Light shed on HPQ and INTC

**Below is from daily email I recieve from wavestrength.com)

“What effect, if any, does all the good news that came out about HP today have on our option play?” - M.P.

You must mean the Intel announcement, because the best news I can find from HP is that clients can now use HP printers to make “personal tattoos” for their iPods. As for Intel, I warned you exactly what they would do: lower guidance a few days earlier, beat same, and then bad-mouth the next quarter.

What do you think is going to happen when all those folks who bought on the headline return home tonight and read the fine print, which points out that Intel’s much-ballyhooed inventory drop may actually fall somewhere between wishful thinking and accounting fraud?

Think I’m exaggerating? Get out a pencil and work with me for a minute:

Intel reported earnings of US$1.9 billion or US$0.30 per share, some 5% higher than a year ago.

Now back out of the gains from a fall in Intel’s quarterly effective tax rate of 21% (one third less than the projected 31%) and their earnings are basically flat.

Revenue came in at US$8.47 billion for the third quarter, a mere 5% over the previous quarter and substantially lower than Intel’s normal third-quarter sequential gains of over 7%.

Now let’s talk about that inventory for a moment. They had been running at record levels for most of 2004, as have their customers. Might be good, might be bad. One could certainly make the argument that manufacturers should build up inventory when they foresee rising demand.

But that ain’t what happened here. Five percent sequential revenue gains means only one thing: No one wants the stuff, and soon it will become technologically outmoded.

So Intel resorts to bleeding off inventories, and their gross margins drop from a traditional 59% to 55.7%, where they anticipate they will remain for at least the rest of 2004.

It gets worse the deeper you look, but I’m not going to get into any more here, as I didn’t recommend it. Rather, I recommended shorting HPQ, which went along for today’s ride without even the vague excuses INTC traders could lay claim to.

“Is there enough time left on this contract to have any play to the down side? Seems to me this is cutting too close to the expiration date.” - D.E.

They’re November options, people, and they already made as much as 32% a mere 24 hours or so after we bought them. I tell you what: Tomorrow, expect to see a tech hangover that will push these things way back into positive territory.

Also, watch for another post debate pop, after which I will begin to sharpen my knives for the S&P.

Adam