They’re baaack.

Auto companies crawl back to the primer for yet another 14 billion in bailout money – as they got half what they asked for in December, this isn’t particularly surprising.  I don’t have anything to say about this, I just wanted to use this picture of the monopoly car getting to collect $200 as it passes go.  Also note the backdrop of the real estate.  I really wish I had more to say about this as it’s such an apropos picture.  Oh well.

It was a tie between that one and this one:

… but that’s not a particularly good lolcat.  And it may not even be an authentic one.

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No, those bits of satellite falling from the sky over Texas aren’t XM/Sirius but the company may yet go bankrupt.  This sounds like a spectacular idea to me.  XM and SIRI duking it out with hundred million dollar fists to one-up one another on content was completely ridiculous.  Those deals need to be restructured badly.  With Sirius/XM as the only satellite radio provider, they should be able to bring their content costs down… and a bankruptcy filing is a particularly good bargaining chip when paychecks have to be trimmed.

Semis go from worse to bad

Qualcomm appears ahead of their forecast – you may recall Taiwan Semiconductor has been seeing rush orders.  In handsets, Samsung appears to be running down 15% versus their guidance of down 20% – they’re a major Qualcomm customer.  Some aggressive notebook inventory destocking has bumped into some kind of near-term bottom and component orders are rising in February off January’s lows.  Sounds good.  Really, though, its an inventory adjustment.  End market demand has slowed and the PC and handset markets are likely to shrink this year.  We’re moving from one extreme downtrend of inventory destocking in semis to another less extreme downtrend in industry unit shipments as illustrated in this chart from Citi:

Share price recovery is likely to remain muted in absence of end market pick-up.  In fact, the last time we had a downtrend with a trajectory anything like this was 2001-2002.  From a Barclays note yesterday:

But if history is a guide then second derivative buyers beware: semi growth (figure 1) accelerated from -42% YoY in Q4-01 to +9% YoY in
Q4-02 but the SOX declined from 522 to 289 (-45%).

Despite order growth, overall declining market conditions created significant downside to share prices over a period of recovery.  The problems plaguing the dot com unwind of 2001-2002 were a function of inability to create financing and an oversupply of equipment.  Though this downturn is more related to constricted consumption and a fouled up credit market, the root of the problem is too much underlying consumption assumption.  Credit has fueled much of the consumer spending bubble of the last several years and that consumer spending bubble has been greatly beneficial for companies that make electronic gadgets.  Those heady days are over for now.

Semis are going from worse to bad and that may create opportunities for short-term traders.  The longer-term trend remains down and extreme strength should be sold.  Semis remain expensive and vulnerable to significant gross margin reduction as unit prices continue to be pressured.  OEMs tend to pay less for components in a declining unit price environment and there’s not much semis can do about it.

Some semis are bottoming out fundamentally

Barclays met with 3 dozen semis.  Intersil (ISIL) is tracking up 0-5% vs their guidance of flat.  Marvell (MRVL) business bottomed out in the third week of January and is tracking better for April.  Microchip (MCHP) is receiving rush orders.

Semi investors tend to chase datapoints like these so these stocks may become tradable vehicles – particularly on a day when the market is starting off down a couple of percent for no clear reason.

Longer-term, I expect short-term blips higher in business will not lead to sustained recovery.  This is inventory tweaking and not due to big upticks in demand.  Spending is likely to remain on hold for the determinable future as economic clarity is anything but clear.

The real slowdown is in expectations

Bloomberg ran this article about Midsouth Bank.  They took down a 20 mil infusion from the government, then tried to actively market 250 mil in loans.  They couldn’t drum up any business.

What is different about this economic downturn is the abject caution, the inverse behavior of the prior couple of decades:

MidSouth, which has $937 million in assets and 34 branches in southern Louisiana and southeast Texas, is struggling to put its TARP money to work, Cloutier said.

While he has some fresh borrowers, people are “very, very nervous” about taking on significant new debt, the 61-year-old banker said.

Right.  With such low visibility, and so many talking heads telling people how deep the problems are, its very hard to get a clear picture of potential return on investment.  Taking on a lot of debt right now certainly would seem to be the opposite of what most people are trying to do.

“Credit hasn’t tightened, but the ability to find creditworthy borrowers has tightened,” he said.

Most of the loan demand out there is from the overleveraged who need to refinance.  Don’t forget, banks are affected by that same unclear return on investment that business owners are.  They have to err on the side of caution.  A lot of the federal money has come with onerous coupons attached.  In order to cover the spread between the dividend payments due to the government and the rates charged to borrowers, banks probably lose money on loans here.  If you’re paying the government 8% to borrow money, why would you want to write mortgages at 4.5% with that money?

This is why manipulating rates ultimately doesn’t work.  The Fed has pushed rates down while risk has gone up substantially.  Risk should mean higher rates, not lower ones, you idiots.  Banks can’t possibly turn a profit on new business with this spread and it’s unclear what would alleviate this massive pressure on their models.  Ultimately, the government probably has to forgive these coupons to restart lending.  In the meantime, dear taxpayer… take heart.  At least they’re not making new bad loans.

