Archive: September, 2006

Think Equity Thinks Little of DELL

You may not have noticed, but computer maker DELL has not exactly been hitting the ball out of the park lately. Well, investment boutique Think Equity Partners has noticed, and is so concerned they believe DELL will miss guidance they didn’t even give. According to CNet

Think Equity Partners believes Dell will have to preannounce poor earnings once again, as it deals with a host of issues, including the market, the recall, executive defections, a SEC investigation into its accounting practices, and the loss of marketing support from Intel as a result of its decision to adopt Advanced Micro Devices’ chips.

Even though Dell hasn’t issued guidance for its current quarter, it’s likely to try to slip the bad news in among the other earnings reports that will arrive in mid-October, analysts said in the report.

Now that is an earnings surprise! Of course, when you don’t give earnings guidance anything should qualify as a surprise. As far as DELL’s woes, we were a little curious as to what why and particularly why now these became a concern. For example:

  1. The market. We assume Think is thinking about the market for computers as opposed to the stock market. To some extent, though, both are outside DELL’s control. Today’s personal computer buyer is the consumer rather than big business, and we would no more penalize DELL for that than we would Oracle. It just isn’t their customer.
  2. The recall. With similar recalls now issued by Lenovo/IBM, Apple, Toshiba, and pretty much anybody else who makes laptops, it is hard to call this a concern for one company in particular.
  3. Executive defections. The way things are going, we could use at least one more of these.
  4. SEC investigations are never a buy signal. But with “SEC options investigation” turning up “about 9,390,000″ results in a Google search, again we don’t see the company-specificity on this.
  5. Last but not least, we have the AMD switchover and the question of whether the market share to be gained by offering AMD chips offsets the margin losses from foregone marketing support. While we assume somebody at DELL did the math, given their recent performance we are unsure whether they have anyone at the firm who can properly do the math – so we’ll let Think Equity Partners have this one.

Still, the last point has us more than a little confused at the fact that Think’s semiconductor analyst downgraded AMD on concerns of collateral damage. We guess it goes back to who was doing the math. If DELL loses its subsidy but doesn’t sell any AMD processors anyway, then it would indeed be bad for both companies.

Disclosure: Author is short DELL put options, a position that reflects a neutral to bullish outlook on DELL common stock.

Disclosure: William Trent has a long position in SMH.

Topics: Advanced Micro Devices (AMD), Dell (DELL), Hewlett Packard (HPQ), Microsoft (MSFT), NVIDIA (NVDA), Semiconductors, Stock Market, Technology | No Comments

Energy Beat – Debunking the Bear Case

Barry Ritholtz recently expressed his dissatisfaction with the explanations being bandied about in the media as to why oil prices have fallen:

Here is a short list of the most common current explanations circulating in MSM:

1. More Supply coming online;
2. Reduction of global terror threat;
3. Cooling of hostilities between Israel and Lebanon
4. Seasonally weak demand, as Hurricaine season ends;
5. Iran cooling inflammatory rhetoric

I find these some of the mainstream explanations unsatisfying. At the risk of creating a strawman (only to knock it down), let me put forth my top 5 list:

1. Fast money rotating out of commodities and into tech;
2. Cooling economy consuming less energy;
3. No major supply disruption from weather or Middle East;
4. Psychology peaked earlier in year; (see Business Week Cover Story)
5. Stretched consumer shifts behavior;
6. And lastly, the Weak Strong US Dollar (Crude is priced in greenbacks)

We agree with Barry that each of these can pretty easily be explained away, as we do here:

