I’ve been using and refining our proprietary leading indicators (LI) for fifteen years as a correlation with the semiconductor and semiconductor equipment markets which we analyze.
Recently I took a look at the ECRI (Economic Cycle Research Institute – businesscycle.com) WLI (U.S. Weekly Leading Indicator), a widely read and publicized LI to see if there is any correlation with the semiconductor space. I could find none, and the staff at ECRI confirmed that others have tried in the past with no success.
Then I looked at the Philadelphia Semiconductor Index – SOX. Sox is a price-weighted index composed of 18 U.S. semiconductor companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.
I felt like Aristotle discovering density when he got into his bath and ran down the street naked shouting “Eureka”. I said I felt it, not did it!
Anyway there is an uncanny correlation between the two for the past 12 months. I asked the folks at ECRI and they had no explanation, although I did not speak directly with ECRI's Lakshman Achuthan, but I welcome his call.
See the correlation below. My apologies for the crudity of the inserting of the charts. The end date of both was last week. The WLI starts on July 3, 2009 and the Sox starts on June 14, but the orange dot on the Sox corresponds to July 3, 2009. Anyway, you get the picture.
What does this tell us? I’ll pretend I’m BP’s CEO and just say “I don’t know”, Clearly WLI uses internally developed indicators that are not published, and therefore we don’t know if they use the Sox as one of there components.
One can infer that the entire U.S. economy is intimately tied to just 18 U.S. semiconductor companies. Altera Corp. (ALTR), Applied Materials, Inc. (AMAT), Advanced Micro Devices AMD), Broadcom Corporation (BRCM), Freescale Semiconductor, Inc., Infineon Technologies AG (OTCQX:IFNNY), Intel Corp (INTC), KLA-Tencor Corp. (KLAC), Linear Technology Corp. (LLTC), Marvell Technology Group (MRVL), Micron Technology, Inc. (MU), Maxim Integrated Products, Inc. (MXIM), National Semiconductor Corp. (NSM), Novellus Systems, Inc. (NVLS), STMicroelectronics NV (STM), Teradyne, Inc. (TER), Taiwan Semiconductor Manufacturing (TSM), Texas Instruments, Inc. (TXN), Xilinx, Inc. (XLNX).
Perhaps we should replace the Dow Industrials with the Sox as a major index of the economy of the country.