Glimmers of Hope

Last month I mentioned that the recovery in the semiconductor industry had yet to appear. That statement, per usual, set the stage for the Semiconductor Industry Association (SIA) report that showed a nice little bounce off the bottom for many chip categories. Like many investors, I have to wonder, does this bounce kick off a lasting pattern?

Let's hope it turns out to be something bigger, but it is most likely that the recent bounce is a seasonal phenomenon. In fact, this bounce, which was probably delayed due to the events of early September, is the one I was looking for earlier this summer. While signs of a recovery are welcome, I am wary of extrapolating this rebound into something bigger than it really is. Widespread economic weakness still weighs heavily on the future prospects for the chip business. This may be a sign that we have reached the bottom, but a lasting recovery will only occur once the economy starts to build some momentum. That could take some time.

The bounce in the SIA's tally is not the only thing driving investors into the chip sector. Adding fuel to the fire was news that Kulicke & Soffa received two fairly large orders for fine-pitch wire bonding systems from two assembly and packaging houses. The K&S news is significant in that the company is often viewed by Wall Street as a leading indicator of the chip industry's health. Demand for wire bonding equipment is driven by unit volumes, and strength in unit volumes means stronger final demand. At least that's how it is supposed to work on paper. I sense that these are technology orders that are being driven by packaging requirements for a new device design. Either way, the news that there is some demand for equipment out there is a positive.

The stock market is, once again, playing the role of forecaster. This is to be expected and is not out of line with what I was expecting during the summer months. I have a fear about this rally, though — investors could take these few bits of positive news and run the stocks too far in the coming months. If the stocks are going to go much further, dismissing the bad news will become a phenomenon of this run. The mentality is best summed up by the phrase, "I'm buying because it can't get any worse than it is today."

A big rally could set up another corrective period where share prices give back a lot of the recent gains. Valuations of many chip and chip equipment stocks I follow are just too rich for my comfort level. Of course, it's possible the market may be as much as nine to 12 months ahead of the game here, and that may mean that share prices will not fall at all. I'll be the first to admit that doubting the wisdom of the stock market is, in most instances, an exercise in futility.

So what should people be doing with their semiconductor and semiconductor equipment investments today? It makes sense to me to have some exposure, but I certainly would not throw caution to the wind. I don't see end demand picking up in a way that will spur a cycle like we had last time. The good news is certainly welcome, but there is just as much "un-welcome" bad news crossing the wires.