  1. Supply coming on line takes years. What new supply could have come on line that was not anticipated three months ago?
  2. Just because they will let you take some of the liquids back on the plane now doesn’t mean the terror threat is any lower.
  3. Israel and Lebanon don’t exactly have much oil – no oil supply was disrupted during their skirmish and it did not create any particularly unusual demand, so why would it have any effect on price (which was rising for years before the skirmish started?)
  4. Seasonality is a valid point but certainly a very temporary one. It is long-term supply/demand balances that sent oil to $78, and those haven’t changed.
  5. Iran? Isn’t this sort of the terror/Israel arguments tied together? Iran either wants to sell oil or it doesn’t. We’re betting on the former and think they are selling as much (or nearly so) as they can produce and that this won’t change any time soon.
  6. Amaranth certainly suggests there was some speculation on the way up, but also suggests that (post their pop) there may be limited downside remaining.
  7. The economy would have to cool to zero percent growth for the next five years for technology and substitution to offset the normal demand increase attributable to growth. If that is your forecast, fine (although I hope you are wrong.) Otherwise, your outlook for oil should be consistent with your economic outlook.
  8. Psychology? Perhaps it had an impact on price, but it sure doesn’t affect supply or demand much. Unless you can quantify the impact on price, how do you know the current price is any more correct than last month’s?
  9. Stretched consumer: See #6 above.
  10. Dollar: Ditto.

So with the easy explanations as easily tossed aside, how about something with more meat? John Mauldin recently reposted a Charles Gave article on his site. Its basic tenet that oil prices will be brought back down due to substitution and new technology is beyond reproach. As far as the timing, however, we found it to be long on optimism and short on consistency. Consider:

1- The return of king coal: In WWII, the Germans (who were long coal and short oil) refined processes to make gasoline out of coal. This old process has been perfected and is now a source of energy in South Africa. Why is this important? Because there is more coal in North America or Australia than there is oil in the Middle East. The problems in using coal have historically been a) ecological issues (which can be solved with some money) and b) costs (using/moving coal is not as economic as low oil prices).

2- The exploitation of tar sands or bituminous coals in Canada, the US, and yes, Venezuela. Here, once again, the technology exists and the extraction costs are roughly US$30/bl. The production build-time is roughly around three to four years. The big hang-up is the shortage of technicians. Such shortage problems can however be solved after a few years (time of schooling/training) or, by enticing retired technicians to come back.

The company that converts South Africa’s coal into fuel is Sasol (SSL) and is on our Watch List. During the last few months they have not opened vast new capacity, nor even announced plans to start building vast new capacity. In fact, the recent decline in oil prices has hit Sasol and the tar sands producers harder than it hit traditional suppliers because these processes are only profitable when oil prices are as high as they have been recently. Given the long lead times for building the plants and extracting these resources, companies naturally want some degree of comfort that the price will not fall significantly below current levels for some time. The recent price decline reminded them why they did not start building these plants five years ago, and is unlikely to encourage them to start building them now.

The article continues:

3- The emergence of new technologies to recover more oil out of old and decaying oil fields. With the price of oil where it is, it makes a lot of sense to invest substantially to try and optimize the output from any individual well. In the past 25 years, we have seen the average extraction at existing wells climb, thanks to technology, from 25% of known reserves to 40% of reserves. Norway has set a target of 65% to 70% recovery for a good part of its reserves and is already achieving that in some fields. Where do the improvements come from? Technological progress!

Once again, technological progress that has not occurred overnight. If it took 25 years to increase extraction to 40% it is likely to take as long for it to reach 65%.

4- The possibility to produce oil/ethanol out of agricultural products. On this very topic, the best summary we have read of the issues at hand was produced recently by our friend Mark Anderson, the editor of the SNS newsletter. We lift his work below shamelessly: “Ethanol is a liquid fuel, currently produced from corn… Now here’s the rub: there is a debate about whether it actually takes more energy to create a gallon of ethanol than the energy contained in a gallon of ethanol. According to Report No. 814 from the Office of the Chief Economist of the U.S. Department of Agriculture, corn ethanol contains 1.34 times the energy required to manufacture it….

There are longer-term solutions. In a period of about five years, we could be producing ethanol in quantity from cellulose. Cellulose is found in a variety of plant material, including the stalks of the corn plant. The process for production of ethanol from cellulose does not require large amounts of hydrocarbons and is, therefore, much less expensive. If the federal government continues to provide large subsidies for corn-derived ethanol, however, we are in effect providing a disincentive to make capital investment in cellulose technology. The corn lobby will fight tooth and nail, but in the end, democracy, just like the free market, has a way of doing what is right and sensible (usually, after trying out all other options). In this case, that would see cellulose derived ethanol become widely available in the marketplace.

