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Technology Stocks : Disk Drive Sector Discussion Forum

WDC 241.25

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To: Pierre-X who wrote (1912)	1/1/1998 5:36:00 PM
From: Bill Martin	Read Replies (2) of 9256

Re: Pierre's Theory of Cycles Two observations. First the nit picky one: Humans aren't the only species that can extrapolate. You mentioned it allows us to play soccer. Have you ever seen a dog catch a frizbee or a ball or shoot basket ball hoops? Plainly they extrapolate (and/or solve differential equations?) to tell where they and the ball will meet up. Anyhow, on to a more substantive issue. There's one of thing you talked around but didn't directly address which I feel is the critical effect for cyclical industries like HDD and semiconductor. Think back to the early days of the oil industry as an example (or even today to a lesser extent). It cost a huge amount of money to find and sink a producing well, but once found it cost next to nothing to pump out an additional (marginal) barrel of oil. When there weren't too many wells in existance in the first place this means that people would freely pump oil but not replace their reserves whenever they could. When reserves tightened up enough suddenly everyone would finally see a profit in drilling a new well and many people would. Then you'd have over supply and prices would plunge when the cost of the next barrel was just the cost of lifting it out of the ground. Pricing is established (influenced?) by the marginal cost of the next barrel of oil. This is high when the industry is production limited and must drill new wells, and low when all you have to do is lift another barrel out of an existing well. Semiconductor companies are in a similar position today. There aren't all that many large factories. To add a new one today is a huge expense measured in $Billions. Once you've built that plant, the marginal cost of producing one extra chip is next to zero. HDD plants are similar, but less stark examples of the same effect. FWIW .... Bill

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