Intel Rocks the SOX

I have been getting aggressively short the semiconductor stocks the past week.  Intel did me a huge favour by purchasing a software company this morning. 

Intel Corp. agreed to buy McAfee Inc. for $7.68 billion, its largest acquisition, adding security software to its chipmaking arsenal.

McAfee investors will receive $48 a share in cash, Santa Clara, California-based Intel, the world’s largest chipmaker, said in a statement today. That’s 60 percent more than McAfee’s closing price yesterday. Both boards have unanimously approved the deal, Intel said.

Buying McAfee, which trails Symantec Corp. in security software, gives Intel a leg up on rivals that don’t provide computer protection, said Hans Mosesmann, an analyst at Raymond James Associates in St. Petersburg, Florida. The deal may also help Intel Chief Executive Officer Paul Otellini in his drive to expand beyond PCs by breaking into mobile handsets and landing more chips in other mobile devices.“Security is becoming a really big deal,” Mosesmann said.

“The security threats that are out there are not going away -- you could argue that they are going to get worse -- and having a tightly coupled hardware and software is a strategic advantage.”

Frankly, I cannot figure out why a semiconductor company is buying a software company.  Perhaps Intel is losing confidence in the future of the PC.

This purchase tells me that Intel would rather buy a software company than a semiconductor company at this point in the cycle.  And I am betting that that sentiment is correct.

For signs of the flagging health of U.S. consumer spending, look no further than Taiwan.

At Taipei-based Acer Inc., the world’s second-largest maker of computers, sales plunged 38 percent in July from a year earlier. Micro-Star International Co., a maker of boards that connect computer components, recorded a 15 percent drop.

Sales at Asian computer makers, which account for more than 80 percent of computer and parts imports into the U.S. each year, indicate American shoppers aren’t likely to boost the spending that accounts for 70 percent of the world’s largest economy. Already, consumption is growing at the slowest pace of any recovery since 1945. ...

Tristan Gerra, an analyst at Robert W. Baird & Co., last week cut his ratings on Intel Corp., whose chips run more than 80 percent of the world’s personal computers, following an earlier downgrade on Texas Instruments Inc.

“Everything is slowing down,” said Gerra, adding the slowdown in orders for chips extended into August and that the “initial visibility of orders into September is getting worse.”

UBS AG last week halved its third-quarter volumes forecast for Asian computer makers, known as original design manufacturers, predicting a 6 percent quarterly increase instead of 12 percent projected six weeks earlier.

If a slowdown is happening – and I believe it is – the OEMs and re-sellers are going to see inventory builds, especially with rumours over the past several months of double-ordering for chips.  As demand slows, orders for semiconductors will fall off a cliff and the stock prices of semiconductor companies will collapse.

The usual caveat applies – I could change my mind tomorrow, close out all my short positions and not tell you about it.  However, I have traded this group successfully for the past 15 years, and what I have learned is to buy the semis when they are getting bombed out and stocks are cheap relative to book value, and to sell them when things are good or beginning to deteriorate and the stocks are no longer cheap relative to book.

After a big upward move, this group has gone sideways for a year.  Once the chips start moving sideways after a huge move higher, their next big move is usually down.  I think we are at such an inflection point, and I am looking to increase my short position.


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