Category Archives: Industry Analysis

Taiwan Semiconductor Manufacturing (TSMC): background

May 18, 2020 By in semiconductor manufacturing, Technology, Uncategorized Tags: , , , Leave a comment

what TSMC is

In the early days of semiconductors, chip-making firms tended to be vertically integrated, meaning the companies that designed semiconductors also manufactured them in their own plants.

That changed as the semiconductor industry began to expand rapidly in the early 1990s, for several related reasons:

–chip designs became progressively more specialized and complex, putting increased focus on the design process

–the cost of building chip fabrication plants to manufacture newer, higher-specification, designs rose exponentially, putting them out of reach for all but the biggest firms, and

–TSMC opened in 1987 as a third-party manufacturer, allowing dedicated design shops to set up on their own and still be able to have their designs fabricated.  The design business, something at which Americans have excelled, has flowered since.

Today, TSMC is the most advanced chip manufacturer in the world, and by far the best third-party fabricator, matched only by Samsung, an integrated firm, and maybe Intel.

 

semiconductor equipment makers

Today’s semiconductor fabs are extremely expensive.  TSMC has just agreed to build a new fab in Arizona, for example.  The cost:  $12 billion.  (More on this in the accompanying post)  The equipment inside, the most advanced pieces of which can cost hundreds of millions of dollars, comes from a small number of specialized machinery firms, which are located mostly in the US, Japan or the EU.  Because of the complexity of semiconductor manufacturing and the expense and long lead times involved in developing and testing new equipment, there tend to be very close cooperative research and development relationships between the fabs and their equipment manufacturers.

 

foundries are the future…

…absent some revolutionary change in computer technology.  A decade ago, when I was more up-to-date on semiconductors, a state-of-the-art fab cost about $4 billion.  Operated efficiently, it would churn out, say, $7 billion worth of output.  Both figures are out of reach for most firms.  Hiring a trusted third party to manufacture your designs is the easiest way to go.  Although the ratio of sales to assets has shrunk since I was better informed, the absolute numbers have risen a lot.

 

 

 

 

 

once the worst has passed–Instacart

April 30, 2020 By in home food delivery, post-pandemic world, Retail, supermarkets, Uncategorized Tags: , , , Leave a comment

It’s probably not too soon to start imagining what changes there will be in daily life once the coronavirus is under control.

home food delivery

Online ordering through Whole Foods or Amazon has been impossible.  The wait for a Costco delivery slot has been two weeks+   …until yesterday, when suddenly (I hadn’t looked for a while) slots for same-day as well as every day for the next week were available.  Everything I ordered was in stock–delivered three hours later  …another change.

To me this suggests that panic buying has subsided.

Instacart

What really caught my eye is Instacart, which powers many food delivery services.  Not in a way that makes me itching to invest, though.  The markup on the food was 26%, after including a 5% tip.  That’s a lot, I think.  For a family of four that spends $1000 a month on food, Instacart would cost an extra $3000+ a year.  During a pandemic, this is probably not an issue for most people.  But in normal times, this seems pretty steep to me.

I don’t think home delivery will go away.  But it seem to me that potential new competitors have lots of room to undercut Instacart’s markup.  Also, it would seem to me that delivery from centralized warehouses is inherently less costly than hiring someone to shop in a supermarket in your place.

a surprisingly hardy breed

A caveat–two, actually:  I’m not an expert on supermarkets; grocery is, to me, a weird and wacky industry, with greater staying power than I would ever have imagined.  My town, for example, offers only a number of very dated, inefficient food stores.  A national chain has been trying to build a superstore for over twenty years on commercially zoned land it bought from a department store moving to a nearby mall.   Protests by “citizens’ committees” funded by the incumbent grocers have blocked redevelopment, as I understand the situation, despite the deterioration of the neighborhood as small businesses in need of an anchor have left.

The economics of physical grocery stores is also more complex than I would have thought–all mixed up with payments from manufacturers for premium space, the role of house brands, ancillary services like banking or a pharmacy…

Anyway, this is to say that supermarkets may be harder to kill than it seems on the surface (just look at department stores, which have been dying for almost fifty years).

 

oil at $10 a barrel

April 20, 2020 By in oil, oil and natural gas, Uncategorized Tags: , , Leave a comment

In my early stock market days, one of my bosses sent me on a tour of commodity-trading centers to get me up to speed on palm oil.  This was so I would understand the plantation stocks in Malaysia.  I mentioned to one head of trading I spoke with that my trip was part of a months-long project.  He looked at me like I was an idiot and slowly (so that even I could understand) explained that commodities were all about gut instinct and decisive action.  He hired good high school athletes, not scholars.   A classic jock vs. nerd confrontation.

