Watching the boats go by in Shanghai-
As I write this note I happen to be looking out my hotel window over the Bund onto the brightly lit party boats cruising the Huangpu river that meanders through Shanghai. All is well here in China and the parties on the boats with millions of LEDs go on……
The view from China is that the trade issue is the US’s problem, not theirs and they don’t seem overly worried about it here. Not so in the US and especially chip stocks that are bearing the brunt of trade issues, getting trashed.
We have been talking about China trade issues for several years now, long before it became popular and it appears that we are coming to some sort of denouement in which there will likely be a resolution….but not likely a good one.
China issue won’t die…like Jason in cheesy horror movies
Like a dumb teenager in a Friday the 13th movie, we believed the monster would be dead after the China issue was kicked down the road several months ago and the administration had new topics to tweet about. But it seems to have been resurrected in an even more serious form as both sides appear even more dug in and have already escalated their positions. I don’t think we will be able to kick the can down the road again….there may be blood in the trade wars.
Chip stocks recent bubble just burst….
Chips stocks had been on a tear for no real good reason as the stocks went up for no visible reason at all while reality remained ugly and uninspiring even without adding in the hibernating China issue. That bubble has just been burst as China has brought us back to reality which is not pretty.
China will make for a longer slower chip recovery
We have been saying that China will cause the recovery of the current chip downcycle to be longer and slower. Demand will remain muted due to China and memory makers will have to idle even more capacity as balance will not be restored by increasing demand only falling supply….not a good recovery scenario…especially for equipment.
June was the worst month in DRAM pricing in over ten years….prices continue to crater….how were memory related stocks going up in the face of that reality?
The newly invigorated trade war will certainly slow not only memory demand but demand across the spectrum of the chip industry.
Huawei & rare earth issues bound to come back as well
As the tit for tat escalates in trade the collateral issues will start up again as well. We already see this collateral issue come up between South Korea and Japan as the chip industry is so important that inflicting pain on the opposite side through the chip industry seems an easy thing to weaponize.
So far, semiconductor equipment sales has not been weaponized but we may not be far off as cutting China off from chip making equipment could be the coup de grace or the start of mass destruction….depending on how you look at it. Neither side seems to want to push that button but things are twitchy……
We had advised investors to take money off the table in Lam as the stock had clearly gotten ahead of itself in a weak market, which has clearly worked.
We think we could break through some important support levels in chip stocks as the China news rolls out.
Its not like fundamental news is strong enough to offset the dangerous China news….memory still sucks.
We could be at the beginning of a longer unstable period as the China issue will not go away overnight. This time we will likely see a more sustained period of concern related to China which could go on through a seasonally slow August with the only real hope coming in the fall September October Iphone & holiday sales season which could also be muted due to China.
We would likely stay on the sidelines until things blow over one way or another….not likely to be a pretty or clean ending as the escalation has been quick….