Investment Contrarians

Intel Declines; Is it the End for PC Component Makers?

By for Investment Contrarians |

Intel Declines; Is it the End for PC Component Makers?The latest company citing economic weakness as a headwind is Intel Corporation (NASDAQ/INTC). The firm drastically lowered its forecast for the third quarter based on a dramatic decline in demand, which the firm believes stems from a weakening global economy. While we have seen commodity stocks, such as iron ore producers, suffer in a weakening global economy, it now appears that technology stocks are feeling the brunt.

Some have hoped that technology stocks might be able to weather this latest economic storm because of the ability of new technologies to increase productivity without having to hire additional workers. Increased levels of productivity are one of the strongest selling points for technology stocks.

A large portion of Intel’s sales goes into the personal computer (PC) market. With PC makers lowering orders ahead of the holiday season, it becomes apparent that consumers have shifted away from traditional computers and are now opting for tablets. The environment for technology stocks continues to evolve, and it appears Intel is still relying on the consumer trends of yesterday.

Some might be thinking that PC sales are only slow ahead of the launch of the new operating system created by Microsoft Corporation (NASDAQ/MSFT). This might be the case; however, it is a dangerous time to trade technology stocks based on such a hunch. I would suggest waiting to see some early indications of adaptation of the new operating system and whether it will translate into substantially higher PC sales. Personally, I would focus on technology stocks for tablets and smartphones, as this segment appears to be the market segment for growth.

Intel Corporation chart

Chart courtesy of

Intel has clearly been on a decline from its highs in early May. One will note that in early August the stock broke up through the downward-sloping trendline, a key point in technical analysis. However, the stock then subsequently fell through the trendline. In technical analysis, a failed breakout is a powerful signal that momentum cannot be sustained at current levels.

Technical analysis also indicates that, considering the stock could not hold its 50% retracement level, more selling was in order. As we currently see today, the stock did indeed fail to hold the 50% retracement level, as more shares have been dumped into the market.

Technical analysis certainly values the trendline as an extremely important indication of where the line of least resistance is likely to be. Technology stocks, such as Intel, in the traditional PC space are going to see tremendous headwinds over the next few quarters. While technical analysis indicates this thesis is likely, so does common sense.

With a global economy that continues to weaken and a shift by consumers into tablets and smartphones, I think it is going to be extremely difficult for technology stocks in the PC sector to outperform. Technical analysis would indicate that there might be significantly more selling pressure over the next few weeks.

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  • Masud

    Seventy-seven years ago, members of Congress eretced a tariff wall aimed at protecting American business concerns. The result was a stock market crash followed by drastic retaliatory tariffs and a shutdown of the global trading system. The 1932 Revenue Act made matters worse by massively raising marginal tax rates on domestic incomes. These blunders set the stage for the Depression and world war that followed.Current members of Congress appear to have let their history books collect dust: A raft of anti-China currency and tariff legislation is now widely supported by both political parties as the exigencies of political grandstanding subvert the ideals of sound policy. At the same time, Chinese government officials have threatened to dump some of the government’s $1 trillion in U.S. Treasury securities if Congress continues its currency bashing and tariff threats.This fiscal folly couldn’t come at a worse time. Financial markets have been reeling over the last several weeks as hedge funds deleverage from wrong-way bets on mortgage products. It certainly doesn’t help matters that a tone-deaf Congress, led by a bi-partisan coalition of the economically obtuse, is attempting to advance legislation that would raise tax rates on investment companies as part of a “fix” for the alternative minimum tax (AMT).Has anyone in Congress ever stopped to contemplate why London has once again become the financial capital of the world? Perhaps it has something to do with the fact that the rest of the world is lowering corporate tax rates and trying to moderate regulations while the U.S. is stuffing Sarbanes-Oxley down the throat of its businesses.If that weren’t bad enough, the 2001-03 tax cuts on incomes and capital are essentially on the chopping block, set to expire in several years time unless Congress and the president act to extend them. The current Congress isn’t disposed to extending the tax cuts, while online futures trading points to a Democrat sweep in 2008. In other words, there’s a high probability that tax rates are going up.Some politicians argue that the current anti-trade sentiment has been driven by wage inequality and poor income growth, “tax cuts for the rich,” and high energy and food prices for the poor. But the data refute this. Personal income has grown at an average pace of 6.2 percent since 2004, despite large swings in reported GDP growth; personal income is up 6.1 percent year-over-year as of June, right in line with the average of the last few years. And thanks to a low unemployment rate and a tight labor market, real non-supervisory wages are growing faster today than they were at this stage of the last cycle (1.6 percent vs. 1.3 percent, year-over-year).In fact, low-end (non-supervisory) real wages have grown at about twice the pace for this cycle compared to the first 23 quarters of the last expansion. A broader measure of real non-financial compensation per hour also shows superior wage growth during this cycle (1 percent per annum average vs. a 0.3 percent per annum average at this stage of the last cycle). So to call this a “wage-less” expansion is utter nonsense, despite the fact real GDP growth has averaged 2.7 percent per annum this cycle versus a superior 3.3 percent average at this stage of the last cycle.Attention protectionist stooges: Since the implementation of NAFTA in 1994, real non-supervisory wages have grown at an average pace of 1.2 percent per annum, triple the 1971-2007 average of 0.4 percent per annum. Inflation-adjusted household net worth has jumped $22.2 trillion since NAFTA was implemented while non-farm payrolls have increased by 24.9 million. Manufacturing output, far from falling, actually stands at a record high, and is up 62 percent since 1994.Undoubtedly some have been left behind by the global economy. But free trade, China, and Wal-Mart for that matter have dramatically increased the standard of living for most people, just as protectionism, a trade war, tax hikes on investment and work, and the absence of Wal-Mart would sink living standards for most people.While the global boom continues on the back of pro-growth policies around the world, Congress is speeding down the road to ruin with trade protectionism and a raft of untimely tax hikes. It’s time to take a detour and think about the hugely anti-growth consequences of turning our backs on the global economy and pro-growth tax policy.