Don't you hate to open a bag of chips and find them settled into a pile of crumbs at the bottom of the bag? The chip sector may soon look like a sector of crumbs after the news released on Thursday. Low demand has chips on the shelf approaching their expiration date and half price sales can't be that far off if Intel's update is any guide.
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It was a busy day economically and as usual the answers were as mixed as Forrest Gump's box of chocolates. The Chain Store Sales posted only a +1.1% gain for August compared to a +3.1% gain in July. This was the worst showing since March of 2003. We all know the reasons are gas prices, tougher comparisons over last year and some say the weather. Nothing new here from the weekly update, just more of the same. Every store group except for drug stores posted lower sales. One report today showed that 55% of stores reporting same store sales for August were below plan. Not a good outlook for the sector or the economy. Back to school sales were also reported as slower than normal.
Jobless claims rocketed to 362,000 for the week and the analysts were quick to blame the after effects of Hurricane Charley on the increase. This was the first week over 350K since June 5th and was the highest level since April 10th. Offsetting the Jobless Claims news was a jump in the Monster Employment Index to 145 from last months 134. This was particularly strange since I heard an on air commentator yesterday saying they had seen an advance copy and it was not pretty. It looked ok to me but without seasonal adjustments it is tough to know what the number should be. There is not enough history for this index to be meaningful. Monster itself indicated that much of the advertising was due to seasonal trends in the Agriculture, forestry, manufacturing, mining, transportation and warehousing sectors.
Productivity and Costs were revised down to 2.5% and below the estimates of 2.7% for the updated report. The revision was due to changes in the GDP and a jump in hours worked. This was the smallest gain since the second quarter of 2002 and far less than the +9.0% we saw in Q3-2003. This falling productivity is not something the Feds will be excited about but not low enough to impact their rate hike policy. Offsetting the drop in Productivity was a jump in Factory Orders by +1.3%. This was slightly better than expected and suggests the manufacturing sector is still moving forward despite the slowdown in other sectors. This was the third consecutive month of increases and the largest gain since March. Autos were weakest and that goes along with the drastic drop in auto sales which were reported yesterday.
The Risk of Recession shot up to 32.7% in August from only 25.7% in July. Consumer Confidence, interest rates and weakness in the equity markets were prime factors in the jump. This report projects the chances of a new recession over the next six months. This was the second strong monthly jump with the July jump from June's 12.3% a significant move.
It appears the semiconductor sector is already in a recession with the barrage of data out today. The semiconductor billings were released for July and they increased only a marginal +1%. While we have seen a decreasing trend since March and the likelihood we will see a drop in August the numbers still represent a +37.9% gain over the 2003 levels. This is the highest level attained since Q4-2000. VLSI Research would have us believe that things are better than they appear to be. We have been getting so much negative press on chips over the last two weeks that it is hard to put enough lipstick on this pig to believe that story.
After the bell today Intel released their long awaited mid quarter update and it was not an exciting outlook. Intel has a lot of problems and they continue to emerge as the layers of doublespeak are peeled away. Intel lowered its revenue expectations for the current quarter to a range of $8.3B to $8.6B. This new midpoint of $8.45B is well outside their previous range of $8.6B to $9.2B with a midpoint of $8.9B. This nearly half a billion dollar haircut was accompanied by a drop in gross margin expectations to 58% from the prior estimate of 60%. This goes along with the negative margin surprises various brokers have been predicting. 60% of $9.2B is a gross profit of $5.3B. 58% of the lowered estimate of $8.45B is $4.9B in profits. This represents a drop in $400 million in expected gross earnings before costs. I doubt Intel will be standing in line for food stamps anytime soon but this was a substantial cut in estimates and represents a continuation of the downtrend started several months ago.
Intel said the problem stemmed from weakness around the globe in both corporate and retail sectors with the larger weakness coming from the retail sector. They also said inventory would INCREASE again instead of dropping as they had previously forecast. This is a major change in trend and a major slip up for Intel. They said the 3Q drop was due to a weaker demand picture at the low end of historical expectations. They also said the 4Q would also be weak and set the stage for a lowered profit forecast when they announce 3Q earnings in Oct. Intel said its primary architecture products and flash memory products were trending below plan. They also said they would cut capex spending for the current quarter.
