Bouncing Along the Bottom

Looking at the historical pattern for bookings and shipments of capital equipment, we find that August and September are typically the low points of the year. That pattern is holding true to form this year. It's not over yet — even though this has been the worst downturn we have ever witnessed. By many counts we are still going down, but not forever —there are seasonal tendencies in the semiconductor sector.A while back I placed a chart in this space showing the monthly average of bookings and shipments for the equipment industry over a 10-year period. From March to September the trend is typically down. From October to February the trend has been up. If history repeats itself, we will see a flurry of activity before Christmas. I am not saying that this autumn's bounce will impact every sector of the business. This year is a bit different in that chip inventories and overcapacity are still a severe problem for many segments of the industry.

Aside from a seasonal tendency toward more activity this fall, there are other factors that will come into play. Over the dismal summer months, fabs have been idled, and manufacturing materials at many running fabs have dropped to bare minimums. It is likely that some of these idled fabs will come back on-line this fall as we see business firm. Coupled with increased utilization, one should expect to hear from the materials suppliers that activity is starting to pick up. Fab utilization rates will tick up, and maybe a few manufacturers will buy equipment.

It does not take "rocket science" to forecast a pickup of activity on the chip front for the latter months of this year. The data I look at suggests that every year, no matter if the year is down or up, is always marked by a pickup in activity during the last few months. How big that bounce is this year is anyone's guess. I sense it could be a big bounce off the bottom just because business has fallen so far, so fast.

In terms of making money, I see a short-term trade developing. It appears that I am not alone. If you have been watching the wires for semiconductor analyst recommendations, you are aware that three firms, maybe even four, have suggested that investors increase their exposure to chip stocks despite the fact that evidence for a large-scale recovery is hard to find. Play the bounce? Why not? Wall Street is going to latch on to the end-of-the-year pickup.

A trade due to the seasonal pickup is the near-term story. What about the longer-term outlook? I have said that the recovery in the chip business is going to be "canoe-shaped" as opposed to a "V" or a "U." Clearly there are going to be hops — some of them large — along the bottom of the canoe as we move from the back to the front. We're on the verge of hopping over a canoe seat today. For me to get really bullish, I need to see a turnaround in the economic outlook. We're still working off the excesses of the bubble and, other than seasonal bounces, I don't see business getting dramatically better until the middle of next year. I'm not saying we won't be able to make money in the markets. What I am espousing is the same big-picture view I have mentioned in many of my writings this year: My biggest fear is that we get a strong stock market rally late this year without the support of strengthening fundamentals.