What is the semiconductor index telling us ?

When I started out in this business in the 1990s, amongst the first few things that I learnt what the semiconductor sector was largely cyclical. That’s just the way it was. Semis never really commanded high multiples because they were largely seen as commodity type inputs.

Intel was the King back then (Intel inside was a great tagline) and great new businesses in the Far East were in their early stages of growth.

Fast forward to two and a half decades later and one can contend that the semiconductor sector is anything but cyclical now. In fact, you can argue that it is as structural as it can possibly get.

The only thing that has changed is that Intel is no longer King. It lost that title many years ago.

Today, the world of innovation is kicking ass (to steal an American phrase … pardon my language though) and none of this innovation would be possible without the gigantic leaps that semiconductor companies are making. They touch every sector at their very cores.

The persistent improvement in the quality of our life (let’s not go into the world of mental health for this conversation !) owes a lot to semis. Warren has a great line about America - “Every generation in America will have a better quality of life than the previous one … and you never bet against America.”

I totally believe that. And today, semis are driving that change.

Remember this : there is no AI without chips, there is no autonomous car driving without chips, there is no gene sequencing without chips … the list goes on and on … I think you get my drift.

So when I look at what is today the epicentre of virtually every sector, this is what I see. I reproduce below, the chart of the SOX Index (Semiconductor) :

I take this back to the most relevant loopback period of the last 7 years. From the low on the LHS in 2016 (the first smiley), I have connected it to the COVID low (the second smiley) and extended that line forward.

It never ceases to amaze me how the market has a memory. Is it just a matter of coincidence that the third smiley was exactly on the trend line and from there, the sector has bounced strongly ? Or is there a pattern to things (against what we are taught in finance i.e that stocks are a mere random walk) ?

From my perch, this chart is fantastic information. We now have a trend line which the market respected which implies that it made this line even more relevant. Prices have climbed up sharply on this trend and the entire 2022 decline looks like a correction to a longer-term uptrend.

This also makes a lot of sense. Many areas of innovation are in their growth stages (and which is why I think Cathie Wood will ultimately be very right - though she’s no relative of mine and I don’t really care that much …) and I have a palpable sense about that.

I feel the innovation around me. The future of innovation excites me.

We are long TSMC (Taiwan Semiconductor) through these letters. And every semiconductor stock trades well.

Even the King Who became a Dog i.e Intel is starting to look like it could have seen its darkest days and perhaps a recovery could be round the corner. I need to dig deeper into what’s going on there (if anyone has a strong clue, please share your thoughts).

The last King Who became a Dog and then became a King again was Microsoft. So yes, fortunes can change and Intel has great corporate DNA even though it may be lying dormant. I’m going to look at the Intel filings next.

Could Intel do a Microsoft ? Let’s try and answer that in coming weeks.

Do write to me with your thoughts on ashmathur70@gmail.com . I am now involved with a fintech company called Bridgeweave (product is called InvestorAi on the AppStore and Google Playstore) where I’ve backed an experienced founder & a great team who are building a product that will help all manner of investors and traders curate portfolios driven by AI and ML algorithms. Basically the idea is that you play golf (or whatever else floats your boat) and the machine (which has no feelings) decides what to buy and sell and does it for you too ! This note is my overlay on the machine’s output - hence the title Man & Machine (in case you were wondering) … hopefully you’ll see over time.

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