There is no way to paint this update in a favorable light and investors clobbered the stock in after hours to a low of $19.57 and a close under $20. Several analysts predicted a fair value based on the current outlook at $18. Smith Barney said yesterday there was 20% downside left in Intel at 21.50 which would put it just over $17. We have been looking for a touch of $20 in the LEAPs section for an entry on some 2006 LEAPS. Looks like we got our wish. Odds are good we will also hit our exit on the SMH puts at $28.
Helping push the sector lower was an after hours warning from ALTR and IDTI. While the headline stocks warning dropped between -7% to -10% on the news the majority of the other chip stocks were off -4% to -5% in late trading. As I mentioned earlier this week the closer we get to the warning season, about two weeks away, we would see an increase in warnings and chip and software companies should head the list. Fairchild Semi warned yesterday as well.
Also pressing equity prices this morning was another jump in oil prices after Yukos said they were on the verge of a shutdown because of frozen accounts. Crude hit an intraday high of $45.40 before dropping to close about a dollar lower. Those that thought the $41.30 low on Monday was a hint of lower prices ahead were sadly mistaken.
Everyone knows the President speaks tonight in the biggest event in the Republican convention. After a very slow and weak morning the market took flight at 2:PM and gave Bush a triple digit gift as an investor warm up prior to him taking the stage. Multiple strong buy programs fired off in quick succession and added over 2000 issues to the A/D line and +100 points to a sleepy market. We get buy programs all the time but to see multiple programs in succession and in front of the Intel update, which was expected to be negative and tomorrow's Jobs report which could also be a disaster suggests something fishy afoot. I am sure there are quite a few traders who would like to know who launched those programs and why but it is something we will never know. I would also not only pick on just the Republicans because there was an identical unwarranted program trade spike at the end of the Democratic convention. That spike rallied the Dow +155 points off its intraday lows. Actually that spike made more sense because the low for the day was just under 10,000 and strong support.
We all know games are played and sometimes by people with very deep pockets and sending the President to the podium with a triple digit gain instead of a fear of Intel drop probably looked good to a lot of people.
The Dow explosion today launched from 10175 and ended with a touch of 10301. This was well over several strong resistance levels and triggered substantial short covering. This was the highest level reached by the Dow since July 2nd. The Nasdaq rallied +23 points which by itself was not spectacular except that it came right in front of an almost guaranteed Intel disaster. It is amazing they could budge it higher at all. The SPX exploded over the strong 1111 resistance level and its 100/200dma as though on rocket boosters. There was barely even a blip of recognition as it crossed multiple resistance levels.
Ah yes, that was today. Tomorrow may be an entirely different story without any artificial support and with very strong negatives in the tech sector. We also have that questionable Jobs report before the open and the whisper numbers are all over the map. I have heard the potential for a negative number as well as some expectations for something north of 200K. This is a huge range and given today's spike and tonight's chip news the only thing we can guarantee is a very volatile session.
The main thing I heard today was "the bad news is priced in" and buyers are bargain hunting for the post convention rally. I have to agree that I was expecting a post convention bounce last week and the gains this week were probably some early adopters trying to sneak into positions but we are rapidly running out of events to power/depress the market. Beginning next week we will be left to wander on our own with little more than earnings warnings to keep us company. Beware the September winds because they blow nothing good our way. Historically next week sees an opening rally but then deteriorates into the normal October surprise. So if we do get a decent Jobs report and a post convention holiday rally be sure to wear your parachute and keep those seatbelts fastened.
By breaking those resistance levels today we have just about reached the upper edge of our potential range. The Dow could have seen a further rise to 10400 if Intel has not spoiled the party. It is always possible that a blowout Jobs report tomorrow could resurrect that bullish spirit but I am thinking the damage has been done. If we do move higher it should not be much higher and we are only setting up for the next drop. As of tonight the Jobs report should have more bearing on tomorrows trading than Intel and our fate will remain unknown until 8:30 in the morning.
Enter Passively, Exit Aggressively.