Take the Semi Rally While it Lasts
According to MarketWatch, “An upgrade to chip companies, such as Intel Corp., Advanced Micro Devices Inc., and SanDisk Corp., gave the broader tech sector a boost Wednesday. The Philadelphia Semiconductor Index extended that momentum Thursday, surging 18.25 points in the wake of more Wall Street upgrades for SanDisk Corp. and Nividia Corp.
According to data released Thursday night by Semiconductor Equipment and Materials International (SEMI), the North American trade organization for semiconductor equipment makers, the rally may be short lived.
The three-month average of worldwide bookings in May 2006 was $1.65 billion. The bookings figure is three percent higher than the final April 2006 level of $1.60 billion and over 62 percent higher than the $1.02 billion in orders posted in May 2005.
The growth is even faster than last month’s year/year gains of 60.4 percent, and although it may seem paradoxical this strength concerns us. As we explained before, semiconductor equipment orders eventually create new capacity to produce semiconductors. And with demand for semiconductors rising just 8.1 percent year/year, it looks like there will soon be too much capacity. Semiconductor makers Advanced Micro Devices (AMD - Annual Report) and Intel (INTC - Annual Report) are already fiercely cutting prices. When the new capacity comes on line, we fear it will only get worse.
Disclosure: William Trent has a long position in SMH.
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