The 2020 global pandemic has had far-reaching effects on many businesses, numerous industries, and the underlying economy. One of the biggest concerns coming out of the pandemic has been the far-reaching effect on the supply chain. Supply chain refers to the network sales, distribution, activities, and technology involved in the creation and sale of a product. When looking at supply chain management, we need to assess all the factors that involve the delivery of materials from suppliers, to the manufactures, and even to the eventual sale and delivery of a final product. Total GDP lowered by 3.5% in 2020 compared to 2019- an obvious result of the global pandemic. Supply chain issues caused by the pandemic continue to have a lasting effect on global output. These issues continue to impact distribution both in the United States and abroad.
Furthermore, supply chain issues have been fueled by business closures, modified work schedules, and several months of uncertainty. But more importantly, consumer spending also made a large shift in 2020. People were more focused on fixing their homes and home offices. That meant money that may have normally been spent on a new car or a vacation was going to be used to upgrade your television, your computer, or even on a new videogame system. As we look ahead through 2021 and beyond, it is important for investors to have a good understanding of the current climate in the chip industry. After all, semiconductors are only growing in their use cases and the technologies they help power. Supply chain issues have been especially painful for the chip industry and we’ve already started to see the effects of the chip shortage on other industries.
What are Semiconductors?
First, let's break down exactly what semiconductors are. Semis, also commonly known as integrated circuits “IC” or even as “chips” are essentially the backbone or brain of nearly all technology. Chips have helped make many of your favorite electronic devices smaller, faster, powerful, and more reliable. Just about anything that plugs into a wall these days has a tiny chip inside of it. Semiconductors have become the building blocks of technology and software- they’ve also become increasingly important to car manufacturers.
Chips in the Auto Industry
Whether your dashboard is telling you the temperature in your car, you get an alert for maintenance, or maybe you’re simply running Bluetooth from your phone through your car speakers… all these activities are built off tiny computers and semiconductors. As we previously noted, there was a major shift in consumer spending in 2020. Large purchases like a new car were put on hold to upgrade your home and your office. For instance, you may have decided 2020 was the year to finally upgrade that home entertainment system that’s been getting so much use lately. Any way you look at it, new car sales were down in 2020.
Because of the change in spending, car manufacturers were forced to decide if they were going to cut back on production or order fewer chips. With so many people losing their jobs and cutting back on nonessential spending, the car industry took a collective step backward in 2020. Automakers ordered fewer parts due to the overall decrease in demand. Now that the world is reopening, there’s a growing demand for new cars that simply cannot be met at this time.
Just because new cars weren’t being produced at their standard levels, chips were still being made and being purchased by other industries. On the other hand, electronic companies saw a boom in the growing demand for things like electronic devices and even video games. Video games have seen a collective resurgence, fueled in part by the overwhelming number of people stuck at home looking for new forms of entertainment.
How have Electronic Companies been Impacted by the Chip Shortage?
- As lockdown orders increased, electronic companies saw heightened demand for their video games and electronic devices.
- As concerns over consumer spending grew, these companies bought up a higher supply of available chips thanks to the void left by the auto industry.
- Now demand for things like a new Xbox or a PS5 is through the roof, while millions of cars currently sit in factories awaiting the semiconductor parts needed to power their vehicles.
Previous Market Updates
Weekly Swing Trades
PNRG (Prime Energy)
October 2, 2022
1 Week Hold
Expecting a short-term bump after a recent OPEC+ announcement regarding the a supply constraint to oil. The constraint would result in ~1M less barrels of oil per day, which should cause a price jump. Low RSI and bouncing off our 250 day moving average, both hallmarks of a good swing trade.
October 2, 2022
3 Week Hold
Using our moving averages heavily on this swing trade, look for continued strength as we try to notch out a 6-8% gain. Specifically, we are taking advantage of of a recent cross over in the 50 day moving average. Last week closed down, so wait for confirmation of a reversal.
Growing Effects of the Chip Shortage
We've talked extensively about how electronics and video games have seen a heightened level of demand since the pandemic started, but that does not mean they're meeting their increasingly high demand for more units.
Video game Industry
- Sony CEO stated that demand for their new next-gen PS5 console exceeded even their projections.
- The new PS5 console launched last Fall and it's still a very difficult console to find. This has led to third-party sites like eBay selling new Play Stations and Xbox with more than a 50% markup!
- Microsoft has openly talked about looking into new manufacturing deals to help speed up production and meet their growing demand.
