Kass: Wave Goodbye to the Rally

Conditions Mischaracterized at High-Profile Tech Companies

Intel INTC is an example of a tech company that is largely exposed to PC unit sales but also has a number of company-specific factors (inventory, share gain/loss, product cycle, etc.) Investors' focus on better-than-expected numbers at Intel is the most baffling. Intel lowered guidance for the March quarter when it reported in mid-January. Then the company pre-announced the quarter to the downside again. So, in essence, Intel incrementally beat twice lowered numbers.

Also, take into account that the company resides deep in the supply chain and has very little feel for real end-market demand. Intel knows what its order book looks like, but often that view is vastly different than demand as either inventory is building or demand has slowed while customers have not cut orders yet.

The company seems to view things through rose-colored glasses. That is why it seems to miss or lower guidance about every third quarter. Also, in this case, Intel is gaining a lot of market share from Advanced Micro Devices AMD. The sum total of AMD and Intel performance was not impressive nor were the misses and poor guidance from Avnet AVT and Seagate Technology STX, which are exposed to broad demand trends.

Lastly, the recently reported IDC PC unit data showed that U.S. PC demand for the first quarter slowed sharply to 3% year over year and included this caveat that went widely unreported:

"The preliminary results show that the price pressure during the quarter was greater than we expected. Indications are that the market felt the squeeze in the second half of the quarter. The U.S. market is softening, and this can potentially hasten downward price pressure and further intensify competition for the rest of 2008."

Or consider the euphoric reaction to Google's GOOG earnings after the market closed on Thursday, which seemed to be the proximate cause of Friday's market celebration. If I remember correctly, Google missed the previous quarter, estimates were cut several times during the most recently reported quarter, and the company only delivered on the original forecast. On top of which, Google's results showed another deceleration in its growth rate (especially of a domestic kind), and the company's earnings quality, as chronicled by Bill Fleckenstein below, might be an issue for analytical discussion in the weeks ahead:

"Google helped ignite an explosive party as it managed to win at 'beat the number,' as expectations had been lowered. And then, Google dropped its tax rate about 4 points, which wound up creating the illusion that the company experienced a spectacular quarter.... Google's earnings results, even with the tax-rate fiddle, were about where expectations had been set initially. Meanwhile, Google experienced a total collapse in its revenue growth rate. So, all in all, it was really much ado about not much."

The Times They Are A-Changin'

Fifteen months ago (when the Nasdaq was lower than current levels), domestic credit was cheap and readily available (as the subprime meltdown had not climbed the ladder of credit), the consumer was "healthy", job growth was solid, the world's financial institutions had experienced only limited writedowns (and their net worths and returns on capital were still intact), domestic bank bailouts were a figment of the bears' imagination and so was the need for bailouts across the pond not seen as necessary or with any clarity, there was little evidence of a scarcity or inflation in food prices, crude oil prices were 50% lower than today, private equity had an endless pocketbook, China's stock market was scaling new heights (and its economy embodied the newest paradigm), and housing activity (though moderating) was still elevated. Today, the aforementioned conditions have all turned negative -- in certain cases dramatically so -- and, with that, the specter of lower profit margins are immediately ahead. For example, housing faces an uncertain future as mortgage rates respond to higher Treasury yields.