This is to say that I’m not a commodities expert.  So maybe you should take my comments about crude oil with a grain of salt.  Anyway,

–crude for May delivery plunged over the weekend to right around $10.  On Friday April 3rd a barrel was going for $28+

–the main reason is that oil production is still miles ahead of oil use and there’s no easy way to store excess crude oil output

–this is an epic low in inflation-adjusted terms.  Saudi crude sold for less than $3 a barrel in dollars of the day in the early 1970s and rose to close to $30 in 1979-80, before plunging to $8 (about $27 in today’s dollars) in the recession that followed

–there would be an arbitrage opportunity if there were storage, since crude for August delivery is trading just under $30

–this is where my not knowing oil trading hurts:  I would have expected that future months would have collapsed in line with the current month.  I read this as traders thinking the May situation is a temporary blip, but I really don’t know

–for many years natural gas has sold at a substantial discount to crude, on a heating value basis.  Today they’re roughly equal.

my stock market take

The oil market is saying this is a temporary blip.  I’m not so sure.  But I don’t know.  And the energy sector is so small that I don’t need to do any more than observe.  So I’m going to sit on my hands.

If it persists, this situation is very bad for third-world countries like Venezuela or Russia that are radically dependent on oil.  It’s also not good for the oil countries of the Middle East, which have similarly one-dimensional economies.  They can likely continue to produce at a profit even at today’s price, but I’d expect that their governments would be forced to begin to liquidate their foreign investments as budget deficits soar.  This could have a negative effect on global stock and bond markets.

The largest effect on the US is a redistribution of wealth away from the big hydrocarbon-producing states to the consuming ones.  In theory, this should be an overall wash.  But since there’s very little discretionary driving going on, I think it’s a mild negative.

The price fall is good for the EU and most of Asia.

The US stock market is flattish, despite the oil price.  Both NASDAQ and the Russell 2000 are up slightly, suggesting that neither industries of the future and small business will be hurt by lower oil.  Even the Dow, which is showing its deep roots in industries of the past, is only down by about a percent.

An addendum (stuff I just found out):  the May crude contract expires tomorrow.  The holder is required to take physical delivery of 1,000 barrels/contract.  The price shows virtually no one wants to do so.  Apparently, it’s not clear whether storage will be available on settlement date.

contract closing:  the May crude oil contract closed today at minus $37+, meaning that the seller had to pay the buyer $37,000 to shoulder the burden of taking delivery of the 1,000 barrels each contract represents.  The buyer gets the oil plus the money.

 

 

oil below $20 a barrel

April 16, 2020 By in Autos, oil, oil and natural gas, shale oil, Strategy, Uncategorized Tags: , , , , , Leave a comment

The Energy sector of the S&P 500 makes up 2.8% of the index, according to the S&P website.  This is another way of saying that none of us as investors need to have an opinion about oil and gas production, which makes up the lion’s share of the sector.

Last weekend Saudi Arabia and Russia, with a fig leaf provided by the US for Mexico’s non-participation, led an oil producers’ agreement to cut production by around 10 million barrels daily.

Prior to the meeting, crude had rallied from just over $20 to around $23.  Right after, however, the Saudis announced price discounts reported to be around $4 barrel for buyers in Asia.  Prices were reduced by a smaller amount in Europe but went up for US customers–apparently at the Trump administration’s request.  That sent crude prices into the high teens.

Why is this the best strategy for Saudi Arabia?

The commonsense answer is that Riyadh thinks it’s more important to secure sales volumes than it is to be picky on price.  This is at least partly because the world output cuts reduce, but by no means eliminate, the oversupply.  So there are still going to be plenty of barrels looking for a buyer.  Another reason is that since demand has dried up the Russian ruble has dropped by 20%.  That’s like a 25% local currency price increase for Russian crude, meaning lots of room for Moscow to undercut rivals.

investment implications

The most leveraged play to changes in oil prices is oilfield services.  Companies that specialize in exploration–seismic services, drilling rig firms–are the highest beta, firms that service existing wells less so.  During the oil price crash of the early 1980s, however,  drilling rigs were stacked for a decade or so.  On the other hand, oilfield services firms are the ultimate stock market call on rising oil prices.

Given that US hydrocarbon output and usage are roughly equal, the country as a whole should be indifferent to price changes (yes, it’s more complicated, but at this point we want only the general lay of the land) rather than the net winner it was 15 years ago.  However, within the country oil consumers normally come out ahead, while oil producers are losers.

Typically, the resulting low gasoline prices would be a boon to truckers and to commuting drivers.  The first is probably still the case, the second not so much.

The bigger issue, I think, is the fate of the Big Three Detroit auto producers, who are being kept afloat by federal government policies that encourage oil consumption and protect high-profit US-made light trucks from foreign competition.  While nothing can explain the wild gyrations of Tesla (TSLA) shares, one reasonable interpretation of the stock’s resilience is the idea that the current downturn will weaken makers of combustion engines and accelerate the turn toward electric vehicles.

Personally, I’m in no rush to buy TSLA shares–which I do own indirectly through an ARK ETF.  But it’s possible both that Americans won’t buy new cars for a while (if gasoline prices stay low, greater fuel economy won’t be a big motivator).  And the rest of the world is going electric, reducing the attractiveness of Detroit cars abroad, and probably making foreign-made electrics superior products.

