Last Week's Semiconductor Suckers Rally

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Includes: AMAT, ASX, NSM, SMI, TSM, UMC
by: William Trent, CFA

We have been droning on and on about the oversupply of semiconductors that is looming. For a while, the stock market seemed to be playing out our theory. However, recently there has been a rally we believe is a suckers rally.

Yahoo! Finance reports:

National Semiconductor Corp. (NYSE:NSM) on Tuesday lowered its revenue outlook for the first quarter of fiscal 2007, which ends August 27.

The company now anticipates that first quarter revenue will be down about 6 percent from the $572.6 million in revenue that it posted in the fourth quarter of fiscal 2006.

The company had forecast June 8 that first quarter revenue would be down 2 to 3 percent sequentially.

soxx

National Semiconductor is a symptom of the overcapacity that should be bringing the semiconductors still lower. According to the equipment manufacturer’s industry association [SEMI], semiconductor companies ordered nearly 75% more equipment in July than they did last year. This is far ahead of the single-digit year/year growth in semiconductors and marks the sixth consecutive month that supply has shown faster growth than demand. The supply/demand chart is our own compilation of data from SEMI and the Semiconductor Industry Association [SIA].

semi demand

The trend is unsustainable, and semiconductors are unlikely to put up a sustained rally until significant orders get canceled.