Friday, January 23, 2009

Futures, Intel, and Silicon Valley

I am staying up late preparing for a trial next week. Out of habit, I checked the futures:

DJIA INDEX7,893.00-199.008,051.008,093.007,889.0005:02
S&P 500802.60-22.90824.50826.40801.5005:02
NASDAQ 1001,143.50-28.751,171.001,171.751,142.2505:02
S&P/TSE 60 508.90-16.30515.50519.00504.4001/22
MEX BOLSA19,469.00-154.0019,400.0019,850.0019,100.0001/22

As of around 2:19AM PST, futures are down 199 points. If General Electric (GE), which is reporting in a few hours, tells the Street it will cut its dividend or do nothing to sustain its credit rating, we are going to be in for a really bad day. I wouldn't rule out Dow 7500 if GE reports particularly poor results.

In other news, it appears my prediction that Intel stock will reach 14 dollars this week will be proven incorrect. My average buy price is around $13.50/share, so I am not concerned (Update on January 28, 2009: Intel stock today increased above $14/share). With the upcoming dividend payout, I will have an opportunity to buy more shares while I wait for Intel to return to more reasonable levels.

For now, Intel appears to be in full-blown cost-cutting mode. Bloomberg recently reported that Intel is shutting down its Santa Clara, CA chip factory:

There are no incentives to have sizable manufacturing operations in Silicon Valley. The Valley is hugely focused on intellectual property and innovation, rather than on manufacturing.

"Silicon Valley, CA" may now be a misnomer. As Cypress Semiconductor's CEO T.J. Rodgers warned earlier, employers are leaving the Bay Area in droves, taking manufacturing operations with them:

Few people know it, but so-called Silicon Valley is not really Silicon Valley anymore--almost all of the wafer fabrication plants have been shut down due to the hostile business climate.

As a Santa Clara County resident, this is troubling, but I understand why Intel made its decision. California has strict environmental regulations and very expensive land. As a result, it's almost always cheaper for companies to build fabs or other manufacturing operations outside of California. Although it's tough seeing a large, well-known employer offshore any work, I've heard over and over that the top brains and talent are still in the Bay Area.

It's surprising, however, that Intel seems to be offshoring such an IP-laden part of its business. The Bloomberg article doesn't specify whether a chip fab or a research fab is shutting down. In either case, if an overseas employee takes Intel's chip-level (not motherboard level) source code, or the manufacturing specs for Intel chips, it can sell them for millions of dollars to many interested buyers. That's one problem technology companies have when moving overseas to save costs--they may not be as familiar with local employees, cultural norms, or local court systems. America, despite its problems, still has a healthy respect for the rule of law--something that isn't universally shared.

Disclosure: I own Intel shares.

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