…or at least to try to find out what’s on the minds of market players.

This is an ugly day, the latest in a series of uglies. In my view, this makes today full of opportunity.

One thing that jumps out to me is that “story” stocks are getting killed …again. I was looking at ASAN, for example. I’m not sure exactly what the company does, or, since I don’t own it, whether that matters at all. It’s one of a series of similar ilk. It’s price was cut in half in late 2021 and this year it has lost 3/4 of its 1/1 value, including being down by about 10% as I’m writing this.

I think such stocks may still be bellwethers for the overall market. If so, it will probably be interesting to see if ASAN can bounce off its July low or whether, either today or soon, it breaks down below that level.

Many stocks like this also appear to be Graham and Dodd middle-of-the-depression cheap. I’m no expert on the 1930s, but back then I doubt it was common to have today’s dual share structure that acts to shield current management from hostile change of ownership control. And, the possibility of such change is key to the value stock argument. So today’s cheap may be lower than value cheap. Even so, there has been at least one case, Peloton, where the board has tossed out the special-share-protected founder.

more tomorrow

I’ve just updated my Keeping Score page for August, a month that may simply confirm that sideways choppiness will be the order of the day for a while yet.

–one of my former classmates, an incredible artist, made her thesis film about several of twenty-something contemporaries who had left Italy permanently. Someone pointed out that she’d given no motivation for the moves. She was shocked, because she thought the situation was obvious. Italy has had no economic growth in the past quarter-century, she said, so why would anyone with a choice stay?

Recently, worries about the solvency of weaker euro members like Italy have popped up again, evidenced by the premium buyers of their euro-denominated sovereign bonds are demanding. One consequence of this, I think, is increasing interest in US Treasuries, which offer not only higher nominal yields but the chance of a currency gain. If that’s correct, the Fed will likely have less trouble than might be anticipated in paring down the massive Treasury hoard it has amassed through quantitative easing.

This despite Europeans being appalled at US gun violence, auto deaths, drug addiction, science denial and the echoes (intensely worrying to people who lived through the real thing) of the rise of 1930s Fascism in today’s Republican party apparatus. Btw, despite being in a flatlining economy, Italians live on average five years longer than Americans–mostly because of fewer violent deaths

–I read a brokerage strategy report the other day saying that the valuation differences between large cap stocks (expensive) and small caps (cheap) in the US have reached extreme levels. I don’t know the author’s methodology (I just read the headline) but I’ve felt this way for a while. For me, it’s more cash or cash-like assets rather than eps or current eps growth. It’s also the way the market cycle works: in up markets, investors are willing to swing for the fences; in bad markets they look for a walk.

–the Fed made it clear at Jackson Hole that the 10-year Treasury note is headed for 4% and that its ultimate inflation target is 2%. I think the real, meaning achievable, inflation target is 3%, but for now I think that’s just a quibble. Rates barely moved on the news, meaning these figures are already in every professional’s plans. If so, most of the pain of higher rates should be already baked into today’s price. Most doesn’t mean all, so it will be important to observe the market reaction to further hikes in the Fed Funds rate. This will presumably tell us how close to all we actually are.

–a half-century ago I was a soldier. I spent my first two years+ in the infantry and then reverted to the military intelligence branch, where I ran a counterintelligence office before resigning to return to school (a whole boring story in itself). Anyway, with this latter perspective, I was floored when I read the kind of classified material that Trump had taken from the White House and had lying around unsecured in his Florida golf club. If the press accounts are right, the documents found, included: reports from highly placed officials in foreign governments who are (or maybe now were) revealing secrets to the US; and communication intercepts by the NSA.

The content of the former would presumably either reveal the identity of the spy or narrow the source of the leak to only a few. The latter could show that communications a foreign government thought were secure actually aren’t. Potentially very damaging; in the first case, possibly lethal.

This could end up being a lot messier than it seems now.

Last Monday INTC announced a deal with BIP, a publicly-traded infrastructure limited partnership. The partnership’s purpose is to build and own two semiconductor fabs that INTC is in the process of constructing in Arizona.

Terms: INTC will contribute its semiconductor fabrication expertise plus everything it has done so far on the project, which it values at $14 billion+ and will own 51%; BIP brings $14 billion+ in cash to the table for its 49%.

