To All, DRAM SCAM, Part III. For all MU putters, it looks as though the Asians are about to launch another DRAM scam. The last two have been total failures as far as impacting the trend of DRAM prices goes, but they have the history of raising MU's price for a few weeks or months. I recommend holding no more than a 1/3 put position while the scam is in its infancy. Now some definitions of the scam and why it never works:
1. Basically, the major producers hold back production or hold production in inventory to reduce the supply of DRAM on the market. This has the impact of raising or at least reducing the speed at which DRAM prices fall. The Asians tried it last year and in 1996 and in both cases, there was a temporary move up in DRAM prices.
2. Why doesn't it work for long? Several reasons. One is, there is always at least one major and several minor firms that increase production while the others are holding back. Micron is the chief culprit, but the Taiwanese, looking to increase market share, are also willing mfrs. During the last two episodes, MU's production destroyed the price single-handledly, as the Taiwanese were not big enough to do much harm. This time, the Taiwanese have much more capacity and we know that MU just bought a bunch of new capacity from TXN. The Koreans are already saying that the deal would fall apart quickly if MU doesn't get with the program, and glumly commenting that they expect MU to go their own way. BTW, as a consumer, I agree with MU's rogue tactics here. To hell with mfrs. and attempts to raise the prices we pay.
The holding back of production or storing of inventory also runs counter to the lowering of variable costs. The way you lower variable costs in DRAM mfg. is to increase yields. There is basically no other way. To stop mfg. flat out is to temporarily put cost-cutting measures on hold. And, since DRAM prices decline year to year every year (it is the rate of the decline that makes the difference between profits and losses), inventory is a no-win situation longer term and each firm has to make contingency plans about how they will dump their stash before their cartel allies catch on.
Once the inventory starts to be dumped, prices fall to an even lower level than they would have reached had the scam not taken place. The oems know there is a mountain of DRAM out there, so they are unlikely to make panic buying decisions in this era of slowing pc sales. Also, with Rambus gearing up, inventory runs the risk of being outmoded before it is sold. That also makes things worse than they would have been had their been no cartel collusion.
Lower production also hurts fixed costs as a % of total costs. The idea with fixed costs, fabs, debt, depreciation, etc. is to lower them on a per share basis by spreading them over more units. For example, MU still has to account for interest on its mountain of debt no matter how many chips they produce. The lower the revenues, the lower "coverage" and the greater fixed costs loom in the big picture of earnings or losses.
3. How to play it? Stay lightly invested in puts during the early days, when Wall Street will trumpet "stabilization of prices" and a "bottom," at the top of their lungs. Then, when the reality of a summer with little in the way of pc sales starts to show itself in the reported numbers, increase put positions, preferably at higher prices.
Good luck,
MB |
