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Friday, March 20, 2009

For want of a nail

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail.

After throwing literally trillions of dollars at the economy and the stock market, Congress has gone after AIG for $165 million dollars.  While $165 million dollars sounds like a lot of money if you’re the unemployed type who makes death threats on the receptionist at your local AIG affiliate, in the grand scheme of things we’re talking about less than one hundredth of one percent of the money committed to rescue financial institutions.  We’re talking about less than 1 penny out of every hundred dollars.  The effort to retrieve this $165 million dollars has wiped out billions of dollars of financial stock recovery as the market has decided all the TARP recipients will quickly do offerings to raise the capital to pay the loans back immediately, creating further pressure on the financial stocks.

The market remains efficient, despite unprecedented attempts to manipulate it by policymakers and the Federal Reserve.  This morning Leon Cooperman was on CNBC and he made the claim that the Federal Reserve will eventually fix this.  It may take years, said Cooperman, but they will.  I submit that its not the Federal Reserve that fixes it – they CAN’T – all they can do is influence the market, not dictate it.  Time and pain will fix it.  Eventually the market will find a price for even the most profane of assets.  Eventually bad businesses will disappear.

The government is becoming the most frightening and ominous corporate vulture the free market has ever seen and they will drive investment out of America if they continue to play Robin Hood like this.  In trying to micro-manage their financial stock support, they’re killing the stocks.  I don’t know which is a bigger waste of my tax dollars, the financial crisis or the politicians.

Between minutes 3 and 8 here, Michael Steinhardt has a great riff on the unprecedented lack of bankruptcies and debt liquidation in this cycle due to all the government support.  I have to admit, I actually cheered at one point during this.  I am such a geek.

DRAM contract – 2H March

DRAMexchange reporting flattish contract pricing in both DRAM and NAND for the second half of March.  I believe Micron’s DRAM contract pricing dropped ~5% for the same period – Micron’s has held better but has specialized DRAM in there that isn’t as market sensitive as regular DRAM.  It may suggest a shortfall, or at least a price renegotiation, at Sun Micro (LAVA) whom I believe is the biggest chunk of specialized DRAM.  NAND pricing was flat despite excessive reported strength in the Apple iPhone ramp.

Qimonda may receive a capital injection from Saxony.  There are still too many poor DRAM companies and they’re going to resurrect this one.  DRAM is still precariously poised for a difficult recovery – over-capacity is still there, just idle.  Netbooks use 1/4 the memory of standard notebooks.  Windows 7 allegedly requires less memory.  There seem to be little to no drivers to increase DRAM per box so they’re stuck in a commoditized hell.  Units are unlikely to offset the typical price declines as all the unit growth is in their least penetrated market – netbooks.

Better handset pulls; storage picks up

Samsung/LG better pulls according to Digitimes, say it will be sustainable into June.  Sony Ericsson blowup this morning may provide buying opportunities in handset chips if one is so inclined.  I’ll probably buy some Qualcomm.

Morgan Stanley says March shaped up better for storage than guidance suggested.  They suggest STX and EMC as their favorite ideas, though pricing and enterprise remain blindsides to their survey work.  March in general has a better feel to it.  I’ve been short a little EMC and wondering why its been acting well.  Grr.

Thursday, March 19, 2009

Dollars to doughnuts

Bernanke said, “The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."
"You've been printing money?" Pelley asked.
"Well, effectively," Bernanke said. "And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

The Fed’s push button printing press in full effect, inflation sensitive stocks are skyrocketing.  I’m kind of going through the sectors, trying to figure out where the lower dollar will drive incremental demand.  And I guess that’s where I run into trouble.  The credit problems are a side effect of a broader problem of overexpansion and oversupply of infrastructure, goods and services – all of these credit products funded a supply infrastructure far in excess of true demand and credit card balances and hyper-inflated mortgages funded a demand infrastructure far in excess of true need.  If this stimulus does not drive demand, we will have a debunked currency, inflation and no growth – the nightmare scenario.

Third world expansion is reliant on first world spending.  Retail sales will be my tealeaves of choice for the time being.

Corning (GLW) missing something from release

Glass volumes guided significantly higher but no positive revenue or earnings guidance.  Pricing must be really bad.

Corning guides glass volumes higher

The company had predicted a drop of 20-25% for the quarter and is now saying it will be closer to flat to down 5%.  They say pricing will still decline significantly.  The volumes are a big improvement.  Panel makers such as LG Display (LPL) and AUO (AU Optronics) have been suggesting stronger utilization rates – LPL may be at 90% now according to some press reports.  These companies also say demand isn’t necessarily there and they’re worried they’ll have to cut back again if everyone else doesn’t stop producing.  Like all commodity businesses, its the other guy’s fault when there’s too much supply.

The panel market is likely a good microcosmic indicator of the overall supply chain picture and the cycle seems ready to play out there first.  If demand doesn’t pick up, utilization rates likely drop off as quickly as they just rose.

Fed goes all-in

The Federal Reserve, unable to really lower rates anymore with the effective borrowing rate near zero, continues to resort to other means to reduce credit problems within the system.  They intend to purchase another 750 bil of mortgage backed securities.  Presumably this suggests they’ve already bought the 500 billion they had previously committed to purchase.  Commensurate with this announcement, they said they would purchase 300 billion of long-term treasuries over the next 6 months.  It’s a 1 trillion dollar intervention in one swoop.

