Intel And Semiconductors As Investments. It's Time To Party Like It's 1999!
I wrote back in July of last year that Intel's demise was greatly exaggerated. That was at a time when tout TV in particular was prattling negatively about the company. Last summer a certain personality on TV was extremely bearish on Intel and quite bullish on AMD. Any time a comedian starts giving me advice on a semiconductor company, it's a good time to fade that perspective. At the time the stock was $17ish and today it is trading at $24ish. A nice 40% pop in the stock for those who are invested in technology. Of course, it all depends on where you bought. Intel's stock looks like a disaster over the last ten years. As I've said before, those recommending semiconductor stocks, sans a few niche plays, this past cycle should be viewed dubiously for their investing prowess.
A few days ago Intel announced a new price war with AMD and Intel's recent guidance has been anything but exciting. Yet, the stock and other semiconductor stocks are finally showing some strength. What gives? The economy is picking up? Semiconductor sales are getting ready to explode with a massive move in capital equipment spending? Now, that's funny. Believe it or not, many on Wall Street actually think so. (Doesn't it seem like Wall Street personalities are alot like professional sports coaches? No matter how bad they are, they just keep getting recycled to different teams.) Let's be realistic folks. All you need to do is look at the fundamentals to realize this thesis is absolutely absurd. Semiconductor sales in the U.S., Europe and Japan peaked nearly a decade ago and have been in a comparative ditch ever since. That sales would magically decide to explode with the macro factors surrounding today's global economy is about as statistically probable as me winning the lottery. I don't even play the lottery. It is very important to remember one point when it comes to investing and bubbles. Bubbles burst because fundamentals significantly change. Or bursting bubbles significantly change fundamentals. It's a very simple concept that people just don't seem to understand. The semiconductor game is over. Something may reignite the sector at some point but there comes a point that debating such a thesis of renewed demand is an act of insanity.
The reality of why semiconductors are moving? Remember that post last fall about pairs trading with semiconductors and oil? I really don't feel like digging through my posts to find it but you might go back and read it. This recent market weakness was the broadest short term dump we've seen in a long time. To the untrained eye, it was just another bout of weakness. Mister Market, the great deceiver. It's highly unlikely this technical bounce represents an "all clear" signal.
Semiconductor stocks are actually one of the cheapest sectors and asset classes in the world being they haven't done much of anything except go down for almost a decade. In other words, since the bubble in 1999 and 2000, semiconductors have been about the worst investment on earth. Probably worse than the Somali stock exchange, if there is such a thing. Now that I think about it, a country without an economy probably doesn't have a stock exchange. Semiconductor under performance represents a comparative "value" safe haven or hedge for some. Additionally, "growth", if you can call semiconductors a growth business right now, is less tied to liquidity shocks. Growth companies typically carry less debt and are less affected by exogenous volatility in other financial markets as well. Or, should I say that is generally what is believed by market professionals and that is all that matters in the short and intermediate term. Liquidity shocks you say? But, we are awash in liquidity. And? They will come at some point. Then there is the big gap in Intel's stock price and it looks like someone is having some fun trying to fill it. With options expiration, there are alot of sometimes odd events that unfold. We thought stocks moved because of earnings? Well, okay, they do some of the time.
So, what does this mean from a fundamental perspective? The reality is it doesn't even mean the sector has to go up. I'd be surprised if we made alot of upward progress as there are no fundamental factors driving the sector. Remember, semiconductors have been in a bear market for seven of the last eigth years. The only anomaly was 2003 which was purely a technical reflex to three years of bloodletting. If you are still anticipating a pick up in capex after reading this, you might consider I read the capex expansion thesis in 2002, 2003, 2005, 2006 and they are printing a pickup in capex again in 2007. I guess the premise is if you wish hard enough, it will happen. More probable fundamental factors for this move? That is, if there even is any? At this stage in this cycle and in context of other factors unfolding, semiconductor out performance could mean a rush for quality in the final stages of the asset inflation party. Just something to think about if you are bullish.
A few days ago Intel announced a new price war with AMD and Intel's recent guidance has been anything but exciting. Yet, the stock and other semiconductor stocks are finally showing some strength. What gives? The economy is picking up? Semiconductor sales are getting ready to explode with a massive move in capital equipment spending? Now, that's funny. Believe it or not, many on Wall Street actually think so. (Doesn't it seem like Wall Street personalities are alot like professional sports coaches? No matter how bad they are, they just keep getting recycled to different teams.) Let's be realistic folks. All you need to do is look at the fundamentals to realize this thesis is absolutely absurd. Semiconductor sales in the U.S., Europe and Japan peaked nearly a decade ago and have been in a comparative ditch ever since. That sales would magically decide to explode with the macro factors surrounding today's global economy is about as statistically probable as me winning the lottery. I don't even play the lottery. It is very important to remember one point when it comes to investing and bubbles. Bubbles burst because fundamentals significantly change. Or bursting bubbles significantly change fundamentals. It's a very simple concept that people just don't seem to understand. The semiconductor game is over. Something may reignite the sector at some point but there comes a point that debating such a thesis of renewed demand is an act of insanity.
The reality of why semiconductors are moving? Remember that post last fall about pairs trading with semiconductors and oil? I really don't feel like digging through my posts to find it but you might go back and read it. This recent market weakness was the broadest short term dump we've seen in a long time. To the untrained eye, it was just another bout of weakness. Mister Market, the great deceiver. It's highly unlikely this technical bounce represents an "all clear" signal.
Semiconductor stocks are actually one of the cheapest sectors and asset classes in the world being they haven't done much of anything except go down for almost a decade. In other words, since the bubble in 1999 and 2000, semiconductors have been about the worst investment on earth. Probably worse than the Somali stock exchange, if there is such a thing. Now that I think about it, a country without an economy probably doesn't have a stock exchange. Semiconductor under performance represents a comparative "value" safe haven or hedge for some. Additionally, "growth", if you can call semiconductors a growth business right now, is less tied to liquidity shocks. Growth companies typically carry less debt and are less affected by exogenous volatility in other financial markets as well. Or, should I say that is generally what is believed by market professionals and that is all that matters in the short and intermediate term. Liquidity shocks you say? But, we are awash in liquidity. And? They will come at some point. Then there is the big gap in Intel's stock price and it looks like someone is having some fun trying to fill it. With options expiration, there are alot of sometimes odd events that unfold. We thought stocks moved because of earnings? Well, okay, they do some of the time.
So, what does this mean from a fundamental perspective? The reality is it doesn't even mean the sector has to go up. I'd be surprised if we made alot of upward progress as there are no fundamental factors driving the sector. Remember, semiconductors have been in a bear market for seven of the last eigth years. The only anomaly was 2003 which was purely a technical reflex to three years of bloodletting. If you are still anticipating a pick up in capex after reading this, you might consider I read the capex expansion thesis in 2002, 2003, 2005, 2006 and they are printing a pickup in capex again in 2007. I guess the premise is if you wish hard enough, it will happen. More probable fundamental factors for this move? That is, if there even is any? At this stage in this cycle and in context of other factors unfolding, semiconductor out performance could mean a rush for quality in the final stages of the asset inflation party. Just something to think about if you are bullish.
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