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Fleck Rap


Editor's Note: Professor Fleckenstein provides his commentary for educational purposes and his insights are not intended as investment advice.

You can find his always insightful vibe on his daily Rap.

AMD vs. Intel: An Inflection Point

Overnight markets were a touch firmer, as were our equity futures. Half an hour after the opening, consumer confidence was reported at 105.8, vs. expectations of 104, and last month's reading of 102.2 was revised up to 103.1. That put a little sizzle in the tape, such that a couple of hours into the day, the Dow/S&P were up about 0.5%, and the Nasdaq was up a bit more. The early going was paced on the upside by housing, though financials and retailers were also pretty strong. Chip stocks were a little on the heavy side. (More about the important AMD/Intel lawsuit below.)

Kudos to Confidence/Crude/Quarter-End

The rally ground on all day, in fits and starts, and we went out not far from the high tick. In terms of leaders, the early form pretty much carried through, with the only difference being that as the day wore on, the Sox managed to come to life, gaining about 1%. It looked like there was a fair amount of tape-painting, as we close in on quarter-end. And, I don't think it's any stretch to say that the break in crude helped power today's advance.

Away from stocks, fixed income was lower, as were foreign currencies and the metals. Silver closed down 2% and gold went out 1% lower. Oil finally broke, declining about 4%.

Law & Order: Central Processing Unit

I have spilled a lot of ink on the subject of AMD vs. Intel, and today will be no exception. I think the lawsuit is potentially a very significant event -- and not simply a loser's lament or a frivolous suit, in which one company sues another for small-time gains (as we see fairly regularly among technology companies).

I quickly scanned the lawsuit, which can be found via AMD's "Break Free" site. Click here for the actual document, which I highly encourage anyone interested in this subject to read. Meanwhile, I would like to share a few examples of the many practices cited and executives who are named, beginning with the following quote from Gateway's Ted Waitt:

"If by dropping you [AMD], I become profitable, that is what I will do." Shortly thereafter, he quit doing business with AMD. As cited in the lawsuit, Ted Waitt told an AMD executive that Intel offered him large sums not to deal with AMD, an offer that he could not refuse. The suit also said: "According to Gateway executives, their Company has paid a high price for even its limited AMD dealings [post-eMachines' merger]. They claim that Intel has beaten them into 'guacamole' in retaliation."

A 64-Bit Bully

The suit alleges in some detail how Intel interfered in AMD's attempt to do business with HP: "Eager to break into the commercial market, and to earn a place in HP's successful 'Evo' product line, AMD agreed instead to provide HP with the first million microprocessors for free, in an attempt to overcome Intel's financial hold over HP. On the eve of the launch, HP disclosed its plan to Intel, which told HP it considered AMD's entry into HP's commercial line a 'Richter 10' event. . . . Intel went so far as to pressure HP's senior management to consider firing the HP executive who spearheaded the AMD commercial desktop proposal."

I thought that a comment by Mike Capellas, former CEO of Compaq, was quite potent. Speaking in the third person: "He had a gun to his head," when informing an AMD executive that he had to stop buying its processors." However, I think the most embarrassing allegation was made by Acer, surrounding the September 2003 launch for the Athlon 64, which Acer had been committed to support:

Boss Barrett Pays a Visit

"Days before the event, Intel CEO, Craig Barrett, visited Acer's Chairman, CEO and President in Taiwan, expressed to them Intel's 'concern' and said Acer would suffer 'severe consequences' if it publicly supported AMD's launch. The Barrett visit coincided with an unexplained delay by Intel providing $15-20 million in market development funds owed to Acer. As a result, Acer withdrew from the launch in the U.S. and Taiwan, pulled its promotional materials, banned AMD's use of the video, and delayed the announcement of its Athlon64-powered computers.

"Acer's President subsequently reported that the only thing different about Intel's threats was the messenger -- they were 'usually done by lower ranking managers,' not Intel's CEO." That gives you some flavor of Intel's alleged tactics.

Strong-Arming Meets Long Arm of Japanese Law

This lawsuit is as potent as it is because AMD was able to go to school, if you will, on discovery done by the Japanese government, regarding Intel's strong-arm tactics versus Sony, Toshiba, NEC, Fujitsu, and Hitachi. On March 8, the Japanese Fair Trade Commission recommended that Intel be sanctioned for its "exclusionary misconduct" -- charges which Intel did not contest.

Thus, in addition to whatever information AMD may have unearthed on its own, it was able to both corroborate that and perhaps gather new evidence, thanks to what the Japanese were able to uncover. (It should be noted that the European Commission is in the process of conducting its own investigation.)