Well, call us in five years when the cellulose plants are up and running. In the meantime, with a 1.34 energy output/input ratio the best ethanol can do is cut fuel consumption 34% – and that is assuming there is that much excess corn produced, that the plants can be built, that the increased demand for corn doesn’t make it even less profitable, and so on.

6- Prices & Substitution

High energy costs are not impacting just oil. We have witnessed a stupendous rise in the price of all forms of energy through the substitution effect. And here technology is also making huge leaps. Let us, again, go through a few examples:

* Nuclear power. There are two main problems with nuclear plants. The first is that building a plant takes a long time (though the Chinese are definitely not wasting any time on that issue). The second issue is the disposal of the nuclear waste. But this is where the exciting news lies: we have recently read reports highlighting that the volume of the waste in the new French reactors is a tenth of what it was in the old reactors. This implies that the amount of space needed to store the waste is much smaller, and the arguments of the anti-nuclear green lobby further reduced.

* Production of energy at the individual and local levels: everywhere we go, especially in Europe (where the price of energy, on top of being very high, is also heavily taxed), we find new and interesting forms of energy production: in Scandinavia geothermal energy (one drills in the rocks, and gets the heat coming from below); in France, a massive movement towards heating pumps (exchanging heat between a source of water and the atmosphere – in fact, after a brutally hot summer in Provence, I am biting the bullet and having such a system installed in my Avignon house); in Denmark, there are quite a lot of wind turbines; in Spain, you can see solar panels on a growing number of roofs. All these systems enjoy huge tax breaks, and, once they are put in, they are here to stay; markets lost for oil, for ever.

By themselves, none of the above factors is sufficient. And the rate of substitution from oil to these new sources of energy is excruciatingly slow. For example, if one had the bad luck of installing an oil boiler in one’s house three years ago, one is not going to change now. The capital costs are simply too high. But taken together they are significant and will change for ever the demand for oil or natural gas used to heat or cool houses, factories, or office buildings.

This is indeed the meat of the article, but there is nothing to say that this can happen any time soon. With a ten-year lead time to build nuclear plants, we just don’t see it making a sizable dent any time soon. Then, apart from the environmental issues, Gave offers the reason why it may not help even then:

Our 19th century world was dominated by coal. Our 20th century was dominated by oil. It is our firm belief that the 21st century will not be dominated by oil. It will be dominated by electricity; and oil will become a marginal energy. This simple truth might help explain why, since 2001, uranium has not had a single down month, and since 2003, uranium has never traded down for even a single day, regardless of what was happening to oil prices.

With uranium prices rising so much, why even bother? It sounds like it won’t do much to make energy cheaper, which is after all the point. In fact, there may not even be enough uranium out there to support much additional demand. As far as substitution consider that the median age of vehicles in the US is 9 years. If you assume that hybrids improve fuel efficiency by 50% over their gas-only counterparts, even if 100% of new car sales were hybrids it would take 18 years to fully replace the vehicle fleet and reduce fuel consumption by 50% overall (assuming demand doesn’t continue to rise.) Based on a more realistic (but still wildly agressive relative to today’s sales levels) assumption that 10% of new vehicle sales will be hybrids, the annual demand reduction is less than 0.3%. Color us unimpressed.

With that off our chest, some stories affecting individual companies recently:

Statoil STO) strikes gas at Barents Sea Well

Pension and endowment funds aren’t giving up on commodities yet.

ConocoPhillips Confirms North Sea Discovery – Oil and Gas Online

Helix names new CEO

Disclosure: Author owns shares of United States Oil Fund (USO).

William Trent currently has a short position in put options related to Office Depot (ODP).