The glitzy slides of the investor presentation explaining all this, as well as the turgid prose of the agreement itself, can both be found on the SEC Edgar site. The bottom line as I see it, though, is that instead of getting a bank loan at, say, 5%, or using its A+ credit rating to issue bonds, INTC is ceding almost half the project to BIF for the financing it needs to complete it.

What does this mean?

(highly subjective) background

In the 1990s, the semiconductor business was transformed by the emergence of ARM Holdings and Taiwan Semiconductor Manufacturing Corp. ARM makes semiconductor design tools that allow small groups of semiconductor design engineers to create chips without having to work for the industry behemoths, like INTC or Samsung. TSMC makes these designs into functioning chips in its fabs. This industry development meant that, for the first time, INTC had serious competition for its we-do-everything model.

Though INTC chips are bigger and throw off more heat than ARM/TSMC products, the company kept itself competitive by the ability of its fabs to stay a couple of years ahead of TSMC in the race to “shrink” chips, that is, to etch chip structure on ever smaller pieces of silicon.

Three or four years ago, that changed, however. TSMC pulled even with INTC in fab sophistication …and then moved clearly ahead. The stock market picked this up right away. From the beginning of 2019 until last Friday, INTC shares have lost about 30% vs. a gain of 411% by long-time rival AMD (a user of TSMC fabs).

I find INTC’s response to its less favorable positioning to be curious. Yes, there is a several billion dollar per year increase in capex. But that’s dwarfed by $40 billion in stock buybacks during 2018-20. And there’s the steady outflow of $5 billion+ a year in cash from the dividend INTC chooses to pay.

back to the Brookfield project

I don’t know enough any more about the ins and outs of INTC to be more specific, but generally speaking I see three possibilities–not mutually exclusive–for INTC’s decision to find outside capital to complete the Arizona project rather than use its own money:

–the project itself is a clunker, at the very least in the sense that it will offer lower returns than anticipated. So it would make sense to turn to someone like Brookfield, which does things like building toll roads for cash-strapped municipalities, to get the capital to complete it

–INTC finally realizes how far behind ARM/TSMC it has fallen over a decade of complacency (apparently Only the Paranoid Survive is no longer required reading for board members) and now has a sense of urgency in trying to catch up. Not a great sense of urgency–it is still paying out about $6 billion in annual dividends, dulling the positive impact of Brookfield on cash flow–but still more than two years ago

–a variation on the first. It may be that INTC no longer has the easy access to inexpensive borrowing that its pristine credit rating would suggest. It may also be that directors would balk at a stock offering today, thinking (incorrectly, in my view) that this would make their buyback decisions of past year look even worse

the stock

To me, INTC feels like DIS as it stagnated under Eisner in his last decade. For DIS, of course, what followed was the spectacular rebound under Iger. Whether Ishrak is the new Iger or not, and therefore whether INTC is a classic value stock today, I don’t know. But the BIP deal suggests it’s more thinkable than before.

…actually, sports commentary in general, not just baseball. But it was while I was watching the Mets-Phillies series over the weekend, I was struck by the high quality of of the commentators. In this case, Ron Darling, with play-by-play by Gary Cohen. Darling, a former Mets pitcher, was an All-Star, Gold Glove winner and World Series champion. The third member of the crew is Keith Hernandez, a 5-time All Star, MVP winner and 2-time World Series champion. In addition to being deeply knowledgeable, the three are very analytical and articulate.

At around the same time, I happened to be reading a featured article in the financial press. Although couched in perhaps and maybe terms, its thrust is that the US stock market is substantially overvalued today. How so? Stocks were correctly priced three years ago. The US economy is in rockier shape now than it was then, yet stocks are a third higher .

This conclusion may turn out to be correct. Still, there’s not a whole lot of nuance to the supporting argument. There is a nod to the fact that the US indices contain exposure to non-US economies, but not, I think, to the reality that about half the S&P eps total comes from abroad (note: this is most likely a really bad thing right now). And, as is the case in most/all places with stock markets, huge swaths of the US economy have little/no direct representation in public trading–housing, autos, government come to mind. Publicly traded companies tend, generally speaking, to be the best and the brightest.

Nor is discounting addressed–whether market participants have correctly anticipated future company developments, good or bad, and already factored these into current prices. Same thing about the relationship between stocks and bonds–what level of interest rates does a 17x multiple imply?

Anyway, it struck me as revealing that we expect seasoned pros in the broadcast booth but are satisfied in the financial arena by and large with commentators who have never played the game.