Who’s Right About The Tech Stock Sector?

By: Uncommon_Wisdom

Tony Sagami writes: Intel wants you to believe that its PC business bottomed out in the first quarter and is about to return to normal.

“We are seeing signs that a bottom in the PC market segment has been reached. I believe the worst is now behind us from an inventory correction and demand level adjustment perspective,” Chief Executive Paul Otellini said during a recent conference call.

If Intel is right, this would be a great time to invest in any parts of the PC food chain.

Intel, however, couldn’t be more wrong, and please don’t get sucked into its self-serving optimistic hype.

Here’s why:

Writing on the Wall #1: First of all, Intel’s quarterly report was a disaster. It reported a Q1 profit of $647 million, or 11 cents a share. That’s down from $1.4 billion, or 25 cents a share, compared to the same quarter a year ago.

The reason for the big drop in profits is simple — sales have tanked. Intel saw its revenues fall to $7.1 billion from $9.7 billion in the last 12 months. Some $2.6 billion of sales went ‘pfffffft’ in the last year.

Microsoft’s quarterly profits dropped 32 percent — a first in the company’s 23–year history.

Writing on the Wall #2: Microsoft knows a thing or two about the computer business. Its quarterly profits plunged by 32 percent, but for the FIRST time in its 23 year history, Microsoft didn’t report rising quarterly revenues. The reason is simple — business stinks.

“We are planning essentially for the economy to contract. That may take two, three, four years, partly depending on government policy to ease some of the pain. Then we will see growth again,” said CEO Steve Ballmer.

“We witnessed a deterioration in spending levels through the third quarter. In the fourth quarter, we expect the overall spending environment to remain difficult,” said CFO Steve Liddell in a company statement.

Writing on the Wall #3: The government made a huge commitment to become a major player in the semiconductor business, but it may now wish it wasn’t.

I say that because 60 percent of China’s semiconductor manufacturing capacity was sitting idle in the first quarter.

To put that into perspective, the Chinese chip industry was humming along at a 92 percent utilization rate in 2004, and according to industry watcher iSuppli, that’s the lowest capacity utilization numbers it has ever seen since it started tracking the market in 2000.

Writing on the Wall #4: Taiwan Semiconductor, the largest semiconductor manufacturer in the world, saw its Q1 sales drop 55 percent from the same period a year ago and a painful 39 percent from the fourth quarter of 2008.

Writing on the Wall #5: Taiwan’s United Microelectronics, the world’s second-largest chip maker, reported its second consecutive quarterly loss recently. Why? Because the global demand for chips has fallen off a cliff.

Asia’s semiconductor sector is getting slammed by slowing sales.

Writing on the Wall #6: Samsung Electronics, the world’s largest maker of memory chips and LCD screens, reported a 72 percent decline in profits. Like Microsoft, Samsung doesn’t expect a rebound anytime soon.

“It is still premature to expect the global economy as well as the consumer demand recovery in the near term,” said Robert Yi, the company’s vice president.

Writing on the Wall #7: Hynix Semiconductor, the second-largest computer-memory chipmaker, recently reported a sixth consecutive quarterly loss.

Prices of computer-memory chips declined 48 percent, and flash memory chips (used to store songs and data in portable musical players and digital cameras) fell by 20 percent in the last 12 months.

Who Do You Trust?

Wow, those are certainly different outlooks from Intel’s optimistic forecast. Who should you believe?

Intel, who says that the worst is behind us and the semiconductor future is so bright that it needs sunglasses?

Or the unified voices of concern from the six Chinese, Taiwanese, and South Koreans?

Somebody is dead wrong and if you ask me, there is no question that Intel is the company that is jerking your chain.

That certainly has some important investment implications. First of all, it means you should use the recent rally and sell every piece of the PC food chain that is in your portfolio — such as Dell, Microsoft, Intel, Micron Technology, AMD, Phoenix Technologies — before they get clobbered even more.

In fact, if you’re an aggressive investor, I believe you could ’short’ most of the stocks in the PC food chain and make a bundle.

Another option would be to buy ProShares Ultra Short Semiconductors (SSG), which is designed to deliver twice (200 percent) the inverse of the daily performance of the Dow Jones U.S. Semiconductors Index.

If the business of Intel and its chip-stock buddies continue to deteriorate, SSG could soar in value.

Shorting stocks and buying inverse ETFs, however, is not for everyone, so don’t rush out and short any PC stocks without doing your homework. It could, however, be one of the most lucrative financial moves you could make this year.

Regards,

Tony

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