Intel's Waking Nightmare: Excess Processing Power
By Bill Fleckenstein
05/24/2002 18:07
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Index Close Change
Dow 10,104.26 -111.82
S&P 500 1083.82 -13.26
Nasdaq Composite 1661.49 -36.14
Nasdaq 100 1253.03 -33.74
Russell 2000 493.64 -7.60
Semiconductor Index (SOX) 499.63 -17.00
Bank Index 895.61 -9.37
Amex Gold Bugs Index 140.93 -0.26
Dow Transports 2743.67 -18.83
Dow Utilities 299.51 -0.60
NYSE advance-decline -658 -1509
Nikkei 225 11,976.28 -3.57
10-Year Treasury Bond 5.14% -0.010
Goldman Plays Connect the Chips : In the early going, our futures were under pressure as Goldman Sachs, an illustrious dead-fish house, downgraded one of the darlings of recent memory. I am speaking, of course, of the semiconductor-equipment sector. The wording of this particular dead-fish report was kind of interesting: "If end demand does not pick up in the second half, and foundry utilizations do moderate, the foundries would not need any additional capacity, and thus orders would moderate."
So for once, we've seen someone make a connection that if end demand isn't there, therefore the demand for chips won't be there, therefore the demand for the capital-equipment stocks won't be there. And, naturally, this is why they tend to be late-cycle stocks and not early-cycle stocks, which has been the most recent fantasy on Wall Street.
Bruised Fruits of Labor : This morning, we had the GDP report for Q1, which is of course a waste of time. Because the number is so far behind us, I can't believe anyone cares, though the fact that today's results were slightly smaller than anticipated may have been disappointing to those for whom minutiae matter. Revisions were expected to go up, they didn't, and the number indicated that inventories were built, as final sales were smaller than expected.
In any case, the casino opened to an immediate selloff and then saw a perfunctory dip about half an hour later. At this point, the S&P and the Dow were back to unchanged, but the Nasdaq was mired 1% and change, led by the SOX, which was down a quick 3% for the obvious reasons just described.
Over the course of the day, the market basically just kept sinking. Then, with about an hour and a half to go, a bit of a nasty selling squall ensued on the back of reports that there was an explosion at an apartment house in California. That took the market to its low, at which time the Nasdaq was down about 2.5%, led by the SOX, which was down about 5%. The S&P and the Dow were down about 1.5% apiece, plus or minus. Then, in the last hour or so, we had a sharp rally (as we seem to have had for the last three days), except this one totally fell apart, which left the indices priced as you see them in the box scores.
Once again, the housing stocks were a port in the storm, basically green all day, as the housing-starts number released this morning was better than expected, as were the revisions. But unlike yesterday, the bank stocks today were unable to join them on the upside.
All in all, it was quite an ugly day for tech, and a medium-sized ugly day for the market in general -- especially when one considers that, according to recent bull market folklore, the few days in front of this particular holiday weekend are supposed to be up days. Parenthetically, I would add that of course every day was supposed to be an up day, according to bull-market lore from the mania.
Away from stocks, gold and silver were down 0.5% and 1%, respectively. Fixed income was up a freckle. The dollar was mixed, up slightly against the yen and unchanged against the euro.
Outside-Markets Rap : Now for something a bit unusual. Rather than have me pontificate, I want to share some rather illuminating comments from a subscriber who is a former Intel INTC employee, and from the sage Richard Russell. Let's begin with our reader, who emailed me regarding yesterday's disparaging remarks about Intel. He wanted me to emphasize the underlying problem confronting Intel and the PC industry -- its processing power so greatly exceeds consumer needs that this disparity will tend to stall or lengthen the upgrade cycle. (This is a point I've often made in the past, but not recently.) Put another way, one could say that the PC is standing around, waiting for some killer application to really force people to go out and upgrade.
