Texas Instruments Sounds the Alarm

12/09/2011 9:27 am EST

Focus: STOCKS

Igor Greenwald

Chief Investment Strategist, MLP Profits

The chip maker’s warning is the latest ill omen for global growth, writes MoneyShow.com senior editor Igor Greenwald.

Whatever half-baked compromise comes out of Brussels, for the global economy it will probably have come too late.

Austerity’s relentless squeeze has finally persuaded even the cockeyed optimists at the European Central Bank to lower their expectations for 2012. The ECB’s growing willingness to lend whatever a cash-starved European bank might need on ever-easier terms speaks to dangers much graver than a middling recession.

Meanwhile, the Chinese real estate bubble has begun to pop in Eastern cities, and the bill for years of overinvestment hasn’t even been tallied yet, much less paid. And since China has accounted for a lion’s share of recent global growth and capital investment, its trajectory matters. The Conference Board, for example, is counting on China to deliver more than 40% of the cumulative increase in global GDP it expects next year.

All this is why last night’s warning by Texas Instruments (TXN) is so ominous. You’d be hard-pressed to find a company more exposed to the global growth story.

TI sells thousands of processors that serve as the guts of the modern economy to hundreds of thousands of customers, large and small, across a broad range of tech, industrial, and consumer applications.

Asia accounted for nearly three-quarters of its revenue last year. But lately, that hasn’t been the positive you might expect.

Late Thursday, TI trimmed the upper end of its sales forecast by 6%…and, of course, earnings will suffer a bigger letdown. “The reductions are due to broadly lower demand across a wide range of markets, customers, and products,” said the company.

The US economy has provided more encouragement of late. Jobless claims are at a three-year low, consumers have perked up since the late-summer dog days, business investment is holding up, and there are even glimmers of hope in some housing markets.

But if Europe and Asia keep slowing, as seems almost certain, the dollar might rise, crimping exports. And the US recovery remains fragile, plagued by high unemployment and underwater mortgages.

Lakshman Achuthan of the Economic Cycle Research Institute is sticking with his two-month-old US recession call for 2012, citing among other leading indicators the recent slowdown in income growth.

As this chart from Naufal Sanaullah shows, US income growth has been weakening for two years on an inflation-adjusted basis, and has now nearly flatlined.

That doesn’t augur well for consumer spending, unless we imagine that US businesses are about to go on a hiring binge, which they’re not. And while incomes stagnate, the net worth of US households dropped 4%, or $2.45 trillion, last quarter.

Texas Instruments will drain that some more today, reminding us not to take business spending for granted either.

Economist Ed Yardeni writes that factory orders are closely correlated with correlated with corporate profits, which may currently be peaking, in a rerun from the first half of 2008. “Profitable companies expand, while unprofitable ones do not,” Yardeni notes.

Companies becoming less profitable next year will also want to cut back, which is why TI’s warning will undoubtedly hit Applied Materials (AMAT).

Maybe this is just an issue with chips. Maybe Europe will pull a rabbit out of its dunce’s cap. More likely, Texas Instruments is just a preview of the coming attractions.

Until the omens improve, most stocks with cyclical exposure seem too risky to own. There’s a reason McDonald’s (MCD) and Altria (MO) are setting 52-week highs. They provide the little luxuries most of us can still afford.

As for the rest of the financial merchandize on offer, time seems to be on the side of a patient and flinty buyer.

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