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Greenberg: Beware Cyclical Tech Industry

My tech theme in recent weeks has been about a glut of chips.

Silicone Chip
AP
Silicone Chip

And lest you think this was just the figment of some analyst's (or perish the thought—short-seller's) wild self-fulfilling imagination, the trend has been confirmed by independent channel check firms and others in and outside of the tech industry.

It now appears to be that:

  • Notebook and PC demand was definitely down in July, with expectations being cut in August.
  • Pricing for commodity-like products has become aggressive.
  • And third quarter retail demand for PCs has been weak.

The list of companies caught up in this is wide, including Intel, AMD, Microsoft—virtually every company in the PC chain.

The bright spot: Smart phones. This is were estimates are actually being increased.

But this word of warning: Smart phones may be humming now. But something to think about: They typically have their come-uppance in January.

That's about the time Verizon, AT&T and the others know which phones are selling—and which aren't. Those that aren't get the axe, and so do their suppliers. But until then, it could be clear sailing regardless of the economy.

My point—and I think it's an important one: Not all tech is created equally, but for most of tech this one point often gets lost in the translation. Beyond the hype, it's really just another cyclical industry, just with some cycles longer than others.

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MSFT
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Strategist Francois Trahan of Wolfe Trahan said as much in commentary today to his clients in explaining why he believes tech will continue to disappoint: "Our biggest issue with the tech sector is fairly simple—it remains highly cyclical. The relative performance of most tech stocks remains highly correlated to leading indicators of the economy.

Moreover, our analysis suggests that the influence of macro on tech stockshas never been higher. This means that even the best tech story out there is still at the mercy of the business cycle."

Buyer beware.