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Its the worst inflation at the wholesale level in 31 years! It includes huge increases not only in energy but also in food, iron, steel, building materials and chemicals. It shows surging inflation at every stage of production. So it has not only delivered big inflation to manufacturers in September … its also promising big inflation for consumers in October. Mr. Greenspan and the Fed cannot ignore this. Two weeks from today, they must take aggressive action to jack up rates. If they dont, theyll be called worse names than just wimps. The Worldwide Tidal Wave Whatever the Fed does, its inevitable: Inflation will drive rates skyward, and when rates go up, they go up everywhere. They go up at every bank, broker and mortgage lender in the country. They go up in every town and every real estate market. They go up in Western Europe, Japan, China, the U.S., the U.K, and in virtually all 191 countries of the U.N. Higher rates sweep through the world promptly and pervasively, easily As usual, the United States is leading the way: The yield on 30-year Treasury bonds is the highest since April of this year … 30-year fixed mortgage rates have just pierced 6% for the first time in six months … and with yesterdays auction, short-term Treasury-bill rates are now at their highest level since April 2001. In response … The Bank of Canada is raising its key interest rate today. The European Central Bank is warning of imminent rate hikes that could come almost any day. The Bank of England, which until just a few days ago was contemplating a rate cut to boost its slack economy, has abruptly reversed course and is now considering a rate hike. China has just jacked up the rates paid on U.S. and Hong Kong dollar deposits for the fourth time since mid-May this time by a HALF percent. South Korea has raised rates for the first time in three years. Even Japan, which has religiously adhered to a zero-rate policy, is now talking seriously about rate hikes. A New International
Bidding War for Money Is Now Beginning! At first, the rising rate tide comes in small ripples. But soon it swells to tsunami dimensions. Reason: Every institution and every country in the world wants and needs to borrow more money: They want it to lavish on consumers or to invest in growth. They need it to pay off mountains of old debts coming due and roll them over into new debts. Theyre hooked on money and credit. They simply cant live without it. But to get it, they have to bid for it competitively, offering higher and higher rates. Right now, for example, the main reason China and South Korea are offering higher rates is because the U.S. was beginning to pull away their precious capital with its higher rates. And in the months ahead, a key reason the U.S. will be jacking up its rates even further is to help ward off a flight of money to China, South Korea and elsewhere. Its the opening round of an international bidding war that could escalate uncontrollably. First, with a tidal wave rising, dont expect any president or prime minister, Fed chairman or central banker, Treasury secretary or finance minister to plug the dike. That may have been their policy last year or the year before. But now they have no choice but to let rates rise. Its their only effective weapon to prevent run-away inflation. Second, be sure not to stand in its way. That means unloading any asset that may be vulnerable investment real estate, especially in the hottest markets … long-term bonds of all shapes and colors … plus interest-sensitive stocks (banks, insurers, mortgage lenders, etc.) For up to three free Weiss ratings on the companies of your choice, go to our new website, www.WeissWatchDog.com. (For up to 20 companies, along with e-mail alerts when your companies ratings change, theres a nominal charge of $8 per month.) Third, keep all your cash and equivalent short term. Why get stuck with todays low returns when youll be able to make higher returns in the near future? You just saw how T-bill rates have risen to the highest level in over four years. Now theyre bound to go much higher. For more information on Treasury bills and how to buy them, visit the Treasury Departments website. Fourth, avoid debt if you can. And if you cant, at least lock in a fixed rate. Already in a variable loan? Some lenders may let you convert. It will cost. But contrary to the advice being dished out to millions of consumers, its worth the peace of mind … and it will probably wind up saving you a lot of money. Another alternative: Pay down the loan more quickly. With rates rising, the amount you save in compounding interest costs could be a lot more than you might think. Fifth, stick with your hedges against inflation, including energy- and gold-related investments. Sixth, after taking all the defensive steps you can, if you feel your stock portfolio, your business or your personal