Last Week's Semiconductor Suckers Rally

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Includes: AMAT, ASX, NSM, SMI, TSM, UMC
by: William Trent, CFA

We have been droning on and on about the oversupply of semiconductors that is looming. For a while, the stock market seemed to be playing out our theory. However, recently there has been a rally we believe is a suckers rally.

Yahoo! Finance reports:

National Semiconductor Corp. (NSM) on Tuesday lowered its revenue outlook for the first quarter of fiscal 2007, which ends August 27.

The company now anticipates that first quarter revenue will be down about 6 percent from the $572.6 million in revenue that it posted in the fourth quarter of fiscal 2006.

The company had forecast June 8 that first quarter revenue would be down 2 to 3 percent sequentially.

soxx

National Semiconductor is a symptom of the overcapacity that should be bringing the semiconductors still lower. According to the equipment manufacturer’s industry association [SEMI], semiconductor companies ordered nearly 75% more equipment in July than they did last year. This is far ahead of the single-digit year/year growth in semiconductors and marks the sixth consecutive month that supply has shown faster growth than demand. The supply/demand chart is our own compilation of data from SEMI and the Semiconductor Industry Association [SIA].

semi demand

The trend is unsustainable, and semiconductors are unlikely to put up a sustained rally until significant orders get canceled.