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Fleck Rap



Is That a Smell . . . From Intel?

Overnight markets were a nonevent. The news that mattered to our market today came from Seagate Technology (more about that below) and Alcoa. Seagate's report of problems, combined with what Nokia had to say (and perhaps QLogic last week), cast a pall on the tech tape. Stocks in general were likely affected by Alcoa's failure to win at beat-the-number, just when everyone assumed it would. And let's face it, the market has just had a nice little sprint higher. All of the above, therefore, set the tone for an early-morning sea of red that could best be described as a mile wide and about an inch deep (though certain tech stocks were doing a little worse).

A Market Well-Versed in Crosscurrent Events

After the initial slide, the market attempted to stabilize and then slid a bit more, though nothing remarkable appeared to be at work. Next, with a couple of hours to go, we had a straight-up NASA-like move to the highs of the day, on word of a government press conference at 3:30 Eastern time. Based on that rally, I guess some folks thought they'd hear an announcement about bin Laden being captured. But the rally fizzled as soon as they realized it was just a press conference by Donald Rumsfeld.

We did not, however, revisit the day's lows, and in fact finished kind of near the upper end of the range, as I assume folks are hoping to hear glad tidings tonight from Yahoo and Research in Motion. By day's end, many chip stocks had trimmed their losses, and others had turned small losses into small gains. Away from tech, there was some scattered weakness in cyclicals, but net-net, nothing too earthshaking happened today. Tomorrow, meanwhile, is the gateway to a three-day weekend, where the bulls usually expect a rally. If good news from YHOO and RIMM don't help inspire that rally, it might be a sign of renewed weakness. But before making up our minds, we can wait and see what happens tomorrow.

Away from stocks, the Canadian dollar was weaker, while the yen, euro, and Aussie dollar were stronger. Precious metals were mixed, with gold up 0.75% and silver down 0.5%.

A Message in a Bottle to Rattle Intel

Back to Seagate Technology, as I read its comments last night, I came away with the thought that they hold particularly serious ramifications for Intel, 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 last time, 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 disc 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," i.e., things might get worse.

Hickey Reads Intel an Inventory Story

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 -- points out in today's newsletter. He notes the sharply lowered Q1 revenue and earnings guidance from 02Micro (OIIM), a maker of power-management systems, used primarily for the notebook-PC arena (which contributed nearly three-quarters of its sales last year). As Fred writes: "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 observes, notebook sales were actually up an average of 46% year-on-year. That trend is now slowing, even without a major fall-off in end demand.

Storm Clouds Head for Santa Clara

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, it faces some very challenging comparisons later in the year. Remember that momentum investors hate it when you don't beat your comps.

Given the market's recent tendency to deal harshly with companies that don't win at beat-the-number or meet-the-guidance, Intel, as we saw yesterday with Nokia, is in a position to "disappoint." It could be poised for a tumble in the short run, even though end demand hasn't started to drop yet (though I do expect that it will). Further, when end demand does start to slow -- exacerbating the inventory buildup I have been talking about in cell phones and PCs -- then 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.

Raising the Bar a Notch Too Far

I will be most interested to see where all these chip companies set their guidance for Q2 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 begin to slow down in the second half, as I expect. We'll have a better chance to triangulate on all of this once we get more data in the next couple weeks. But for now, the seeds are being sown for second-half stock-market losses.

Thus far in the Rap this year, I have not mentioned "the elephant in the room," Iraq. The stock market has essentially ignored developments there, but if problems continue to worsen (God forbid), at some point, that too will weigh heavily on the market.

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Position in intc, nok

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