Intel (INTC0 and Altera (ALTR): implications

What can we conclude from INTC’s interest in acquiring ALTR?

–when I became interested in INTC as a stock a couple of years ago, it seemed to me that the firm could be viewed as having two businesses–a high-growth one selling servers and a low-growth, cash cow one selling chips for PCs.   At the time, I thought the server business alone more than justified the then stock price, and that the PC business was mainly important for its contribution to overhead and its free cash flow generation.  A desire to acquire ALTR seems to confirm that this is also INTC management’s view.

–good companies periodically reinvent themselves.  After a period of stagnation, this appears to be what INTC is doing

–the threat of low power servers run by ARM chips is serious

–my guess is that a bid will take the form of all or mostly INTC stock.  An all or largely cash offer would imply either that INTC thinks its shares are deeply undervalued, that debt financing is too ridiculously cheap to pass up, or that long-suffering ALTR shareholders want  to declare investment victory and move on.

–an INTC-ALTR merger spells trouble for Xilinx (XLNX), the main competitor to ALTR

–the main source of value in ALTR is its software.  Assessing that, thorough accumulated R&D spending, is the key.

Numbers tomorrow.

Intel (INTC) and Altera (ALTR)

Late last Friday afternoon a rumor reached Wall Street that INTC is in talks to acquire ALTR, causing a sharp rally in ALTR shares and a modest one in INTC’s.  In hindsight, INTC appears to have been headed down this path for a couple of years, as a prescient article in the Electronic Engineering Journal (titled “When Intel Buys Altera”) pointed out last June.

Why a deal is potentially crucial for INTC:

1.  what ALTR does:  The company is one of the two dominant makers of Field Programmable Gate Arrays (FPGAs)–the other is Xilinx.   FPGAs are logic devices.  What makes them unusual is that they contain software that can be updated, revised or reprogrammed after the servers or telecom equipment (the two big markets for FPGAs) they’re in have already been built and installed.  The traditional upside of FPGAs is that they allow customized equipment to be put into the field and fine-tuned quickly.  Their downside is they’re more expensive than the pure-hardware alternative, ASICs (application-specific integrated circuits).

2.  INTC and Moore’s Law:  A factory to make current-generation INTC chips costs about $3 billion – $4 billion.  A next-generation factory, using much different equipment, will cost maybe $14 billion.  Samsung has already said it will build one; INTC says it’s too risky to build one by itself.  How, then, does INTC retain its technology/speed advantage over rival chipmakers?

3.  an INTC chip + a FPGA:  as reported in the EE Journal, INTC says linking an INTC microprocessor with a FPGA in a server can boost performance by 10x.  Bind the interface between the two closely enough can double performance again.

In other words, INTC + ALTR = huge step forward in chip performance.

why a merger and not a joint venture?

To my mind, the risk to both parties is too high for a joint venture.  INTC would have its lucrative server business in jeopardy if it committed to the FPGA route and the parties ever parted.  ALTR would have to devote a lot of resources to making its programming tools easier to use, potentially diverting attention from its telecoms customers.

More tomorrow.



Millennials and shoes

For a while, I’ve been convinced that my search for secular growth consumer stories should shift from Baby Boomers–an amazingly rich lode to mine for my entire career–to Millennials.

Two reasons:

–Millennials are now more numerous than Boomers, and

–Millennials’ incomes, now only about half that of Boomers, are risng, while Boomers’ are falling as more enter retirement.

So I’ve been on the lookout for information about trends in Millennials’ consumption.

The other day I found one from the NPD Group blog.

It’s shoes!!

The average American–man, woman and child–buys 7.5 pairs of shoes a year.  The business has been growing by about 3% a year since the economy’s low point in 2009.  Total annual retail footwear sales in the US are now around $54 billion.

According to NPD, Millennials in the US spent $21 billion on footwear, about 40% of the total, last year.  That’s up by 6% over their outlay in 2013, or triple what the industry growth was.  In addition, Millennials were a bigger factor in the $100+ shoe segment, where they spent 12% more than in 2013.

Now to find a pure play.



thinking about the oil price

I’ve been reading lately that many US oil companies are continuing to drill for shale oil, despite the fall in the price of crude.  However, while they are finishing drilling holes in the ground, they’re not yet “completing” the wells.  That is, they’re not fracking the underground deposits by pumping in water/sand/chemicals to create a path for the hydrocarbons to get to the well.  Nor are they installing the equipment a working well requires.

There’s even a name for these already drilled but not completed wells–fracklog.

The decision not to complete is easy to understand.  There’s already too much oil sloshing around in the world.  Why spend money to add to the problem–maybe even pushing prices down enough to make your own efforts unprofitable.

Why continue to drill, though?

Lots of potential reasons.

A drilling rig may be under contract, so the oil explorer has to pay for it whether used or not.  Drilling a certain number of wells may be necessary to keep mineral rights to specific acreage.  In the case of companies with too much debt, the bankers may be calling the shots (although such wells will surely be completed as fast as possible).  Some exploration firms have also made it clear that they consider today’s oil price to be a purely temporary dip.  So they’re going to continue to drill no matter what.

