Intel's Founder on America's Future

Fantastic article from the NYT:

http://www.nytimes.com/2009/04/12/business/12immig.html

“We are watching the decline and fall of the United States as an economic power — not hypothetically, but as we speak,” said Craig R. Barrett, the chairman of Intel.

I've sued Intel before, so I don't agree with everything it says or does, but Mr. Barrett knows of what he speaks. The fact that politicians are not heeding intelligent entrepreneurs like Mr. Barrett means our political system is broken. Politicians seem to be incapable of educating their constituents about the benefits of immigration. Part of the problem is that media outlets, which used to have substantive political discussions, such as FDR's fireside chats, have moved away from being an educational tool. In addition, the media's shock-value brand of journalism has diluted America's capacity for intelligent analysis.

When the Internet came on the scene, it seems that traditional media outlets ditched intelligent commentary and analysis in favor of "Do whatever it takes to look at me" journalism. Prior to the Internet, for example, reality television--where a loudmouth or superficial person was vaulted to celebrity status--was a small portion of mainstream media. (MTV's "The Real World" was really the only major reality show for years.) In contrast, today's media items are designed to appeal to the lowest common denominator (e.g., Octo-mom) to attract readers. In an age of video games, the Internet, text messaging, and numerous other entertainment options, mainstream media resorted to bottom-feeding to get eyeballs. As a result of so much information--most of it devoid of any real analysis--the public gets little news that has any real substance. If you assume that mainstream media is an important pillar in keeping a country on the right path, the media's declining standards should frighten you.

Speaking of pillars, the New York Times has been a beacon of light throughout America's history. It was responsible for the seminal case of NYT vs. Sullivan, which affirmed a newspaper's right to publish controversial new reports without fear of litigation. Here is one of my favorite parts of the opinion:

Those who won our independence believed . . . that public discussion is a political duty; and that this should be a fundamental principle of the American government. They recognized the risks to which all human institutions are subject. But they knew that order cannot be secured merely through fear of punishment for its infraction; that it is hazardous to discourage thought, hope and imagination; that fear breeds repression; that repression breeds hate; that hate menaces stable government; that the path of safety lies in the opportunity to discuss freely supposed grievances and proposed remedies; and that the fitting remedy for evil counsels is good ones. Believing in the power of reason as applied through public discussion, they eschewed silence coerced by law - the argument of force in its worst form. Recognizing the occasional tyrannies of governing majorities, they amended the Constitution so that free speech and assembly should be guaranteed."

Thus we consider this case against the background of a profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open, and that it may well include vehement, caustic, and sometimes unpleasantly sharp attacks on government and public officials.

Now ask yourself: are Octo-mom, Madonna's adoption efforts, and Lindsey Lohan's romantic exploits what America's founders contemplated when they talked about our duty to have "robust" political discussions? To wit: the top stories on Yahoo's main portal right now are about a ship captain's rescue; Obama's dog; Lohan's hair; and cable TV bills. Go back and re-read Mr. Barrett's comment above.

Oh, the decline of an empire.

Futures, Intel, and Silicon Valley

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

http://www.bloomberg.com/markets/stocks/futures.html

DJIA INDEX	7,893.00	-199.00	8,051.00	8,093.00	7,889.00	05:02
S&P 500	802.60	-22.90	824.50	826.40	801.50	05:02
NASDAQ 100	1,143.50	-28.75	1,171.00	1,171.75	1,142.25	05:02
S&P/TSE 60	508.90	-16.30	515.50	519.00	504.40	01/22
MEX BOLSA	19,469.00	-154.00	19,400.00	19,850.00	19,100.00	01/22
BOVESPA	38,371.00	-428.00	39,400.00	39,400.00	37,500.00	01/22

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.

Intel Makes its Numbers, and My Deja Vu Experience

Looks like my hits are coming early this year--as I predicted, Intel (INTC) made its earnings numbers today. See my prediction here, and the AP earnings summary here. If the presidential inauguration goes well, Intel stock may rise above $14/share next week (Monday is a holiday). If I am correct in this follow-up prediction, I should achieve a 5.7% gain in less than one week. (If you're interested, you can view the results of my 2008 predictions here.) (Update on January 28, 2009: Intel stock today increased above $14/share, making my prediction true, but a few days later than I expected.)

