Tad, I've been reading this thread and others like it for 2+ years, for the same reason I ascertain that you have: to run into someone who might have some interesting ideas and knowledge worth sharing. I haven't written many responses but your recent posting triggered a question: Given our job success necessitates both cynicism and optimism, I share you worry regarding semi inventory accumulation as a driver of higher than normal order growth. Help me with this though, if one tracks a large group of system companies, semi vendors, contract manufacturers, and distributors,(about 50 tickers) examines the last 5 years of quarterly balance sheets up to 2Q 1999, and from the 10-Q's tracks the raw material inventory accounts, one would think if inventory was building rapidly , we'd see it in the overall days inventory #'s or the raw material #'s, just like last cycle(94-95). It appears to me that your worry is valid, especially in areas like flash memory, but in general is premature. Please tell me where I'm wrong with the following theory: Over the past several years, semi supply has been abundant, so no one had the incentive to have high levels of inventory and had the incentive to "destock" and reduce overall inventory levels to bare bones minimum...then against all odds, we see the combination of a quick reversal in Asia, a continued strong US, a stabilization in Latin America and the early signs of an improving Europe. Add to this the "free PC effect" , the Internet and all the bandwidth "stuff", and finally, Y2K stimulation..etc and you have probably scared some OEM's into building more inventory. The problem is, they can't do it fast enough as the cyclical economic conditions and the secular tech consumption trends around the world keep accelerating. So the customers try to "restock" but they can't really change their overall raw material positions yet.(Because restocking has not occurred in the balance sheets yet) So as you go into the seasonally strong tech production period, OEM's will still be trying to restock which means more quarters of unusually strong results(no summer slowdown)..after they restock, then the double ordering takes place as capacity scares gain attention. The double ordering goes on for a few quarters and then something negative happens like it always does, and destabilizes the cycle ...Maybe I'm naive but it seems to me this process is still on-going and early in its life cycle. CSCO in its recent ccall had a 15% Q/Q rise in raw materials inventory even as total inventories rose 3% q/q. I had a talk today with your cap equipment analyst Theodore and he hadn't really thought about this process yet. He wasn't quite "close enough to the semi co's" to verify or dismiss the argument. My point and my question is if this process is ongoing, by being too negative too early, one leaves a lot of money on the table even if the valuations are high by historical standards....Any thoughts??
Thanks |
