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Daily Intelligence Briefing |
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Identifying Change-Driven Investment Themes - Five sections, explained here. |
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I. Today's Thematic Investment Idea A deep dive into a market driver with alpha generating potential. |
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US Switches Tactics to Boost its Semiconductor Industry |
U.S. lawmakers are trying a completely new tactic in the US-China tech war: a subsidy policy for private industry. The CHIPS for America Act proposed to congress last week would allocate billions of dollars to help fund the construction of new semiconductor manufacturing factories in the U.S. The shifting consensus on Capital Hill in support of such a move is game-changing in itself.
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Related ETF: iShares PHLX Semiconductor ETF (SOXX) |
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A new piece of legislation introduced in Congress last week is proposing that the federal government allocate billions of dollars to support semiconductor manufacturing in the United States. If passed, the “CHIPs for America Act” would create a 40% tax credit for semiconductor manufacturing equipment; it would establish a $10 billion federal program that matches state and local incentives for construction of semiconductor factories; and it would provide $12 billion in R&D funding to be disbursed over the next five to 10 years.
The overarching goal of this bill is to help shift some chip manufacturing back to the United States. Although the semiconductor industry as we know it emerged out of Silicon Valley in the 1950s, eventually becoming the fourth largest U.S. exporter by value (behind only airplanes, oil, and automobiles), much of the industrial investment in recent decades has gone to other countries, driven by the high cost of construction and generous incentives offered overseas to attract chip plants.
For years, domestic designers have been turning to foundries in places like Taiwan and South Korea to manufacture their chips. Even US-based Intel (INTC) and GlobalFoundries, who are among the largest chip makers in the world, manufacture some of their chips at their international factories in China, Ireland or Israel.
As a result, the U.S. now accounts for just 12% of global semiconductor production capacity even though semiconductors are still one of America’s largest exports, and American companies that design and sell chips still account for nearly half of global revenue in the sector, the greatest share of any country. And, while there are still dozens of commercial semiconductor factories scattered across the U.S., only those operated by Intel are capable of making the fastest and most-power-efficient chips, those branded as having transistors 10 nanometers or smaller.
The shrunken production capacity and supply chain vulnerabilities revealed in the wake of the coronavirus pandemic are two major reasons the CHIPS for America Act is showing up now. Securing that supply chain is of utmost importance because semiconductors are a foundational technology that can give nations an edge in innovation, especially in areas like artificial intelligence, robotics and wireless communication using 5G. The chip industry has long been dominated by the United States, and that advantage is the U.S.’ to keep or cede depending on actions taken.
The fact that China is on track to become the largest semiconductor manufacturer in the next few years has increased pressure on the U.S. government to intervene now. Also of concern is the fact that Taiwan, the self-governing island China claims as its own, is home to Taiwan Semiconductor Manufacturing Co. (aka “TSMC”), the world’s largest contract chip manufacturer and one of only three companies in the world capable of making the fastest, most-cutting-edge chips. Beijing's declared intention to eventually enfold Taiwan into China makes continued production in Taiwan less desirable.
What is Game-Changing about CHIPS For America
To be clear, the $22 billion sum earmarked for spending over several years is not in itself a game-changer for the industry. After all, chip-making is one of the most expensive manufacturing processes in the world, to the point where building a single new chip factory with advanced manufacturing capabilities costs upwards of $10 billion. Also consider that US chip design and manufacturing companies spent $40 billion on R&D in 2019 alone.
What is game-changing is the shifting consensus in Washington about federal intervention and where that shift could lead.
First, the bipartisan and bicameral sponsorship of the CHIPS for America Act suggests that Republicans, who have long been skeptical of government-funded industrial development on the basis that it is redolent of communism, have warmed up to the viewpoint that federal funding for factory building is indeed necessary to keep the U.S. ahead of China and other countries that heavily subsidize their chip industries. China has used similar tactics in the past to rapidly dominate industries from steel and solar panels to shipbuilding.
Second, it seems like all hands are on deck with this one. Before this bill was introduced, the Trump administration and members of the U.S. military had been among those pushing for U.S. self-reliance on its own semiconductor supply chain, especially in light of rising tensions with China. Some in the military even deem it a national security matter, since advanced chips are used in a variety of U.S. military applications including for missiles and fighter jets
Secretary of Commerce Wilbur Ross and Secretary of State Mike Pompeo are also examining ways to help the industry. “The Trump administration is committed to ensuring the United States has a secure, vibrant, and internationally competitive high-tech ecosystem, supported by domestic chip production,” said Mr. Ross. A State Department spokeswoman echoed that support, saying they are “working closely with Congress and industry to ensure that the future of the semiconductor industry remains in the United States.”
