Taking Media With A Grain Of Salt; Even Semiconductors Could Stage A Recovery Soon

by: Shlomi Cohen

The first week of "terrible October" ended on a handsome rise. As far as Wall Street traders are concerned, it wasn't another regular week of trading, but a highly dramatic week in the war now being waged between short positions and long positions over the market's fate until the end of the year. At the start of the second week of October, the longs have the upper hand.

Market technicians supplied the shorts with ammunition in the shape of the projection that if there is a downward breakthrough of the 1,100 points level in the S&P 500 Index, then the market will fall apart, because in their view-- technically speaking-- that level is the last line of defense, and it has not been breached in a downward direction since the crisis of 2008. Last Monday, in the course of the session, the shorts' wishes came true, and the line was broken through, but unfortunately for them there are investors who don’t play by technical rules but according to p/e ratios, and they piled into stocks, so that the week ended with the index 5% above the famous line.

What is interesting in this war is that the media always seem to be on the side of the shorts-- not out of ill will or some interest, but because a market collapse is a much bigger drama than gradual, boring rises, and drama sells newspapers.

For example, CNBC has a regular intraday slot called Fast Money, which hosts a group of speculators who explain what they are up to. They almost always only sell short. Anyone who didn't see how some of them were embarrassed when they were wiped out in the short positions they took on Apple (NASDAQ:AAPL), when it rose to a peak of over $420 three weeks ago, has never seen what the vaporizing of short players on live broadcast can look like.

Another helping hand to the shorts comes from prophets of collapse and/or recession like George Soros, Jim Rogers, Nouriel Roubini, Bill Gross, and others who make frequent media appearances but for some reason -- apart from a disclaimer no-one reads at the side of the screen -- are never asked explicitly whether they are not talking from their positions. After all, all of them manage money or advise on portfolio management. I myself take what this lot say on the media with a large pinch of salt.

Buffett the part pooper

Among others, the person who spoilt the party for the short players last week was Warren Buffett, who was interviewed by Bloomberg. Unlike the gang of seers mentioned above, Buffett is someone whose every word I believe. He also speaks freely about his positions and what he is buying these days. Asked about Soros's claim that a second recession is ahead, Buffett responded that-- apart from in the construction industry-- he saw no sign of one.

With the start of the reporting season this week, technical analysis will be put to one side and p/e ratios will rule, because all agree that in the long run, profit per share is what determines the share price. For example, in the technology sector, two gorillas with three figure share prices will report in the coming days: Google (NASDAQ:GOOG) this Thursday, and Apple next Tuesday. Google, which has a share price of $500, is expected to report earnings per share of $8.75 for the quarter to September, while Apple, with a share price of $370, is expected to report earnings per share of $7.20.

I'm fairly sure that, next Tuesday, Apple will come in with earnings per share very close to those of Google, and for me, the great riddle will be how close Apple's share price will approach that of Google over the coming year, because it deserves a much higher price than it has today, by any economic criterion you care to look at, and the last of the skeptics will understand that next week. Captain Steve Jobs is no longer with us, but he left Apple in a management situation of "automatic pilot", with all fuel tanks full, and I believe that the competition will find it very hard to shoot this plane down, at least in the next couple of years.

Chips in recovery?

The only technology sector which is clearly in a slowdown is semiconductors, particularly equipment for manufacture and inspection of semiconductors. This is not because of a recession among end users, but because of excess orders until early this year, with the exit from the crisis. Among the major equipment companies, Dutch company ASML will be the first to report on Wednesday. In the last crash, ASML replaced Applied Materials (NASDAQ:AMAT) as the equipment provider with the biggest market cap. If on Wednesday, before trading commences, ASML guides for recovery in orders in the fourth quarter, or even in early 2012, then a great rally is likely to get underway in the entire sector, and small caps like Israel's Camtek Ltd. (Nasdaq: CAMT) and Nova Measuring Instruments Ltd. (Nasdaq:NVM), which have been slaughtered, will take off.

In addition, the biggest Israeli company in the field, Orbotech Ltd. (Nasdaq: ORBK), which at its low two weeks ago reached the ridiculous market cap of $400 million, when it has cash net of debt of over $200 million and is highly profitable, will soar.

Among other Israeli semiconductor companies, I detect a certain weakness in EZchip Semiconductor Ltd. (Nasdaq: EZCH) recently. Perhaps there are investors who are nervous about the quarter, because the company has yet to publish a release date for its financials, but in my view it will not publish a warning, and, unlike many companies in the field, it is likely to guide for a strong fourth quarter because of an acceleration in orders from Cisco (NASDAQ:CSCO) through Marvell (NASDAQ:MRVL). Perhaps the weakness stems from the latest rumor, which has it that Marvell will shortly acquire EZchip rival Xelerated, a privately owned Swedish company. If that happens, it might not be to replace EZchip, but the opposite: to deepen the cooperation between Marvell and EZchip via the Swedish company.

Published by Globes [online], Israel business news - www.globes-online.com - on October 10, 2011 Published on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011