If Bill Fleckenstein is even in the ball park on this one, it could start to get real interesting. CPI tomorrow, the MoP version? Could they get away with that?
Contrarian Chronicles
Is Seagate's swoon bad news for Intel?
The hard-drive maker's surprisingly bearish third-quarter guidance may be a sign of weakness ahead for Intel. Are the seeds being sown for a second-half sell-off?
By Bill Fleckenstein
After Tuesday’s market close, Seagate Technology (STX, news, msgs) lowered its third-quarter forecast. As I read the hard-drive maker’s comments, I came away with the thought that they hold particularly serious ramifications for Intel (INTC, news, msgs), via Seagate's notebook business. In attempting to explain away its missed guidance from just last month, Seagate acknowledged: "Overall demand for the quarter was modestly weaker than normal seasonal patterns, and each major market exhibited characteristics since March 2 that have adversely impacted Seagate's ability to meet its previously stated earnings estimates."
Either the company had chosen to wing it a bit at its March 2 update, knowing things were worse than it was implying, or things got far worse recently to cause the problem, or perhaps it was a bit of both.
But the important part for Intel was this comment: "The most substantial impact to Seagate's earnings results was the reduction in notebook disk drive shipments, which were affected by two factors. First, the supply imbalance caused by excess purchasing in the December quarter . . . combined with the subsequent slowdown in notebook systems growth. . . . " Furthermore, it warned that given the way things were set up, "the supply imbalance may cause further uncertainty into the June quarter." Translation: Things might get worse.Fast and easy.
Seagate is not the only company to have cited a slowdown in notebooks, as my friend Fred Hickey -- the king salmon and only live-fish tech analyst -- pointed out in his “High-Tech Strategist” newsletter on Wednesday. He noted the sharply lowered first-quarter revenue and earnings guidance from 02Micro International (OIIM, news, msgs), a maker of power-management systems used primarily for the notebook-PC arena. (Notebook PCs contributed nearly three-quarters of its sales last year.). Fred wrote: "02Micro cited 'significant weakness in the portable PC market, with lower-than-expected run rates at major manufacturers in Taiwan and China.’” On its conference call, the company also said that the softness was due to a buildup of inventories.
Additionally, there's been a lot of chatter about a slowdown in the Taiwan motherboard business. We have an inventory problem because the recent past was mistakenly extrapolated into the future (as is often the case). Despite Intel's Centrino being a less-than-spectacular chip (certainly expensive for what you get), it did manage to help drive notebook sales. Over the last three quarters of 2003, as Fred observed, notebook sales were actually up an average of 46% year-on-year. That trend is now slowing, even without a major falloff in end demand.
I have gone into a bit of detail to discuss notebooks because their parts are especially profitable for Intel. If a problem arises in notebooks, it will affect Intel's bottom line more quickly than, say, a problem in plain-vanilla desktops. Over the course of the year, Intel will quite likely have some trouble meeting its own targets and those envisioned by the bulls. Obviously, the company faces some very challenging comparisons later in the year. Remember: Momentum investors hate it when you don't beat your comps.
Nokia’s shareholders bare their fangs
That the stock market has recently tended to punish losers at beat-the-number or meet-the-guidance was demonstrated Tuesday by Nokia (NOK, news, msgs), whose shares closed down 18% after it preannounced disappointing revenues. The slide confirmed my belief that any companies announcing bad news would be dealt with extremely harshly. Nokia’s bad news was a case of inventory indigestion. (Here’s another example: Shares of the big handset distributor CellStar (CLST, news, msgs) fell 11% on Tuesday after it said its earnings would be as much as 50% below estimates.)
Nokia’s problem was precipitated in part by local number portability, which turned out to be an air ball. Further exacerbating the damage: Last January, management had led folks to believe that all was well. Now, a whole lot of shareholders who might have been less than thorough and unaware that management was especially truth-challenged are trapped.
Thanks to the tax cuts/rebates, retail end demand for most things has still held up pretty well. But the real problems for all these companies will occur when end demand starts to slide some.
Intel could be poised for a tumble in the short run, even though end demand hasn't started to drop yet. (I do, however, expect it will.) Further, when end demand does start to slow -- exacerbating the inventory buildup I have been talking about in cell phones and PCs -- there will be a real problem. It will wend its way backward through the food chain into lots of these other chip vendors and, eventually, the semiconductor-equipment manufacturers.
I will be most interested to see where all these chip companies set their guidance for the second quarter and beyond. My hunch is that the guidance will be set too high. Therein could be the start of trouble for the tech tape and stock market generically, especially if things start to slow down in the second half, as I expect.
We'll have a better chance to triangulate on all of this once we have more data in the second quarter -- when all these shots of stimulus over the last six to eight months will finally have worn off. But for now, the seeds are being sown for second-half stock-market losses.
I would also just mention, with guarded breath, "the elephant in the room”: Iraq. The stock market has essentially ignored developments there. If, however, problems continue to worsen (God forbid), at some point that, too, will weigh heavily on the market.
Euro-long for a mere song?
Shifting, optimistically, to the "outside markets," I am getting quite excited about the opportunity being presented by the euro's decline. (It’s down about 5% against the dollar from its high reached in mid-February.) The decline has played out pretty much like the 8.7% correction we saw in the euro last summer and fall. I have been waiting patiently for another opportunity to buy euros on the cheap, even though they are just another piece of paper.
My expectation is that the next few weeks might bring an opportunity to buy the euro at a pretty important low, perhaps somewhere around $1.18 or a bit lower. I'll probably also buy some Canadian and more Aussie dollars. It remains to be seen how this develops, but again, I think that the next couple weeks are going to be a time to pay especially close attention.
Silver will wait for gold at the finish line
Of course, renewed dollar weakness will matter to gold and silver, where I also note genuine cause for optimism. Turning first to silver, a question I hear from readers of my daily column is why it continues to outperform gold. (Silver is up over $8 an ounce, a gain of more than 70% since the end of 2002.)
The bottom line is that silver has a far better supply/demand story than does gold, and the precious metals are being accumulated. (Palladium and platinum are also interesting stories and have done very well accordingly.) Though silver could obviously have a nasty setback at any time, I believe it will be the percentage gainer over gold in the precious-metals bull market.
A small correction from the recent high appears to be developing in gold. Whether it trades down another $10 to $15 from the high at $423.70 is a little hard to say at the moment. But I feel that once gold gets over $430, it could really run higher, especially if it is coincident with the end of the bounce in the dollar. |