In time, this bill could prove to be just the first of several government initiatives to bolster America’s chip makers. Other members of Congress have been working on their own bills to support the industry domestically, according to the Wall Street Journal. The scale of all these proposals is well beyond what has been contemplated in recent years. While past government subsidy programs have largely focused on chip research, the latest bill puts a heavy emphasis on domestic manufacturing.
Meanwhile, in the private sector, companies are planning new factories. Taiwan Semiconductor Manufacturing Co. (TSMC) has pledged to invest $12 billion in a chip factory in Arizona between next year and 2029. Intel is reportedly mulling similar plans. According to media site CBS-SF, Intel CEO Bob Swan said in an April letter to two Pentagon officials that strengthening U.S. production “is more important than ever, given the uncertainty created by the current geopolitical environment.” He said it would be in the best interests of the United States and Intel to explore how the company could build a plant.
The US-China tech war is certain to intensify as Washington DC doubles down on its efforts to protect its semiconductor advantage. Shifting a big chunk of that manufacturing back to the United States will accelerate the decoupling of the global semiconductor supply chain. That decoupling, in turn, should benefit segments of the chips industry, a topic we will cover later this week.
How to Gain Exposure
Investors can gain exposure to the semiconductor industry through ETFs such as the iShares PHLX Semiconductor ETF (SOXX), the VanEck Vectors Semiconductor ETF (SMH) or the SPDR S&P Semiconductor ETF (XSD).
Nelly Nyambi
Managing Director, Research
McAlinden Research Partners
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Source material for today's market insight... |
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Semiconductors A newly proposed bipartisan bill would earmark $22 billion to lure chip manufacturers to US
A bipartisan group of US lawmakers introduced the CHIPS for America Act, which, if passed, will reserve tens of billions in federal funding to support domestic semiconductor manufacturing and research programs. The CHIPS Act, which stands for "Creating Helpful Incentives to Produce Semiconductors," would create a 40% income tax credit for semiconductor equipment, a $10 billion fund to match any chip manufacturing incentive programs at the state level, and $12 billion in R&D funding to be allocated over the next five to 10 years.
The CHIPS for America Act will help shift chip manufacturing to the US, but its impact will be limited by exorbitant manufacturing costs and the challenges of shifting supply chains. The funding proposed by the CHIPS for America Act must be contextualized in order to grasp its significance. For instance, US chip design and manufacturing companies spent $40 billion on R&D in 2019 alone, so $12 billion in funding distributed over five to 10 years wouldn't exactly be game-changing in itself.
The bipartisan, bicameral push comes on the heels of the Semiconductor Industry Association, a trade group, lobbying for $37 billion in federal funding to help the US reduce its reliance on Asia for technology manufacturing.
Read the full article from Business Insider + |
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Semiconductors Lawmakers Propose Spending Billions to Strengthen U.S. Chip Industry
A campaign to expand semiconductor manufacturing in the U.S. gained traction Wednesday with the introduction of legislation to allocate tens of billions of federal dollars to domestic chip-making and research programs. Legislation was introduced in the Senate Wednesday by Sens. John Cornyn (R., Texas) and Mark Warner (D. Va.). Reps. Michael McCaul (R., Texas) and Doris Matsui (D., Calif.) said they would introduce the House version of the bill.
Growing U.S. production has gained new urgency within the Trump administration and among many members of Congress who see chips as an important battleground with China, given their central role in technologies such as artificial intelligence and 5G networking. The disruption that the coronavirus caused to Asian supply chains has added fuel to efforts to do more at home.
Other lawmakers have been working on their own bills to support the industry. Sen. Tom Cotton (R., Ark.) is planning legislation that would offer generous grants for domestic factory construction, in line with some of the SIA’s proposals. A bipartisan group of lawmakers including Senate Minority Leader Chuck Schumer (D., N.Y.) and Sen. Todd Young (R., Ind.) has also proposed a $110 billion boost in technology spending that would include semiconductor research.
Read the full article from The Wall Street Journal + |
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Semiconductors China’s Trillion-Dollar Campaign Fuels a Tech Race With the U.S.
China has embarked on a new trillion-dollar campaign to develop next-generation technologies as it seeks to catapult the communist nation ahead of the U.S. in critical areas. Since the start of the year, municipal governments in Beijing, Shanghai and more than a dozen other localities have pledged 6.61 trillion yuan ($935 billion) to the cause, according to a Wall Street Journal tally. Chinese companies, urged on by authorities, are also putting up money.
Under a plan outlined earlier this year by China’s Ministry of Industry and Information Technology, these efforts would contribute to at least $1.4 trillion in investments during the next five years in artificial intelligence, data centers, mobile communications and other projects.
At China’s annual legislative meeting last month, China’s Premier Li Keqiang said the campaign was a top priority of the Communist Party and would give the country a “new-style infrastructure.” That marked a subtle shift from months earlier, when Chinese leaders played down their previous industrial policy, known as Made in China 2025. The Trump administration has pointed to that previous policy as evidence of Beijing’s intent to subsidize national champions and tilt the playing field against foreign companies.
