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July 4, 2018 | China Bans Micron Chips: Trade War Accelerates

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
China accounts for 50% of Micron’s revenue. China put an end to that today.

MarketWatch reports Micron Stock Dives as China Blocks Sales, other chip stocks join in fall.

Fireworks came early for shares of Micron Technology Inc. on Tuesday, following a report that a Chinese court had blocked sales in China of memory chip products from the Boise, Idaho-based company.

Shares of Micron MU, dropped 5.5% to close at $51.48 in Tuesday’s abbreviated session ahead of the July Fourth holiday, after touching an intraday low of $50.10. Shares are still up 25% for the year, compared with a 3.6% rise in the PHLX Semiconductor Index SOX, and a 1.5% gain in the S&P 500 index SPX.

While China accounts for an estimated quarter of global memory chip sales, half of Micron’s revenue comes from China sales, according to FactSet data. Another 12.5% comes from sales to Taiwan, according to FactSet.

Micron Revenue by Country

Patent Issue?

This is not a patent issue. This is further escalation of a trade war and it strikes smack at US giant Micron.

The headline may be correct, at least in terms of what China claims, but we know the real reason is an escalating trade war. The body of the article has some interesting details.

China’s Huawei Technologies Co. and ZTE Corp. are fighting U.S. government action that threatens to cut them off from U.S. suppliers and potential customers. On Monday, the U.S. moved to block China Mobile Ltd., the world’s largest mobile phone service provider, from entering the U.S. market, citing national security grounds. Meanwhile, Qualcomm Inc. is still waiting for permission from Chinese regulators to complete its acquisition of NXP Semiconductors NV. That delayed deal was scheduled to be closed at the end of last year and has been approved everywhere else in the world.

While their governments fight, companies face potential disruption of a complex supply chain that produces most of the world’s smartphones, computers and their components. For example, Qualcomm designs its chips at its San Diego headquarters, then has them manufactured in Taiwan, Korea and China. The semiconductors then become the most important electronic parts in phones that are mostly made in China and then sold worldwide.

Global Supply Chain Mess

Trump blocked China so China blocked Micron. That’s the complete story.

Global supply chains will now be a mess.

Trump calls this “winning”.

Fourth Quarter Recession?

If there is a 4.0% GDP print for the second quarter, and I highly doubt that, don’t expect much of anything in the second half.

These tit-for-tat trade disputes will take away 100% of any gain from tax cuts. And the tax cuts were heavily front-loaded.

I would not be surprised in the least by a recession starting in the fourth quarter. All it will take is further escalation of the trade war.

Whenever the recession starts, don’t expect the usual one-year warning following an inversion. It’s likely to be very sudden.

Mike “Mish” Shedlock

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July 4th, 2018

Posted In: Mish Talk

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