MorningWord 1/21/16: Bad News Bears

by Dan January 21, 2016 9:34 am • Commentary

On Friday in this space (here) I opined on the weak forward guidance and cautious commentary given Thursday night by semiconductor behemoth Intel (INTC). One analyst called the commentary ‘Uncharacteristically Cautious’. The caution meant the stock was on its way to a 9% decline for the day. My view was simple:

at this stage of the game it makes sense to take management’s caution as just that, caution, and question cautious optimism as uncharacteristic in the current state of the global economy.

Here are some direct quotes from INTC’s CEO and CFO on their Q4 conference call regarding the source of their caution, China (emphasis mine):

Brian Krzanich CEO
While our outlook for the first quarter reflects some caution about overall demand, particularly in China, we continue to expect solid growth in the business in 2016.

Stacy Smith CFO
This outlook represents a soft start to the year as we remain cautious on the level of economic growth, particularly in China.

Brian Krzanich CEO
It is the same type of trend we saw in 2015, emerging markets slower than the mature markets, U.S., Western Europe looking okay. China and the rest of Asia, slow. It was both, consumer and enterprise.

Stacy Smith CFO
Then our team on the ground in China has gotten fairly cautious about what is going on in China right now. 

The commentary and the stock’s reaction very much fit the current market environment. But do know that the economic conditions that led to the commentary did NOT just start while the stock market started its early 2016 swoon. Those economic conditions were clear long before January 1st.

So are we merely seeing a change in investor psychology? Investors had been conditioned to discount cautious commentary, buying dips in a bull market and being rewarded soon after. But as we now head into the meat of Q4 earnings in the coming weeks, the lower the broader market goes (currently -9% for S&P 500 (SPX) and -11% for the Nasdaq Composite on the year) the more likely that negative earnings news and guidance will be in the stocks when received.

Last night Xilinx (XLNX) (a major competitor to Altera, the company that INTC bought for $17 billion closed in late December) offered results and guidance that beat and met consensus estimates respectively, and the stock is up nearly 10% in the pre-market.  The stock’s reaction is at odds with INTC’s obviously, but remember that XLNX is a pimple on INTC’s backside, with $2.4 billion in trailing sales vs INTC’s $55 billion.  The stock’s gains could have more to do for the potential for a take-out says FBR’s analyst, per the

FBR Capital analyst Christopher Rolland says Xilinx’s (XLNX) regulatory filing detailing a change of control provision and benefits for management upon a takeout is “even more interesting” than the company’s better than expected Q4 results and “better than feared” guidance. The provision changes are similar to Altera’s (ALTR), which were issued six months prior to Intel’s (INTC) buyout offer, Rolland tells investors in a research note. The analyst believes Xilinx’s new provision increases the odds of a takeout and “perhaps lends credence” to the dealReporter article suggesting that Qualcomm (QCOM) could be a suitor.

So there are two take-aways, let’s be careful not to press shorts in market that is severely oversold, where investor sentiment has gone from sanguine to downright depressed.  And let’s be careful not to fit the news to the current sentiment environment.  If in three weeks from now, with dozens of data points from semiconductor companies and others in the PC supply chain confirm INTC’s initial commentary, then these stocks will be sales on any rally for months, but it makes little sense to press shorts at key support from a poor sentiment situation before there is a clear fundamental take.