I said I would not comment on tech, but this is so ridonculous I must say just one thing:

“We need more stuff.”

There is going to be a full on shortage of chips by year-end and into 2012, and INTC is going to be the winner.

Just sayin’, not suggesting it should be bought right now, just pointing it out. Go read the LRCX transcript and see what Mr. Sunshine has to say. Read between the lines.

It gave me a shiver, along with all the other things that companies are not investing in but where demand is increasing.

I have seen Asian kids pissing on the edge of shoulder-less highways while cars zip by at a cool 160kph.  I have seen my dog happily eat his own vomit. I have seen healthy, young policemen direct traffic under working traffic lights.

I don’t shock easy anymore. I was almost shocked today.

EVERYWHERE I went outside of offices today had professionals talking/pitching equities. It was weird. I have been at this a while and I am attuned to what folks say around me and I know the difference between some SBUX Day Trader and a pro – this is by far the most I have ever seen/heard outside of the confines of usual cages.

This is all independent of Congress fucking things up, and I trust them about as far as I can throw any one of those fat fucks. My point is that I don’t plan to stick around too long in my short positions and certainly not past these meatheads signing a debt increase. Folks seemingly want to buy stocks regardless of fundies or macro.

Because JIT is not good enough.

OK, raise your hand if you heard “ocean freight” connected with “cost reduction” more than once so far this earnings season. C’mon, I know we hate shippers, but this is different.

“Ocean freight” = “lower turns”

“Lower turns” = “higher inventory” (depending upon shipping terms – but someone is still holding the stuff)

“Higher inventory” = “greater Gross Margin risk”

Ohhh…but shipping costs are down to offset GM risk. Got it. So how does JIT work again? Deflation? China supply?

Wait, I thought Chinese wages were going up with the RMB.

I am so confused. FOB, CFR, DDU…sounds like maybe that whole JIT thing is a passing great idea and that shipping is the next storehouse of inventory. The question is “who is going to hold it?”

Smells like a short squeeze. Did you see that mess today, right smack in the middle of earnings? Everything was up, even stocks whose companies puked earnings. And how many >1% days does that make it in the past month?

And then those crazy “IP” companies. You wanna talk bubble? I smell a bubble coming and going real fast. I bet there’s another $13 up in PANL before Samsung squashes that one by saying “Meh, don’t really like it. And regular panels are pretty cheap right now. Think I will avoid OLED for another year.” That whole cycle should last all of one week in this market.

All day long I stared at my screen saying “this ain’t right, this ain’t right,” and indeed it wasn’t…to an extent. There was a little fade but not much. I should have stopped saying “this ain’t right” sometime in the morning. Certainly better than saying I will swallow my own cock if the market goes higher. Who says that sort of crap anyway?

And so I struggled. At 33% cash, I was itchy to go full boar bearish (boarish?) and throw everything I had into stupidly OTM Aug puts. The Pseudo-Rational Me stepped in, pulled the bottle from my mouth, and said “Now, now, the last time shorts were squeezed we saw 92 on TNA and 31 on TZA. Big change vs today.” Granted, decay is an issue, but it does put things in perspective. If bulls don’t get their shit in one sock soon, there is a whole lot of pain comin’. I am short TNA from 82 and 86.

Now don’t get me wrong. I love home runs, but I have been burned enough over the past couple of years to take as many bunts and walks as possible. The highest probability home run that I see is a TZA short to zero…or continuous reverse splits, at least. I will say, right here and now, that I plan to set my account aflame with a stupidly OTM put on TZA with the intent of putting and sitting until the thing reverse splits at least once. Therefore, I am dying for the market to puke just so I have a better chance of success shorting TZA to zero. Just so folks have perspective.

And let me tell you, I was very close to letting my last Aug 40 TZA put put. (A noun and a verb. I love this business.) I just don’t trust Congress. We get past this latest bullshit with a deal big enough to set The Fed free for another year or two and I will be all over TZA like a boxer on a toy poodle at the local dog park (I gots pictures…).

So I wait. PRM convinced Me to sit tight, things are still OK and earnings, really, aren’t so hot. Guidance, actually. Whatever. My shorts are in good shape. Point being that now is not the time to burn capital hoping for a market meltdown. Decline from here means the market is my toad.

So I sit on 33% cash, 33% stupidly OTM calls from earlier this year, and 33% sort-of ITM puts mostly comprised of TNA. In the end and given the actions I performed today (nothing), I am simply wasting mental energy. I should just set sell stops and go to the beach.

