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Wednesday, May 13, 2009

Leading and lagging indicators - where does Tech go from here?

So how do we view the most recent data from the tech sector? We two economic reports and comments from a CEO. They can be looked at as lagging and leading indicators respectively. How much weight do we give to each?

First, a lagging indicator --

From today's report of the ADVANCE MONTHLY SALES FOR RETAIL TRADE AND FOOD SERVICES, we see that retail electronics sales fell sequentially March to April 2.8%. The table below summarizes the weakness in sequential and year-over-year sales.

Apr 2009 adv. from --Mar 2009 prelim. from --
Kind of BusinessMar 2009 (p)Apr 2008 (r)Feb 2009 (r)Mar 2008 (r)
Electronics & appliance stores-2.8-12.0-7.8-8.8

We know the enterprise technology sector is more or less just limping along. Without the retail consumer buying gadgets and big screen TVs, the tech sector will find it difficult to mount a true recovery.

Now the leading indicator --

Yesterday, Intel's CEO Paul Otellini spoke at a conference at the company's headquarters. Otellini was quoted as saying "What we've seen so far is a little better than what we had expected," in referring to recent sales trends. Furthermore, he said recent economic assessments by research firm Gartner may have been too pessimistic. In March, Gartner predicted that shipments of PCs, the majority of which contain Intel's chips, would probably decline about 12 percent this year from 2008 levels.

Within the tech sector, semiconductor sales are usually looked at as a leading indicator for the rest of tech. If microprocessors are selling, than other PC and server parts should start to see demand. This would include memory chips, networking chips, disk drives, power supplies (that include analog ICs), monitors (typically flat screens these days), etc. Processor sales, in other words, give a bunch of tech sub-sectors a kickstart.

Conclusion --

So where does tech go from here? Sales for last month were disappointing though not as disappointing as they had been. An influential CEO sees things improving now though he warns that it is hard to say whether the improvement has staying power. Tech stocks have now declined for several days in a row with the NASDAQ down a full 3% today.

Today also saw the release of the MANUFACTURING AND TRADE INVENTORIES AND SALES report. The general thrust of the report is that, as of March, inventories had not yet declined to a level that would support strong growth in manufacturing. Yet Intel is now seeing a pickup in sales.

So is the Intel news company specific or can it be generalized across the tech sector? I think it helps some areas of tech but, in the end, investors will have to say "Show me" before accepting Intel's tentative results as a precursor to a tech resurgence.

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