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Right now investors and traders are getting a crash course in how vulnerable global supply chains are to disruption–especially when they become really extended. And how a supply chain disruption can ripple out in unexpected directions thanks to the complexity of many key products.

First, the Pandemic took a hammer to the complicated logistical systems required to get Commodity A to Sub-assembler B in order to make Consumer good C that would show up for sale around the world.

Just in time inventory, it turned out, didn’t work very well when nothing arrived on time.

Second, the Russian invasion of Ukraine has–or at least it should have–reminded us that global supply chains can resemble Whack-A-Mole. Think you’ve got a handle on all the problems for the world food supply resulting from the disruption of grain production in Ukraine and Russia–only to discover that soaring prices for wheat and corn would put a crimp in supplies of oats for oat milk. And that countries with big farm sector and abundant supplies of natural gas were not only big producers of farm products, but they were key suppliers of fertilizer to farmers a long, long way from the conflict. For those farmers getting crop nutrients has become difficult because supplies are so tight and expensive because suppliers are so tight. Somewhere down the road I wouldn’t be surprised to learn that farmers have cut plantings of soy beans–and that–plus the already apparent increase in the price of corn–has led to an increase in the price of chicken and pork. Which has led to grumbling in China and the release of pork from that country’s strategic pork reserve and stimulus from the People’s Bank.

But the war in the Ukraine should also remind us that countries can’t be reduced to single product icons. On a map of the world Ukraine doesn’t just get summed up by a wheat icon.

The country is also a key producer of industrial gases such as neon and krypton that are, in turn, key inputs in the global semiconductor industry. (Ukraine supplies about 40% of global krypton gas. The country is the source of about half the world’s neon. and let’s not forget xenon.) The gases are use to power the lasers the chip industry uses to etch circuits onto silicon. No neon, krypton and xenon, no lasers for the new chip making equipment needed to expand chip production at companies like Taiwan Semiconductor Manufacturing (TSM) in order to reduce the current severe shortage of chips that has driven some customers, particular in the auto sector, to cut back production.

In my post yesterday on lags…n-watch-the-lags/ I argued that it was of crucial importance in this market and in this global economy to figure out how long any individual supply glitch would take to fix. Announcing the end to a problem, doesn’t make the problem go away. Companies have to build hire qualified workers, find raw materials, and build production facilities. For example, one argument put forward by U.S. oil shale producers in the Permian Basin in the hours after the White House announced a ban on imports of Russian oil and natural gas, was that there would be a delay in increasing production even from the fast response oil shale wells because of a shortage of skilled workers, crimps in getting fracking sand to the wells, delays in leasing drilling rigs, and the like.

The timeline for fixing the chip shortage, by building new fabs, has been shifted a number of times in the last six months from the beginning of 2022 to the middle of 2022 to early 2023 to, now, the middle of 2023.

The odds are, given the difficulties in building and testing and certifying new gas production facilities, that the middle of 2023 is an optimistic forecast and one that is likely to be missed.

Which, this being an investing site, brings me to the stock market consequences of this new chip supply disruption (or at best uncertainty.)

At a minimum, we’re going to see two quarters or so (the quarter of 2022 that ends on March 31 and gets reported in April and the quarter that ends on June 30 and gets reported in July) where companies hold earnings calls where they emphasize the supply chain headwinds that have reduced sales growth in the quarter and that are likely to continue further into 2022. That’s a recipe for Wall Street disappointment in a stock and downward pressure on share prices.

We’ve already had a dry run of the effects of this kind of forecast on the stock price of, in my opinion, the best semiconductor stock for the long-term, Applied Materials (AMAT.) The shares are down 24.08% for 2022 to date (as of the close on March 7) largely on the influence of comments in the last earnings report about supply chain “constraints.”

If those “constraints” aren’t going away soon, that downward pressure on the stock price last until sometime in the second half of 2022 when the company starts to say it’s seeing an end of those “constraints.”

I think Applied Materials is the best of (long-term) class among chip equipment makers (and aware as I am that I do make mistakes) so I’m keeping the stock in my long-term 50 Stocks Portfolio.

But I am selling tomorrow the two chip stocks that I added to my Jubak Picks Portfolio in 2021 to leverage my exposure to the gains that would come (and still will come, to my mind, just later) from an increase in capital spending as chip makers expanded production.
I added shares of ASML Holding to my Jubak Picks Portfolio on March 29, 2021. That position is down 8.41% since then as of the close on March 8. I’m also selling the position in Lam Research (LRCX) that I added to the Jubak Picks Portfolio on June 1, 2021. The shares of this chip equipment maker were down 24.54% since then as of the close on March 8.

I think the longer term story of rising capital spending on chip making equipment will play out–just that I expect a lag in that story and in market recognition of that story until the second half of 2022. I’ll be looking to rebuy in that time frame. (And in the meantime I take a little cash out of the market at a time when fears of a recession are rising.)

The effect of the lag in the chip supply fix isn’t limited to the chip equipment makers. I wouldn’t sell, at this point and after recent losses, the core best in class chip makers–Taiwan Semiconductor Manufacturing (TSM), Nvidia (NVDA). Qualcomm (QCOM), and Advanced Micro Devices (AMD), for example, but I would look to trim holdings in this sector, especially among chip makers with big exposure to the auto market. There’s a kind of vicious cycle that we’re seen before and that looms again for these chip makers. A shortage of chips leads to cuts in auto production, which leads to a downturn in orders, which leads to reductions in revenue at chip makers.

Here I’m selling Infineon (IFNNY) out of my Jubak Picks Portfolio. I added that position on May 6, 2019 and the stock is up 30.31% as of the close on March 8.

The other holdings that I’m watching in this space is NXP Semiconductors (NXPI), but I’m not quite willing to sell these shares yet.