Chris Lau - Seeking Alpha

Tuesday, August 26, 2008

Sometimes the Best Action to Take is Inaction 

Claymore Investments held its first annual Claymore’s Next Top Model Summer ETF Competition.

Contestants would pick ETFs that could not be changed over an eight week period. I participated, but failed miserably for two reasons: my investment objective was to generate the greatest volatility and to be number one. I bet everything on energy and commodities, despite knowing the technical odds were great that energy prices would fall. 

It turns out that the winner of the contest invested 98% in cash, earning the $1,000 prize.

Sometimes inaction is the best action to take, especially under current market conditions. Cash is truly king for many reasons. Investors may quickly deploy cash, when the opportunity presents itself and it is risk-free (when held as treasury bills backed by the government). The downside of cash is that its value declines due to inflation.

On A Completely Different Note: Technology Stock Rally is Stalling 

Many technology stocks rallied nicely, but the rally is stalling. Does this mean that the next move is down?

To get an idea of the health of this sector, it is best to review the pricing of the semiconductors, and more specifically, DRAM pricing.

Taken directly from the August DRAMeXchange newsletter:

  • DRAM supply bit growth is still expected to grow by ~65% YoY
  • DRAM contract price remained flat in July and drop by a respective 10% in 1H and 2H of August, which is the largest range in the past six months
  • Consumption of NAND Flash related product is being shadowed by the subprime woes, resulting in a weaker-than-expected sales growth in 2H08. But given that mainstream NAND Flash ASP has slumped by over 80% since 3Q07, a more favorable pricing stimulus thus is seen
  • Buoyant sales of Apple 3G iPhone after its launch in mid July provide a positive sign for NAND Flash demand

Market watchers and investment analysts might argue that oil prices, raw material costs, housing markets, and unemployment levels will dictate consumption and therefore consumer discretionary stocks. I would argue that consumers don't always behave predictably, and investors therefore require better indicators to try to assess demand.

The hottest consumer non-essential goods use flash memory chips. These goods include cellular phones, LCD TVs, MP3 players, and computers/gaming consoles. Therefore,  the prudent investor ought to closely monitor the spot prices of flash memory. While over-supply levels are monitored, if demand improves, one may expect increased demand for other goods besides electronics.