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Tuesday, November 25, 2008

More unfree(zing) market

Following up saving the allegedly perfectly healthy Citigroup, the Federal Reserve and Treasury unveiled new cash for trash programs targeted at alleviating the pressure on the mortgage backed, credit card backed, student and auto loan backed securities markets. The Fed will buy them. No discussion as to how this would work in terms of valuations that I've seen.

Yesterday Obama edged into the limelight to announce key members of his cabinet. He's a very well prepared man and seems to soothe the markets so far. Sorry if my partisanship is showing.

The most interesting development was mortgage rates dropping hard and fast from 6 pct last night to anywhere from 4.875 - 5.5 pct today. Its a sign that the actions of the Fed and Treasury are finally starting to impact "real" rates that help someone besides flailing financial institutions.

The ted spread ticked up today. 10 year treasury credit default swaps ticked up to 50 basis points, too. It may be a blip. Or it may be doubts about the long-term viability of the government coffers under such substantial financing offers. One concern the interventions raise is that given a choice between trading counter-parties, participants are going to trade with the Fed every time and not with each other. Policy-makers need to layer in a penalty for using these facilities or they run the risk of bifurcating the market further between the haves and have nots.

From an AP article:

The latest federal moves raised U.S. commitments to contain the financial crisis to nearly $7 trillion — though no one thinks the government will actually spend anything like that figure, which would be almost half the nation's total gross domestic product.

Yes, let's hope they don't actually spend anything like that figure. It'll be a billion dollars to the peso if they do.

Monday, November 24, 2008

Hewlett Packard (HPQ) conference call commentary

EDS helped a lot. Check this slide out:

Ex-EDS, sales slowed substantially.

HP both raised prices on ink and plans to raise it further. Channel inventories went up 1/2 a week. They said it had to do with sell-out slowing down at the end of the quarter, as if to say inventory in the channel didn't go up much on a dollar basis -- the days to sell went up because they're selling less per day. If there's a price increase in there, too, it would follow that dollars should have gone up a lot. The language around this is confusing. The impression management gave was there isn't much to make of it. I'm going to give them the benefit of the doubt. Ink is a consumable and printers are an evil market -- you sell the hardware for nothing and gouge the hell out of your customer with ink. Those $39 printers are awesome but it costs you $50 to refill it with ink. It's diabolical.

Inventories in the channel also rose a week in PCs, as one would expect for the seasonal period. Of course, this year is anything but seasonal. They dialed 1Q:2009 down on an anticipated slowdown. I would speculate 2Q:2009 could also come in lighter as it looks like they stuffed the channel a little on PCs. It doesn't sound like it when you listen to them as they say they're gaining lots of share and notebooks are accelerating.

The company's financing group showed good growth in the quarter and the company plans to tap the Fed's commercial paper facility. Good for them, they're actually borrowing money from the government and loaning it to customers like they're supposed to. Dell, which took a whack on growth this quarter, pulled back from customer financing due to the risks. Hewlett Packard is going the other way. If the economic spiral stops and we have a regular recovery, HP will benefit from being more aggressive.

Hewlett Packard (HPQ) reports

A little better than the preannouncement. Notebooks a bigger chunk of the mix. Desktops down y/y. The EDS acquisition added a lot to services -- they were up 99% with EDS and up 10% without it.

HP makes most of their money in printers. From the release:

Imaging and Printing Group

Imaging and Printing Group (IPG) revenue declined 1% to $7.5 billion. Supplies
revenue grew 9%, while Commercial hardware revenue and Consumer hardware revenue
declined 10% and 21%, respectively. Printer unit shipments decreased 8%, with
Consumer printer hardware units down 8% and Commercial printer hardware units
down 9%. Operating profit was $1.2 billion, or 15.5% of revenue, versus $1.1
billion, or 14.5% of revenue, in the prior-year period.

It will be interesting to hear whether channel inventories of supplies went up (they probably did) and what they have to say about printers leading ink in terms of forward visibility. Also its worth noting that the revenue includes a currency benefit -- the overall company grew 16% in constant currency but 19% with the benefit. Presumably that means in constant currency the imaging unit was worse than down 1%.

