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Technology Stocks : Semi-Equips - Buy when BLOOD is running in the streets! -- Ignore unavailable to you. Want to Upgrade?

To: Ian@SI who wrote (3895)	12/16/1997 10:08:00 PM
From: Jay M. Harris	Read Replies (2) \| Respond to of 10921

FYI \| ------ \| Edit your message \| Earnings \| Remove Navigation To: Sam Citron (530 ) From: Jay M. Harris Tuesday, Dec 16 1997 9:57PM EST Reply # of 532 Hi Sam, sorry for the trouble with my 18 month reference. Evidently, I was posting on the Motley Fool in the depth of the last semi downturn. I tried to go back and find my posts under Bird9 on the Motley fool under Micron and felt it would be more productive to address the IPEC thread with my analysis of a cycles turn. I will briefly review peak cycle indicators to watch which are exactly the same as the trough cycle indicators, only with opposite direction. Cycle Peak Please note that the following is a sequence that is precipitated by the preceding event! Also, note that equipment Co's trade very close to the SOX index. 1) Semiconductor equipment spending annually running greater than 21% of global chip industry revenue. Source = VLSI; Dataquest 2) Memory and other semi component pricing. Any decline greater than 50% Semi annually should capture your attention and force you to begin your analysis. This is because commodity prices are inherently volatile. 50% moves generally only occur because of fundamentals(supply/demand) and not exogenous factors or natural price declines associated with learning curve efficiencies and Moores Law. (I personally prefer to use the ASP's in Microns quarterly earnings reports in addition to spot and contract prices.) Micron enjoys a 10 to 15% premium. 3) Lead times compressing due to greater availability of components. As lead times get shorter, this is a function of 2 things. A) Finished goods availability at chip producers; B) purchasing managers reducing inventory because of declining prices and the expectation of getting a better bargain. Please note that the Dell direct model is taking on added significance in this cycle as well as the networking OEMs Cisco over the Web. 4) Book to Bill ratios in Semi company earnings reports for various chip sectors. Currently, microprocessors and analog and DSP's are holding up pretty well. However, the rest of the industry is currently cooked. SRAM units are great, but prices drove Cypress over the cliff. 5) Work in process (WIP) and finished goods inventory at chip makers increasing sequentially. This is the final cockpit warning indicator light! You must reduce exposure when inventories begin to appear at INTC; TXN; MU; LSI etc. This is your last chance to get out at decent valuation. This is when the Fat lady is warming up for the dreaded Fab push outs. 6) Fab Push outs announced by major chip OEM's. Along with Fab push outs comes the dreaded analyst downgrade (only after they have gotten their clients money out)! We are currently at this stage in the peak of the cycle. 7) Equipment companies reaching peak revenue and EPS over the subsequent 2 quarters. 8) Equipment company book to bill ratios rolling over on a monthly basis. 9) Fab closings and equipment cancellations; and equipment write offs. This is the stage when we will reach 1X revenue in 6 months from now in my opinion. 10) Equipment company layoffs and EPS losses. Blood running in the Streets. This is the time to buy after the last analyst downgrade(probably Robert Maire at DLJ :~) You will get in for 1X revenue and enjoy the ride to 4X revenue. I chose to discuss the cycle peak, because many are still bullish. I will post when the appropriate time to buy comes along. The problem with human nature is simple. When I come along and tell people to buy, they will not want to. They frankly will think I'm nuts. This is because I will buy the group at the darkest hour when people are actually questioning equipment companies survival! We are probably 6 months away from this given all of the fab shut downs I see coming in this cycle. This cycle will truly cleanse the industry of the 30% equipment spending as a percent of semi revenue since 1995! I hope this post helps, Jay