Topics: Conoco Phillips (COP), Economy, Energy, Helix Energy Solutions (HLX), Sasol (SSL), Statoil (STO), Stock Market | No Comments

Wall Street Blues

Long before Law and Order there was Hill Street Blues, a cop drama that always began with officers coming on duty listening to the daily briefing. At the end of each briefing, the Sergeant would close with advising his men, “Let’s be careful out there.” Recently, as we receive our daily briefings, we keep thinking tech investors should keep those words in mind as well.

For the past couple of years, technology has been driven by consumer electronics – specifically digital cameras, flat-panel televisions, portable music players and wireless phones. Even purchases of personal computers, the dowdy staple of business spending, have been dominated by consumer purchases.

Alas, all good things must come to an end – and it looks like the end of consumer-driven tech spending is nigh. Cell phone inventories appear to be building in Asia, suggesting that market may have peaked. While big-screen TVs are still going strong at Best Buy, the strength is likely driven by their generous financing terms. It seems logical that home theater sales are related to home sales, much as other appliances are. And appliances ain’t lookin’ too hot in the latest durable goods report.


Likewise, the latest GDP revision confirms that housing weakness started before June.


Meanwhile, it is clear that business is not yet picking up the slack. Second-quarter GDP showed decent but slowing spending on equipment and software.


But things continued to slow further, as the durable goods report shows all too clearly.


There is still hope that business spending will step in just in the nick of time. Microsoft’s strong deferred revenue trends indicate there may be more to Vista than the skeptics think.  And the chart of GDP components shows a comforting tendency for one driver’s weakness to be offset by another’s strength.
But let’s be careful out there.

Topics: Economy, Stock Market, Technology | 1 Comment

P/E Wave Meme Meets Wall Street Journal

We have frequently expressed our belief that stock market valuations are undergoing a long-term contraction.  Although many interpret this to mean that we expect lower values (as in a decline in major benchmarks) that doesn’t have to be the case. From 1968-1982 the market traded more or less sideways because the valuations (multiples paid on earnings) declined about as fast as the earnings themselves grew.

Now the theory has gone about as mainstream as you can get, with SeekingAlpha’s summary of the Wall Street Journal indicating that the most famous source of market news has a story on the topic.

How Price/Earnings Will Impact the Dow: Financial News – Yahoo! Finance

Can stock prices continue to rise? Two potential bullish resolutions: 1) Earnings soar, taking prices with them. This is unlikely; we have already seen four consecutive years of strong earnings growth, and profits margins are at record numbers. 2) Earnings remain stable, but investors fork-out ever-higher prices to buy-in to their favorite stocks, driving P/E up. This is similar to what happened in the 1994-2000 run up. But then, a) long-term interest rates were plummeting — today it seems unlikely they can fall much more, and b) there was an insatiable hunger to get into the markets — since dampened by the aftertaste of the ensuing bear. Says Byron Wien, chief investment strategist at Pequot Capital Management, “My view is that both earnings and interest rates will be pushing against you.”

Our point exactly.

Topics: P/E Waves, Stock Market | No Comments

The Capital Goods Beat

Capital goods fared no better than most other sectors in the latest durable goods report. Shipments broke their streak of double-digit growth, and new orders growth was off sharply.

In fact, when defense orders are stripped out the remaining orders were flat.

Turning to specific sub-groups, manufacturing shipments were steady, new orders growth plummeted and inventories crept up.

Shipments and orders for machinery both appear to be slowing, although the double-digit year/year growth remains reasonable for the capital goods sector.


Electrical equipment actually saw a decline (not just a slowdown) in orders, likely due to the housing slowdown.

With defense being the strong point, it is interesting to note that Ceradyne, Inc. (CRDN) received its initial order for boron carbide/aluminum metal matrix composite (MMC) components from Transnuclear for more than $1.5 million. The MMC components are for dry storage of spent nuclear fuel and are scheduled for delivery by the end of second-quarter 2007. Still a long way to go before it makes up for slowing body armor sales, though.

