Monday, January 17, 2011

17 January 2011 Apple, Chips, Barron’s and the week ahead.


17 January 2011 Apple, Chips, Barron’s and the week ahead.

Last week we saw the official notice that Verizon will be selling the new 4G iPhone. Some were a bit surprised that Steve was not at the announcement and left that to Mr. Cook the COO. We now know why. He has asked his Board of Directors and received another medical leave of absence. In 2004 he had a leave for a rare form of cancer and in 09 he had a liver transplant. Details of this leave are not available, but rumor of persistent weight loss seems to be the scuttle.

Not good news and our thoughts go out to him. AAPL took a 6% hit in European markets today. Tomorrow, we will probably see a like adjustment of 6-10% down. We expect to see a 30% drop in one of our AAPL calls.

If you believe in the future of smart phones and tablets, Apple is and will remain the predominate player. A 10% correction might create an incredible buying opportunity. There is no doubt that Jobs is the nuclear engine of the AAPL, but there will be life at AAPL while he is gone and even if he unfortunately does not return. We will probably bail out of our call option and look to get a new one during the correction tomorrow or wait and double down.

Look at the Chips in that dip.

If AAPL corrects, the entire tech sector could see a short term correction. Be on the look out for buying opportunities there as well. Here are few ideas:

First off you have to believe in the migration of applications to cloud platforms and virtualization strategies. Then you also have to accept that mobile applications on smart phones and tablets will rule the day. Then you have to understand the battle going on right now to get in your living room and bedroom by tech and media giants. If you can buy into all of that here are few ideas to do homework on.

If you buy into that, then you need to understand that the device makers are looking for chip solutions not necessarily being provided by traditional chip makers. This shift in technology have caught a few to the big guys a sleep at the wheel. One of our picks last year benefitted immensely because of this oversight. ARMH has doubled in the last year and yes we got out at the 78% mark. They probably have a ways more to go. Do your homework, but look for a dip in the next day or so to consider a position. INTC Intel had a great earnings report, but warned a drop in the PC market will impact results in the quarters ahead. (While at the same time announcing they are making strides to make them selves more competitive.)

Industry research is proving common sense to be, common. If you Jane Consumer had 500-1000 dollars to spruce up your video card or ram on your PC are you going to do that or will you buy an iPad. Yeah the iPad will win that bet. Of course you are doing that while reading your Kindle or playing your XBOX games, all using chips not necessarily made by INTC or CEOless AMD. INTC just settled a chip design lawsuit with NVDA (another name to watch is there is a pull back) who does make relevant chip technology for cloud computing and virtualization and mobile platforms.

You could also look at the list of customers of ARM Holdings (the American ADR is ARMH) You see they do sell chips to Apple, but their primary business is to design and sell or lease those designs to other chippers like NVDA Nvidia, BRCM Broadcom, TXN Texas Instruments, MRVL Marvell Technology, and QCOM Qualcom. (Barron’s readers will recognize this as the bulk of the article by Tiernan Ray about Intel. We have added some additional information from other Barron’s articles and a couple of column grabs from IBD.)

After pimping ARMH, Mr. Ray suggests a cheaper (by P/E standards) AMAT Applied Materials.

Keep in mind all of these companies except for maybe ARMH are changing plants and processes to accommodate these multi-tasking processors. That creates another linkage opportunity to consider. If these chippers are changing out plants and equipment, who does that, and are there investment opportunities? FINVIZ to the rescue! Just go to our favorite equity information website and in the search field put in “semiconductor processing equipment” . Now you might have already figured out that setting up a chip processing plant is a huge endeavor so you will not Willie and Jose’s Chip Plant makeover. There are only four plays in the sector.

ASML Holding N.V., through its subsidiaries, engages in the design, manufacture, market, and servicing of semiconductor processing equipment used in the fabrication of integrated circuits. It offers an integrated portfolio of lithography systems comprising steppers, and step and scan systems primarily for the manufacture of integrated circuits. The company's PAS 5500 product family, which supports a wafer size of 200 mm in diameter, comprises advanced wafer steppers, and step and scan systems for i-line and deep ultra violet processing of wafers. It also manufactures computational lithography products used for the implementation of optical proximity correction to design data and verification before mask manufacture. The company operates principally in the Netherlands, the United States, and Asia. ASML Holding was founded in 1984. It was formerly known as ASM Lithography Holding N.V. and changed its name to ASML Holding N.V. in 2001. The company is headquartered in Veldhoven, the Netherlands.

KYO Kyocera Corporation provides fine ceramic components, electronic devices, and equipment to individuals, corporations, governments, and governmental agencies worldwide. Its Fine Ceramic Parts segment offers information and telecommunication components, sapphire substrates, components for semiconductor processing equipment, components for liquid crystal display (LCD) manufacturing equipment, automotive components, and industrial ceramic components. The company's Semiconductor Parts segment provides ceramic packages for crystal and SAW devices, CCD/CMOS sensor and LSI ceramic packages, wireless communication device packages, optical communication device packages and components, and organic multilayer packages and substrates. Its Applied Ceramic Products segment offers residential and industrial solar power generating systems, solar cells and modules, cutting tools, micro drills, medical and dental implants, and jewelry and fine ceramic application products. The company's Electronic Device segment provides ceramic and tantalum capacitors, SAW devices, RF modules, EMI filters, timing devices, connectors, thermal and inkjet printheads, amorphous silicon photoreceptor drums, and LCDs. Its Telecommunications Equipment segment offers CDMA mobile phone handsets, personal handy phone system related products, and wireless broadband systems. The company's Information Equipment segment provides ECOSYS printers, and multifunctional peripherals and systems; and managed print services. Its Others segment engages in telecommunications engineering, data center, management consulting, and real estate businesses; and integration business on information systems and network infrastructures, as well as offers chemical materials for electronic components, electrical insulators, and molded products. The company was formerly known as Kyoto Ceramic Kabushiki Kaisha and changed its name to Kyocera Corporation in 1982. Kyocera Corporation was founded in 1959 and is headquartered in Kyoto, Japan.

