For Semis, the Good News IS the Bad News (KLAC)

Jul.13.06 | About: KLA-Tencor Corporation (KLAC)

We have been railing about excess semiconductor capacity since… well, since we started this site in March. Since that time, the Philadelphia Semiconductor Index (NASDAQ:SOXX) has behaved pretty much as we expected it would (as demonstrated by the chart below). So you may wonder our take on Tuesday's late rally, which began, according to Bloomberg, on a report of strong orders out of semi equipment maker KLA-Tencor (NASDAQ:KLAC).

Semiconductor makers, this year’s worst performers, led U.S. stocks higher after a sales report from KLA-Tencor Corp. triggered speculation that the industry may recover.

KLA-Tencor, the world’s biggest maker of equipment to inspect computer chips, said orders in the June quarter exceeded its highest forecast….
“There’s a sense of doom overhanging the markets,'’ Michael Steinhardt, chairman of Wisdomtree Investments Inc. in New York and a former hedge-fund manager, said in an interview. “Before too long, things will look a lot better.'’

KLA-Tencor’s shares jumped $3.23, or 8.2 percent, to $42.56 after the company said bookings rose as much as 30 percent from the third quarter. In April, it had forecast a 10 percent gain.

Intel Corp. the world’s biggest chipmaker, gained 49 cents to $18.67. A measure of semiconductor-related shares rose 2.9 percent. The group has been the worst performer among 10 S&P 500 industry groups, down 15 percent this year on concern profit expansion may slow as the economy weakens.

Well, this “news” is exactly the news we have been railing against for all these months. Honest. Read the posts. The orders for semiconductor equipment are running at a much higher rate than the demand for semiconductors. This means capacity is going to rise faster than sales can fill it up. That means inventories will go up even more and the price wars will get even more intensive.

The market should have plummeted on this news, not rallied.

SOXX 1-yr chart:

SOXX 1-yr