The New Technology Cycle

So far this earnings season, we are seeing a clear
separation between two of the stock markets leading sectors Starting with
Intel (Nasdaq:
INTC) and continuing with Apple (Nasdaq:AAPL) and IBM (NYSE:IBM), technology earnings were
fantastic in the fourth quarter.

Frankly, it’s tough to express just how good
Apple’s quarter was. Apple’s own forecast was that it would earn $4.80 a
share. The actual number came in at $6.43 a share. Revenues hit $26.74
billion, when $24.43 was expected.

Yes, Apple “found” an extra $2 billion in sales in
the quarter, but it’s the breakdown of product sales that is truly
amazing. Apple sold 7 million iPads, 19 million iPods and 16 million

iPhones, and iPods, especially, are somewhat
mature products. And sales numbers still blew estimates away. But for a
relatively new product, 7 million iPad sales is incredible. One
commentator said that no one believed Apple could even make 7 million
iPads in a quarter, let alone sell that many.

And now, companies like JP Morgan
Wells Fargo (NYSE:
WFC) and Cardinal Health (NYSE:CAH) are all testing iPads for
their employees. Wow. Sales could get even better.

I guess it’s time to forget what I said yesterday
about Apple stock moving lower on Steve Jobs’ leave of absence. That dip
has come and gone. In retrospect, Jobs announcing his leave of absence on
earnings day was a good indication that Apple itself had a clean bill of

did quite well too. It reported $4.18 a share vs.
estimates of $4.08 a share. Revenue hit $29 billion vs. estimates of
$28.3 billion.

IBM saw growth in
all its divisions, with hardware sales up 21%, software up 7% and
services up 18%. (I should note that I’ve had
IBM in the Top Stock
since it was $118 a share.)

Still the results kind of pale in comparison to

*****There is very interesting shift going on in the tech sector right
now. Handheld, wireless Internet devices like the iPad and iPhone and
other smartphones, are giving the PC market a real challenge. And

Wall St. knows

That’s why there has been so little enthusiasm for
Intel’s strong results. Intel doesn’t have much exposure to wireless
chips. And so it is perceived that Intel is missing this boom in wireless
Internet devices.

Recall that Qulalcomm (Nasdaq:QCOM) recently bought wireless
chipmaker Atheros for a nice premium.

The wireless boom is creating a strong technology
growth cycle. New devices are requiring new chips and more robust
networks. We are clearly seeing device sales scream higher. Wireless chip
stocks are doing great. Smartphone apps developers are going crazy. And
subscription revenues to network providers like AT&T (NYSE:T) and
Verizon (NYSE:VZ) are booming, too. Though I should note that AT&T
hasn’t done much with its iPhone monopoly. And now that it’s about to
lose it, it’s hard to be bullish on that stock.

*****Personal computers are becoming dinosaurs. Of
course, we still need them. But the development cycle is basically set.
And pricing has become commoditized. Just look at Dell
stock. It’s barely recovered from its crisis lows. And even with a
forward P/E of 9, it trades with a
PEG ratio of 1.3. Simply not a
lot of growth there.

Getting back to Intel, yes it missed the first
stages of the wireless chip boom. But it can get right back in the mix
with a strategic acquisition. I bet CEO Otellini is still kicking himself
for not snatching up Atheros. I also bet Intel makes a move, and

Top candidates would be Broadcom
and Nvidia (Nasdaq:

*****I should note that not everyone is bearish on
PCs. Nomura Securities analyst Romit Shah says that of the 352 million
PCs sold in 2010, only about 15 million are vulnerable to tablet (iPad)

Laptop computers are most vulnerable to tablet
sales. Of the expected 61 million laptops to be sold in 2011, 15 million
could be replaced by tablet sales.

*****Now, I said earlier that another sector is
dampening the enthusiasm for technology. You’re probably aware I’m
referring to the financial sector. Earnings for both JP Morgan
and Goldman Sachs (NYSE:GS) were in line. But Citigroup (NYSE:C) missed,
badly, I would say. And that doesn’t bode well for Bank of America
which reports on Friday.

It should be clear that banks are still grappling
with the loss of mortgage business and the fallout from the financial
crisis. And quite simply, while the climate for banks has certainly
improved, as a group, they are not going to return to the growth they
enjoyed in the last decade anytime soon.

I was an unabashed bull on the financials in late
August and through much of this rally. I loved
BAC at $12 and Citi at $3.50.
But the run for financials is probably topped out.

While technology stocks have upside, the
financials more accurately reflect the overall economy, with high
unemployment, weak housing market and high debt levels at the state and
federal level.

*****Stocks are struggling to maintain a positive
bias this morning. The odds that a correction for prices is at hand are

If you want some great ideas on how to play a
downside move, check out my Wyatt Investment
colleague Jason Cimpl and his

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Jason does a great job of nailing profits and
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doesn’t meet your needs.

*****As always, send your
questions and comments to [email protected].

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