Now Hear This!

Somewhere between 2pm and 2:30pm eastern news that the House had rejected the $700 billion Wall Street rescue plan began to spread on Monday. And as it did, stocks fell and tech stocks fell hard.

As the Dow Jones Industrial Average took a direct hit and sank by more than 750 points in the day's trading, companies like Apple, AMD, Google, and Intel all saw their stocks go tumbling down by double digits. Apple, AAPL, collapsed by nearly 18% and $22.98 to close at $105.26. AMD closed this afternoon down almost 17% at a meager $4.29. Google, GOOG, dropped more than $50 or 11.6% to close at $381. Intel, INTC, fared better, falling just more than 10% to $17.27.

The Philadelphia Stock Exchange Semiconductor Sector Index (an index of 19 large semiconductor stocks, also known as SOXX) dropped 8.8% or more than 28 points in the day's trading to a new 52-week low value of 293.31.

This blog entry marks the third week that coverage of the overall stock market has been warranted for a tech-focused publication like EDN. And the signs say that the market hasn't hit bottom yet, not even close.

Bill McClean at IC Insights sent out an industry update this afternoon (See "IC Insights cautious, but still sees 2008 growth" for our news coverage.) Wisely sprinkling words like "realistically" throughout the update, IC Insights reported that ASPs (average selling prices) are down, so even though unit shipments are expected to climb as much as 9% in 2008 compared to 2007, sales growth is suffering.

In the update, the research company reports, "While the volatility in the US stock markets … may be a precursor to a significant slowdown or recession in the US economy, historically, the annual change in the Dow Jones Industrial Average has not had a very good correlation with worldwide semiconductor market growth." The update offered the below chart as proof.

That's true. The semiconductor market isn't always spot on with the Dow, and of note in the chart is that over the measured time period the semiconductor market's CAGR (compound annual growth rate) was higher than that of the Dow.

But we're in a much different situation than we have been in previous economic cycles. Consumer electronics have not played as large a role in the semiconductor market's well being in the past. Nor have they influenced ASPs as heavily; semiconductor ASPs are down in large part because consumer electronics demand low retail prices for sales. Would the iPod enjoy as widespread popularity as it is does now if it came at a $500 price tag?

For decades, companies like Intel have had business backing the PCs its chips were used in. Now, Intel gets much more of its revenue than it did before from consumer models. And as we move into what will be a recession, if not a depression, business as well as consumer spending will be pinched.

It's for that reason, that the Consumer Electronics Association (CEA) beseeched Washington to come to an agreement this morning before the House slammed down the $700 billion bailout package in a 228 to 205 vote. 

“CEA on behalf of the vibrant technology industry urges the Administration and Congress to agree on a plan which will bring stability and confidence to our capital markets. Our economy depends on corporations and banks lending each other money and confidence needs to be restored so that overnight lending can allow business to continue and payrolls to be met," Gary Shapiro, CEA president and CEO, said in a statement this morning.

And here's the rub (and the reason why this blog continued its non-tech financial focus this week):

“CEA represents the corporate leaders in innovation and believes the US must remain a beacon for inventors around the world. Innovation creates jobs and requires stable capital markets and vibrant free markets that encourage investment,” Shapiro continued. 

When stocks slide and spending gets squeezed, companies look to make cuts. Look for more torpedoes to hit in the form of layoff announcements in the next month as semiconductor companies begin to report on the September quarter. Also expect cuts to 2009 R&D budgets as Q4 progresses. Less engineers and less research resources means less innovation. That, in turn, sinks competitive advantage and profits for stockholders.

As always, your comments are welcome. Share your thoughts on the bailout package rejection, the influence of consumer electronics on the semiconductor market's economic stability, and the overall impact on innovation below.

--Suzanne Deffree, Managing Editor, News