- Here are some of the biggest chip manufacturers that focus on the development and advancement of more powerful computer processing chips:
Nvidia, AMD, Texas Instruments, Analog Devices & NXP Semiconductors
- Cell phones are certainly feeling the impacts of the chip shortage too.
- Samsung noted they might end up skipping the launch of their next Galaxy Note smartphone due to the chip shortage.
- Apple, the communications powerhouse is not above chip shortage issues either.
- Apple has already warned they may need to postpone manufacturing on some of its laptops and iPads.
- Apple already manufactures some of its chips in house, but this has sped up the need to develop more semiconductors under the Apple umbrella.
- Here are some of the biggest chip manufacturers that focus on the development and advancement of smartphones: Qualcomm, Broadcom, Skywork Solutions & Qorvo
- We’ve already talked about how diminished interest in car purchases has helped fuel the chip shortage. Now the current problem with car manufacturing is that they are seeing increased demand that they cannot supply.
- GM, Ford, and others have already predicted the chip shortage will cost them billions in earnings during 2021.
- Experts are predicting more than 800,000 cars will not finish production this year.
- Here are some of the biggest chip manufacturers that focus on the development and advancement of technology in automobiles: Texas Instruments, Analog Devices & NXP Semiconductors
What’s next? Government support?
The current shortage is having a major impact on companies and their employees. There is a growing concern and the United States must learn to adequately build, manufacture, and ship semiconductors in-house. The pandemic and surging interest in the need for semiconductors have only elevated those concerns. President Biden is currently seeking support on a $50B proposal to fund semiconductor manufacturing and research. There are growing concerns over supply chain resiliency in the US given our dependence on foreign manufacturing. The administration believes we need to prioritize the chip shortage and strengthen our supply chain going forward.
How Long will the Shortage Continue?
Unfortunately, much like the housing market, there isn’t an immediate resolution available. Supply chain issues are only going to be resolved over time. Even if any bill is passed to help position the United States as a potential chip-making powerhouse, that process will take many years. With that said, each of the major industries reliant on chips will have its unique outlook going forward through 2021.
As we previously noted, no industry has been hit harder than the automobile industry. Thousands of cars are unable to be completed due to manufacturing issues caused by the chip shortage. Due to the shortage, Ford was forced to shut down production at several locations. Given the strict requirements needed to put a fully developed vehicle on the road, the auto industry is likely to feel the pain longer than other industries. The chip shortage is one of the reasons used car stocks like CarMax and Carvana have soared over the last year.
PCs & Computers
Computers, PCs, tablets, and gaming devices have all greatly benefitted from the global shutdown. As people spent more time indoors, electronics grew in higher demand. PC sales hit record highs in 2020 with levels not seen since 2011. Computer processing chipmakers continue to see record sales. With a resurgence in video games and powerful hardware like the Xbox and PS5 still under heavy backorder, chip makers in this industry stand to continue big sales through 2021.
With the universal upgrade of 5G networks, 2021 is set to start a multi-year surge in smartphones. Though this industry has not been immune to supply chain issues as well. Chipmaking powerhouse Qualcomm openly discussed sales being lower than they should have been, simply due to increased demand. These comments came after a blowout quarter from Qualcomm. Cellphone providers like Nokia and Verizon noted new phone sales did decrease in 2020. Much like automobiles, phones were not considered an essential need and most people chose to postpone any major cellphone upgrades. With that said, the demand for new phones looks poised to ramp up as people get back to work and more stimulus is flooded into the economy.
As technology continues to advance at such rapid rates, there is no denying semiconductor stocks will be poised to benefit for years to come. We anticipate the demand for semiconductors to grow rapidly for the foreseeable future. Just look at the current pace of growth below
Unfortunately, supply chain issues caused by the pandemic will continue to be felt for much of the upcoming year. With that said, many semiconductor industries have benefitted from new highs caused by the lockdown. Conversely, other industries such as car makers may continue to see prolonged issues caused by the chip shortage.
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Market Performance- Week of 09.25.2022
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Market Performance- Week of 09.25.2022
September 11, 2022
Price at High:
Return for Members:
2 Month Hold
Strong momentum over the last few weeks. Watch for a mean reversion, but if moving averages stay consistent look for an early play to open the week.
PNRG (Prime Energy Resources)
September 4, 2022
Price at High:
Return for Members:
3 Week Hold
PNRG had a drawdown to historical levels of support (around the 100 day moving average). Looking to make an entry in the coming days as we also have macro tailwinds with the energy crisis in Europe.