I’m just getting around to reading a transcript of the TGT 1Q22 earnings conference call–the one after which the company’s stock lost a quarter of its value. I should also mention that I’m a long-time holder of TGT shares. I haven’t bought or sold on the earnings report, even though I think the market response to it is a bit excessive.

The first thing that strikes me is that there are three presenters, each trying to put a different marketing spin on the quarter, intending to make the results look better than they were. This is, in my experience, at least mildly insulting to listeners/readers, and never a good idea. Another result of this approach is that it’s not 100% clear what happened in the quarter.

My take on what TGT said:

–the higher oil price, caused by the Russian invasion of Ukraine, is a significant issue, in two ways

–freight costs are higher, and

–consumers are factoring in the cost of gasoline into their purchase decisions. What I mean is–is it cheaper to walk to the drug store or the supermarket, which may charge more than TGT, or to take the sure loss of spending $5 on gasoline to drive to the TGT store in the mall? This deliberation may not be 100% rational, but it seems to be causing fewer customer visits. TGT’s best defense has been to keep prices across the board clearly lower than they would normally be (squeezing gross margins).

–purchases of stay-at-home goods have fallen off a cliff, taking TGT by surprise. The result has been that TGT has a glut of TVs, kitchen appliances and furniture in inventory. The company has already started to discount merchandise to get it off the selling floor, putting some in temporary storage. But it will take time and skill to rectify this mistake, with lower overall margins for TGT until this is done.

implications

–other retailers have been reporting similar experiences, although generally not on such an aggressive scale as TGT

–it will take TGT a couple of quarters to recover

–although inflation in advanced economies is ultimately about wage inflation, there has been intense stock market focus on increases in the price of physical goods. The TGT quarter seems to imply that we’re past the peak for this, suggesting less urgency for the Fed to raise interest rates. I still think the 10-year yield will ultimately settle at 3.5% – 4.0%, though.

SNAP

Efficient markets is the academic finance dogma that all relevant publicly-available information that affects a given stock is instantaneously factored into its price. A corollary is that traditional security analysis is futile, since all the company and industry expertise you develop, and all the insights you may gain from modeling possible future earnings growth paths, are already baked into the current stock price. What I find most amusing about this bizarre belief is that it was formulated in the US during the early 1970s, a time when stocks were imploding as the Nifty Fifty stock mania came to an end.

Anyway, SNAP was down by 40%+, on the March quarter earnings report by management after Monday’s close. What bothered the market is summed up in this sentence:

“In the latter portion of Q1, advertisers in a wider variety of industry groups reported concerns related to the macro operating environment, including continued supply chain disruptions, rising input costs, economic concerns due to rising interest rates, and concerns related to geopolitical risks stemming from the war in Ukraine.” 

Typically, in lists like this companies are careful to begin with the most important influences and continue in descending order of importance. If we think like academics, then, the “new” information that caused SNAP, already cut in half ytd before the earnings release, to be pummeled yesterday is:

–supply chains are being disrupted (why increase desire for products if the shelves are bare?)

–inflation is a problem

–interest rates are rising, and

–Ukraine.

Not exactly news.

the DJIA

Regular readers will know that I’m not a fan. The Dow indices were great when they came out in the late nineteenth century. But they’re very narrow. At least as important, the way the names are weighted is goofy. Their main significance in today’s world is to signal that the user is clueless.

Yet…

I read in Barron’s this morning that since September 2008 there have only been 25 trading days (out of about 3200, or about 0.8% of the time) on which the DJIA outperformed NASDAQ by more than 2 percentage points. Yesterday was one of them.

This may actually be significant. Since acquiring the Dow indices in 2012, S&P has cleaned up the DJIA. So it’s no longer the junkyard it once was. But it still contains a small number of the largest and most stable companies listed in the US. So it’s not really representative of the market as a whole. If we think that the DJIA stands for safety, which in my mind it does, and NASDAQ stands for risk, yesterday was one of the most extreme anti-risk, flight-to-safety expressions by the stock market since the Great Recession. It would be interesting to see when the other 24 days were.

Broadly speaking, a semiconductor firm can make its products more powerful by creating more efficient designs, or cramming more semiconductor pathways onto a given chip, or making bigger chips. For commercial use, the first and second are the ways to go. (Firms can also use larger silicon wafers, tp get more chips/wafer, but that’s a different issue.)

Today’s state of the art semiconductor manufacturing plant costs $10 billion+. It’s highly automated, runs non-stop and spews out around $25 billion – $30 billion worth of output. These very high numbers express the problem for any firm that wants to both design and manufacture semiconductors–who has the money to build a new fab? and who has the markets for that much worth of product?