finances are still vulnerable to rising rates, take out some rising rate insurance. The simplest vehicle is a mutual fund thats designed to go up in value as rates rise, such as the Rydex Juno Fund (RYJUX), which tied to long-term bond yields. Morningstars report on the Juno fund does not show good results. But thats to be expected, given that long-term bond yields were actually going down for most of this year. Now, that trend has reversed, Junos value is going up nicely and should continue to do so for many months to come. Another vehicle is our trading program that seeks maximum profits with limited risk from rising rates and their direct impacts. This is only for funds you can afford to risk. But it aims to help you build $4,500 into as much as $50,000 in a relatively short period of time. (Click here for more details.) Seventh, stay on the alert for a series of repercussions in the economy and the stock market, including sectors that are not closely identified with interest rates. Case in point: The tech sector, the focus of Tonys latest update …
A few hours from now, Intel will announce its earnings. Whether Wall Street sees it as a big bang or a non-event … a terrible shock or a pleasant surprise … its something you should play close attention to. Intel is or has been the king of microchips, and microchips are at the core of the entire computer industry, which, in turn, is at the heart of the worlds tech sectors. Moreover, Intel is now in a life-death duel with its rapidly-growing rival, AMD, and the outcome of this duel could impact many of your investments, whether you own technology or not. Today and in the weeks ahead, I will keep you posted as to how this duel is unfolding. But first, lets go back in time to see how it all began. It Wasnt Very Long Ago That
Microchips Didnt Even Exist! Just six decades ago, computers were more science fiction than reality … and more military than civilian.
Three years later, however, computers took a giant technological leap forward when a group of scientists at Bell Laboratories invented the transistor, shrinking the size of electronics and ushering in the information age. Problem: Transistors were discrete components and had to be wired together to form a single circuit, a process that was expensive and inefficient. So it wasnt until 1971 that a company called Integrated Electronics introduced the worlds first single-chip microprocessor, composed of 2,300 transistors etched on a tiny chip capable of executing 60,000 instructions per second. That company changed the world of computing. And it made its founders and investors wealthy beyond their wildest dreams. Its Name Today: Intel, Indeed, right now, institutions own 57% of Intels outstanding stock. Mutual funds like Fidelity Magellan, Vanguard PRIMECAP, American Century Ultra, and Putnam Voyager count it as one of their largest positions. My view: Their love affair with Intel is their ticket to disaster. Intel is an overvalued time bomb replete with fatal flaws … Fatal Flaw #1: The low-growth doldrums of a mature technology. The life cycle of new, cutting-edge technology (including computers and microchips) follows a well-established path: 1. Invention and early innovation. The individuals in the vanguard are the true pioneers of technological innovation. They are not, however, good business people. The technology is too far-fetched from real life. Profits are virtually nonexistent. 2. Practical application. The technology begins to find its way into the real world. But the early versions are still bogged down with high costs and inadequate performance. Investors throw money at the new technology but often come up empty handed. 3. Take-off phase. The technology gains a life of its own and is integrated into daily life, spreading rapidly through society. Thanks to newcomers with better ideas and stronger cost cutting, the price drops far enough to become a household product. Profits take off. Fortunes grow. 4. Intense competition. New companies and technologies challenge the leaders, often rendering the original versions obsolete. What was once the cutting-edge technology falls into a long-term decline. Investors, still thinking theyre on a gravy train, lose their shirts. Where do computers and Intel fit in to this life cycle? In my opinion, at the tail end of phase 3 or the beginning of phase 4. I say that because …
Rather, the most important feature for computer users today is connection speed to the Internet. For most Americans, the personal computer is rapidly being transformed from a computing machine into a connection machine. Result: The great sales curve has flattened. According to market research firm IDC, the growth rate of personal computer unit sales will drop from 10.1% in 2004 to 9.7% in 2005 and 8.6% in 2006. And thats unit sales. In terms of dollar sales, its dropping much more quickly as prices fall. Fatal Flaw #2: Chips have become commodities. Intel has spent a fortune on its Intel Inside marketing campaign to make you believe that its chips are better and faster than those of its competitors. And that perception has allowed Intel to charge a premium price for its chips. Trouble is, that strategy will not work going forward. Reasons:
