I agree with JP Morgan's thoughts on a potential correction in chip stocks, but we are not supporting a bullish scenario with a second half upturn yet. Fundamentally, in my view, the industry has entered a choppy phase with strength and weakness in different subsectors of the semiconductor industry. From a technical viewpoint, SOX formed a classic three-year triangle pattern and the breakout (upside or downside) could foretell the direction of this chip index for the rest of the year.
I participated in a semiconductor analyst forecast panel sponsored by Semiconductor International magazine which discussed forecasts made by industry analysts for 2007. (Click here for access to the complete webcast.)
Basically, the chip forecasts made back in December 2006 ranged from +12% growth to -10% decline in industry revenues. We were among the more cautious forecasters with a -5% forecast for 2007. The summary of the numbers is shown below:
Since those forecasts were made last December, the analyst guidance updates for the 2007 forecast have been guided down.
While the chip industry tends to march to its own drumbeat (business cycle) based on supply-demand factors, it is part of and influenced by the larger macroeconomic ecosystem.
Financial developments to worry about that could have negative impact: the real estate bubble bursting, US deficits ballooning, the dollar value declining, unwinding of the Yen carry trade, and the tapped out consumer debt.