Transportation Equipment
EgyptAir orders Six Embraer 170s

Embraer expects backlog to grow for small jets Embraer Still Cruising (The Motley Fool)Homebuilders
Homebuilders Offer Garages, Sod to Lure Buyers Amid US Slump – BloombergDisclosure: Author is long Ceradyne shares, which are fully offset by a short position in call options.

Topics: Capital Goods, Ceradyne (CRDN), Economy, Stock Market | No Comments

Basic Materials Beat

Along with other commodities, the basic materials have taken something of a beating recently. The durable goods report suggest that it could be more than just a technical move as shipments, orders and backlog for primary metals all slowed while inventory growth accelerated. It is worth noting that the fundamentals aren’t bad, they are just not quite as good as they were a month ago. Most industries wish they had 15% growth in orders and 25% growth in shipments, and with both growing at a faster rate than inventories it is hard to argue there is a glut. Still, it will be interesting to watch whether the deterioration continues.

Fabricated metal products, which were never as strong as the primary metals to begin with, also show a slowing trend. Here, the fact that inventory growth was faster than order growth and nearly as fast as shipments suggests a higher degree of caution is warranted. Further, with these firms building inventory they are likely to need less of the primary inputs in future months.

Larry Kudlow sees falling commodity prices and bond yields as cause to worry about deflation.

According to a Bloomberg article, Chinese copper demand is slowing as well.

Copper demand growth in China, the world’s biggest consumer of the metal, may slow to 5.6 percent this year, as record prices prompt makers of cables, wires and air conditioners to switch to cheaper substitutes.

Consumption may be 3.8 million metric tons, Yang Changhua, senior analyst at Beijing Antaike Information Development Co., which advises the government on industry policies, said today at a conference in Nanjing in eastern China. The estimate is lower than his March prediction of consumption of 3.86 million tons and last year’s growth of 9 percent.

Meanwhile, Zambia keeps digging up more of the stuff:

Chamber of Mines of Zambia general manager Fred Bantubonse has said Zambia’s copper production for this year was likely to be at around 600,000 metric tonnes.

In an interview, Bantubonse said this year’s copper production was higher than last year’s which was pegged at 466,000 metric tonnes. “Future prospects of copper production for the year 2009 are likely to about 800,000 metric tonnes all things being equal,” he added.

Inco has the right idea: produce less metal but earn more income.

South African gold production plummeted by 6.1 percent over the three months ended July from the previous three months, according to Statistics SA.

Newmont Sees Lower Gold Production Until 2008

Russia’s gold production down 0.4% in 8 mthsRumors of massive central bank gold selling are still just rumors.

In their latest Investment Survey, Value Line noted significant improvement in ranking for specialty chemicals makers such as Watch List member Sasol (SSL).

The Specialty Chemical Industry is currently ranked 32 out of 97 for year-ahead performance. This is, as noted, in the top half of all industries covered by The Value Line Investment Survey, and a considerable improvement compared with our June report.

Most companies in the specialty chemical sector reported strong bottom-line advances during the June quarter. The earnings outlook for the sector remains relatively favorable for the second half of 2006, as well. Moreover, much of the strength will probably continue into the first half of 2007. This is a disparate group, however, and prospects vary considerably by the product line and market position of each participant. We urge investors to carefully review each stock before making specific investment decisions.

Paradysz Matera

Disclosure: Author is long the Streettracks Gold ETF (GLD)

Disclosure: Author is long STREETTRACKS GOLD (GLD) at time of publication.

Topics: Barrick Gold (ABX), Basic Materials, Economy, Freeport McMoRan (FCX), GLG, Gerdau SA (GGB), Goldcorp (GG), Newmont Mining (NEM), PD, Sasol (SSL), Stock Market, StreetTracks Gold Trust ETF (GLD) | No Comments

Message from Durables Report: Play Defense

The market being in a celebratory mood, little attention is being paid to such gloomy news as the durable goods report, which describes in rather bleak terms:

August durable goods new orders dropped a disappointing 0.5%.  There was nothing in the breakdown of the data to provide contrary cheer. Every key category was soft.

