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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: Rillinois who wrote (7623)	9/5/1998 12:51:00 AM
From: Skeeter Bug	Respond to of 42834

rillinois, the problem is a supply/demand imbalance. supply and demand. when will it change? when this imbalance is corrected. things that affect supply: 1. cost reduction (the only way to reduce cost per chip significantly is to increas output - usually by leaps and bounds). even so, everyone has been trying to outpace everyone else on "cost reduction." 2. 16 mb to 64 mb crossover - drastically increases supply and is done to reduce cost per mb. 3. current equipment purchases are at about 1996 levels - the same levels that got us in this mess in the first place. 4. the closing of fabs. this is mostly hype. you RARELY spend several billion and let it sit idle. most closings are outdated fabs such as 4 mb fabs. they are now supporting 64 mb fabs. the fabs that don't open, though, for example siemens, can be started up very quickly and will in a profitable environment - thus putting a lid on long term dram profits. 5. plant idle periods. currently, korea is shutting down their fabs 25% of the time. what is the best way to reduce cost? increase output. what is the best way to increase cost/chip? you got it, reduce output. i'm not sure that their costs are going up more through these reductions than the price increase. not a long term solution for korea, imho. especially as the japanese, taiwanese and micron sell into this blip and keep pricing low. why? they don't want to increase costs and they know it is not a long term solution. and they don't even say thank you ;-) how long will korea subsidize their fierce competitors (and mu always files dumping charges against korea ;-) 6. inventory holdbacks. ooooh, these are dangerous. i'm not convinced that the plant closings are actually "put dram into large silo bin" parties. why? it HURTS, oh so bad, to increase your cost per mb when you are losing money and your competitors don't help. how do you keep costs down? keep building, baby, and store it away so prices move up. in early 1997, this is PRECISELY what korea did. they bumped 16 mb dram from $6 to over $10. when they unleashed their torrent of inventory, though, dram went from $10 to sub $1.50 in 10 months. as an aside, on the way to $10 everyone said we had a "turnaround." suckers ;-) now let's look at demand: 1. pc growth. pc growth has been slowing even though prices have dropped at unprecedented rates. of course, prices have dropped b/c components are cheap. even though growth is anemic now, and the bang for the buck and the y2k expenditures look to slow it even more, it will get worse if dram gets more expensive. why? basic economics. price cuts will stop and demand growth will slow, stop or reverse. ditto for disk drive makers and everyone else losing money selling components. 2. mb per box. if this increases then demand increases. however, one must be sniffing good glue to think that if memory gets more expensive, and box makers feel more of pinch than they already are (dell is the only one with a decent growth rate - muei is barely breakeven, hwp warns every q, ibm isn't growing, gtw grew eps a whopping 6%) that they won't take out that dram to improve their margins. this will, obviously negative impact demand growth. 3. all the dram fabs blow up. with current available capacity about 25% above demand right now, and capacity increasing daily, that is what it will take to get things rolling anytime soon. i wouldn't bet on number 2 ;-) especially when valuations in the industry are at bubblemania levels. last time mu's biz was this bad they traded at $2. amat traded at $13 in 1996 when business was a lot better. i will start buying semi stocks when everyone else hates them and sees them as dead wood. that will be when NOBODY is buying equipment and NOBODY is entering the LOUSY business. having said that, i wouldn't put in too much. 5 years of boom being all but wiped out by 2 qs of bust isn't a good business model, imho. that is what happened to mu. semis aren't going away. neither is salt. the semi industry will not have growth like they did in the early '90s ever again as they are maturing into a straight commodity business. just like salt. btw, stock prices will reflect the pessimism by being a lot lower. amat at $10-13 in about 2 years time may be a good buy.