PC components weaker in March; cells bounce off very low February

Seagate blasted pricing down 15% in 250-320gb hard drives in the last 2 weeks of the quarter, according to Baird late last week and Wachovia today. Inventories are running in the 7-8 week range whereas industry guidance is roughly 4-6 weeks. Both Western Digital and Seagate raised guidance intra-quarter, so they've both got to be somewhat surprised by the downturn. That said, hard drive stocks are clearly telegraphing number reductions going forward as Seagate and Western Digital trade at 6* next year's earnings estimates. I'd be looking to buy the lowered forecasts when they come.

Notebook continues to be strong and desktop continues to be weak. Margins are generally better on notebook components which continues to bolster profits somewhat for component suppliers. Desktop feels very weak. Financial companies are an important vertical for desktop sales. The layoffs and frozen credit markets are certainly constraining IT spending habits there. Makes sense. Every time a company lays a guy off the IT manager redeploys his desktop to someone else either within the organization.

In cell phone components, February was suppressed by snowstorms in China. They bounced afterward but I don't think it was enough to keep June numbers from coming down. I stay negative on Texas Instruments and National Semiconductor.

Memory pricing still stinks. Elpida is talking about raising prices on DRAM. I don't see how that's going to work. A number of DRAM manufacturers have been holding inventory off the market, waiting for better pricing. That scenario tends to lead to a spill lower. Most DRAM manufacturers are in the red here and have been subsidizing the DRAM business with other product lines. As the other product lines are likely getting weaker, expect DRAM inventory write-downs. Micron is apt to remind investors that memory is a supply driven market. There's still too much supply. Expect further capex cutbacks as we move through the year. I remain negative Lam Research, Mattson, KLA Tencor, Varian Semiconductor.

Starting late this week we're eligible for earnings pre-announcements. I don't expect a lot of good ones. The question is more of what's factored into stocks. The semiconductor index is down 40% from its October high. Numbers are clearly going lower. Valuations look very compelling but business looks weaker. My guess is you buy bad news when it becomes a headline but there's time.