If there’s any practical investment question in this, it’s:  if the driving culture in the US remains but the internal combustion engine disappears, who are the winners and losers?

 

 

 

 

 

 

 

 

energy: oil

April 13, 2020 By in oil, oil and natural gas, shale oil, shale oil and gas, Strategy, Uncategorized Tags: , , , Leave a comment

history

–oil began replacing coal as fuel of choice in the early 20th century, but that loss was mostly offset by substitution of coal for wood, until…

…at the end of WWII, Saudi Arabia, having lost its primary source of revenue, Hajj pilgrims, in the prior decade-plus, opened its oil deposits to foreign development.  

–Third-world producing countries formed OPEC in 1960 as a political organization to battle exploitation by oil-consuming countries.  In the 1970s, OPEC “shocked” the world by raising the price of crude oil in two stages from $1 barrel to $7.  In the panic that ensued after the second increase the price spiked to over $30 before collapsing and staying low for years.

–During the 1970s oil crisis, every major consuming nation other than the US acted decisively to decrease dependence on oil.  If anything, the US did the opposite.  One result of our misguided policy (to protect domestic auto firms) has been that although the US represents 6% of the world’s population it consumes 20% of global oil output.  Another, despite this + trade protection of domestic carmakers, has been loss of half the domestic auto market to better-made, more fuel-efficient imports.  (In most cases this is what happens–protection weakens the protected sector.)

supply/demand

price dynamics

Pre-pandemic, the world was producing about 100 million barrels of oil daily.  It consumed about the same.  Oil supply is relatively inflexible.  In over-simple terms, once a large underground pool of oil start to flow toward a well, it’s difficult to stop without harming its ability to start up again.  Because of this, even small supply excesses and shortfalls can induce sharp price changes.

supply

The biggest oil producers are:

US          19.5 million barrels/day (includes natural gas liquids.  crude alone = 12.7 million)

Saudi Arabia          12 million

Russia          11.5 million

Canada, China, UAE, Iraq, Iran      each 4 – 5 million

demand

The biggest oil consuming countries are:

US          20 million barrels/day

EU          15 million

China          13.5 million

India, Japan, Russia      each about 4 million

my stab at production costs (which is at least directionally correct)

Saudi Arabia        less than $5/barrel

Russia          $30/barrel

US fracking          $40/barrel

where we stand toady

The coronavirus outbreak appears to have reduced world oil demand by about 15 million barrels a day.  Enough surplus oil is building up that global storage capacity will soon be completely full.  Also, a spat broke out between Saudi Arabia and Russia over production cutbacks to support prices.  When the two couldn’t agree, the Saudis began to dump extra oil on the market.

West Texas Intermediate, which closed last year just above $60 a barrel, plunged to just above $20 a barrel in late March.  It goes for about $24 as I’m writing this late Sunday night, despite Moscow and Riyadh seemingly paving patched up their differences last week and agreeing to cut their output by 10 million barrels between them.  The market was not impresses, as the Friday WTI quote shows.

fracking

The US is in a peculiar position:

–the administration in Washington appears to have two conflicting energy goals:  to keep use of fossil fuels as high as possible; and to keep the world oil price high enough to make fracking profitable.  The first argues for lower prices, the second for higher.

–according to the Energy Information Administration, fracking accounted for 7.7 million barrels of daily crude oil liftings in the US last year, or 63% of the national crude total.   If the cost numbers above are anywhere near accurate, domestic frackers are in deep trouble at today’s oil price  

This doesn’t mean production will come to a screeching halt. 

The industry has two problems:  excessive debt and high total costs.  According to the Wall Street Journal, Whiting Petroleum, a fracker who recently declared bankruptcy, prepared for pulling the plug by drawing its full $600 million credit line, swapping stock in the reorganized company to retire $2 billion in junk bonds and paying top executives a total of $14.5 million.  That solves problem number one. 

As to number two, total costs break out into capital costs (leases, drilling…) and operating costs.  I have no idea what the split is for Whiting and I have no interest in trying to figure it out.  My guess is that the company can generate positive cash flow even at today’s prices.  Almost certainly the reorganized company can.  It may choose to shut its existing wells in the hope of higher prices down the road.  But it could equally well opt to continue to operate just to keep experienced crews together.  However, new field development is likely off the table for now.

my take

When I was an oil analyst almost (gulp!) a generation ago, the ground level misunderstanding the investment world had about OPEC was the belief that it was an economic organization, a cartel, not the political entity that it actually was.  The difference?–economic cartels invariably fail as members cheat on quotas; political groups have much more solidarity.  Today’s OPEC, I think, is much more an economic cartel than previously.  In other words, it can no longer control prices.  And despite the fact that Putin and MSB have extraordinary sway over the administration in Washington, my guess is this won’t help, either.

There’s some risk that investing in oil today is like investing in firewood in 1900 or coal in 1960.

Despite this, for experts in smaller US oil exploration companies, I think there will be a lot of money to be made after a possible wave of bankruptcies has crested.  Personally, I’d rather be making videos.