Read the full article from The Wall Street Journal + |
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II. Updates of Themes on MRP's Radar Follow-up analysis of key market drivers monitored by MRP. |
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Bonds: Investors Get Ready for the Fed to Cap Rates |
Lebanon: Currency collapse fuels mass protests in Lebanon |
Payments: AmEx Wins Clearing License for China’s $27 Trillion Market |
CRISPR LONG: Crispr Gene Editing Shows Promise in Blood Disease Update |
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IV. Active Thematic Ideas MRP's active long and short themes, with an archive of follow-up reports. |
See Them Here → |
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V. Macroeconomic Indicators Key data releases relevant to MRP's Active Thematic Ideas. |
See Them Here → |
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Select a theme to see when and why we added it. Also included is a link to all recent Market Insight reports we've written about that theme, allowing you to track its progress. |
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Week Ahead
US Fed Powell's testimony to Congress and an European Council meeting will be keenly watched. Data to follow include US and China retail trade and industrial output; UK jobs report, retail sales and inflation data; Germany investor morale; Japan trade and inflation; and Australia employment figures. Monetary policy action will be taken by central banks in the UK, Japan, Brazil, Russia, Switzerland, Indonesia and Taiwan, while minutes from prior meetings will be published in Japan and Australia.
Click here to access the data + |
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US Futures Plunge as Coronavirus Cases Mount
Stock futures in the US started the week in negative territory, with the Dow falling more than 600 points, the S&P 500 more than 50 and the Nasdaq more than 170 amid resurgence fears over a second wave of coronavirus. Alabama, Alaska, Arizona, Arkansas, California, Florida, North Carolina, Oklahoma and South Carolina had a record number of new cases and hospitalisations also hit a record in Arkansas, North Carolina, Texas and Utah during the weekend. Meanwhile, protests over the death of George Floyd and police brutality continued while the death of Rayshard Brooks by a police officer in Atlanta was considered homicide, which reignited protests in Atlanta. Meantime, Larry Kudlow, National Economic Council chief, said the administration opposed extending the federal government’s $600 bonus to unemployment payments beyond July. Last week, the Dow Jones lost 5.5%, the S&P 500 retreated 4.7% and the Nasdaq declined 2.3%.
Click here to access the data + |
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Global Stocks Sell Off Continues
Major stock indexes around the world plunged on Monday amid mounting concerns about a second wave of coronavirus infections. Cases in the US are spiking, Tokyo recorded a jump over the weekend and Beijing closed a big wholesale market and the surrounding neighborhood was locked down after more than 50 people tested positive. Meanwhile, data for China industrial production and retail sales disappointed, suggesting the Chinese economy is still struggling to recover.
Click here to access the data + |
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PBoC Injects CNY 200 Billion
The People's Bank of China launched a CNY 200 billion one-year medium-term lending facility (MLF) operation at 2.95% on June 15th 2020, the same interest rate as in the previous one. The central bank said the move aims to maintain the reasonable and sufficient liquidity of the banking system and will fully met the needs of financial institutions. However, some investors believe the financial system needs more liquidity as the central bank allowed CNY 120 billion yuan of 7-day reverse repurchase agreements to expire on Monday, after CNY 500 billion yuan of MLF loans last week.
Click here to access the data + |
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Oil Prices Tank
Oil prices plunged on Monday, extending losses from last week, as fears over renewed COVID-19 outbreak in China and the US could weigh on the recovery of fuel demand. Meanwhile, Reuters reported that an OPEC-led monitoring panel will meet Thursday to discuss ongoing record production cuts and see whether countries have delivered their share of the reductions, but will not make any decision. On the data front, industrial output in China, the world's biggest crude oil importer, rose for a second straight month in May but less than market expectations, suggesting the economy is struggling to get back on track after hit by a virus crisis. At around 05:15 AM GMT, WTI crude plummeted 4% to $34.80 a barrel, while Brent crude slumped 2.8% to $37.64 a barrel.
Click here to access the data + |
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Coal Remains Under Pressure
Coal have been trading around $56 per tonne in June, following a collapse in demand due to the coronavirus pandemic. On top of that, efforts to reduce greenhouse gas emissions and fierce competition from renewable energy pushed coal producers into their deepest crisis ever. The Energy Information Administration reported that the US consumption of renewable energy overtook coal in 2019 for the first time in over 130 years ago.
Click here to access the data + |
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MARKET INSIGHT UPDATES: SUMMARIES |
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Bonds Investors Get Ready for the Fed to Cap Rates
Investors are preparing for the Federal Reserve to tap a policy tool untouched since the aftermath of World War II, a move that could change how key financial markets behave and give an even bigger boost to the stock market’s best performers. Members of the Fed are embracing the idea of putting caps on government bond yields. The Fed has offered trillions of dollars to quell the economic shock of the coronavirus shutdown. The caps would be a way to make sure those efforts aren’t undermined by rising yields.
