Intel

Interesting stuff -- Intel blows through estimates and its the S&P that goes crazy while the semi stocks underperform. Go figure. Intel's Q4 guidance shouldn't be too surprising to anyone with an understanding of the seasonality of their business -- even this guidance seems conservative to me. I expect them to hit the high end of those estimates.

I'm still long the semi's figuring they will break out and head higher its only a matter of time. I think they were held back today based on the cyclicals theory -- time to sell is when the news is best at the cyclicals because it has to get worse going forward. I disagree in this case given that the economic cycle is just getting started.

Big debate about ECRI and their big calls -- look there is no arguing that the firm is promotional and they brag incessantly -- to an annoying extent but its also true that their calls have been better than most. Were they late on this recession call? sure but they also told you it was going to be ugly while the market was in the 1300 range -- and they said bad recession before lehman and the panic started -- interesting stuff. I got to see a presentation slide of theirs that includes the indicators developed by their founder -- the early research -- not one mention of the money supply, interest rates, credit, etc. wow. so different than what most would expect. The 8 mentioned by them in the presentation:
1. sensitive commodity prices
2. avg work week manufacturing -- if you are going to produce more, you probably are going to work longer -- yet this seems like it should be more coincident. then again production cycle times mean work week increases before output does.
3. commercial and industrial building contracts -- not sure what this refers to.
4. new incorporations
5. new orders
6. housing starts -- makes sense given how much of the economy gets pulled in to making a house
7. stock prices
8. business failure liabilities -- not sure what this is either.

People are so focused on what the US government has done to boost our economy and their belief that it is unsustainable and therefore the recovery can't last yet I keep wondering the impact of the global stimulus -- every economy on the planet practically has done some kind of stimulus so given that we are the world's largest manufacturer and exporter (despite sentiment otherwise), you would expect us to benefit from the growth elsewhere.

I keep reading about how the fundamentals don't justify current stock prices. That depends on your definition of fundamentals -- most people making that argument are looking at current conditions -- or recent past. When Intel was in the low teens, do you think anyone thought they would do over $10 bill in Q4 revenues? I doubt it. I remember looking at semi stocks in 2003 and thinking about what their earnings power could be based on a reasonable margin estimate -- I used consensus revenue estimates figuring in my mind the problem would be margins would not be as good as expected while revenues were in line. Wow was that a bit off -- revenues soared past estimates because expectations were so low and the stocks took off.

Stock prices are designed to be forward looking but clearly that view is colored by sentiment -- in the spring too many investors began to extrapolate the awful economic data into the future (not to mention too many forced liquidations occurred where no one cared about the fundamentals). Those looking to justify the rally with fundamentals are always one step behind -- the news comes out and people will argue well if I knew Intel was going to earn X, I could easily have paid what the stock was selling for last month when I thought it was too expensive. Now of course those investors still aren't willing to pay up because intel has moved higher -- but Intel's numbers in the future will be higher too -- the investors doing well are those that anticipate where earnings expectations are headed -- find the stocks where the gap is greatest -- where actual future earnings are well above current expectations -- and those are the stocks to buy.

If UEPS is able to produce $4 in earnings in 2012 -- then that stock will be materially higher. If TSRA is able to produce $2.50 in 2011 earnings -- that stock will rise dramatically over the coming year. Those are longer term plays but near term I am betting CY and other semi's will see stronger revenue growth than people realize. I found it funny that Kass on realmoney today was picking on LLTC's comments about their business being driven by turns rather than orders -- many believe semi's are just about inventory refilling -- turns business occurs when supply is so much greater than demand that no purchasing manager worries about getting product when he wants it. orders come when they realize supply is filling up and if they want to keep getting product they better get their orders for the next few months in or they will lose out to others. So my point is anyone that is doing turns business is not increasing their own inventory -- they are ordering just in time for what they need for production. perhaps a little inventory build but not really -- why would they if they can get parts so easily?

this being options expiration week I expect to see the market stable to up until friday or possibly monday. Friday because index options stop trading Thursday night so any hangover hits on Friday. Stock and ETF options expire on Friday so their hangover is on monday. We will be max overbought on friday too so again -- more likely we pull back next week -- just like last option expiration.

Speaking of this incredible rally -- realize that last month's expiration was at 107 on the SPY? So we have gone up a whole 2% in the last month (all of it wednesday) -- yippy. August's expiration was at 103 -- so until Wednesday's rally we were flat with last month and only up a few percent since August. That to me is a slow crawl up the wall of worry.

enjoy