Michael Moore working on film about finance industry abuses

http://dealbook.blogs.nytimes.com/2009/02/13/michael-moore-wants-wall-street-scuttlebutt/

Can’t wait to see it.

Memory spot prices drift lower, rush order stories abound

DRAM spot prices have given back most of their gains since the post Lunar New Year rally.

NAND spot has come in slightly but is still up quite a bit since the holiday.

Taiwan has set a budget of $2 billion to encourage consolidation among the DRAM industry.  Micron (MU) has been actively seeking a key role in the Taiwan memory industry’s restructuring and stands to benefit greatly from the inevitable reduced capacity coming from Taiwan after the dust settles.

Digitimes is flush with stories of better notebook trends in February, led by Asustek, HP, Apple and Toshiba.  End market demand still remains in question, but there is some near-term inventory restocking, according to most of these stories.  Digitimes claims Taiwan Semiconductor has seen some rush orders lately from Qualcomm (QCOM), Infineon (IFX) and MediaTek and has recalled some furloughed workers, according to the Commercial Times.  Xilinx (XLNX) and Altera (ALTR) have firmed up due to 3G deployments in China following new license awards last month.

The Skew:  Seems kind of early for inventory restocking to rush back significantly but semis tend to overreact.  Tech has been acting better than the rest of the market for the last several sessions.  Valuations in the semiconductor space are better on a price to book value than they’ve been several years but the demand environment is highly uncertain.  The problem is earnings estimates have come down pretty significantly, too, and will likely stay punk till the second half at least.  February strength is very unseasonable and is likely related to overly aggressive inventory destocking.  It won’t be a sustainable pick-up without better economic tone.

IDC predicts down processor shipments in 1Q/2Q:2009

IDC says processor shipments dropped 17% in Q4, the worst decline since they started collecting the data in 1996.  Netbooks, at a $300-400 price point, helped units a lot – if not for them, units would have dropped over 20%.  IDC says processor shipments remain weak and will likely drop again in Q1 and Q2.

The Skew:  Keep in mind the PC industry is huge.  Unit shipments for 2008 were 30.8 billion.  Netbooks are having very significant impact in order to move the bar on industry unit shipments like that.  That trend will only continue, depressing average selling prices and reducing revenue generated from notebooks as netbooks are superior portable computers relative to existing notebooks for the needs of most users – they’re smaller, lighter, robust enough to run multiple applications and have longer battery life.  In all seriousness, my netbook has turned “bringing my computer” from lugging a burdensome bag of bricks into something I don’t think twice about anymore.  It’s that significant a difference.
   PC shipments continue to weaken in this crummy and uncertain environment.

A little more material on Applied Materials (AMAT)

A couple of things stuck out on the call.  First off, about a quarter of a billion dollars of orders fell out of the order book because its been there more than 12 months.  Orders, typically the driving force of semicap company stock prices, are a really poor indicator of future demand trends over the long-term.  Using them seems completely at odds with long-term forecasting, which is what you need to do to buy heavy cyclical stocks like AMAT.  Stock picking is more about perceiving future perception than anticipating future reality.

Solar orders were much weaker than expectations and the company indicated thin-film customers are having difficulty securing financing for future projects.  Near-term, I still believe solar is vulnerable as existing projects are hitting snags due to the credit crunch.  The stimulus package may loosen this market up in the future but that may take quite some time.

SaaS spending intentions fall

RBC/Changewave did a survey of IT managers.  Not surprisingly, spending intentions are dropping as the economy weakens.  An interesting chart from the report:

Note willingness to spend on SaaS solutions has dropped to its lowest level since they began the survey.  Salesforce.com (CRM), the poster child for SaaS, may be in for a rougher environment.

The Skew:  Pretty sure I’m going to be a short-seller of CRM soon.

Applied Materials (AMAT) 4Q:2008 results

Revenues in-line with orders well below lowered expectations.  New orders down 59% – silicon off 79% q/q, display –60% q/q, even mighty solar down 34% q/q.  The company declined to guide for next quarter but then completed the sentence by saying revenues would probably be down 30% q/q, which would probably put revenues at about 1 billion for Q1, ~5% below the street’s expectations.  The company indicated they see no near-term return to order growth.  When asked about the recent memory price hikes and whether they were seeing any improvement as a result, they indicated the memory price strength was due to supply cuts and not incremental demand.

The Skew:  With semiconductor utilization averaging in the mid 40s for most major producers, its very hard to imagine a scenario where capacity additions come on in a significant way.  Think of it this way:  if business doubled from current levels for semiconductor manufacturers, they would move to 90% utilization and be able to produce enough to meet demand with existing capacity.  Process changes, such as Intel’s conversion to 32 nanometer technology, will provide some opportunity for semiconductor equipment companies, but a return to the heady days of yesteryear are unlikely.