Buckle Up!
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 12/1/2000
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| Carl Johnson, INFRASTRUCTURE |
I don't like being the bearer of bad news, but I am hearing some disheartening stories from the capital equipment front. This is not really that surprising. In INFRASTRUCTURE's last monthly letter, we offered our view of the cycle, even going as far as projecting our expectations for next year. We believe a period of slow growth will be seen in the first half of 2001, followed by a pickup in business during the second half.
The second-half strength will be driven by the move to 300 mm wafers and copper interconnects. It's not that those two drivers are not a part of the landscape today; they are. It's just that we see them kicking into a higher gear next year.
There are other factors that have not been favorable for the chip sector outlook. There is a huge debacle taking place on the DRAM front. That long-awaited shortage, forecast by several market research firms, has yet to materialize. In all likelihood, it will not. Spot and contract prices for the most popular memory densities have plunged. Manufacturers are rumored to be dumping inventory on the market because they see weak demand on the computing front. Again, this weakness can be directly correlated to the health of the economy.
Speaking of the economy, Wall Street is very worried about next year. In a way, the weakness is now fulfilling the prophecies of this summer. While some will say the weakness is a self-fulfilling prophecy, there is no arguing with the historical precedent. Check out www.infras.com/news/gdpsemi.gif to view a chart that portrays this relationship.
What are we doing to weather the storm? Early this year we suggested to our readers that a 30% cash holding be a part of their portfolios. In the middle of the summer we decided to abandon that strategy and move to a heavier weighting in the stocks. Bad timing on our part.
We're back to a 30% cash position today. We are also in the process of retooling the makeup of the portfolio in companies that are positioned for the ramp next year. Those players include the gorilla of the industry, Applied Materials.
It will take time for the sentiment to turn on Wall Street. Over the next few months I am expecting to see announcements regarding order push-outs and cancellations. A number of industry insiders are already bracing themselves for this onslaught. Buckle up!
Before I leave you, I want to reiterate that INFRASTRUCTURE tends to view the chip sector from a long-term perspective. I know I do not have to spend a lot of time defining the drivers; you know what I am talking about.
I also acknowledge that the chip business is violently cyclical and there are appropriate times to be over-weighted and under-weighted in the stocks. This appears to be one of those times when caution is warranted. It is also one of those times that creates tremendous investment opportunities. •
