bull market reasoning (corrected)

Enrique Diaz-Alvarez enrique at anise.ee.cornell.edu
Wed Feb 23 08:42:58 PST 2000


Rakesh Bhandari wrote:


> In a much appreciated post, Enrique shared his understanding of things
>
> A $500 PC just doesn't have any room for the
> >profit margins Intel has grown fat on. Add in the enormous increase in fab cost
> >for each succesive generation (a .18 micron fab already costs several billion
> >to build) and the future of the CPU industry, in my opinion, is increased
> >commoditization, ugly price wars, and desperate fights for vanishing profit
> >margins. Intel is yesterday's news, and that's why it has shown no significant
> >profit growth for the last three years - though it may have a brighter future
> >as a speculative hedge fund; after missing tis earnings expectations two
> >quarters in a row, it decided to count the money it made betting on the
> >Internet stock lottery as if it were earnings from business, guessing
> >(correctly) that neither its stockholders nor the SEC would give a hoot.
>
> Yet if US microprocessor firms can maintain some monopoly power as unit
> sales of pc's expand as prices plunge, they may do quite well. They'll go
> from high margin/low volume to lower high margin/more volume. And AMD and
> Cyrix may gain on Intel as a result.

No doubt they will. So where is the monopoly power? Particularly as the fattest market (Western business users) has already been serviced, and it is likely that Third World users will be even more price conscious.


> Still better than ever lower
> margin/ever more overproduction memory chip business.

No doubt. Intel will become GM; Micron Technology has a date with Chapter 11.


> So the relative
> profit expectations from US firms are indeed quite a bit stronger than
> elsewhere, partially explaining the tech specific US stock market rise.

A matter of opinion. Methinks that the tech stock rise is a classic demonstration of fund managers occupational dynamics: if you want to keep your job, you can 1) be always right and 2) do what everybody else does (in this case, buy tech).


> As
> long as the divergence is increasing

What divergence?


> --even if US profit margins are
> themselves dropping--US tech stocks (and the dollar) will remain quite
> strong.
>
> If things get really rough, then expect further cartelisation.

A definite possibility, though the dynamics of chip production (marginal costs after fab yields rise are very low) make cartelization difficult.


>
>
> Of course further cartelisation may not be necessary; more government
> programs like Sematech (along with VERs) which announced to the world
> seriousness about maintaining the US technological position may already
> suffice as a threat to stay out.

I don't think anybody is planning to compete with Intel and AMD. I just don't think the MPU industry will be worth competing for.


>
>
> Perhaps the US govt is being so cautious about breaking up Microsoft so as
> not to create room for a new foreign monopoly commanding a bigger network
> abroad merely to supplant it as well? Probably why the US government has
> allowed massive mergers and monopoly power in aerospace.
>
> Strategic trade theory was centered on these kinds of questions. The US
> government seems quite committed to the power of its technological
> monopolies.
>
> But you have encouraged me to give a call to some old hands in Silicon
> Valley. I'll report back.
>
> Needless to say, you may well be right about Intel's future. Moreover, if
> the next downturn is disturbingly deep with no govt stabilisation program
> at hand, future profit expectations may be so dim to crash capital goods
> orders (in which pentiums and cutting edge software would be embodied)
> even those that would give an immediate fillip to profitability in
> desperate times. Yet these monopoly prices seem to be themselves
> weakening the structure through wage cutting, deflationary strategies they
> are forcing upon technology using firms.

I am not sure I follow. My whole argument is that, in the MPU industry, monopoly prices are a thing of the past. Cartelization may bring them back, in a reduced fashion, but I don't see the industry as being very cartelizable.


>
> >However, the problem I see with the technology industry in
> >general is that it is absolutely drowning in capital, thanks to the Greenspan
> >Bubble: in just about any promising area you can think of, there are several
> >competitors armed to the teeth with no-strings-attached,
> >lose-as-much-money-as-you-want-for-as-long-as-you-want investor's money. And
> >not just on the internet. That's no way to extract monopoly rents.
>
> That's why they call it vulture capital.

I am not sure what you mean here.


> But people like Kenney and Florida
> thought it would ruin solid American companies to the advantage of the
> keiretsu. They were wrong.
>
> yrs, rakesh

Cheers,

-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at ee.cornell.edu Ithaca, NY 14853 http://peta.ee.cornell.edu/~enrique



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