On-the-Mark Missive : In any case, his technical remarks are a brilliant illustration of how much horsepower PCs have these days, and how little it's utilized. I encourage everyone to read his comments, and perhaps read them twice. Then, maybe it will be clear to people why the PC industry is stagnating. It's not just a saturation issue -- it's that there's no need to upgrade. So, everyone who thinks we're going to have an upgrade cycle every three years just because they'd like that to be the case is really living in a dream world. That is the powerful message of the following missive:
Exorcising Speed Demons : "As a former Intel employee, one of the jobs that I held was working in the Intel Architecture Labs, trying to keep the processor speeds from getting too far in front of the processing demands of application and system software by 'stimulating the development of new applications.' The software curve has been advancing much slower than the hardware curve over the past decade or so, but some new driver (i.e., Windows, Office, Internet, Broadband) always appeared at the opportune time to consume the ever-growing availability of MIPS. MIPS stands for "millions of instructions per second" -- a slightly better measure of processor horsepower, as opposed to megahertz, a measure of clock speed, which is often confused with being a measure of true through-put.
Device Squad Nabs Loitering Processors : "Since I left Intel, I've used my ill-gotten gains (stock options) to trade for my own account. I recently built a 2 processor Athlon system with dual monitors and the full complement of storage devices, all for under $2000. At any given time during the day, I'm receiving real-time tick data on over 2000 stocks, each with a large set of indicators and alarms being calculated in real time, along with an array of 100 or so continuous calculations for real-time arbitrage opportunities between selected stocks, options, and futures.
"In the first five minutes of the day, which is the time of heaviest system load, the processor utilization averages under 20%. Except for streaming video, I can't imagine a mainstream desktop application that puts more sustained load on a system than my trading system, and I can't even get close to using a significant fraction of the processing power of my $2000 system. The gap between available processing power and realistic software application processing requirements is now much larger than at any time in my memory.
Upgrade Cycles Downhill : "I interpret this to mean that the PC upgrade cycle will be substantially elongated as the headroom between application processing requirements and available processor capabilities continues to widen at an increasing rate. This has always been Intel's nightmare scenario, since the resulting math on processor sales volumes when the mean time between PC upgrade sales doubles is intensely scary (for Intel). By the way, my dual processor Athlon motherboard configured with 2 Athlon 1800 XPs cost me a total of $455, and it is absolutely as solid as a rock. It easily outperforms a dual Xeon processor/boardset, which costs a minimum of $1500."
Man of Letters Mans Dow Theory Letters : Now I would like to share a concise, very insightful essay that was written yesterday by the always-thought-provoking Richard Russell (who can be found here . It's a wide-ranging piece that covers the stock market, gambling vs. speculating vs. investing, the dollar vs. gold, and even touches on the housing bubble. As longtime readers know, I am a big fan of his. I think his insights are just terrific. He was kind enough to give me permission to run his comments in their entirety, and I encourage readers to print them, save them, and maybe read them a couple of times -- especially the discussion about what investing is all about and what gold really is. In any case, I hope people will bear with the fact that this will make the Rap a little longer than usual, but hey, it's a three-day weekend, and you've go to have something to do, right?
Kick the Tired Gauge : "Russell, May 23, 2002: "Big news, exciting news, news you can make money with. Well, it's not exactly news, let's er, uh call it history. What was the 'news?' Durable goods orders were up 1.1% in April, up for the fifth month in a row. It really is amazing. People are still trying to gauge the trend of the stock market by reading the newspaper, listening to Commerce Department reports, or reading what some Federal Reserve governor said yesterday. Others are attempting to map out the coming path of stocks on the basis of cycles, seasonal patterns, gaps in the averages and the action of the market on a daily basis.
Profitless Pastimes : "In all the above, the great tidal forces of the markets tend to be ignored. But it's the tidal forces that I'm most interested in. It's the tidal sweep that changes the fortunes of nations, while at the same time it changes the size of investors' bank accounts. Within the tidal sweep, investors struggle valiantly to 'beat the markets.' Millions of man-hours are spent every day trying to outwit the market, to make a profit here, to pick a rising group there, to climb on the back of the right stock, to buy the right option on cotton or live cattle or the S&P or the QQQ.