If you read the first article linked above, you'll notice that two analysts downgraded Intel, even assigning a $10/share price to Intel recently. (Intel is trading around 13.58/share in after-hours trading.) Analysts came under fire because they were overly optimistic during the subprime crisis, so expect a reversal of sentiment--analysts will now become too pessimistic. In over a decade of investing, I've rarely seen any analyst issue "sell" ratings or assign prices to blue-chip companies below current trading levels. If you're a contrarian investor, you may be encouraged by these overly pessimistic signs. I know I am.

I just re-read a Money "special report" issue from September 2002, another turbulent time. The cover page had the following deja vu titles: "When will the bear market end?"; "Where should I put my cash?"; and "Who can I trust?" As I flipped through the pages, I began smiling. If Money magazine re-issued its September 2002 issue today, no one would notice any outdated information. Indeed, most stock prices and indices are back to where they were in 2002. In addition, Americans had just suffered through the Enron and Worldcom debacles, which reduced not only investor confidence, but faith in the entire capitalistic apparatus.

Let me share with you some lines from Money's 2002 special report--see if they look or feel familiar:

Stock prices in free-fall: "There's a disconnect between how these businesses are doing and how their stocks are performing," says one manager. (p. 36)

Anger over corporate irresponsibility: Nell Minow has developed some very clear ideas of how to cure what ails corporate America. To her, it boils down to one thing: Change the way boards of directors operate. Yes, reform of the accounting profession is needed. Yes, it ought to be easier to put corporate fraudsters in jail. Yes, something has to be done about those insanely outsize options packages that have given so many executives the motive to commit fraud. But to Minow, all of this is secondary to reforming corporate boards. (pps. 57-58). [Author's note: someone get Ms. Minow an SEC position pronto.]

Anger over inadequate government oversight: But after 2 1/2 years and a market loss of nearly $7 trillion, the White House and Congress still don't get it. (p. 63)

No commentary needed: Whoever said crime doesn't pay obviously never ran a big corporation. (p. 64)

Bargain hunting: Is General Electric (GE) stock a bargain? It looks like one to us. (p. 68) [note: GE was selling for around $28/share at the time. It is now selling for $13.77/share. I liked it at $14.66/share and look forward to averaging down.]

Nuff' said: Is Our Financial System Broken? (p. 79)

What's the lesson? Just this: the more things change, the more they stay the same. I will leave you with some reassuring words from experienced investor Peter Lynch, circa 2002 [warning: PDF file]:

RUKEYSER: If you could give one sentence of advice to scared investors right now what would it be?

LYNCH: I think you ought to see some kids. You know, hire an eight-year-old. Hire a six-year old. Just watch them. They don't know who Alan Greenspan is. They don't know about the shape of the curve. They're optimistic about the future. We'll be fine for the next 30 or 40 years.

When I heard Mr. Lynch on the Louis Rukeyser show in 2002, I remember thinking, "He gets it." I coach youth basketball to get away from the vicissitudes of my legal practice and investing. There's something about seeing a bunch of happy, healthy kids coming together as a team that inspires faith in the human race. This year, I'm coaching 4th graders at the Campbell Community Center. My favorite current NBA player is the San Antonio Spurs' Tim Duncan. Yet, in some sort of cruel cosmic joke, my assigned team this year is the Spurs' nemesis, the Lakers. Fittingly, our team uniforms consist of hideously bright yellow t-shirts. Oh, well. Things on the outside may look bad right now, but deep down, our future is bright, we have plenty of land, a new president, and peace within our shores. I don't know when we'll get a market recovery, but just like post-September 2002, it'll be here before we know it.

Disclosure: I own shares of GE and Intel.

Intel Stock

At these levels, I am a buyer of Intel (INTC) stock. You can pick up shares now for around 13.24/share. I realize Intel is reporting earnings on January 15, 2009, but Intel already warned the street that earnings would be below expectations. Unless things have changed substantially in the last week, it's hard to see any surprises happening tomorrow. No surprises is usually good for a company's stock price. Intel appears to have around 10 billion dollars in net cash, and its 4% dividend may prevent a deep slide in its stock price. On the other hand, options contracts relating to Intel stock expire on January 16, 2009, so expect short-term volatility.

