Technology options traders are the most bearish since May 2010 amid concern demand is slowing while Thailand’s worst floods in almost 70 years disrupt supplies.
Three-month puts to sell the Technology Select Sector SPDR Fund (XLK) cost 11.29 points more than calls to buy, according to implied-volatility data compiled by Bloomberg. The price relationship known as skew increased 57 percent in the past three months, the second-biggest rise among nine exchange-traded funds tracking broad Standard & Poor’s 500 Index industries. The measure reached 11.67 on Nov. 9, the widest in 17 months.
Speculation Europe’s debt crisis will slow global growth combined with flooding in Thailand that caused the worst supply disruptions since the March earthquake in Japan have increased concern about technology earnings before the holiday season. Apple Inc. (AAPL), the world’s largest technology company by market value, fell 3.9 percent last week amid fresh concern that demand for iPads and iPhones is slowing.
“Uncertainty on Europe and the global economy is causing people to wonder how successful these companies are going to be,” Giri Cherukuri, who helps oversee $2.5 billion as head trader for Oakbrook Investments in Lisle, Illinois, said in a Nov. 11 phone interview. “People are very focused on whether companies can beat earnings expectations and trying to get a handle on how the economy is doing and how that’s affecting tech earnings.”
The Chicago Board Options Exchange Volatility Index, the benchmark measure of U.S. equity derivatives, decreased 0.4 percent last week to 30.04. The gauge has remained above 20.54, the average over its 21-year history, since July. It gained 9.2 percent to 32.80 as of 12:29 p.m. in New York. CBOE’s Apple VIX Index, a gauge of the company’s 30-day options prices, jumped 12 percent last week to 34. In Europe, the VStoxx Index (V2X), which measures the cost of Euro Stoxx 50 Index options, added 1.6 percent to 40.15 today after declining 4.7 percent last week.
Apple retreated to $384.62 last week, the lowest price since Oct. 7, as a survey of the company’s suppliers showed a decline in orders. Chief Executive Officer Tim Cook said in a conference call in October that Apple expects the floods to harm its suppliers.
Cleveland Research Co. reduced its prediction for iPad shipments to 12 million from 14 million this quarter, citing information it gleaned from Cupertino, California-based Apple’s suppliers.
Hewlett-Packard Co. (HPQ), Dell Inc. (DELL) and Microsoft Corp. (MSFT) are among companies that may be hurt this quarter and in 2012 by the floods, IDC said in a Nov. 10 report. Rising waters have swamped industrial parks in Thailand, where Western Digital Corp. (WDC) and other companies make about a quarter of the world’s disk drives. The PC industry, already weighed down by concerns about a weak economy, would usually be in “peak production” ahead of holiday demand at this time of year, IDC said.
PC shipments will decline between 2.2 percent and 3.4 percent in the fourth quarter from a year earlier, worse than a prior forecast that called for 5.1 percent growth, Framingham, Massachusetts-based research firm IDC said.
“The Thailand floods are to the tech sector what the Japanese tsunami was to the auto industry,” Brian Jacobsen, who helps oversee $209.1 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said in a Nov. 1 e-mail. “There’s plenty of reason to be cautious.”
The growth rate for spending on technology worldwide probably will slow to 3.9 percent in 2012 from this year’s 5.9 percent gain, Gartner Inc. projected last month.
Earnings for S&P 500 technology companies will rise 31 percent in 2011, according to analyst projections compiled by Bloomberg. Growth will slow in 2012 to 12 percent, the worst year since 2009, when earnings fell 8 percent, the data show. Computer companies, software producers and chipmakers have increased income 23 percent each year on average since 2002.
“Investors are simply betting on slower-than-expected growth due to near a recession-like situation in Europe and a slower rate of growth in China,” Howard Ward, who helps oversee $35 billion at Gamco Investors Inc. in Rye, New York, wrote in a Nov. 11 e-mail. “This is not unreasonable.”
ECB President Mario Draghi, president of the European Central Bank, said earlier this month the region may be headed toward a mild recession. The median economist estimate for the 2012 expansion in China’s gross domestic product has dropped to 8.5 percent from 8.8 percent in July.
Western Digital fell 7.4 percent on Oct. 17, the most since July, after the Irvine, California-based company said production at its Thailand facilities was suspended due to the flooding. The interruption will have a “significant impact” on the ability to meet customer demand, the company said.
ON Semiconductor Corp. (ONNN) slumped 16 percent, the most in three years, on Oct. 19 after the Phoenix-based maker of chips that help computers manage power said the impact from the flooding on its manufacturing plants will reduce revenue in the fourth quarter of 2011 and into 2012.
While risks from Europe’s debt crisis remain, growth in technology companies is centered more in emerging markets, said Chad Deakins, an Atlanta-based manager of an international equity fund for RidgeWorth Capital Management Inc., which oversees $47 billion. Developing countries are likely to expand 6.4 percent this year and 6.1 percent in 2012, according to the IMF forecasts in September. That compares with the average growth rate of 1.6 percent and 1.9 percent in the developed world.
Technology companies had the second-best performance among the 10 main S&P 500 groups in the past six months, falling 0.2 percent. Nine of 75 companies, including Google Inc. (GOOG), Cisco Systems Inc. and International Business Machines Corp. (IBM), posted gains of more than 10 percent.
“The technology sector is leveraged to global growth,” Deakins said in a telephone interview on Nov. 11. Disruptions in technology supply chains from flooding in Thailand “have already been expressed in U.S. stocks,” with companies like Western Digital and ON Semiconductor already falling to reflect the impact of the flooding.
The technology ETF’s implied volatility, the key gauge of options prices, for puts 10 percent below the current share price is 32.54, compared with 21.24 for calls 10 percent above the ETF level. The current 11.29-point spread for the price relationship known as skew is 27 percent higher than the five- year average of 8.86 points, Bloomberg data show.
“Skew is one of the most important indicators of the market’s perception of risk,” Fred Bethon, a managing director for strategy and execution at X-Change Financial Access LLC in New York, said in a Nov. 11 phone interview. “Perhaps with the market being so volatile and with such extremes, you could see people looking to hedge themselves.”