Instead I will finish the bottle. Gawd, I can’t wait to go long stocks again. Because it worked so well for me before.

I sense sanity coming again soon. The debt deal will conclude one way or another within weeks if not sooner, and those crazy Europeans look about sort out their silliness soon as well, and hopefully with a move big enough to ward off the big balance sheets away for a while. One can hope this ends the reign of +/- >1% / day market moves. I leave it to Woodshedder to tell us how many times in a one month period we have seen this many >1% moves in the market. This kind of intraday volatility is helping make me jaded old man. “Pfff, don’t talk to me until TNA is up 5% in 2hrs.”

To be clear, I am not hopeful. I am merely recognizing the time for decisions is near at hand. We either all jump off the cliff holding hands together, or wake up and go “Huh? What am I doing here?” and walk quietly away in our separate directions away from the cliff.

I am 75% set for the cliff jump. I am debating whether to short TYH ahead of INTC, or wait until after it reports, or do nothing and stick with my existing positions.

Looking ahead, I will plan for the “walk away.” My heart wants to dig up tech stocks but I will do my best to avoid them. They seem a little heavy to me, but on a historical basis they are still pretty cheap. Maybe I have been too conditioned over the past few years to believe we will ever see anything remotely close to 17x on any of the bigger names again. Who knows? Maybe this time will finally show a return? I am doubtful and will stick to things less focused on by the fast traders. I am no longer interested in having my ass handed to me on a once monthly basis.

Avoiding tech, I will gander at industries and stocks driving inflation. It’s only just beginning.

This Mexican Mule Train is slowly pulling into its destination and it is pretty clear the haul is empty. But at least it highlights a few things. Let’s recap the original thesis before figuring out what we know and where to go from here.

This ill-fated adventure began with the idea we are running out of stuff. Not all stuff, just some stuff. Since many folks supply such stuff, it suggests the scarcity of stuff is due to a market-wide supply problem of said stuff. After hearing all sorts of mania about how industry’s lack of investment since 08/09 leads to skewed cash flow analysis, it seemed reasonable to consider when investment must begin again in order to alleviate said shortage of stuff.

The quick answer is that industry HAS been investing, and in some places quite heavily even through the 08/09 timeframe. This is contrary to naysayers and media and certainly contrary to my prior generic belief after reading such press. You have no idea how much it pisses me off that I was swindled with this generic view. Then again, this is why I do such analyses. But like excessive valuations in one direction or another, incorrect viewpoints can linger longer than expected. Just talk to a contemporary General mentored by a Cold War-era veteran.

Moving on, let’s see if we can hitch on to a different Mexican Mule Train.

1. Capital Intensity by itself is not a leading indicator

This should be clear by this point. The past few posts on the subject highlight the cyclicality in capital intensity and in some cases the already high levels of capital intensity in areas where underinvestment was presumed. In fact, I would now argue that capital intensity is highest in industries where prices are most depressed and players think they can push competitors out of business, but we will leave that for some other time.

2. Capex cycles are linked to business cycles which may be longer than a calendar year

This is a large part of Po Pimp’s point. Well run companies are smarter than Wall Street and have much longer timeframes than demanded by traditional y/y or q/q metrics quoted by the press. If a capex cycle lasts more than a year it won’t be captured by summing FY sales and FY capex. This suggests the need to match capital intensity to the business cycle. As an aside, this represents one of the big reasons buy-side generalists have such trouble with industry specific fundamentals.

3. Higher capital intensity does not mean higher spending for all parts of the chain

Increased capital spending for an industry is not necessarily evenly distributed across all providers. Newer technology is usually built on the back of prior technology. We and TNT love drama and want something revolutionary to change the world, but in the end, incremental technology changes are what moves the world forward. Newer technology carries higher recent costs for a given return and thus leads to higher prices within its segment, driving overall capex higher. This last sentence is a mouthful but represents the reason why capital intensity rises in nearly every case and every industry.

From all of this, the key is to focus on the specific segments driving the increased capital requirements. For example, if you see “capital intensity” rising at telecom companies, it is probably not a good idea to expect that increased capex to flow down to providers of wireline equipment. Seems obvious when put this way, but the generic sell-side capital intensity argument misses this nuance.

When considering capital intensity as a “leading indicator,” look for the incremental technology spending that is driving this capital intensity higher. That is where new investment cases can be found.