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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Foad who wrote (18811)	12/11/1998 10:27:00 PM
From: Clint E.	Read Replies (1) \| Respond to of 69291

====Semiconductors====Irrational Exuberance===By TK of MER======= Investment Highlights: · Despite popular opinion, we see no evidence of a broad-based industry recovery. Fundamental Highlights: · PC seasonal pick up driven by retail sub $1000 models. · Corporate PC demand not materially affected by Y2K. · PCs not enough to drive overall industry recovery – only affects 36% of market. Semiconductor Industry – 10 December 1998 What Has Changed – Irrational Exuberance Yesterday's New York Times market page stated that semiconductor stocks rose amid optimism that the “recent boom in chip sales” will continue. However, there is no evidence of a broad-based chip industry recovery, let alone a boom. As we recently reported, the industry's own October trade data shows this. Actual sales fell 11.4% in October from September. The three-month rolling average increased 6% because of dropping off the vacation month of July and adding October. The October three month average is always up from September for this reason. The actual always falls because September is a five-week month. Year over year, sales fell 2%. Compared to average monthly sales for all of 1998, October was up a little vs. down a little last year, but hardly a boom. And, that modest increase is due entirely to higher microprocessor sales for the seasonal PC pick up. What has whipped the overall semiconductor group into such a sharp price recovery in such a short time? With industry sales still very weak and SIA data yet to reveal any growth over 1997, what is the group's appeal to investors now? So far, there is no question that PC sales are up from the first half, which is producing a recovery for microprocessors. But what is behind this PC pick up? Is it sustainable? Is another inventory correction coming? And what about corporate buying and Y2K? Answers to these questions help with analyzing PC driven Intel (INTC, B-3-3-7, $119) and Advance Micro Devices (AMD, C-2-2-9, $31), but what about the other 80% of the chip industry? First, on PC demand, Merrill Lynch believes 1999 can be a reasonably healthy year in units (up 15%) but average prices will continue to decline as the low end mix rises. So downward price pressure on PC chips should continue. In Q4 of this year it appears that sub $1000 PCs will comprise 41% of total PCs or 13 million (8 million Celeron, 5 million AMD K-6) out of 31 million. This is way above the 1998 average of 25% for sub $1000 PCs implying that a major part of the Q4 PC sales pick up is seasonal retail buying. This can go away in Q1. Also, corporations are spending their PC budgets before they are cut in 1999 due to lower profits and industry consolidation. Profits are down or looking weaker in 1999 in finance, banking, consumer products, drugs, manufacturing, oil, chemicals and many other large PC markets. Will the Y2K issue increase PC buying dramatically to offset down corporate profits? It is not clear, but we see companies such as Merrill Lynch solving Y2K without much change in PC buying by simply testing existing equipment, which overwhelmingly passes. Practically all leading Pentium, Pentium II and AMD K-6 PCs are Y2K compliant. If more horsepower is not needed then why replace a perfectly good PC in 1999? It appears that software fixes in mainframes to deal with Y2K are taking up a lot of the IT budget. We would not be surprised if corporate PC buys are flat or fall off in 1999. What about the other 80% of the semiconductor industry not directly tied to PCs where no broad recovery is apparent? About 20% of that 80% is helped indirectly by the seasonal PC recovery in Q4. Therefore, some fraction of most major chip houses sees some Q4 pick up. But not enough to make an attractive earnings recovery out of. Indeed, many companies still see enough weakness in the rest of their business to make a forecast of general recovery hard to support. We believe earnings prospects for 1999 still look lackluster for most semiconductor companies. We also believe the stock prices of most of these companies are inflated by expectations of a new up cycle that does not appear to be developing. Yes, pricing has stabilized due to cut backs in production and capital spending but this has no impact on demand. And while production is down, capacity is not. Unused capacity is sufficient to allow for an estimated 45% increase in semiconductor production. Indeed, Intel is cutting its spending sharply now due to excess capacity and smaller die sizes and this is being repeated around the world. Ample chip capacity exists. Spot chip shortages are not amounting to anything because factories can just raise output. This has already become evident in DRAMs with the Korean production increase.

To: Foad who wrote (18811)	12/12/1998 6:15:00 AM
From: Clint E.	Respond to of 69291

Foad, by the way, I highlighted my concerns and areas where I agree with Kurlak in the previous post. I didn't think he was attacking INTC or AMD. High-end is doing well and will continue to do well. I don't fully agree with everything he says but he does have some valid concerns with respect to "not all chips are equal", "demand beyond Q1", "unknown effect of Y2K spending on PC sales and corporations", and "manufacturing capacity". He also has a valid point that if price of PCs is not rising, the price of chips cannot be rising either. He didn't mention it but I think he knows that a good portion of the new orders for the semi. gear makers will be technology-driven and not capacity-driven. However, chip makers are not rushing to buy new equipment yet. This won't happen until the end of Q1, from what I was told early last month. Let's hope that the IMF aid packages and interest rate cuts will help global economies to recover next year. I don't think anybody in their right mind would like to see a recession here or globally. I know I don't. Clint