LRCX Lam Research Corporation engages in the design, manufacture, marketing, and service of semiconductor processing equipment used in the fabrication of integrated circuits. It offers etch products, including dielectric; conductor; micro-electromechanical systems and deep silicon; and three-dimensional integrated circuits, which are used in etching process. The company also provides single-wafer wet clean and plasma-based bevel clean systems, which are used in post-etch/post-strip cleaning and pre-diffusion/pre-deposition cleaning process. Lam Research Corporation sells its products and services primarily to companies involved in the production of semiconductors in the United States, Europe, Taiwan, Korea, Japan, and the Asia Pacific. The company was founded in 1980 and is headquartered in Fremont, California.

VSEA Varian Semiconductor Equipment Associates, Inc. engages in the design, manufacture, marketing, and service of semiconductor processing equipment used in the fabrication of integrated circuits. It offers medium current systems, including single wafer VIISta 900XP series, and the VIISta 810XP and VIISta 810XE ion implanters. The company also provides high current VIISta HCS series single wafer ion implanters, high energy VIISta HE and VIISta 3000 single wafer implanters, and VIISta PLAD tools. It serves semiconductor manufacturers primarily in North America, Europe, Japan, Taiwan, and Korea. The company was founded in 1999 and is headquartered in Gloucester, Massachusetts.

Intel’s strong reporting and heads up that they are changing over some plants to catch up in the newer chip market has driven this sector up about 10% in the last 7 sessions, but they are far from rich. Do your homework. We are closing in on LRCX with some nice fundamentals and a sexy chart. If a gun were to my head and asked for a win, place and show, it would be LRCX, VSEA, ASML, beating out KYO by a nose.

Barron’s and the week ahead.

It was another great issue of Barron’s this week. The cover story was their renowned Round Table group of stock pickers. The 10 prestigious players (like Bill Gross of the PIMCO Group and Cohen from Goldman Sachs) were very upbeat about the 2011 market while acknowledging the economic footing for longer term is very shaky. Almost all indicate a significant adjustment soon and a 5-20% upward move by years end. Lauren Rubin did a great job of lobbing the questions and assimilating succinct answers. And the article teases “16 stocks to buy in 2011” but I never saw this in this first installment of the article. Part deux next week? (I would not give them to you anyway. I might be a plagiarist, but I am not a thief.) I encourage to get the article because it is not as much about the picks as the thinking behind them that I find enlightening.

Andrew Bary did a great job of analyzing the huge unexpected news break about Verizon launching and iPhone. He looked at the impact to VZ Verizon, VOD, Vodaphone, T AT&T, and AAPL. It is a great read. (teaser alert VOD and VZ might be the best play)

Michael Santoli lays out a nice comparison of Morgan Stanley and Goldman Sachs. Sorry you have to read the magazine for that one.

Anna Raff writes a great piece about the gap between Nymex crude oil prices and Brent crude oil prices. Currently it is an unusual 8% delta. Usually it is 1-2%. She explains why and which way it will correct. Yeah, easy guess it will adjust up. We will be coming up on 100 a barrel soon.

There are quite a few more, but it is getting late and we still want to prognosticate the week ahead.

Tuesday, tomorrow will have the monthly New York regional manufactures survey released (aka The Empire report). The consensus is 14 we are thinking 16 with no real impact on the market. The APPL news and resulting tech meltdown will put a wet blanket on the market. The distinct possibility of a rate increase in Canada could get everyone’s attention. The prevailing wisdom is no increase, but we are talking about crazy Canadians.

Wednesday we have a retail report sure to disappoint and a housing report guaranteed to disappoint. Look for 520M in the housing report. These are housing starts so this should be received as good news (Less inventory on the market), but the market does not think logically. A poor number (520) will keep the market down.

Thursday is the jobless claims and look for yet another small improvement say 20,000 less applicants. Existing home sales will be posted on Thursday and things are expected to be good. Who are we to argue with that. Look for close to 5 million units. 4.9 is the guess.

There are quite a few earnings this week and it is late. Here they are in rapid order. Con Ed a beat. AAPL a beat but the stock will anguish over the Jobs issue, Schwab a miss, IBM a big beat, C Citigroup a beat, F5 has to be a huge beat of huge number (82 cents if I am correct), Ebay who cares but a little beat thanks to Paypal, GS Goldman a big beat (even without the fees from the Facebook Deal), UP Union pacific a big beat, JCI Johnson Controls an big beat, Fifth third and Capital One misses, B of A a beat and GE a Big Beat (despite some serious currency exchange issues).

Salve Lucrum


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