Why Nobody Should've Been Surprised by Gateway

The surprise with GatewayGTW is that everybody was so surprised and that it, along with bad news out of AlteraALTR, spooked the futures market so badly. Yet, in each case, warnings were there for all to see.

Let's start with Gateway: There were the simple warnings, as I've written on RealMoney.com's Columnist Conversation, such as the company's apparent ability to show strong growth while every other PC maker was hitting the skids. (And what where they doing opening Gateway Country stores so close to one another?)

There were the slightly more complex warnings, such as the one I noted two quarters ago, when Gateway's operating income was up 37% on only 12% growth in sales. How could that be? Gateway relied heavily on non-PC-related sales from high-margin, noncore sources such as Internet access, financing and warranties. The trouble with so much in the way of sales from noncore sources like that is that they camouflage what's really going on with the company's main business.

Then there were the more complex warnings. Nobody nailed those better than money manager Bill Fleckenstein of Fleckenstein Capital in Seattle. I don't make a habit of steering you to other sites, but I would be negligent if I didn't point you to the column he wrote on Silicon Investor on Oct. 23. It was there that the longtime Gateway bear wrote, in detail, why the quality of Gateway's earnings was rapidly deteriorating.

As for Altera, it's just more of the same: It's the channel, stupid. The supply channel has been stuffed. As I noted on the CC, the Boston brokerage firm of Fechtor Detwiler issued this yesterday: "The story we are hearing out of [distributors] ArrowARW and AvnetAVT is to expect a flat Q1 and Q2 and 'it's going to be a couple of tough quarters with flat business at best.' "

The cause of the problem is excess inventory at OEMs across the board. It's interesting that the two companies everyone is pointing fingers at are Cisco SystemsCSCO and NortelNT. We are told other sinners include ADCADCT and Fujitsu, both of which have canceled programs;

Astral Point and SycamoreSCMR, who have had substantial "push-outs." We are hearing that there have been meaningful cancellations and/or rescheduled orders at ActelACTL, Dallas SemiDS, AtmelATML, AlteraALTR, ConexantCNXT and NationalNSM.

We have also heard that while application-specific suppliers such as PMC-SierraPMCS and AMCCAMCC have not seen huge cancellations, CEM's {contract manufacturers} are supposedly "sitting on a 'mountain of inventory' which is causing some concern about Q1 order rates."

Which leads to the obvious: If the PC makers are hurting and component makers up and down the line are hurting, what about IntelINTC? Fleck's bet is that it, too, must be experiencing order cancellations, in which case he can't see how it, too, doesn't at some point by year-end preannounce. (Which, of course, would not be good for the market, unless it would be the final blow. Maybe I should dredge up my open letter to IBM'sIBM Lou Gerstner -- the one that urged IBM to preannounce -- and redirect it to Intel's Craig Barrett. After all, Craig, it's the thing to do. Everybody is doing it! (Better to do it while you blend in rather than when you don't!)

Cree correction: Nobody alerted me to this; I alerted myself to it and it's a stupid mistake (though it doesn't change anything about what I wrote). I wrote that Eric Hunter, the brother of Cree CREE CEO Neal Hunter, is the former CEO of C3, which is now Charles & Colvard CTHR. Sorry 'bout that, the former CEO of C3 is Jeff Hunter (the brother of Neal and Eric). Eric was merely a founder of C3, and, until this year, its largest investor as well.

And speaking of Cree: I've been advised that I'm getting skewered on the message boards for last summer having given myself failing marks on Cree in my semi-annual report card. Like I had any choice?! -- the stock was $30 when I wrote about it; it went to $202 and stayed high for an extended period of time. What's more, the extent of the related-party transactions, with investment in World Theater, was not known at that time.