Update: two analysts disagree with me--they have price targets of 11.50 and 10 dollars. Intel closed trading today at 13.08/share.

Disclosure: I own Intel shares and recently bought more Intel shares.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

An X-Mas Shopping List

For those of you looking to tip-toe back into the market, looking at money flows is one way of seeing what others are buying. On December 18, 2008, it appeared investors were buying the following companies: Cisco (CSCO); Intel (INTC); Coca-Cola (KO); and Wells Fargo (WFC). Investors might also consider adding a Brazilian ETF (EWZ) and an undervalued technology company, Maxim Integrated Products (MXIM), to the above list.

The dollar's recent decline favors American companies that receive a substantial portion of their revenues abroad. Although one of my colleagues thinks Coca-Cola is sugar water and refuses to buy the stock, Coke has a decent dividend; good cash flow; and worldwide appeal. Even if a large percentage of the entire world becomes unemployed, they still have to drink something, and coffee--especially at 4 dollars a cup--is losing its status as the drink-du-jour. I also find it unlikely that people will cut back on soda, because soda is still cheaper than most other drinks.

Cisco is poised to rebound as an infrastructure play, especially if it gains ground in China and other Asian countries. Cisco has taken various actions--which include providing support after the Sichuan Province earthquake--to convince the Chinese government it wants to be a technology leader in China.

Wells Fargo represents a risky contrarian play. When the real estate market recovers--which it will, at some point--Wells Fargo will benefit. If it maintains its dividend, investors will receive around 4% while they wait, a better rate than most CDs. I considered replacing Wells Fargo with an REIT, but I used to own REITs primarily for their dividends. At this time, Wells Fargo's dividend is high enough for me to prefer its diversified business over a REIT. I also like the fact that Warren Buffett owns Wells Fargo shares.

EWZ is a Brazilian ETF. I've included it here primarily for diversification purposes, especially in the energy/commodities sector. Some investors may prefer to buy ConocoPhillips (COP), another Buffett pick, instead.

Intel (INTC) was downgraded by Jefferies and Co. today. (Interestingly, Jefferies (JEF) itself is being sold short by Barry Ritholtz, who accurately predicted the most recent market downturn.) With a 3.6% dividend yield, a dominant market position, and around $10 billion of net cash, it's hard to see Intel stock remaining at current levels. Although the U.S. market is saturated, Asian consumers will be buying more computers, and businesses worldwide will be buying more servers--products which generally require or use Intel CPUs, due to Intel's quasi-monopoly position in the processor market.

Intel's real problem is that lower-end laptops have become so cheap, they retail for about the same price as a Blackberry, iPhone, Google Android phone, and Sony Playstation. As a result, if consumers choose to delay upgrading their laptops and instead buy an iPhone or a video game console, Intel's revenue will suffer.

Maxim Integrated Products (MXIM) has no debt and finally appears to have its financial house in order, having resolved stock option backdating issues. Now that its external issues have been resolved, Maxim should do well as more consumers worldwide buy products using Maxim's analog chips. Maxim sports a 6% dividend yield.

A caveat: I don't work on Wall Street; I'm not in the business of making stock recommendations; and I don't have any financial licenses or formal financial training. Do your own due diligence before buying shares of any company. Although I currently own shares in all the companies mentioned above, I may sell all my shares in the future. Current conditions are volatile and favor short-term traders.

Disclosure: I own shares in all of the companies mentioned above. My relatives also have other financial interests, including shares, in Maxim Integrated Products (MXIM). You can read about Maxim's recent shareholder meeting here.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

I plan on revisiting these stocks a year and two years from now. Prices at the close of business on 12/18/2008:

CSCO = 16.66
EWZ = 35.95
INTC = 14.26
KO = 45.18
MXIM = 12.00
WFC = 29.65

S&P 500 = 885.28
DJIA = 8,604.99
Nasdaq = 1,552.37

Update on December 23, 2008: a JP Morgan analyst disagrees with my assessment of MXIM. We will see in December 2009 who was right about MXIM. Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a "sell" or "underweight" rating, that's when contrarians and value investors should take a closer look at a stock.