again. You're going to hear that phrase a lot today.

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