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It’s nice to sit back, especially during earnings season, and look at the big picture. One big picture comes to you a day late — my apologies — but is nonetheless worth citing. Merill Lynch North American economist David A. Rosenberg says tech is poised to outperform as capital investment by companies picks up. Specifically, Rosenberg cites five factors, and its worth giving you the whole thing to see for yourself, so here goes:

[Tech] has outperformed the market by some 400 basis points in the past three months, but is still the worst performing S&P sector year to date with a 5% gain. There may be reason to believe that the sector is going to continue to play catch-up because quite frankly, there is no other sector in the economy right now that is putting up the numbers that tech is.

Five points worth making

  • Tech spending is visibly picking up: total tech Industrial Production was up 1.9% month-over-month in Sept vs. -0.5% for the all-industry headline. The year-over-year rate is 22.7%, which is 4x the pace for the overall economy – and momentum is accelerating because the three-month trend is running at a 30% annual rate. The details of tech IP also show that all areas are booming: computers production steadily increasing – now at 15% year-overyear,

    highest since Aug/03. Comm equipment IP at +26% as of September. Semiconductors production strong too, 24% year-over-year.

  • Order books are firming: over the past three months, total computers and electronics orders are up at a 30% annual rate; leading the way has been telecom equipment at 55% growth.

Though not, I should point out, for Texas Instruments (TXN), which is struggling with a declining book-to-bill ratio, as I noted earlier. Okay back to Rosenberg:

  • CAPU [capacity utilization] rates are improving, which is important from a pricing power standpoint: Tech capu rose a full percentage point in September to 80.7% and stands at its best level since Jan/01 and perhaps more important than that is that it is well above the long-term average of 78.1%. Within the components, computers and communications are both at 84.7% (compared to the 78% and 76% respective long-term averages). Semis are at 78.2% vs.

    80.5% for the long-term average, but still well above its cycle lows.

Though we might want to wait until Thursday morning, to see how the largest contract semiconductor maker, Taiwan Semiconductor (TSM) does when it reports earnings.

  • Remember that what makes the tech sector unique is its global exposure – 51% of its sales are derived outside the USA. Computer exports are up three of the past four months and running at an 18% year-over-year rate. And momentum is accelerating – with the three month pace running at 22%. Semiconductor exports jumped +2.1% in August and are up +10.6% year-over-year. Not bad at all.

Though if that’s the calm before the storm of chip inventories, things might not look so good in a month or two…

  • On the earnings front, the clouds look to have parted too. Thus far, 29% of the tech universe has reported their Q3 results and 70% have beaten estimates; just 9% have missed. Net-net, the tech companies that have reported so far have beaten expectations by an average of 6.5% which is a full point above the overall market; Q3 earnings estimates for tech have been revised up so far in October to +8% year-over-year from +6% year-over-year, and only financials and health care have done better than that. As for Q4, after seeing yearover-year EPS estimates for the current quarter sliced from 19% to 10% between July and September, and looking at the latest macro data points, this could be the one cyclical sector that finishes the year with the greatest upside surprise potential.

There you have it: look past the gloom of a TI or a Motorola (MOT) to corporate spending.

Source: Merrill: Tech Is Back - Five Reasons Why