I'm not a big fan of HP though their big advantage is they sell a captive consumable (ink). Of course, people can and will print less in a recession... but they'll hold up better than some others because of it.

More after the call.

Analog Devices (ADI) guides down 20%

Street mean has down 8% modeled. Gross margins are targeted to 57% for next quarter, the street is using closer to 60%.

It shouldn't be a giant surprise that an analog player is guiding lower. What's a little different is that ADI doesn't have the same channel dynamic -- they recognize on sell-through not sell-in. This suggests major cutbacks from OEMs in orders -- which we know, but part of the dramatic weakness at the analog companies was attributed to poor credit conditions for the analog distributors. The weakness is flowing straight through from OEMs it would seem.

My friend Helene Meisler at often talks about ADI's tendency to lead the semiconductor index so I'll be paying a lot of attention to how it acts in the next few days.

Apple (AAPL) discounts at Best Buy (BBY)

It's totally unheard of for Apple to discount product. Nonetheless, Best Buy is offering $50-150 discounts on Macbooks. They're also running a free $15 itunes card promotion on the skinny new one and discounts on almost every other ipod. It's unclear whether the discounts are driven by Best Buy themselves in some sort of desperate market share grab or by Apple corporate in some sort of desperate market share grab but so far Apple's online store isn't matching their prices (or the itunes card offer).

Macbooks are supposed to be the strongest part of Apple's business right now and to see them on sale is extremely unusual.

Anecdotally, my wife was in an Apple store the other day getting her Powerbook fixed and the genius she spoke to (his official title, I might add) said business has been very slow.

Western Digital (WDC) eyes flash market

Article by the guy that used to write for blocksandfiles. He shut it down and went to work for

Bottom line is Western Digital is missing a key consumer market. They're open to the right opportunity to play there.

With the capital markets shut down as they are, Western Digital would be far more likely to partner with someone to enter the market versus buying someone to enter the market.

Google scales back Christmas party

Google (GOOG) has decided to "scale back" the year end extravaganza this year. At least they're having one... a lot of others aren't.

Obama takes the stage - sell the news?

Nice big rally in front of his appointments. I think they sell off here.

Mastercard says you tightwads still aren't spending

The real balance sheet that is struggling is not at Citigroup -- it's yours and mine. The consumer is tapped out of credit, in danger of being laid off and hunkered down. Mastercard reported some pretty grim spending trends this morning:

Specialty apparel down 19%
Electronics sales down 22%
Luxury items down 21%
E-commerce as a whole down 7.5%

In related news, Santa laid off 20% of his elves.

E-commerce is less affected because e-commerce tends to grow at a more accelerated pace due to the secular shift to online purchasing. Keep in mind that Amazon has forecast a 15% rise in year over year sales for the December quarter. Down would be a disaster. The overall trend seems in line with the year over year declines in October.


Citibank has been saying they're fine, they're well capitalized, they're not in jeopardy. This weekend the government stepped in and backstopped them on 300 billion of losses after Citi loses 40 billion. Thank goodness they're well capitalized - imagine how much they'd need if they weren't.

The market's initial reaction on this news is to rally. I can understand some relief that Citi isn't going under any time soon. I think the admission that Citi was in such dire straits that it needed a gigantic rescue package to survive is very scary and not a cause for celebration.

The FDIC entered the year with 53 billion in capital. Indymac, which was seized by federal regulators earlier this year, cost them ~12 billion. Since then, they have participated or individually guaranteed literally an infinite amount of deposits. The FDIC will clearly need more capital down the road.

The government continues to try to fix a leverage problem with more leverage. It seems implausible to me that this will be a successful strategy. They're shoring up bad managements and business models with capital influx -- good money after bad. Headlines like Citibank being rescued do not inspire confidence. They inspire fear. A week ago Paulson testified before congress that buying bad paper was not the appropriate use of the TARP funding. Now we've got an agreement to buy bad paper from Citigroup.

All these guys do is react and write checks -- it's pretty concerning.

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