Tuesday, December 14, 2004

The United States: Facing an Impossible Trinity

Posted a link to this article in the Economics Log just a few minutes ago. Upon further reflection I think this is worthy of position on the front page. Here's a quote from the article: The following statistics illustrate the degree to which foreign capital flows have supported US markets. During the September quarter, foreigners absorbed the equivalent of an extraordinary 97.7% of all Treasury issuance, an even more extraordinary 99.9% of all agency issuance, and 63% of all corporate bond issuance. Combined foreign purchases of Treasuries and agencies came in at an annual rate of $369.3 billion, which equaled almost 99% of total Treasury and agency issuance during the third quarter. Saw a wire story today that quoted a senior Australian Treasury official. He said that the US is facing an "impossible trinity". Martin Parkinson, Deputy secretary and head of economics, told a conference that the problems facing the US would limit global economic growth: It (the US) is fighting a global war on terrorism while becoming dramatically more dependent on foreign financial support at a time when the developed world is ageing. The US will have to take on more of the burden itself, increasing the risk of a "disruptive correction". A disruptive correction..... Doesn't sound good to me......

More on the Changin' Times......

Technology Revolutions vs. Media Revolutions I've quoted Paul Saffo when he has presented at SEMI's annual Industry Strategy Symposium. He will be presenting again this year. Some recent comments he made in an article I read today fall neatly in line with the article I posted yesterday: "It turns out, the Internet revolution was not a technology revolution but a media revolution," says Paul Saffo of the Institute for the Future in Menlo Park, Calif. "It's a shift from mass media to personal media." Speaking cosmically, he is by no means certain that this is an entirely good thing: "Digital technology is so bewitching that it risks turning everything into entertainment ... and the lesson from Rome onward is that all great civilizations fail by turning everything into entertainment." Link to full article: http://www.csmonitor.com/2004/1214/p01s01-ussc.html Cosmically speaking, I don't think it would it be a stretch to link this trend to the trends we see taking hold in the companies that make up the semiconductor and semiconductor equipment world. One might say all this is 20/20 hindsight but that is not totally true. If you will recall the hype in '99, '00 and '01 was more centered on hardware performance and how the Internet was going to influence (revolutionize) corporate productivity and, as a byproduct, profitability. If you poll end product manufacturers and device makers today you will see a more pronounced tout of their products that address the delivery of "digital media". The Media Center PC is a great example. Yes, corporations and individuals also use digital technology to enhance their productivity and profits. I am not going to deny that and I will certainly not say uses aimed in this direction are reaching a dead end. At the same time, I wonder about the growth rate and momentum of the end market products that are aimed at productivity enhancement. The chip companies, holding a business that is driven by unit volumes, have certainly been thinking about it..... Drop me a note if you have some thoughts on this....

Monday, December 13, 2004

The Times They Are A Changin'......

The Times They Are A Changin' The line it is drawn The curse it is cast The slow one now Will later be fast As the present now Will later be past The order is Rapidly fadin'. And the first one now Will later be last For the times they are a-changin'. From Bob Dylan - who else? :-) An article in today's issue of EE Times highlights a trend we have been talking about for a while: Evolving IC Industry Being Shaped by New Forces. I suppose wide acknowledgment means that the great awakening is finally taking place. Here's a snip from the article: The extent to which the consumer driver permeates current thinking around Greater Silicon Valley was apparent from rumblings that emerged in a series of electronics association and analyst briefings this reporter attended last week in New York, San Jose and San Francisco. Once the indisputable volume driver of semiconductor unit shipments, the PC has been eclipsed by a range of non-PC applications, including cellphones, automotive and consumer digital products that will account for more nearly 32 percent of all 2005's unit volume. PCs, by contrast, will account for only about 10.5 percent of semiconductor unit shipments. Consumerization..... Commoditization..... Wider proliferation (hopefully)... It's been going on for years. SIA President George Scalise warns, "....a consumer-driven electronics industry's comes with its own unique risks." There's no doubt about that. The risks are enormous - especially when you consider the leveraged state of the consumer. It is this trend that has prompted us to chart Retail Electronic Store Sales vs. IC Units. See chart below:

Tuesday, December 07, 2004

If Intel and AMD are Right......

Companies that supply components for PCs and Notebooks, provided that they have not saturated the channel with inventory, should see some better times. If "portable computing" remains as the major trend, we'd probably be wise to monitor companies that fabricate the components that go in these devices. The pie chart below provides us with a Bill of Materials for the average notebook computer:
Craig Barret, Intel's CEO (at least for a while longer) believes they have turned the corner. From today's analyst meeting Mr. Barrett provided these thoughts: "I think we have recovered from those missteps and I think the machine is firing on all eight cylinders in terms of product introduction." He went on to say, "I think we will see some exciting advances in products coming out in the near future." Whether or not these "exciting advances" can be pushed into the market with some pricing power remains to be seen..... Personally, I have my doubts....

Will it be a U, V, W, or Canoe Shaped Recovery?