Such a move raises worries that in suppressing medium-term yields, the market loses an important benchmark against which much of the investment universe is measured. Such caps are also known as yield-curve control since the central bank takes control from the market in determining both short-term and longer-term bond yields.
Capped yields are likely to benefit “growth” stocks that have powered the market higher such as tech giants like Facebook, Amazon and Netflix. Low-yields tend to signal that growth is slow and so investors pay a premium for shares in companies that can grow quickly despite economic headwinds. In discounted cash flow models widely used by investors to value stocks, future earnings are worth more when rates are low.
(Related ETFs: IEF, SPY)
Read the full article from The Wall Street Journal + |
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Lebanon Currency collapse fuels mass protests in Lebanon
A dramatic collapse in the value of the local currency sparked protests across Lebanon on Thursday night, as the government and central bank struggled to stem the country’s worst economic crisis since its civil war. The Lebanese pound, which has officially been pegged at L£1,500 to the dollar for two decades, fell to L£6,000 to the dollar on the parallel market on Thursday. The pound started the week at L£4,000 to the dollar, falling 50 per cent on the parallel market in four days.
There are now multiple exchange rates in Lebanon’s chaotic currency market. The union of money changers has set its exchange rate at just under L£4,000, while commercial banks had been required to sell dollars for about L£3,000. In light of the disparity between rates of exchange, the traders’ syndicate of north Lebanon announced a general strike on Friday while markets in Baalbek city also closed. In Beirut, many exchange houses — which have been taking rolling strike action — remained shut on Friday, leaving petrol stations and other informal traders as the main exchange.
The government in April estimated about 48 per cent of the population was living in poverty, and predicted poverty levels could hit 60 per cent by the end of 2020.
Read the full article from The Financial Times + |
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Payments AmEx Wins Clearing License for China’s $27 Trillion Market
American Express Co. received approval to start bank card clearing services in China, making it the first foreign payments network to be allowed to process local currency transactions in one of the world’s largest markets. The People’s Bank of China granted a network clearing license to American Express’s China joint venture, Express (Hangzhou) Technology Services Co., the central bank said in a statement on Saturday. The company is required to start the clearing service within six months, according to the statement.
The bank card clearing network being built by the joint venture will process both online and offline payment transactions, and the company will cooperate with leading Chinese mobile wallet services providers, according to a statement from American Express.
Mobile transactions topped 190 trillion yuan ($27 trillion) in China in 2018, making it the world’s largest such market, according to iResearch. Ant Financial’s Alipay and Tencent Holdings Ltd.’s WeChat Pay are the dominant firms. China had 8.5 billion bank cards in circulation at the end of September, with over 90% of them debit cards. (Related ETF: IPAY), (Related Stocks: AXP)
Read the full article from Bloomberg + |
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Biotechnology & Healthcare |
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CRISPR Crispr Gene Editing Shows Promise in Blood Disease Update
Longer-term results from a first-in-human study of the gene-editing tool Crispr showcased the technology’s potential and delivered a win for the company that shares the platform’s name and its partner, Vertex Pharmaceuticals Inc.
Crispr Therapeutics AG and Vertex said a trio of patients, two with beta thalassemia and one with severe sickle cell disease, saw benefits from one-time treatment with CTX001. After a follow-up of five to 15 months, all three patients are free from their once-routine need for blood transfusions and painful events that came with their disorders. So far, the companies have successfully treated five beta thalassemia patients with all of them producing mature red blood cells, a process known as engraftment. They have also dosed a second sickle cell patient and plan to provide additional data later this year.
The study results provided a boost to others studying therapies based on Crispr gene-editing technology. Editas Medicine Inc. administered its lead drug for a form of blindness to the first patient earlier this year, while Intellia Therapeutics Inc. is on track to file for its first human trial by mid-year.
(Related ETF: ARKG)
Read the full article from Bloomberg + |
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ABOUT THE DIBS AND MCALINDEN RESEARCH PARTNERS
McAlinden Research Partners (MRP) publishes daily and other periodic reports on the economy and the markets.
MRP focuses on identifying change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP's compilation of articles and data from multiple sources on subjects reflecting change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. |
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The information provided in this Report is not to be reproduced or distributed to any other persons. This report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, all information is sourced from public data.
McAlinden Research Partners is a division of Catalpa Capital Advisors, LLC (CCA), a Registered Investment Advisor. References to specific securities, asset classes and financial markets discussed herein are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. CCA, MRP, employees and direct affiliates of the firm may or may not own any of the securities mentioned in the report at the time of publication. |
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