So, in an attempt to find the silver lining and push the market over the critical hump so we can enjoy the champagne we have had on ice since January, 2000, here are the durable goods categories that showed better growth in both shipments and new orders in August (all data sourced from US Department of Commerce, on a non-seasonally adjusted year/year basis.)

The clear winner in today’s report was Defense Capital Goods, which saw nearly a 70% rise in new orders and a 10% rise in shipments. And while the trend does nothing to help our general sense of well-being, with inventory and backlog flat and a customer with good credit quality the defense sector appears to be a good play in this environment.


The runner-up for our affections is Communications Equipment, not traditionally a defensive play but perhaps so today due to how low the sector sunk and the high credit quality of its remaining customers. Those who deride Verizon’s capital spending may not appreciate that the company is one of the last threads on which the economy hangs. At any rate, their spending appears to be lending a helping hand to the environment for comm equipment manufacturers.


In the “ehh, I guess we’ll take it” department is Transportation Equipment. New orders improved and turned positive, while shipments did just a bit better. Still, the inventory growth suggests that the industry is making too much stuff and will have to cut prices, production or both in the near future.


Finally, last but (unfortunately) not least comes Motor Vehicles and Parts.  Orders and shipments for beleaguered Detroit were both down year/year. However, they were down less than they were in July. With inventory building up further the industry may still be going to hell in a handbasket, but it will take longer to get there. That’s positive, isn’t it?

We now return to our previously scheduled celebration.

Topics: AH, Alcatel-Lucent (ALU), Autos, Capital Goods, Ceradyne (CRDN), Communications Equipment, Communications Services, Consumer Cyclical, Corning (GLW), Daimler Chrysler (DCX), Economy, Embraer (ERJ), Ford Motor (F), General Motors (GM), L-3 Communications (LLL), Motorola (MOT), Nokia (NOK), Palm (PALM), Qualcomm (QCOM), Research in Motion (RIMM), Stock Market, Technology, Transportation, UT Starcomm (UTSI) | 1 Comment

Break Out The Bubbly

With the Dow Jones Industrial Average well within striking distance of a new high, it seemed an appropriate time to revisit a theme we consider important enough to get right and sit tight. That theme is the concept that the long-term bull market of the 1980’s was due as much to expanding valuations as it was to improving fundamentals. Under this thesis, valuation tends to move in waves over very long time horizons. The chart below, which was taken from Barron’s (via The Big Picture) provides graphic support to the theory. During the flat periods, earnings growth is largely offset by shrinking multiples the market is willing to pay for those earnings.

It is easy enough to argue over where a given valuation expansion or contraction starts and ends. The point is that we aren’t talking about a matter of days or months, but of years. And more than six of them (eight if one looks at broader market indices), which is our current tally in what we believe to be a contraction cycle. The fact that the market is now back to long-term average P/E multiples suggests that the contraction may be halfway through – which would give us the equal number of periods below and above the average necessary to label it “average.”

So, will breaking above the previous record change our opinion that we are in a long-term contraction phase? Not at all. In the last contraction cycle (roughly 1968-1982) the market reached new highs several times. However, it tended not to stay there and the new highs were at lower earnings multiples (P/E ratios) than the previous ones.


The second chart compares the Dow Jones Industrial Average from 1968-1982 with the same index from 2000-Present (Source: Yahoo! Finance). The point is not to say that the monthly returns should exactly overlay each other, but to demonstrate that they are similar. And just as the Dow made new highs five years into the last P/E compression cycle, doing so six years into the current one would hardly invalidate the thesis.

So, do we stubbornly stick to our guns despite whatever evidence may come along to the contrary? Of course not. We merely set a fairly high bar for what will qualify to knock us off a key belief. For example, a close that exceeded the previous high by maybe 10% would be enough to revisit the thesis. In this case, that would mean a close above 12,895 – heck, let’s call it 13,000 because we like round numbers.

Yet even a 13,001 close wouldn’t necessarily invalidate the thesis. Remember, we aren’t predicting a flat stock market so much as that valuations will compress. They may compress at a slower rate than earnings grow, in which case higher stock markets would still fit into the thesis. Or, they could compress at a faster rate than earnings grow and signal an S&P level of 800.

