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Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, October 17, 2006

What Does EMC Telegraph for a Reaction to Intel Earnings Today?

Intel (INTC) is expected to post EPS of $0.17 and revenues $8.6 Billion. The battleground looks a little different today compared to last week, and now the mega-bulls have more issues to scratch their head about before automatically hitting the BUY button on their keyboard.

It is often good to compare tech leaders to other tech leaders ahead of events. EMC (EMC) is to storage what Intel (INTC) is to processors. This morning may set up a not so great welcoming wagon for Intel. Based on EMC (EMC) beating both top-line and bottom-line numbers and the stock selling off over 4%, it would make one wonder just how well Intel would have to do to please the street.

Here is what we know about Intel. They have been having margin pressure since AMD came on with their competition and since wiggling their way into Dell PCs. All of Intel's recent processor news about the Core Duo and then the new upcoming quad core chips (that will just go exponentially from here) seem to be taking back the technology lead that AMD had snagged a few quarters ago. The consumer PC market is still soft and isn't expected to widely improve until the Windows Vista launch is within sniffing distance. We still have to see what vouchers will be offered with new PC's purchased by consumers for operating systems upgrades after the first of the year. Intel is also in the midst of a global restructuring to trim some 10,000 positions and it is no secret that they had to offer up larger price cuts after AMD made so many in-roads in Spring and early-Summer. Yesterday's comments about 5 million Core Duo chips being shipped in the first 60 days will have also set the bar high for future shipments, although that could go either way for the next quarter on a standalone basis.

Intel was just downgraded by Goldman Sachs to a Neutral this morning ahead of earnings because of valuations and consensus estimates being high. Even if they will have a ZERO PERCENT CHANCE of changing their rating immediately, it is impossible to get past the 25% run-up since the lows of July. The shares are down about 3.5% today because of the downgrade, and this may have set the mood for the near-term. It is possible that this is even true for the tech sector as a whole because of the run-ups we have seen in recent weeks.

The Semiconductor HOLDRs are down almost 3% to $34.66 today, but toward the end of July they were as low as $29.10 on July 21. The NASDAQ 100 Trust (QQQQ) is trading down 1.4% at $41.85 today, but at the same date of July 21 the QQQQ was down at $35.68. Even Microsoft (MSFT), with shares down 0.6% today at $28.27, saw its shares down at $23.78 on that date and had traded as low as $22.25 or so a few days before. Cisco (CSCO) does not report until next month, but even with its shares down 1.15% at $24.30 today, it is up from $17.46 on that on the July 21 date and up from a low close of $17.24 close in August before it beat earnings.

If you believe that these are rangebound stocks, then you will likely be even more convinced that we have seen a near-term top in these names or at are close to it. If you think these will have to fight harder and harder to rise from the peaks of the last few days, then you will likely only look to enter on decent pullbacks. If you are a mega-bull, then these are just buying opportunities every time they pull back.

Jon C. Ogg
October 17, 2006

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