There is an embarassingly nice profile in the "Quite Contrary" column of yours truly today.
My favorite line of the interview (unfortunately) got cut:
"If this is a short term call, its rather late, as the SMHs have already fallen more than a third from their highs, giving back half of their gains. If its a long term call — is this semi-condictor cycle over already? — it seems to be rather early."
That’s from memory; It was prolly wordier than that (and hence exised).
In response to those of you without WSJ access, here’s a PDF
Quite Contrary: Placing a Wager On the Chip Sector
Maxim Strategist Ritholtz Sees Tax-Incentives Sunset Picking Up Semiconductors
By Erin Schulte
Wall Street Journal, August?3,?2004;?Page?C3
Placing a Wager On the Chip Sector
Sees Tax-Incentives Sunset
Picking Up Semiconductors
THE WALL STREET JOURNAL
August 3, 2004
After taking a sustained beating from analysts this summer, the
semiconductor sector is sporting a shiner.
Some of the biggest names in the business suffered a rash of
well-publicized downgrades from chip analysts last month, sending the
Philadelphia Stock Exchange Semiconductor Index down just over 14% in July.
Better earnings offer companies no solace: The same day Intel Corp. reported a 96% jump in
second-quarter net income, its shares tumbled 11% over concerns about
inventory and profit margins.
Merrill Lynch recently downgraded chip stocks to "underweight" from
"overweight," and UBS last week downgraded semis to underweight from a
"neutral" rating. Morgan Stanley said it expects Intel’s third-quarter
revenue to come in below estimates. Deutsche Bank cut Intel’s rating to
"hold" from "buy," Lehman trimmed its earnings targets, and Merrill
downgraded the company to neutral from buy.
And yet, industry groups are talking about huge gains for chip sales
this year, and hopes for capital spending and economic growth are still
primarily upbeat. Global semiconductor sales in the second quarter rose
9.5% from the first quarter to $53.45 billion, according to the
Semiconductor Industry Association. In June, sales were up 40% year over
year. As such, there are still those on Wall Street who believe that chip
companies will finish 2004 in good shape.
Barry Ritholtz, chief market strategist at Maxim Group in New York, an
investment bank with about $5 billion under management, thinks chip
companies could shine in the fourth quarter thanks to tax incentives that
end this year, motivating businesses to spend on technology before the
sunset. He thinks that growth in chip sales could come even if the broader
U.S. economy slows, as it recently has been showing signs of doing.
Equipment and Materials International predicted sales for suppliers to the
chip industry will leap 63% this year, and the Semiconductor Industry
Association projects global chip sales will rise by about 29%. Do you agree
with all the recent pessimism coming from Wall Street about the outlook for
the chip sector?
Mr. Ritholtz: To use a recently
popular phrase, this sounds like a bit of groupthink to me.
I don’t agree with the specific pessimism for the rest of 2004, but my
macroeconomic model shows some real problems by mid- to late 2005. That’s
not specific to semiconductors — it’s more a [question] of, how will the
economy keep going once the "pig is through the python," once all of the
tax and interest-rate stimulus are gone? With higher interest rates,
increased commodity prices, raised taxes regardless of who wins in November
and the stimulus fading, why will the recovery keep expanding?
Longer term, I think the semiconductor cycle can remain somewhat
insulated from the broader economy. As long as demand for iPods, laptops
and phones remains robust, semiconductors should do well. It would take the
economy to grind to a full stop to derail the semiconductor cycle here.
The U.S. is but one of the world’s major economies. Asia — especially
China, but also Japan’s recovery, along with healthy outlooks in Singapore
and South Korea — will continue to stoke demand for semiconductors. Even
Europe, whose economy has lagged the rest of the world’s recovery, shows a
continuing demand for electronics. My expectations for a robust semicycle
assumes that Europe maintains a humdrum growth pace. If their economy ever
woke up, semiconductor sales would soar.
As long as the Asian-rim recovery keeps humming along, semiconductor
sales can still grow, even if the U.S. recovery remains anemic.
Do you think Intel’s
outlook — which predicted revenue growth of about 10% in the third quarter
– indicates chip and chip-equipment stocks may avoid the fate Merrill laid
out for them? There still seemed to be concerns about profit margins and
I think some of Intel’s problems are due to the real competition
developing in the CPU space. One of the unsung aspects of Intel’s margin
pressure was Advanced Micro Devices. They have
matured into a real competitor, and are no longer just an also-ran. Their
new server chip got rave reviews, is well priced, and will migrate to the
Some analysts are
concerned that a glut of inventory capacity may hurt pricing power. What do
you see happening?
I am expecting a surge of orders in the fourth quarter to take advantage
before [the] sunset on the accelerated depreciation-tax rule passed a few
years ago. It behooves big buyers of hardware and capital improvements to
step up and make their buys in 2004 rather than wait until 2005. The
semiconductor companies’ expectations of this surge helps to explain the
inventory build-up: You have to make hay while the sun is shining, and it
will shine brightly in the fourth quarter.
Of course, this sort of "reverse channel stuffing" could hurt sales in
2005. That’s the law of unintended consequences.
Historically, what kind
of performance have chip stocks had at this stage in an economic
It’s hard to make any sort of comparison between this cycle and any
previous cycle. There has been incredible post-bubble damage, 9/11,
unprecedented stimulus and a war — all the while with very tepid job
creation. I simply cannot find an analogous era with which to compare the
The soon-to-be-gone accelerated depreciation will be the driver in the
fourth quarter. I’m looking for a bounce into the end of the year, and
possibly the first or second quarter of 2005.
Tech valuations are usually too high. The question is, are they absurdly
overpriced, or merely expensive? Intel, AMD and SanDisk have become, if not cheap,
well, certainly more reasonably priced than they were.
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