Are we there yet? Better yet: Does it matter? Following a tepid quarterly reporting season and some disconcerting news on the economic front, a number of industry analysts and Wall Street prognosticators are telling us to buy semiconductor and semiconductor equipment stocks because a turn for the better is anticipated in Q1 '05. Have to admit, I can buy into the late Q1/Q2 '05 bounce theory. The push over the edge came about when Intel's (INTC) mid-quarter update came in much better than anticipated. If you have been reading the Stock Blog you know that I was anticipating a good result before the release of the report. Along with the excitement about Intel there is cheer growing in the ranks of those following Advanced Micro Devices (AMD). Couple these more bullish sentiments with the recent drop in crude oil prices (see Econ Blog), the cash that is coming into the market and you have some fuel for a rally. Clearly Intel, and to a lesser extent AMD, have a lot to say about the future of the chip business. When they are bullish the markets tend to respond. It would be foolish to openly dismiss their bullish tidings. Unfortunately they are not the final answer. Is it all just pre-holiday noise? While Intel and AMD are battling for front page headlines we're hearing, deeper down the food chain, more dour outlooks from companies that have proven to be very good indicators of future action. For one example, check out last week's news from Microchip (MCHP). Microchip's CEO warned of an inventory build way back in April and now his company is saying that business will be off as much as 7% in the coming quarter. Ouch...... If we are going to bounce next year we have to wonder how big that bounce will be. Will it be a U, V, W or canoe shaped recovery? Will it be enough to push our stocks higher? Will profitability be better during the next ramp? If the recovery is going to come in late Q1 or, early Q2 (which is normal when you look at our seasonality charts), it is probably prudent to anticipate another downturn in Q3 '05. Here's a sample of one of the charts in this month's Chart Watch:
More in the Chart Watch Section......

Tuesday, November 30, 2004

SEMI Consensus Forecast : Press Release Data

Data from the SEMI Member Consensus Forecast was delivered in a press release today. One part of the release is shown in the table below. This press release, from what I recall, is the first that SEMI has issued containing a breakout of the equipment market by segment. After you have a look at this table I'm sure you'll be asking yourself the same question I am right now: "If this forecast is accurate will it be good enough to move equipment company share prices higher?"
Forecast by Equipment Segment
Equipment Type 2003 Actual $B 2004 $B % Chng 2005 $B % Chng 2006 $B % Chng 2007 $B % Chng
Wafer Process $14.75 $23.93 62.24% $23.17 -3.18% $23.88 3.06% $27.34 14.49%
Assembly & Packaging 1.67 2.38 42.51% 2.04 -14.29% 2.26 10.64% 2.83 25.39%
Total Test 4.12 6.22 50.97% 5.64 -9.32% 5.61 -0.53% 6.32 12.66%
Other Front End 1.65 2.78 68.48% 2.64 -5.04% 2.77 4.92% 3.12 12.64%
Total Equipment* $22.19 $35.31 59.13% $33.49 -5.15% $34.52 3.07% $39.61 14.76%
Today I've been rounding up the recent Chart Watch data, which contains the most recent update from SEMI's SEMS data package. That series of charts Subscribers follow on a regular basis will be updated this evening.

Thursday, November 18, 2004

Why is the Market Rallying?

While I am still pecking away on company comments and some other items, I've been answering a few e-mails. People are asking, "Why are semiconductor related issues moving up?" The jump in prices, especially following the rather dismal Applied Materials earnings report (the stock is up $0.30 as I type this), is mainly what prompts the question. Of course, quarterly earnings are just snapshots of a particular moment and though they are heavily scrutinized by media, analysts and investors, they tell us little about the long term outlook. What are investors looking at? A few of the reports I've read have said that Q2 of next year will usher in another turning point. Some are talking about the end of '05. Perhaps the best explanation for today's rally, other than the one that suggests semiconductor and semiconductor equipment share prices are primarily driven by gaming theory, is one that was offered by SunTrust's Chief Investment Strategist, Gail Dudack: Between Cingular's cash purchase of AT&T Wireless for $41 billion and Microsoft's (MSFT-$27.12) special dividend ($32 billion) payable on December 2, there will be over $73 billion of cash coming to investors in November - December. This figure is significantly larger than any two months of equity mutual fund flows since February - March of 2000. The November through January period tends to be a good period for the market due to normal liquidity patterns. This year we see an extra boost. Meanwhile, there is less than $3 billion in IPO's pending by year end. In short, the current supply/demand backdrop for equities is excellent. This makes it all seem rather simple.... It's just supply and demand.

Wednesday, November 17, 2004

Applied Materials Reports.... Bookings Headed South

The much anticipated Applied Materials quarterly earnings report was released after the close of today's trading session. The earnings conference call is underway and I plan to have an update of this in the Model Portfolio comments to be delivered this evening. First impressions: Bookings for the next quarter are expected to be off 35% - that's quite a bit more than anticipated. Most of the reports I've read were expecting a 15% to 20% fall in bookings. Revenues are estimated to be down 20% to 23%. That's also larger than expected. More comments to be posted shortly......