What's the deal with Intel, and are they just the first "chip" to fall?

What really prompted this post is the Q3 warning that Intel released Friday morning shortly after the market opened, cutting guidance on revenue and gross margins, and I'll get to that shortly, but first, let's go back a bit further in the year to their first quarter earnings.  Now before proceeding any further, I'll tell you right now that I am not a forensic account, nor do I spend all of my free time delving into company balance sheets.  When it comes to trading, I'm a technical analyst, and in my 9 - 5 job, my background is engineering and technical product P&L's, so when it comes to company fundamentals, I guess you can say that I'm a top line/bottom line kind of guy. In other words, those of you who do dissect balance sheets for a living (or for fun?) will likely be disappointed with the lack of fundamental data/analysis here, but I think you'll still get the point.

So, back to Q1 earnings for Intel - announced after the bell on April 13th, and by all accounts, they were excellent.  Revenue was up, margins were up, the sun was shining and the birds were singing. On April 14th,
the stock had gapped up a dollar, and analysts were all coming out with bullish calls on the stock.  Here's an interview with Jim Cramer [Cramer Interview] from The Street.com where Jim is calling for higher prices.  Well, gotta give him credit...Intel did trade higher for one day, and then proceeded to sell off for the next 7 weeks.   Good call, Jim!!

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To be fair however, I should also point out that this is not too unusual, considering the run-up the stock had seen in the two months prior to Intel's Q1 earnings.  Some would say that Intel's good earnings were already "priced in" and that the stock really shouldn't be priced much higher.  We should also note that at the time Intel really started selling off, the rest of the market was doing the same thing.  This is back when Greece was the hot topic in Europe and everything over there was going to hell in a hand basket.  So, okay...maybe Intel would've gone higher had it not been a victim of the overall market plunge...I'll give them a pass on Q1.

Now let's fast forward to Q2 earnings.  Intel President and CEO Paul Otellini had the following to say:

"In Q2, Intel posted its best quarterly results ever as the economics of the world continue to reflect renewed economic momentum. Intel growth continues to run ahead of economic growth, reflecting what we believe is a fundamental shift driven by Internet adoption. Our second quarter was up 5% from Q1 versus a seasonal norm of down 2%."

During the Q&A session,  an analyst from UBS asks about how things are tracking for Q3 within the distribution channel for inventories.  Paul's response

"Well, so far so good. I mean we gave guidance to a very robust third quarter. As Stacy said it was basically seasonal or just slightly below the midpoint of seasonality. We don’t see any inventory issues out there."

Click here to read the full transcript of the Q2 earnings call, courtesy of SeekingAlpha.com, but let's focus on the text that I have highlighted above.  SingleMalt interprets this as follows: in the history of the company, earnings at Intel have never been better, and the future's so bright, I gotta wear shades!  Well hell, on news like that, the stock should be headed to the moon, right???  Let's take a look....

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Hmmmm.... maybe I should treat myself to another dram and re-evaluate my interpretation?  As we can see in the above chart, the stock gapped up after earnings and had a nice little run, but by the close of the day, had sold almost back down to the opening price.  From that day forward, Intel has not been able to challenge those highs, much less overtake them, and since mid August, the stock has completely tanked.  If you bought and held Intel based on Paul Otellini's rosy Q2 earnings announcement, you're now down about 15%. 

And now, here we are, just 6 short weeks after "the best quarterly results ever" and "robust Q3 guidance", and Intel has come out with revised Q3 guidance, slashing both top line revenue and margins.  What's up with that??  I mean seriously folks, did I miss a headline somewhere?  Did two or three of Intel's production facilities get blown up or something?  Probably not, but I'll tell you what I believe is and has been happening.

First of all, despite what you'll hear from the pump-monkeys and the money-honeys on CNBC, it's important to understand that this entire so-called recovery and the run-up in equities since March 2009 has been nothing but an attempt by the Federal Reserve Bank and our Government to paper over a problem by printing money and promoting consumer spending in the economy.  This in itself is a longer topic that I will post on at some point in the future, but the important thing to recognize now is that in March/April of 2010, the Fed officially ended its quantitative easing (QE) program, whereby it had been injecting liquidity into the banking system by regularly purchasing toxic assets, ahem, mortgage backed securities (MBS) from the "too big to fail" banks.  Two weeks later, at the end of April, also marked the end of the Govt.'s home-buyer tax credit program.

These programs represented the two largest forms of stimulus that were put in place by "the powers that be" in an attempt to jump start the economy, and together, they have added over $1.5 Trillion to our country's level of debt.  These programs, and the accompanying debt, were sold to the U.S. public as way to help Main Street by freeing up the credit markets and promoting job growth.    Well, they have failed miserably on both counts.  The banks still aren't lending, and the unemployment situation hasn't improved a bit.  In fact, I would argue that it's worse, but that too is a topic for another post.  The bottom line is, the only people who have benefited from all of this stimulus are the very people who got us into this mess in the first place - the banks, or as some like to say, the banksters.  I could write a book on that topic too...but back to today's post...

It is my humble opinion that though most major corporations like Intel were not the direct recipients of Govt. subsidies, they were indirect beneficiaries of the stimulus programs simply due to how much money was pumped into the system in such a short span of time.  Our Govt. and many other govt.'s around the world created an artificial recovery via stimulus programs, which for a short amount of time drove spending and allowed companies like Intel to show growth, but as soon as the Govt. tit gets taken away, the situation deteriorates rapidly, something that we have clearly seen in the weakening weekly and monthly econ reports that have been published since May.  I'm not going to list all of the examples here, but the two latest from this past week were the miserable Durable Goods Report, which showed only 0.3% growth vs. an expected full 3% growth in orders for durable goods [Yahoo Finance article here], and the Q2 GDP revision from 2.4% growth originally reported down to 1.6%, a 30% reduction that will likely be reduced even further next month when the final Q2 GDP number is released. You can read some of my previous comments on the latter by clicking here.  If you require more extensive proof, Google all of the reports that come out on a regular basis and see for yourself....construction spending, new home sales, retail sales, unemployment, durable goods, etc. With the exception of a minor uptick in the first week of July, these and many other economic indicators have been getting progressively worse since the stimulus officially ended.

So where do we go from here?  I think Intel's warning and Q3 downward revision are just the first of many more warnings we'll see from corporate America in the coming weeks, and short of any new Govt. stimulus programs, I believe the economic situation will continue to deteriorate.  As for Intel's stock price, it's been dropping like a rock over the past several weeks, so I would expect some sort of bounce in the short term, with first resistance at 19 and second resistance at the gap fill around 19.45 - 19.50.

Your feedback is welcome.  Good luck trading.