SAN FRANCISCO -- Major averages were buried under an avalanche of news Wednesday morning, and trading at or near session lows at midday.
With so many data points -- including
J.P. Morgan Chase's
fourth-quarter loss due to its exposure to
and Argentina -- it's hard to pinpoint the prime contributor to the market's losses. But I want to focus on the convergence point of the day's micro and macro issues: Specifically,
capital expenditures cut last night, and the industrial production/capacity utilization figures out this morning.
Intel reported better-than-expected earnings, revenue and gross margins for the fourth quarter last night, but its shares were down 1.7% at midday. In addition to some cautious comments by CFO Andy Bryant about the shape of the economic recovery, the stock was being pressured by Intel's plans to cut capital expenditures by 25% this year to $5.5 billion.
In another example of tech-generated productivity, Intel's spending last year on larger 300 millimeter wafers will allow the company to cut spending this year, but still produce the same amount of chips, Bryant said in the company's conference call.
Credit Suisse First Boston dubbed Intel's capex cut "a welcome surprise" -- because it suggests lower depreciation rates and higher margins for the company -- and Prudential Securities called it "benign." Merrill Lynch tried to put a positive spin on the impact of the cuts on chip-equipment makers, but the action in related stocks suggested otherwise. The Philadelphia Stock Exchange Semiconductor Index was down almost 3% at midday.
Banc of America's Mark Fitzgerald also suggested otherwise, forecasting that Intel's capital expenditures will remain in the $5.5 billion to $6.5 billion range for several years, noting that the trend of increasing expenditures in recent years is "not sustainable in the face of declining returns on capital."
Intel's capital expenditures relative to its revenues are at a 15-year high, Fitzgerald noted. Alone, that isn't a problem. But return on capital is at a 15-year low, and "these two trends cannot diverge over a long period of time."
On the macro front, capacity utilization fell 0.1% in December to 74.4%, its lowest level since 1983. The latest decline in capacity utilization "argues against a rapid upturn in capital spending, just coincidentally confirming Intel's decision" to lower capex, commented David Orr, chief economist at Wachovia Securities in Charlotte, N.C.
The fact that industrial production continued its recent trend of ever-shrinking declines, falling 0.1% last month, was an encouraging sign to some.
But John Lonski, chief economist at Moody's Investors Service, observed that capacity utilization rates for the semiconductor and electronic components sector was 61.3% in December, up from the cycle low of 59.4% in August, but way below its peak of 95.8% in May 2000.
Meanwhile, overall high-tech capacity utilization was at 61.2% in December from its peak of 88.8% in May 2000.
The fact that industrial production is likely to turn positive in the near future is a positive, "but any sense of optimism has to be guarded," Lonski said, reiterating
a concern that capacity utilization rates may remain below 80% for an extended period of time.
"Low rates of capacity utilization preserve the difficult pricing environment that hinder a recovery in profitability," he continued. "What will make matters more daunting is the simple fact
that equities in high tech are far from cheaply priced -- they are still richly priced."
Albeit less so at today's midpoint.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.