Intel Excoriation, AMD Affirmation

Industry executives are in a tricky position. If they did not believe that AMD is a viable source for parts, they'd be extremely reticent to stand up in public and discuss what Intel had done to them or threatened to do to them. Therefore, I think this is a powerful statement on the part of industry executives, who have put themselves and their companies at some risk to detail Intel's tactics.

Were they not fairly certain that (a) AMD is a viable competitor and (b) the light of day might stop Intel's tactics, I doubt we would see the specific instances cited in the suit. (On the conference call to discuss this suit, AMD said that it was extremely well received by its customers, as no one wants to be held hostage, and that AMD had not received one negative comment from a customer or business partner. However, in all fairness, that might change over time.)

As one can see from reading this, Intel seems quite threatened by AMD's Athlon, Opteron, and Turion lines, and appears desperate to thwart with muscle what it was unable to overcome with technology. Regular readers know of my long-held belief that Intel is essentially a marketing (muscle?) machine, not a technological powerhouse.

A Monopoly in the Unmaking

If the mere threat of this suit causes Intel to tone down its tactics (which I expect to occur), that will help AMD increase its own market share. The latter has grown recently, despite these barriers thrown up by Intel. Any sort of level playing field is only going to make AMD's life better and expose Intel for what it is -- a technological also-ran.

Folks should not forget another fact I've pointed out several times: Dell's ex-chairman, Mort Topfer, is on the board of AMD. Thus, he would obviously be aware of any tactics that Intel may have previously used with Dell, and obviously, Intel knows that AMD has Mort on the board. It will be interesting to see Intel's response to this suit.

Meanwhile, the information contained in the suit only serves to enhance my view of the two companies. Though I am not short Intel at the moment, I continue to hold puts. Last night's development only increases my desire to re-institute my short position and buy more puts sometime in the next few weeks. But to be clear: That doesn't mean anyone else should do what I do.

A Stock Bubble Sires a Housing "Double"

Turning to the macro environment, I encourage folks to read Steve Roach's June 24 missive: "From Bubble to Bubble." It carries the theme I have championed for so long -- that Greenspan is basically in the bubble-management business. Steve's comments about housing are particularly appropriate:

"The [housing] debate has an eerie sense of deja vu. Today, there are those who dispute the very existence of a U.S. property bubble. Similarly, five years ago, there were many who argued that U.S. equities were not overvalued -- that, in fact, they were fairly valued on the basis of the powerful earnings potential of a high-productivity growth New Economy.

"Today, we hear tales of a 'fundamentally-driven' housing boom -- supported by increased homeownership, immigration, low unemployment, and, of course, low interest rates. And there are those who repeatedly caution against characterizing property as a broad asset class -- especially in the context of fragmented real-estate markets that are always distinguished by their 'local' idiosyncrasies.
This is rubbish -- five years ago and, again, today."

Steve links the two bubbles throughout his article, then sums up as follows: "Don't kid yourself. America's property bubble didn't just appear out of thin air. It is traceable directly to the equity bubble of the Roaring 1990s -- and to a central bank that remains steeped in denial. The real lesson of Japan is that there may well be no easy way out."

Bubbles: Not Nipped in the Bud

He makes the point that the Fed "prides itself in having learned the lessons of Japan." The Fed has concluded, incorrectly, that it can manage a bubble, when in fact, bubbles are totally unmanageable. Once a bubble begins, there's nothing that can be done to undo it. A bubble cannot be "solved."

It's why, throughout history, responsible central bankers have tried not to let bubbles occur -- as the damage is so potent and long-lasting. We've tried the novel approach here of bailing out one bubble with a bigger and more leveraged bubble. In the not-too-distant future, the entire country will find out why that idea was not attempted before, because it is simply trying to solve alcohol addiction through heroin addiction.

The "Maestro" Who Played With Matches

In a new piece titled Fire," Bill Gross makes similar points that tie Greenspan's bailout policies together. With special emphasis, he notes: "The origins of this fire can be traced as far back as the mid-1980s, when . . . Greenspanesque interest-rate cuts were called upon to stimulate a potentially faltering economy."

Following that logic, Gross explains how it relates to current events: "My point in this Outlook will be an extension of the thoughts expressed over the past few months that this recovery is on fragile legs because it is asset-appreciation-based and that future asset appreciation is vulnerable based on the weakening stimulative power of interest rates."

As I have been saying for nearly a decade now, Alan Greenspan is the most irresponsible, incompetent central banker of all time. In the next couple years, folks are going to see quite clearly why I have maintained that viewpoint.

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Positions in AMD and INTC

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