Where is the Bottom?

In the midst of SEMICON West... I was hopeful when I wrote my last column that by the time I was writing this column the markets would have washed out all the weak hands and stocks in the semiconductor and semiconductor equipment sector and we would be in the midst of a rally phase. Wishful thinking on my part!

Investors around the world are using every bit of bad news to head for the exit door. In many ways I do not blame them — the news is not that great. Then again, the news is not that bad. When you step back and look at where we were (in terms of the chip business) one year ago, we have to admit that conditions have gotten much better. It's not great, but it's better.

All this gyrating has fit well with the scenario I have been outlining in this column for months. I don't want to go breaking an arm patting myself on the back because this next phase is one that I suspect will be much more difficult to predict. Allow me to say I feel a little less confident given what has been happening over the past few months. That does not mean I am unwilling to take a stab at predicting the future. My spouse often tells me that I am a glutton for punishment.

I see a rally in the making. I see a rally that takes us into the middle months of the third quarter. I see this rally taking some of the stocks in the capital equipment segment up at least 30-40%. Some of you may be shaking your heads, but this rally — like so many we have seen in the recent past — will be driven more by what is going to happen late next year as opposed to the events of the next two or three quarters. The rally, in my humble opinion, will arrive too early to continue all the way into next year.

Sometime late in the third quarter of this year the realization that the end-of-the-year demand uptick, the increase almost everyone is expecting, will not materialize will send share prices back toward the low levels we see being recorded today. The drop that follows the rally will, finally, set the bottom for the stocks and 2003 will be a good year to be invested in the sector. Gains of 30-40% will be easily attained — perhaps we will even see some stocks double and triple.

As you know, I reserve the right to change my views at any moment. This just happens to be the way I feel about the situation today.

Clearly, there is a lot of risk to this forecast. The news that some companies are going to start expensing stock options is not going to sit well with many technology investors. Frankly, I like the fact that financial accounting is getting more conservative. It makes it much easier to assess values.

In terms of business, well, business is actually not as bad as many would like investors to believe. No doubt, unit volumes and revenue levels are nowhere close to the levels recorded during the last cycle, but they have stabilized and are holding together even during the dog days of summer. This is that canoe-shaped bottom I have been talking about. Periodic flurries of activity are merely hops over the seats in the canoe. When we get to the front of the boat, probably sometime during the first quarter of next year, we'll have a decent and sustained upcycle.

I don't have to tell you that this bear market has been very trying. The key to making money here is to be very patient. Keeping some powder dry at all times is a good idea. Some great opportunities are going to appear late in the year. All we have to do is survive between now and then.