Thursday, July 26, 2007

Novellus Guidance Takes A Dive And Stock Responds Up 10%.

I have not liked capex related technology this entire cycle. Not because the companies are poorly run or somehow aren't executing. In fact, I've bullishly highlighted Microsoft, Intel and Dell on here when people were saying these companies were going to zero. Since those posts, each stock is up at least 50%. Without going back and looking at the exact post date, Dell and Microsoft might actually be up close to 80%+. So, has my position changed on these companies? Not one iota. Fundamentals matter. How long does it take for people to realize what is happening?

I've posted bearish comments re semiconductors for over a year even while recognizing their strength a few weeks ago. My trading system gave a buy signal on semi's when the market washed out in August of 2006. Yet, the fundamentals didn't support it. They still don't. The only fundamentals that support semi's going up are the deteriorating fundamentals of other assets including cyclicals. Who'da thunk semiconductors would be a relative value play eight years ago? The recent strength in semiconductors, as I wrote about a few weeks ago, is driven by non correlation and significant under performance which is used by trading strategies of Goldman Sachs and others. That strategy works until it doesn't work. It doesn't work when fundamentals are deteriorating in the non correlated assets. Riding with the herd is beneficial most of the time. But, now the lemmings are back extolling semiconductor and technology stocks again. This for the umteenth time since 1999. We've had rallies. They've all failed. This one will too.

Last week Novellus, a dominant semiconductor equipment supplier, reported their backlog for new orders dropped 19% quarter over quarter. That rivals the largest magnitude drop in fundamentals I've ever seen in any business. That includes 2000. This is not a year over year number but quarter over quarter. Their outlook was extremely poor as well yet the stock responded by going up 10% in a day. Then we see Intel up and then down 10% in a few weeks. Now, it's Texas Instruments reporting poor results again.

Is technology bottoming? Are we about to start another semiconductor cycle where companies boom as they did in the late 1990s? There sure is alot of hope out there as nearly everyone on Wall Street now espouses said fact. Hope. That greatest of human emotions. That worst of investing traits. There sure was alot of hope in 2000. How did that help anyone when the Nasdaq fell 85%?
posted by TimingLogic at 9:00 AM

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