Inventory glut spells doom for techs

By Bill Fleckenstein

When expectations seem to be far out of line with reality, it's a setup for disappointment. That's how I see this week shaping up in the stock market.

For a flavor of the current thinking, let's go back to last Monday. That morning, Advanced Micro Devices (AMD, news, msgs) announced it was cutting revenue expectations for the quarter by about 20% (the second puke this quarter). Also, the company said it was going to freeze hiring and cut capital expenditures.

Pavlov's bull

That news prompted tech bulls to take the "prudent" course -- and buy more AMD. They also piled into Intel (INTC, news, msgs), with the tortured logic being that since AMD had pre-announced twice and Intel hadn't, then Intel's quarter must be going swimmingly.

One dead fish even tried to suggest that Intel-as-a-monopoly was "back," implying that the company would no longer see its margins pressured due to competition with chip-making rival AMD. This wrong-headed deduction couldn't be further from the truth.

Of Intel and inventory purgatory

I expect that Intel did not have a good quarter. I also expect that when the company reports after the close Tuesday, it will be unable to claim the future looks bright. In addition, I imagine that Intel has a large inventory problem due to its excess capacity, which has continued to build for more than a year.

Nonetheless, as of last Tuesday's close, Intel had rallied nine days in a row to finish at $20.68. That day, one could have purchased INTC April 20 puts for just under 20 cents. [A put option is a contract that gives its owner the right to sell a security at a stated price and time. In this case, the put would allow its owner to sell the stock for $20 on April 20.] I bought some and noted in my daily column (subscription needed) that for folks willing to accept a 100% loss on their speculation, those puts might be an interesting speculation into Intel's earnings announcement. (Believers in the efficient-market thesis may like to see how this plays out.)

Intel isn't alone. There is too much inventory nearly everywhere, as Fred Hickey recently noted in his High Tech Strategist subscription newsletter: "We have excess PC inventories, excess cell phone inventories, excess auto inventories, excess networking inventories (the Cisco 'Lean' initiative), excess telecom inventories (carrier consolidation), excess PS3 and Xbox game consoles (disappointing sales), excess iPod inventories, excess computer server parts, excess disk drive inventories, excess DRAM inventories, excess microprocessor inventories -- and it will all be cleared during the housing and credit bust, and the first consumer cutbacks in 16 years."

A BlackBerry pie in the face

Of course, this kind of analysis is irrelevant to stock-chart aficionados, who seem to be many in number these days. Which brings me to BlackBerry maker Research in Motion (RIMM, news, msgs), whose chart was signaling good news Wednesday. For those who don't know, RIMM was widely expected to win at beat the number, which it did not. Among other negative developments, the company announced that it was the subject of an official Securities and Exchange Commission investigation. (Did it just find this out the day it was supposed to report?)

In any case, this is a perfect example of how a stock chart not only didn't have the information right, the chart had it dead wrong, as the breakout turned into an 8% dive Thursday. With so much emphasis placed on market action these days, by people who don't bother to learn the fundamentals (and think they're irrelevant), I would expect this type of action to become more prevalent.

Linear letdown

Justin Mamis, who calls himself a "chartist," on Thursday had some comments in a similar vein that pertain not just to RIMM but to the overall market. I thought they were worth sharing:

"Okay, class, take a look at RIMM. Notice how it looked like it was failing when it broke down to a lower low in late January, but then rebounded. It ought to have failed at resistance but didn't. We began to jot it down as 'better,' as it kept on going to a minor, higher high early in March, backed off (but only to a higher low in late March -- 'better' yet again -- and then took off strongly higher late last week. RIMM went through a whole series of looking like it ought to, and was going to, fail at resistance, until we were proven too grumpy. When it broke out, looked better, we kept writing it down on various positive lists, considering it an oddity among generally weak techs. Now consider how 'strong' turned into 'vulnerable,' and 'vulnerable' has turned into 'dangerous.'

"Such stocks as RIMM are the stocks on the new high lists; these are the stocks that seduce; and, for want of anything 'better' -- because the stocks that look like they ought to break out -- Yahoo (YHOO, news, msgs), Ebay (EBAY, news, msgs) -- don't, these are the stocks that get bought, even though they are already up. One can stare at our daily chart and not find an inkling that anything was wrong. A comfortable holder could have left at the close of trading yesterday afternoon to get to his daughter's softball game, and never even known. Notice how, unlike genuine middle of bull markets, when it gets late, the strong stocks seem even stronger, and even more appealing, even less risky because they are so seemingly strong. But, in fact, they are more vulnerable instead."

It goes without saying that the dead fish on the RIMM conference call didn't ask any questions about the SEC investigation, didn't ask about the balance sheet, didn't ask what specific products will drive the company to its revenue expectations given that it's taken two product launches to barely make the past two quarters. And it was only asked in passing where Chief Financial Officer Dennis Kavelman was. I find it quite surprising that the CFO was not on the call, given the controversy. Of course, these days CFOs come and go, and the market barely notices anymore.

To get a firsthand feel for what passes for information these days, I encourage you to listen to the RIMM conference call (subscription needed). Though I must warn you that it's particularly nauseating. The comments from CEO Jim Balsillie are so obnoxiously outlandish that he almost makes Cisco Systems (CSCO, news, msgs) CEO John Chambers seem downright dour.

A somewhat g-RIMM forecast

In sum, I believe Research in Motion's stock is finally cooked. The company has no product to fill the channel this quarter. Given the growth of receivables and inventory, I believe RIMM struggled very hard to make this quarter just ended, and it won't make the guidance for the current quarter.

At the time of publication, Bill Fleckenstein was short Intel and long Intel puts, and short Research in Motion and long Research in Motion puts.