What’s important for investors, though, is how the fracklog may affect any rebound in the oil price.

My picture is that oil is bouncing along at or near the bottom, waiting for high cost production to leave the market.  As/when that happens, and as world GDP growth gradually increases demand for petroleum, the oil price will begin to rise again.

I think the fracklog creates a ceiling above which oil will find it difficult to rise.  It implies that when these backlogged wells become profitable enough, a rush of new output will hit the market.  Maybe the appropriate price is $70 a barrel.  $60, anyone?  It’s almost certainly below $100.

If I’m correct, an eventual oil price rise will be unpleasant for consumers but not devastating.  Also, the buy/sell decision for any oil producer becomes much more a sharp pencil exercise than a thematic call on the possibility of boundless price increases for output.



off to a very slow start today…

…so I’m not going to write very much.

During the first world oil shock (1971 – 74), the US was unique among developed countries in enacting a byzantine system of oil price and distribution controls aimed at preventing the ipact of higher prices from affecting the country (don’t ask for details).

One facet was to price oil from already producing wells substantially below world market level.  The idea, I guess, was to prevent owners of oil from enjoying a profit windfall from the upward spike in oil that was occurring at that time.  One unintended effect of the legislation was that the supply of such “old” oil began to shrink rather rapidly.

After controls were abolished during the Reagan administration, curious as always, I asked executives of a number of big oils whether the falloff in  “old” was due to lack of new investment or to a deliberate decision to shut the wells down to await for higher prices.  The answer was uniformly the latter.

I think something similar is beginning to happen in the US today–not the price controls, shutting wells in.

More tomorrow.


Grexit a 50/50 possibility…

…according to financier George Soros.

Personally, I have a hard time dealing with Mr. Soros’s Donald Trump-ish nature.  In his book The Alchemy of Finance, for example, he claims to have invented the thesis-anti-thesis-synthesis explanatory pattern that was introduced to European thought by Hegel in 1807 and developed by Marx later in that century.  Hard to believe Mr. Soros, who studied philosophy, is completely unaware of either of these seminal figures.  I’ve also thought that a significant amount of the success of his Quantum Fund was due to Soros’ less well-known partner, Jim Rogers.

If there’s one thing, George Soros knows about, however, it’s currencies and politics.  So his view that it’s a flip of a coin whether Greece stays in the EU or leaves, is well worth listening to.

The short story of Greece’s woes is that after joining the EU it racked up so much sovereign debt using the implicit repayment guarantee of being in the euro (kind of like having a credit card that can’t be maxed out) that it can’t possibly pay all of it back.  The gravity of the situation came to light several years ago when a newly installed (and now gone) government announced  the previous administration had been falsifying the country’s national economic accounts  for years.

Greece has since been negotiating for debt concessions in return for ending its spendthrift ways.  Its strategy so far has been to promise reform in return for debt relief   …but to do nothing.    This tactic seems to have recently passed its “sell by” date.  The EU and the IMF now appear to believe that the moral hazard risk of continue to accommodate Greece is worse than the potential damage to the Eurozone from expelling it.

As I see it, the ball is now clearly in Athens’ court.

For what it’s worth, I think Grexit would turn out to be a genuine tragedy for Greece, but far less damaging to the euro than is commonly believed.  Rather than giving encouragement to breakaway movements in the UK, Spain and elsewhere, I think Greece outside the EU–substantial currency depreciation, loss of access to external finance–would serve as a cautionary tale instead.    Think Argentina without the farm wealth.

My guess is that the euro would decline a bit on Grexit.  The banks might have a rocky time, too.  It’s very possible, though, that the markets would be happy just to have the situation resolved–and that any fallout would be small and short in duration.



HSBC says the dollar is peaking

HSBC (Hong Kong Shanghai Bank Corp) has begun to seek publicity for a research report arguing that the US dollar has peaked.  I’ve seen mention of it both in the FT and on Bloomberg (the link above).

HSBC is generally pretty good at economics, and has been ahead of the curve on major moves like this before.  So I think its argument is worth considering.  It also fits in with the way I’ve been thinking over the past few weeks.

The HSBC argument:

–the EU is starting to show economic strength as the US is beginning to slow a bit

–on purchasing power measures, the US$ is more overvalued than everything except the Swiss franc

–the Fed is reaching the end of its tolerance for dollar strength

–sentiment is universally bullish for the dollar (i.e., where are new buyers going to come from?)

–the dollar typically weakens after the first Fed Funds rate hike.


Risks to the view are mainly geopolitical:

–Greece exits the euro

–emerging markets crisis

–perceived failure of Abenomics

–US legislation forcing American companies to repatriate foreign cash holdings.


my take

I don;t know David Bloom, HSBC’s chief currency strategist and the report’s author, personally.  But I see his work as another piece of evidence that the pro-dollar consensus is beginning to crack and that at least a mild reversal of form is likely sooner rather than later.