The answer–almost nobody except Intel and Samsung.

Enter Arm Holdings of the UK, which gives chip designers a framework in which to operate independently, and TSMC of Taiwan, which provides cutting-edge contract manufacturing services to designers.

A decade ago, TSMC was a year or two behind Intel in the sophistication of its manufacturing plants. Today, it’s a year or two ahead, with no signs that I can see of Intel being able/willing to regain lost ground.

Hence, the crucial political importance of Taiwan, and the potential vulnerability of the US tech industry were Taiwan to become a part of the PRC.

located in China?

In the aftermath of WWII, two armed parties fought for control of China. The Nationalist army, generaled by Chiang Kai-shek, lost to Mao. Chiang and his followers fled to Taiwan, where they disenfranchised the local population and set up a new government as the Republic of China (ROC), separate from the People’s Republic of China (PRC) on the mainland. The PRC maintains the ROC is a runaway province, still subject to PRC rule. The ROC says it’s a separate country. The rest of the world has generally opted not to express an opinion.

Prior to Xi’s becoming in charge, the stock market argument in favor of Hong Kong remaining relatively autonomous was that the big prize for Beijing was always the ROC and that treating Hong Kong with kid gloves was the best way to lure the ROC back into the fold.

designing vs. building semiconductor chips

As I see it, the two big trends in the semiconductor industry over the 30+ years I’ve been watching it are:

—the rise of ARM Ltd, a semiconductor and software design company founded in 1990, whose overall chip design infrastructure allowed small groups of engineers to make cutting-edge chip designs independently, rather than as cogs in the bureaucratic machine of a large semiconductor conglomerate

–at the same time, Taiwan became the center of a new global industry, contract manufacturing of semiconductor designs created by others. This gave smaller users of ARM-based designs a way of putting their work on silicon–thus giving them a way to create products to sell to industrial users

the GM-ization of Intel

For a long time, the most powerful commercially-available semiconductors in the world came from INTC. The main issues with them were/are that they’re large, clunky and throw off a lot of heat. But until the past five years or so its factories were the most advanced in the world. And its plants are located in the US or in countries generally favorably inclined toward the US.

Today, TSMC is considerably ahead of INTC, partly due to its excellence, partly to INTC stumbles.

The result of all this is that the political status of Taiwan now matters a lot, especially since the US is denying the PRC access to US-owned IT intellectual property.

Target

The price action of the Consumer discretionary sector, and of TGT in particular, so far today shows the essence of a bear market. Despite being down by 20% from its high last year, TGT has lost a quarter of its market value, or about $20 billion, in trading today that in the first hour is already about 8x normal daily volume.

Yes, the quarterly results the company reported this morning were surprisingly bad. Yes, the company might have lessened the shock if it had hinted at the weakness it was seeing as the quarter developed (although I’m a holder, I don’t know the company well enough to understand its disclosure policies in this kind of situation). And, yes, we may not see positive earnings comparisons until next year. But a loss in market value this large seems a bit much.

But this is the essence of a bear market. The same bad news–in the present case, higher interest rates, supply chain disruptions, the end of extra government stimulus…–gets factored into stock prices over and over and over again. WMT, for example, which had its wings clipped by 10%+ just yesterday on earnings that weren’t as bad as TGT’s, is down another 5% in the first hour today. HD, which reported an excellent quarter yesterday, has given back Tuesday’s gains and then some so far today. Also, the market has a relentless focus on the here and now, reacting especially to bad news.

The most reliable indicator that the down market is over when companies report quarters like TGT’s and the stock doesn’t go down. We appear to be a ways away from that.

Twitter

I don’t use TWTR and I don’t pay much attention to it. The internet tells me Elon Musk is worth $200 billion+, although I vaguely recall a number closer to $150 billion being tossed around in commentary about his bid for TWTR. A good chunk of that is his 17% interest in TSLA.

My sense, having owned both TSLA and Solar City for a considerable time, is that he thinks big thoughts and is willing to take substantial risks, but that he leaves the details to others. His apparently shaky grasp of the securities laws that pertain to his proposed acquisition of TWTR are a case in point.

Knowing only this much, my guess is that Musk thought, based on his past successes, he would have no trouble obtaining third-party finance for his (fun for him) bid for TWTR. That doesn’t appear to be the case, however. Instead, he’s essentially being asked to take out a margin loan secured by his TSLA stock.

If so, if TWTR turns out to be SolarCity redux, or if TSLA stock weakens for any reason, his loan could be called and he would lose the stock put up as collateral. Embarrassing? Yes. More important, he could end up losing control of TSLA.

My guess is that Musk is only working all this out now, and that this is the source of his apparent cold feet with TWTR.