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Tuesday, December 9, 2008

Semis rally on bad news

Broadcom, Altera, National Semiconductor, Integrated Device Technologies and Texas Instruments are all up sharply after guiding estimates well below the street. Does this mean it's time to pile in?

The business environment is perhaps the worst I've seen in 25 years of watching the market. Valuations are telegraphing major estimate cuts for next year. And this seems right to me. And today, the market is saying there is enough conservatism in investor sentiment that even 30% reductions in outlooks for semiconductors are acceptable and that these rates of decline are unsustainable. And I agree. They won't see these kinds of drops in their sales consistently.

This move today comes after a 20% rally off the lows in the SOX. We're in the dead spot between Thanksgiving and Christmas. The conference presentations I'm listening to don't suggest any kind of imminent uptick. In fact, it looks like semi inventories were relatively elevated coming into the quarter and the reductions in order patterns are appropriate.

I think semis will start to work higher when order rates begin to pick up. At least, historically, that's what makes them work higher. We are still seeing cuts. We have no clear picture on OEM demand going forward. I suspect that the economy has been hampered enough that Cisco and Dell will see no immediate snap back to business. I think without a snap back in business, the OEMs will force the semis to live hand to mouth – like they've done in the past.

Q1 is typically down for technology for a number of factors but those have become more pronounced in recent years as electronics have become a much larger mix of holiday shopping. I assume no bounce in the early days of January… and I expect further disheartening outlooks from PC and handset makers will keep a lid on any kind of sustained rally. Gross margins literally are just cracking this quarter for many semi companies. There's no sense of a near-term bottom in those and gross margin is what makes these stocks work. Without expanding gross margins you just get more sweat and tears for less profit. I think its too easy for them to rally on these kitchen sink numbers.

I'm a better seller of tech here in general. I think people have the right idea here… I just think they're probably too early and that the group will go lower again once the dour nature of Q1 becomes apparent. I'm not saying this right here is the top… I just wouldn't be buying them here unless I had a very long time horizon… which I rarely do. I think they'll be lower in January.

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