Fleckenstein: Denial is a river in tech land
Tech stocks have been rallying of late, but investors are deluding themselves about what's going on. Business is not good, and I don't see this little rally lasting very long.
Throughout the tech food chain, business isn't up to expectations. The truth is obvious, but it's a hard sell to inveterate bulls. Denial, as an investment "strategy," will ultimately fail them, though for now they use it to ignore the recent, and growing, bad news.
Let's begin at the back of the tech food chain. Semiconductor-equipment maker Applied Materials (AMAT, news, msgs) won at beat-the-number, but its guidance was less than spectacular. And, uncharacteristically, Applied Materials cited a build in chip inventories.
Other networkers' woe = Cisco's unstubbed toe
Which brings us to Marvell Technology Group (MRVL, news, msgs), a chip-maker of sexy networking products. Recently, the company lowered its guidance, stating that revenue growth "was limited, due to some near-term challenges in some of our end markets." Which dovetails nicely with what network supplier Broadcom (BRCM, news, msgs) noted last month about nearly all its chip offerings. In addition, Marvell's comments jibe with what every company close to networking has had to say. (The exception is Cisco Systems (CSCO, news, msgs), whose CEO blew tons of smoke at the dead fish, as he talked on the recent conference call about how wonderful things looked.)
Next in the list of disappointments: National Semiconductor (NSM, news, msgs), which said (just days before quarter-end) that its revenues were going to be worse than expected. From what I've been hearing, that is due to cancellations, although National Semiconductor only attributed it to lower-than-expected sales to mobile-phone customers.
Moving to PC land, Hewlett-Packard (HPQ, news, msgs) may have won at beat-the-number, but there was a big jump in its receivables as well as inventories.
PC pall hangs over a call
But now for the shock of all shocks: Dell (DELL, news, msgs) -- a company that I don't ever remember not promoting the concept of a second-half pickup -- said that it did not expect one. In fact, the company allowed for squishiness in the second half. Given that Dell was so subdued on its recent conference call, you can bet that Intel's fabled hockey-stick recovery is unattainable. Those looking for a pickup generically in PC-oriented businesses are also liable to be disappointed. (Last week, technology distributor Tech Data (TECD, news, msgs) said it saw no sign of any spending bulge. With $20 billion-plus in revenue, the company has a great vantage point.)
In terms of problems that are specific to Dell, the company has no roadmap for how to get out of the pickle it's in. Dell tried using price cuts, then not using price cuts, and now it's talking about using them again. It's basically sunk because the PC business is not inherently a growth business, and Dell has gobbled up as much market share as it's likely to get. The company is essentially out of room to produce superior profitability from a business that doesn't have that much to begin with.
Back-to-school plays hooky
Turning to the department of potential perfect storms, about the only thing that could make matters worse for the chip universe would be a collapse in end demand, which we saw late last week when retailers such as Williams-Sonoma (WSM, news, msgs), Deb Shops (DEBS, news, msgs) and Chico's FAS (CHS, news, msgs) all blamed the economy (aka, the consumer) for their problems.
A knowledgeable reader of my daily column said that, according to a good source at Best Buy (BBY, news, msgs), the back-to-school season is a disaster so far. On a scale of 1 to 10, his source ranked it as a 2. The key problem, he said: Traffic is way down. The best case would be that if things were to improve in the next week and a half, maybe that 2 could ratchet up to a 4. But his source was not optimistic.
So, while we've recently seen a big rally in technology, it could not be a worse time for the bulls to have thrown a party. The fabled corporate IT spending spree never materialized. And now I could easily build an argument suggesting that consumer demand is waning.
Rally in haste, repent at leisure
I am, of course, biased, but it would seem to me that stock bulls are in the process of discounting a world returning to perfection. They appear to believe that problems are a thing of the past -- witness the collapse of the CBOE Volatility Index ($VIX.X) back to the 12 level. (It nearly reached 24 in mid-June as the market was slumping.) With so many people now racing to the bullish side of the boat, it probably won't take much to flip the dingy over.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. At the time of publication, Bill Fleckenstein was long Intel puts.
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