C4T:
Been busy. Have spent a fair amount of time in the field of late, endeavouring to keep track of end-of-chain sales of computer, cell phone, networking and telco gear. Putting it bluntly, sales have been dismal, and finished goods inventories in these sectors are both large and rising. Worse, the distribution chains for many of these products are clogged. The tennis ball appears to be embedded in the toilet bowl.
This of course has nasty implications for the semi producers. As Fred Hickey has so eloquently pointed out, most of the PC/cell phone manufacturers were worried that the war might impede their JIT deliveries of chips so they placed large orders with their semi suppliers and took delivery during the early part of Q1 (this is why semi producers could claim that their order books were "holding up"). Unfortunately, the end-of-chain sales have been miserable, so we now have clogged arteries, hence congestive heart failure symptoms are likely across the sector.
The thing that amazes me is that investors don't seem to realize that most semi products have become "commodities". Yes, a decade ago, they were "state-of-the-art" dazzling diamonds, but today, courtesy of automated production processes, most semis are produced inexpensively and in mind boggling numbers. They remind me of precision nuts and bolts...... if you examine nuts and bolts closely, you realize that they are amazingly complex items, but since we learned how to produce them cheaply decades ago, they are now commoditized items that provide razor-thin margins (at best) for the companies that produce them. At least in the nuts and bolts game, the industry has long since reached a reasonable supply-demand balance. Unfortunately in the semi game, epic excess capacity has yet to be dealt with, hence most semis sell for a fraction of all-up cost-of-production. Given this scene, it is inevitable that over the next year or so, many current participants in this arena will be carried off the battlefield on their shields.
In spite of the above, insane mo-mo fund managers have been bidding up the most popular semi producer "names", even as these companies move ever deeper into the glutted, saturated swamp. Obviously these rascals could care less about the fundamentals (particularly the deteriorating balance sheets), so we are close to a Wiley Coyote moment. Sooner or later, one of these twits will decide to take a quiet, middle-of-the-night exit and the stock price collapse will begin.
At this end, I have become even more interested in the left hand side of semi company balance sheets (in a commodity shake-out, the deeper pockets tend to be the survivors). In the current environment, I view long positions in semi stocks as nothing more than a bet that the pool of surviving "greater fools" has not yet been exhausted. On the other hand, if one has been fortunate enough to have been a mere spectator to the recent mo-mo insanity, the prospect of acquiring short positions at current bubble prices is quite delightful. Obviously, one should employ an MB "thirds" (or similar conservative)entry strategy to the game, as determining the altitude to which bubbles can float is more art than science. That said, the fundamentals weigh heavily on the side of the shorts in semi land and gravity has not yet been banished from the planet.
As I noted many weeks ago, a fox hole deep in the weeds had been chosen as an appropriately cozy place from which this particular bear would safely watch the early war proceedings (it was obvious early on that most pundits expected a relatively short term engagement and also expected that the primary follow-on circumstance would be "cheap oil"). As the price of oil is embedded in almost all products and processes, the availability of inexpensive oil really is bullish for the global economy, at least over the short term. Currently, the US now directly controls the second largest reserve of high quality oil on the planet and has a powerful military force sitting in remarkably close proximity to the largest known reserve as well. Given this situation, methinks those who anticipated "cheap oil" made the correct bet. As a consequence of this situation, being short the broader market makes no sense to me.
Unfortunately, behind the headlines, both the US economy and the broad global economy continue to deteriorate, indeed at an accelerating rate. Global trade is slowing, the rate at which debt (consumer, government and corporate) has become parabolic, excess capacity still reigns, and above all else, lay-offs continue unabated. Hard to see how a nasty depression can be avoided.
Tossing all these ingredients into the old Earlie salad bowl, I expect a short term reprieve in our march to the edge of the cliff. Over the near term (say this summer), I would not be surprised if we experience a bit more rise in the broad markets, followed by sideways action during the summer doldrums. But by autumn, things will begin to change, perhaps fairly quickly, primarily as a result of something that is already evident to those who are observant. The US economy is now completely dependent on the US consumer. If he decides to pull in his horns with respect to the insane, debt-financed consumption binge he has been on over this past half decade, or if he decides to start (heaven forbid) saving a bit as he realizes that his pension fund is bust and that his stock portfolio isn't going to appreciate, then the excrement will be truly into the propellor. At this end, my various "markers" tell me that this is a given and that we are heading in that direction fairly quickly now.
The US consumer relies on borrowed money for much of his purchasing. On the positive side of the ledger, credit availability is at an all-time high. Unfortunately, the US consumer is finding his current debt levels to be perilously close to being "unmanageable" and he is worried sick about lay-offs and the prospects for his continuing employment. Of the five main ways in which he borrows, four of them have been in decline for many months and the fifth appears to be peaking. As well, the rate at which consumer borrowing is declining appears to be just starting to accelerate. Unless this trend reverses very soon and very abruptly, by the late fall there will likely be few who will question whether we are entering a "double-dip" recession or not.
For how long and to what degree will the availability of "cheap oil" modulate this underlying reality? I don't know. For this reason, I intend to remain relatively disciplined with respect to my market activities. while keeping a close eye on the US consumer. Yes, I will continue to short selected semis and also pounce on selected "mortally wounded" companies (of which we are seeing more and more with each passing day) as these are relatively low risk situations from my perspective, particularly if one maintains plenty of cash to ward off the margin calls that are a part of the vicious bear market rallies. I will also pick away at a few favourite gold stocks, the prices of which have been delightfully squished, courtesy of the war. Additionally, as I expect the general market climate to remain fairly benign for a few months, I will continue to hold a few chosen high risk "juniors" (a couple of which I have mentioned previously) which appear to be making better progress than I had expected.
Over the next two quarters or so, I expect that the market will recognize that the US consumer is heading for the hills. As this recognition dawns it is likely that the stock markets will take it in the neck. Of course, all of us would like to be there with plenty of short side exposure when it occurs, but the reality is that Mr. Market has taught us well that he is scrupulously without prejudice, and is equally as delighted to smash bears as much as bulls. No doubt most of us will likely be cowering beneath our desks, shell-shocked by the preceding vertical rallies when it occurs. But as long as one has maintained discipline and not tried to hit home runs, one is likely to survive the period with at least some capital intact. In the follow-on era, some cash plus minimal debt will likely serve one well.
Best, Earlie
PS: For the next while, I will not have much time to post, but will endeavour to scan the thread whenever possible. Apologies to those who have PMed, but it is hectic at the moment. |
