Intel Does It Again
September 3, 2004
I think PLENTY is already being written on just how bad Intel's whiff was last night. Essentially, Intel is continuing the pattern that I wrote about last July. However, I DID want to do one follow-up. In that piece, I claimed that Intel was like the canary in the coalmine of tech, signaling to us that trouble was bearing down on us. While this has proven to be true to some extent, I thought I would look more closely at that claim.
Certainly, intuitively, if Intel is having problems with inventory, pricing, and production, everything else up and down the supply chain is either being effected or contributing to the problem. Since Intel's products are at the core of a lot of the machinery in tech, it stands to reason that Intel will tell us a lot about what is going on. However, we have heard recently both Dell and IBM wax poetic about how good business looks for them. Even Tech Data, one of the world's largest distributor of IT goods, suggested recently in their earnings report that demand is looking pretty good to them. (In fact, an analyst asked Intel's President Craig Barrett about some of this, and Barrett responded that he sure would like some of these folks to start building motherboards and call him for product. Let's just say that you have been warned…)
So, given all this I decided to just pull up some correlations of Intel vs the NASDAQ. Correlation measures the tendency of one thing to move with another. The scale is from -1 to 1 where -1 means when A goes up, B always goes down, where 0 means that there is no relationship, and 1 means that when A goes up, B also goes up. Sure enough, I did NOT get a nice clean picture suggesting that Intel is a bellweather for technology STOCKS. The chart below shows the correlation between Intel and the NASDAQ based on closing prices of the previous 90 trading days. That is, on any given date, I measured the correlation in prices in the previous 90 days. The next day, I would drop the first date in that series and add yesterday's. Get it? Why 90-days? I like 90-days as a measure of intermediate trend. Definitely, one day I should look at multiple windows to determine what kind of bias 90-days introduces. Anyway, you will see that at key junctures, the correlation between Intel and the NASDAQ broke down…mainly because Intel's price stayed strong relative to the NASDAQ. But for the most part, the correlation between the NASDAQ and Intel is very high…often close to one. NOW, we have something quite different. Intel has been consistently breaking down all year, but the pace of its decline as out-stripped the NASDAQ for long stretches this year. In fact, since the technology bubble reached its final stages, there has not been a longer period where Intel's correlation to the NASDAQ has been so poor as it has been these past 9-11 months.
What does it all mean? For now, all we can say is that Intel seems to be losing its grip of influence on the NASDAQ. This could mean that the market is coming to terms with thinking of Intel as a big, mature technology company that cannot grow as fast, nor be as profitable, as tech at large. Looking forward, you could also make the argument that the NASDAQ is lagging the dynamics that Intel is already telling us. And finally, you could make a case for both. I definitely agree in the latter argument given my overall bearish in tech. Plenty of copmany's are still reporting decent results, so there is no reason for tech to completely fall on its face. But if current trends keep up, Intel's troubles will catch up to everybody.
Be careful out there!