China, the largest holder of our bonds, has warned recently that the administration had better keep the currency firm or they will be forced to sell.  Theoretically, by buying the long end, the Fed will keep China’s investment somewhat stable.  The dollar, on the other hand, dropped significantly.  Inflation sensitive commodities have exploded, with gold and crude oil trading up over 6% since the announcement.  Outright purchase of the long bond was perceived to be the Fed’s move of last resort and its a bit surprising to see them use it when markets have been clearly recovering.  The Fed minutes will be interesting when they are released in a few weeks.

The Fed views deflation as one of the larger near-term risks in the economy.  The problem with engineering inflation is its hard to stop once you get it going.  They’ve got so much stimulus coming at the economy from so many different directions -- there’s lots of options to throttle back if they need to.  Conventional wisdom dictates when there is too much debt in the system, the currency must be inflated to make that debt easier to pay off.

Wednesday, March 18, 2009

Apple (AAPL) builds improving

Barclays indicates Apple builds are up substantially for the June quarter and predicts a new iPhone AND some kind of Supertouch tablet.

Fechtor Detweiler, known for their semiconductor research, says iPhone builds are up dramatically from 4m units last week to over 8m units this week.  They speculate Apple may have signed China Unicom as a carrier.

Yesterday, Apple held a big hoopla event around iPhone 3.0, the latest software build.  As iPhone 1.0 went on the first iPhone, 2.0 went on the 3G version, clearly 3.0 will go on the latest iteration.   Expect the new phone to be released in early summer.

NPD data for the month of February looked pretty poor frankly.  Macs and iPods look toward the lower end of estimates.  The company refreshed a number of product lines in early March and speculation is sales will rebound on the strength of new products.

The new shuffle looks very cool but internet backlash is strong.  It doesn’t take a regular headphone port without a $30 adapter – that’s half the price of the device itself.

Technically, Apple (AAPL) acts great.  It’s passed through every line of potential resistance so far.

Poly prices to drop

This morning there are a number of data points suggesting weakness in polysilicon pricing.

Digitimes reports there were some small transactions at $100/kg in the spot market but that most prices have been more like $120-$130/kg.  Also according to Digitimes, China-based solar cell makers are predicting contract prices dropping from $100-130/kg to $60/kg and eventually to $25/kg.  LDK’s CEO suggested spot prices have room to fall.  Lastly, Barclays indicated the weak semi market is forcing Japanese suppliers to sell excess poly in the Chinese spot market after 2 months of stability.  Barclays says spot pricing is now below $100/kg.

WFR is a silicon supplier to semiconductor and solar manufacturers.  WFR has been a notoriously poor performer, even when they had a rising tide of semiconductor and solar demand.  As demand in both markets has flagged, they’ve been forced to renegotiate their allegedly iron-clad contract prices lower.  I’m thinking they’ve got a rough day ahead of them as investors factor in a more aggressive spot pricing environment.

Monday, March 16, 2009

Bernanke on 60 Minutes

The Federal Reserve Chairman appeared on network television in an infomercial on the financial crisis and how the government is dealing with it. Reserved, calm and soothing, Bernanke laid out his case for the state of the world.

Laced with shots of 64 million dollar pallets of hundred dollar bills and Bernanke sitting on "Main Street" in his home town, the interview plays like a propaganda piece intended to inspire confidence and demonstrate empathy for the plight of the American public. You think you're mad about AIG? So's Ben. He slammed his phone down a bunch of times because of those guys. Jerks! There's a Main Street in his town too, people. He knows your pain.

(PELLEY:) Does the Federal Reserve bear any responsibility for missing
what was happening to the banks, as it was happening?

(BERNANKE) Well– like other regulators– we– we probably could have
done more. We’ve already done a lot of– put a lot of effort into
reviewing our practices. And reviewing the bank’s practices. We are
trying to strengthen our regulation at every point that we can. So, I
don’t want to deny that we certainly could have done a better job, and
others could have done a better job.

This is where I decided this wasn't an interview but a puff piece. Bernanke flat out denied subprime was a bigger problem in late 2007. There was plenty they could have done along the way. 60 Minutes was chosen for its reputation as a hard hitting investigative news outlet but he might as well have been on the Today show. To not mention his role in missing the nature of the crisis would seem to have to be omission on the part of 60 Minutes.

The Chairman said we have averted a depression, that the economy's woes will moderate in 2009 and that recovery will begin in 2010. He committed to letting no big banks fail.

(PELLEY ) Your response has been to do what the Fed didn’t do in 1929,
and that is pour money into the system. But there’s an argument made
today that that’s not what the problem is. The problem isn’t that
there’s too little money in the system. The problem is there’s too
much fear in the system. That with these companies being propped up by
the government, no one on Wall Street can tell who’s solvent and who’s
not. And therefore, business does not move.

(BERNANKE) Well, I absolutely agree that confidence is key. People
don’t know what’s happening. And they’re afraid. And they’re not sure
what– you know, whether or not the– the– the system is going to
recover. So, how do you get confidence, that’s the question. And I
think the way to get confidence is to show progress.

And that is the why of it. Typically media shy save congressional testimony, the Federal Reserve Chairman needs to help confidence in any way he can. Frankly, it's resourceful. The media is an influence tool the Fed typically does not employ directly -- the prescient leak is more their style. Things are bad, my friends, for them to break rank like this. On the other hand, it's a particularly clever and probably pretty effective move and the use of unconventional tools to fight an unconventional problem is to be praised.

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