Turning Point for Semis May Be Just Around the Bend

Our regular readers know we follow the orders for semiconductor equipment as a leading indicator of semiconductor supply, on the reasoning that more equipment to make semiconductors will lead to more semiconductors being made. We also believe that when supply is growing faster than demand, it will be bad for prices and lead to circumstances like Maxim’s (MXIM) disappointing earnings announcement.

Last night the semiconductor equipment trade organization SEMI released their latest equipment book/bill figures (for August.) Bookings were up nearly 70% year/year, while billings (installed equipment) rose 65%. Both growth rates are far higher than the 11.5% year/year growth in semiconductor demand in July. (August figures for semis are not yet released.)

It is beginning to look like a turning point is near (bulls would argue we missed it last month). The enormous quantities of manufacturing equipment ordered over the last several months are now being installed, and will soon affect inventory levels. Meanwhile, the rate of growth for new orders is slowing down (and we believe some of the existing orders will be pushed back or canceled altogether). So the seeds to solve the problem are also being planted.

We think a slowdown in consumer spending will affect the holiday spending on consumer electronics more than the market currently expects, and that this will cause a final (for this cycle) plunge in semiconductor prices in the relatively near future. After that, it looks like the clouds may finally pass.

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Comments

[Brendan McC...:]

Good information. Where are you getting the data from - SIA?

2006 Sep 20 05:23 PM

[GS MKTS:]

Just asked the same question; I am more curious to see how quickly the stocks are factoring in this over-ordering? So an overlay of the SMH (Semi Holdrs)on this supply/demand chart would be interesting.

2006 Sep 20 05:59 PM

[William Trent_:]

Apologize for the late response - was out of town.

The data is culled from both SEMI and SIA. The overlay is possible but sensitive to scaling factors used. I have found the process useful in predicting trend persistency and turning points for stocks, as the reported fundamentals lag this indicator. However, the market does appear to be anticipating cycle activity earlier and earlier. The stock bottom used to lag the bottoms in this chart, recently it has been more coincidental, but it is entirely possible that the recent rally was in anticipation of this bottom.

Even if that is true, however, the longer-term considerations of the trend should still add value.

2006 Sep 25 11:14 AM