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When The Chips Are Down

Semis are now synonymous with the overarching macro narrative.

The story on Monday is the rout in semis. I’m not sure there’s any way to dance around that.

You may not care about chip stocks. I certainly don’t. To be clear, I’m not sure why anyone would own them knowing where we are in the cycle and considering how sensitive they are to trade escalations, but it makes no difference to me.

What does matter, though, is the macro story and semis are now synonymous with that overarching narrative. This is similar to what happened in November, by the way. At various intervals during the protracted trade conflict, certain sectors and, in Apple’s case, individual companies, have become inseparable from the big picture. This goes above and beyond the extent to which cyclicals are by definition sensitive to shifts in the economic landscape.

What you see in the visual below is an increasingly heinous selloff, and it speaks volumes about the extent to which the trade escalation is inflicting serious damage just barely below the surface.

Now we’re seeing real supply chain jitters and that’s a problem. For the better part of a year, analysts and economists have warned that upending globalized supply chains could lead to potentially disastrous outcomes. The Huawei decision represents something of an existential threat in that regard, especially considering how dependent we all are on technology.

If that sounds self-evident to you, that’s because it is. That’s kind of the point: The Trump administration is doing something that is self-evidently perilous in the name of “national security”. Take it with however many grains of salt you want, but Catherine Chen, director of the board at Huawei, wants you to know that this is a misguided crusade. Consider this passage from an Op-Ed published Friday:

Singling out Huawei because it is headquartered in China makes little sense. Telecommunications companies such as Nokia and Ericsson draw from a global supply chain, as Huawei does. They use equipment developed or manufactured in China, which accounts for much of the telecommunications and internet gear currently installed in American networks. Blacklisting one company — or all of the companies from one country — does nothing to mitigate this global supply chain risk and will substantially reduce competition that will inevitably increase costs.

There’s more in the full, linked post. Much more.

Presumably, the Commerce Department will be forced to adopt some kind of middle ground that ameliorates market concerns and helps cushion the blow. Otherwise, this is going to quickly erode confidence. May is already on track to be the worst month since the crisis for semis.

“It might be tempting to think this is an over-reaction”, Bloomberg’s Andrew Cinko wrote Monday, before explaining precisely why it’s not. “The risk remains that China retaliates in a way that further damages the electronics supply chain”, he cautions, adding that Beijing could “target LEDs, lithium-ion batteries and specialized chips, which could have ripple effects on Apple, Dell, HPE and other American phone, server and PC companies.”

Monday ended up being the second-worst session of the year for European tech.

It’s hard to see how this is sustainable. That is, given that the weakness in the chip space is indicative of an actual, real-world bid to dismantle the global technology supply chain, it’s difficult to imagine how this doesn’t spill over and prompt an across-the-board rout at some point in the very near future unless the Trump administration comes forward with something definitive regarding how they plan to mitigate the fallout from last week’s decision.

Barring that, the Huawei move is going to look like another example of a slapdash, hastily-construed effort to strong-arm another country into compliance with an increasingly rigid set of US demands.

That probably isn’t the right way to characterize Trump’s Huawei decision, but nobody is going to care whether it was or wasn’t ill-conceived if it ends up triggering a meltdown reminiscent of Q4.


 

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