We know that to some extent this thesis is a gloomy one (although it is possible to make money in any kind of market given the right strategy.) We also know that, after six generally difficult years it is tempting to celebrate new technical highs. So by all means, break out the bubbly when the Dow breaks its previous record. Just don’t drink so much that it goes to your head.

Topics: Dow Diamonds (DIA), Economy, P/E Waves, S&P 500 (SPY), Stock Market | 2 Comments

Services Beat

Conference Board

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The Conference Board said its index of U.S. consumer confidence rose more sharply than expected in September to 104.5, up from an upwardly-revised 100.2 in August, as energy costs fell and job prospects improved slightly. This throws a modest kink into the consumer slowdown thesis, so we took a look around to see what other anecdotal evidence might be indicating. In short, it seems like buyouts are the buzzword rather than any overall economic outlook. thinks hedgies may be looking to talk Watch List member Guitar Center (GTRC) into going private.

It’s pretty clear to me what Sageview wants management to do: Don’t go into too much debt trying to double or even quadruple the number of stores; rather, take on debt to reduce shares, cut costs and perhaps even go private.

Why go private now? The company has a $1.5 billion enterprise value and cash flow of $180 million, so it trades at a multiple of eight over cash flows and is experiencing growth, albeit not double-digit. In other words, it could take on a lot more debt and comfortably pay it down. This is perfect for an LBO firm looking to help management take it private, even at a premium of up to $50-$55 per share.

Makes sense to us.

Why can’t Valassis (VCI) and Advo (AD) just get along?

Sounds like Liberation Investments wants to “liberate” Multimedia Games (MGAM).

H&R Block shares plunge on loss provision (we warned you about those provision accruals!)

Consumers continued to spend at a stronger-than-expected pace in August as lower gasoline prices helped spur spending in other areas, pushing up retail sales by an unexpected 0.2 percent, a government report showed. Of course, Barry Ritholtz says we should read the fine print. Those strong home theater sales at Best Buy are spurred by 36-month zero-interest financing. But if you hit month 37, watch out! 24% interest – back-dated to the time of purchase!

Topics: AD, Advertising, Economy, Links, Services, Stock Market, Valassis Communications (VCI) | No Comments

Semi Equipment Orders Don’t Get Better Than This

Eric Savitz points to research from JPMorgan’s Jay Deanha anticipating higher orders for semiconductor equipment.

He says that, driven by orders from Samsung, Hynix and Nanya, “we expect most equipment suppliers, particularly memory centric ones, to deliver the high end or better orders relative to third quarter guidance and better-than-currently anticipated fourth quarter booking guidance.

Apparently Deanha believes that, somehow, a semiconductor industry growing sales at approximately 10% over last year can support equipment orders even higher than the current 70% year/year growth rate, despite August marking the eighth consecutive month that equipment orders grew faster than underlying demand for semiconductors.

Despite Microsemi’s sneak announcement.

Despite Maxim’s miss.

Despite Silicon Labs’ warning.

Not to mention Analogic, Microchip, or Xilinx.

Or Texas Instruments saying Asian cell phone chip inventories were high. Or Intel’s Days’ Inventory being at a multi-year high.

Somehow, in the midst of all this, Deanha believes the chipmakers need even more equipment? Please. As we said last week, we are probably near a turning point for semis. But if we are, it will be because they order less equipment and are thus able to bring supply back in line with demand.

Chart sources: Semiconductor Equipment and Materials International (SEMI), Semiconductor Industry Association (SIA) and Stock Market Beat estimates.

Disclosure: Author owns put options on the Semiconductor Holdrs (SMH)

Disclosure: William Trent has a long position in SMH.

Topics: Applied Materials (AMAT), Intel (INTC), MEMC Electronic Materials (WFR), Maxim Integrated Products (MXIM), Semiconductors, Silicon Laboratories (SLAB), Stock Market, Technology, Texas Instruments (TXN) | No Comments