Monday, July 24, 2006

Tech Deflation

Tech stocks have been getting killed as most folks know. There are a lot of reasons for this, but probably the most important reason is that tech prices continue to deflate big time. And if prices are falling, both because of intense competition and new technologies, it’s awfully hard to keep up profit margins.

Since 2000, chip prices are off 27 percent, and YTD 2006 versus 2005, chip prices are down another 5 percent. In the computer sector, since 2000, prices have dropped 58 percent, YTD they’re off 11 percent, compared to a year ago.

The consumer is of course, the big winner from these lower prices. But producers like Intel, AMD and Dell are naturally the losers. Compare this with industrial commodity prices that have been soaring in recent years. Of course, that is why industrial and commodities stocks have until very recently done extremely well.

This tech price deflation should slow down some of you inflation hawks out there. The chip stocks SOX index is off 30 percent or so, since early January.

Serious deflation.