MorningWord 8/22/12: Tech Hardware Death Rattle, Can You Hear It?

by Dan August 22, 2012 9:07 am • Commentary

MorningWord 8/22/12:  If you listen very closely, you can almost hear it, it is the sound of the infamous corporate death rattle for the once dominant PC maker DELL.  If you have been an investor in companies like NOK, RIMM or MOT this sound is not unfamiliar too you, but truth be told it is not usually heard until it is just too late too turn around your investment.

Last  night DELL reported fiscal Q2 earnings that were below street consensus and guided Q3 and fiscal 2013 down.  While expectations were not exactly running high as it relates to full year guidance (company had guided to above $2.13 back in Feb, while consensus sat at $1.90) the company guided to at least $1.70.  As expected, PC sales led the weakness, as they make up 50% of the company’s revenues.  There were a couple bright spots though, sales of Servers, Software and Storage to corporations saw a year over year gain and the company hired an executive from KKR and formerly HPQ to run their Enterprise Solutions Group that houses these products.  My first thought, HPQ, really?  Well as I said in my preview yesterday, these guys are fairly well screwed and the stock appears to be a classic value trap.


Price action yesterday was slightly reminiscent to what we saw back in March/April before we topped out.  As some were calling it, we were in an NBA market, Nothing But Apple.   Yesterday AAPL opened to a new all time high, dragging the SPX to a new 52 week high, only to reverse on a dime at about 10:40am.  The SPX took this in stride for a bit, but then also turned lower at about 11:19am, while both spent the rest of the day grinding lower (chart below).

1 Day AAPL vs SPX Aug 21, 2012 from Bloomberg


AAPL is nearing about 5% of the SPX’s total weighting, and nearly 20% of the Nasdaq Comp, don’t be mistaken about who is driving the train here.  Put another way the SPX and the Nas really need AAPL to release a Revolutionary New iPhone, not just an evolutionary iteration as they have apparently gotten used to over the last 2 cycles.  AAPL’s 14% rise since reporting in July poses risks to the broad market, this coupled with the new found enthusiasm for bank stocks.  If European debt/banking fears re-ignite, coupled with the usual global growth fears we could see very similar price action to the spring where tech and financials 2 of the great outperforming sectors of Q1, lead us lower, and quickly.

With the SPX above 1400 (for now), I expect disappointment in Jackson and at the Fed’s Sept 13th FOMC meeting, while Europe remains a wild card. If I read another blog post about the impending “Bazooka” that the ECB is prepared to wield I may puke, it may be a short term trick, but it ain’t gonna fix the ills on anything more than on a short term basis (remember operation twist).