National overview
Semiconductor cycle: is this time different?
Welcome to Capital Note, a business, finance and economics newsletter. On the menu today: the shortage of semiconductors, funds considering new prime brokers, Amazon employees saying no to union and a look at the capital cycle. Follow this link to sign up for the Capital Note. Disk shortage Since the end of last year, the shortage of computer chips has slowed the production of everything from cars to video game consoles, as semiconductor manufacturers struggle to keep up with the growing demand. The shortage is so severe that President Biden has undertaken to take action to increase production. Meanwhile, chipmakers are increasing capacity, with Intel, Applied Materials and Taiwan Semiconductors all predicting significant increases in capital spending over the next few years. The shortfall led to a rise in the semi-equities, which pushed the PHLX Semiconductor Index up 17 percent for the year, better than other tech verticals. However, the history of the semiconductor industry suggests that investors should be careful before buying in the sector. Computer chips constantly undergo volatile cycles, leading to supply shortages leading to excessive capital investment and eventual oversupply. Since manufacturers have to project production at least nine months in advance, supply tends to weaken demand, causing large fluctuations in investments and returns. In response to the shortage of chips, Intel has announced plans to enter the foundry and manufacture chips designed by other companies. Applied Materials, one of the best performers in the industry, predicts $ 85 billion in manufacturing equipment by 2024. As outlined in Capital Returns: Investing through the Capital Cycle: ‘No part of the technology world was more prone to cyclical trees and busts. as the semiconductor industry. In good times, prices increase, companies increase capacity, and new entrants usually appear from different parts of Asia. We are currently in the “good times” phase of the capital cycle, but analysts need to be careful about extrapolating to the good times in the future. While the PHLX Semiconductor Index skyrocketed, performance before the COVID-19 pandemic was generally very volatile and weak. Some argue that this time is different. A recent note from Goldman Sachs points out that a serious supply chain supply in different types of devices and the sense of urgency on the part of governments to redesign / support the country’s supply chains will support a cycle that ‘ longer stronger ‘is upward compared to the past. According to this view, government support will prolong the semi-cycle, while fundamental changes such as reprocessing will weaken the link between growing capital investment and declining returns. Yet the feeling of ‘urgency’ can just as easily contribute to excessive capital investment, which lowers the returns for disc makers. An analyst at Raymond James argues that government intervention ‘could potentially lead to structural oversupply over time, which despite subsidies could suppress profitability in the industry. ‘And while reprocessing may be a blessing in disguise for some manufacturers, it’s unlikely to benefit the industry as a whole. The much-discussed disk shortage is only an organic outgrowth of the semiconductor cycle. Around the Internet, hedge funds are considering primary brokers after Archegos inflation managers consider switching to the credit providers they use as their primary brokers – banks that offer a range of services, including equities, leverage and trading execution. The head of one London hedge fund said the firm had embarked on an “internal process” to evaluate its key brokerage relationships following the Archegos debacle. The biggest concern was the reputation, especially whether their customers believe they are “associated with the bad people” in the sector, the person said. Amazon employees in Alabama vote against founding a union Amazon.com Inc. employees in Alabama voted not to unite, giving the technology giant a victory in its biggest battle to date against labor organization efforts that the national debate on working conditions at one of the country’s. largest employers. It is estimated that 71% of Bessemer, Ala., Warehouse workers who voted voted against joining the Retail, Wholesale and Department Store Union, according to the National Labor Relations Board, which on Friday rejected all the undisputed votes. , counted. The federal agency has yet to confirm the result, but notes that the ballot papers printed are not enough to exceed the voting margin against union. Random Walk Earlier we discussed the semiconductor cycle. Capital Returns: Investing through the Capital Cycle, a collection of reports from Marathon Asset Management, explains how capital flows can affect returns at the operating level: Capital is usually attracted to businesses with high returns and departure if returns fall below capital costs. . This process is not static, but cyclical – there is constant flooding. The inflow of capital leads to new investments, which over time increase the capacity in the sector and eventually lower the returns. Conversely, if returns are low, capital outflows and capacity are reduced; over time, profitability restores. From the perspective of the broader economy, this cycle resembles Schumpeter’s process of ‘creative destruction’, as the function of the bust, which follows the boom, is to dispel the misallocation of capital that took place during the upswing. roomy. High profitability loosens capital discipline in an industry. When returns are high, companies tend to increase capital spending. Competitors are likely to follow – perhaps they are equally hubristic, or they just do not want to lose market share. In addition, the pay of CEOs is often determined in relation to the earnings or market capitalization of a company, which encourages managers to grow the assets of their business. When a company with big fanfare announces a big increase in capacity, the share price often rises. Growth investors love growth! Momentum investors love momentum! Investment bankers lubricate the wheels of the capital cycle, which helps increase capacity during the boom and consolidate the industries in the bust. Their analysts are happiest in the fast-growing sexy sectors (higher turnover equals more commissions.) Bankers earn fees by arranging secondary issues and IPOs, which raise money to finance capital spending. Neither the M&A banker nor the broker analysts are much interested in the long-term outcomes. As the incentives of investment bankers are skewed to short-term payouts (bonuses), it is inevitable that their time horizon should also be cautious. It’s not just a matter of incentives. Analysts as well as investors are aiming to extrapolate current trends. In a cyclical world, they think linearly. – DT Follow this link to sign up for the Capital Note.