Do you really care who makes the LCD screen on your monitor? Do you really care who makes the keyboard that you type on? And do you really care who makes the processor chip? No. Computers and the components that go in them have become commodities. More importantly, are you willing to pay $50 to $100 more for a computer just because its powered by an Intel chip? If you own a Hewlett Packard, Gateway, Acer, or Sony, the answer is no. Because all of them use competing microprocessors namely, those made by Intels arch-rival, AMD. How AMD Has Built
a Better Mousetrap Fatal Flaw #3: Forget about price for a moment. Most studies have shown that AMD chips are (a) faster, (b) use less power, and (c) throw off less heat than Intel chips. Even if Intel chips were just as cheap which theyre not most experts would agree that AMD chips are superior. Example: AMD beat Intel to the punch with its new generation of 64-bit processors, which processes larger chunks of data faster than the previous generation of 32-bit processors. But dont take my word for it. Ask Microsoft Senior Vice-President Bob Muglia, who says: So there are some things that AMDs done that Intel hasnt done … There’s no doubt they led the way on this one. Fatal Flaw #4. Major news flash: Market research firm Current Analysis reported on Monday that, for the first time in history, AMD sold more PC processor chips than Intel. Thats right. In September, 52% of all desktop computers sold in the U.S. had AMD processor chips. Intels market share was only 46%! The last major Intel holdout is Dell. But I doubt that will last much longer. Reasons:
Fatal Flaw #5: Intel is priced like were still in 1999. Intels stock is not cheap. In fact, it is priced as if the dot-com bubble had never burst.
Its selling for 3.79 times its book value compared to 2.82 for AMD. Its selling for 3.85 times its sales, compared to less than HALF that valuation for AMD. Plus, its recent track record is lousy: In 2000, Intel sold $33.7 billion worth of chips. In 2004, Intel sold $34.2 billion worth of chips. Thats a pathetic 1.4% growth in sales in 4 years! Profits have been even worse. In 2000, Intel made $1.51 per share of profits. In 2004, it made only $1.16 per share. So here you have a company thats barely showing any top line growth, thats actually making less money today than it did four years ago … and still Wall Street loves it? This is crazy. Fatal Flaw #6. Play the connect-the-dots game, and you will see there are plenty of warning signs that Intels ship is starting to sink:
First, if you own Intel, sell. Thats regardless of Intels numbers tonight. If their numbers kick off a mini-rally, grab the chance to sell at a higher price. If the numbers are a disappointment, hurry up and sell before it falls even further.
Third, I say nearly because there will still be some exceptions, and AMD could be one of them. AMDs share price is up 51% since May … while Intels has gone nowhere; up a meager 1% in the same period. This doesnt mean you should rush out and buy AMD, especially with its share prices now in a downtrend as well. But there IS a good bet here for investors who have some spare money to play with: You can buy put options in Intel, and you can buy call options in AMD. I wouldnt necessarily buy them at exactly the same time. Rather, when the tech sector rallies thats the better time to buy the Intel puts; and when the sector falls, its the better time to buy the AMD calls. Needless to say, this is not for all of your money, not even half of your money. Its strictly for money you can afford to risk. More importantly, keep the rest of your money safe from danger and growing steadily. Best wishes, Martin D. Weiss and About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. 2005 by Weiss Research, Inc. All rights reserved. |
The New Tidal Wave
If you think Fridays release on consumer prices was bad, wait till you see todays release on producer prices!
overwhelming attempts by any financial institution or central bank to resist the rising tide. 
Germans invented one of the earliest computers in 1941 to help design airplanes and missiles … the Allied Forces developed the Colossus to help decode German messages in 1943 … and IBM created its Mark I to produce ballistic firing tables for the Navy in 1944. It was half the size of a football field.
As the table shows, Intel continues to sell at a very lofty valuation. 
Second, if you own other technology stocks, watch out. Intel could lead nearly the entire sector down.Previous post: The Inflation Monster
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