Russell on Roulette : "Believe me, the above are a tough way to make a living. Gambling is putting your money on the unknown and trusting to a throw of the dice. Speculation is putting your money in an area in which you believe you have special knowledge or skill. My definition of investing is putting your money in a vehicle which you have reason to believe will provide you with a stream of dividends or interest over a given period of time. Investing implies that you have a reasonable good chance of a real return. The three rules for investors in order of importance are (1) The item is reasonably safe. (2) The item will provide me with a return on my money. (3) There is a reasonable chance that the item will increase in price.
Momentous Investing : "Occasionally, very occasionally, there comes a time when you may have to make a momentous decision, a decision that overrides all other decisions. We may have that kind of situation today. The situation poses these questions: Is the U.S. in a precarious situation.? Are the finances of the U.S. running out of control? Is the dollar itself in danger of collapsing in the face of huge and unending government expenses, chronically negative current-account balances, and a world situation in which tens of millions of Arabs and Muslims are angry at the U.S. and plotting or at least hoping for our downfall?
"Then there is this situation: Whatever prosperity the U.S. is enjoying is a result of the wild spending spree on the part of U.S. consumers. To continue this rate of spending, U.S. consumers must also continue to take on enormous amounts of debt. At some point, it is reasonable to believe that U.S. consumers will cut back substantially on their spending. If, or when this occurs, the economy (while continuing to lose its manufacturing base) will have to 'adjust.'
Rocky Odyssey : "I see two massive forces operating in the markets and economy at this point. The first is that we are in a long-term, primary bear market. This will entail stocks moving from their current extreme ofhigh valuations to an ultimate area of great values and undervaluation. How we get from here to there will be the story of the coming decade. The second major force is the health and the trend of the dollar. The strength or weakness of a nation can be measured by the trend and level of its currency. Since in the current system there is no definition of any paper currency except as it relates to another paper currency, we watch the relationships. Of course, in the big picture, all paper currencies can be defined in terms of how much of a given currency it takes to buy an ounce of gold.
"The dollar has been strong against the yen up to late January 2002. Since then, the yen has been stronger than the dollar. On this basis, the dollar has been stronger than the euro up to July 2001. Since then, and particularly since January 2002, the euro has been strong than the dollar. Up to March 2001, the dollar has been stronger than gold. But since March of 2001, gold has been stronger than the dollar. Gold has also been stronger than the yen and the euro.
The Instinct to Inflate : "Investors and speculators turn to gold as or when they begin to lose faith in paper currencies. Currencies can go 'broke,' and history tells us that no paper (fiat) currency has ever lasted. This is because under the central bank system, the amount of a currency can be expanded at will. So, as a given government overspends (and all nations eventually overspend or exceed their budgets), it creates the needed currency. This process is called inflation. In due time, as inflation continues, the given paper currency declines toward ultimate worthlessness.
Exceedingly Profligate : "The U.S. is now exceeding its budget, and in view of rising terrorism, there appears no end to the U.S. government exceeding its budgets. The U.S. has now elected to become policeman to the world, and this will entail massive, seemingly unending expenses. On top of this, U.S. consumers are exceeding their budgets. The savings rate in the U.S. has sunk to zero. Much of U.S. inflation has funneled into the price of housing. The housing situation has evolved into a bubble, and in due time, every bubble will burst.
Golden Sun Vanquishes Paper Moonshine : "In view of all of the above, the Dollar Index has topped out, and gold has been rising. Gold has been rising as distrust in the dollar has been rising. There are only four major currencies in the world today. Three of them are fiat currencies, and they are the dollar, the euro, and the yen. The fourth is an intrinsic or commodity currency, and that currency is gold.
"International competition by nations for exports is now intense. China and a few other Asian nations have become manufacturers to the world. In due time, we will see competitive devaluations of paper currencies as nations battle for their much-needed exports. In the end, the island of safety from the standpoint of money will be gold. The primary trend, the long-term trend of gold is therefore due north. Irregularly north, but nevertheless due north." |
