2007 — A Lot of If!

• If the situation in the Middle East worsens (or improves)…
• If world and U.S. economies bottom…
• If interest rates go up (or lower)...
• If energy prices increase (or decrease)...
• If the U.S. housing market improves (or worsens)...
• If U.S. consumer spending weakens (or strengthens)...
• If the adoption of Microsoft Vista is slow (or fast)...
• If the iPhone is the hottest thing since sliced bread (or not)…
• If semiconductor inventories continue to build (or improve)...
• If the industry builds excess DRAM and NAND capacity (or not)...
• If the logic and foundry companies rebound (or not)…
• If there is an extended polysilicon shortage (or not)...
• If we get immersion lithography working (or don't)...
• If the new material integrations at 65 and 45 nm goes smoothly…

And on and on and on....

Any one of these could throw a wrench into a well-reasoned forecast. So, the best thing to do is to make a guess and then punctuate it with “if.”

In the end, it's all short-term noise — short-term noise that keeps hedge funds and day-traders in business.

My objective this year is to think in the longer term. Longer than one year. Longer than two years. In my forecast for '06, I talked about the continued and relentless pricing pressure we would see in the IC market. That's not going to abate anytime soon, so I can repeat that one with no fear. I also talked about activity on the mergers and acquisitions front, and how the industry needs to consolidate. Well, that was a really big story last year, and I seriously doubt if it is going to slow in '07. The industry still needs to consolidate.

As for new thinking, it's pretty clear that “green” is getting more and more visibility. Obviously that means good things for companies that are exposed to the solar energy scene. Short-term sentiment toward solar is dictated by the price of crude oil. Longer term, the use of solar energy is definitely worth attention. I can play that game.

Will it be a good year for chip and chip equipment companies and their stock prices? Given that most companies in the sector had a fantastic '06, and share prices have been rallying for the past six months, I would say that for the first two quarters of '07 caution is warranted. We're going to learn a lot about the inventory situation when January's quarterly reports are released. I have to admit, I am not too optimistic on that front. We are already getting warnings (I'm writing this during the second week of January) from MPU makers and telecom equipment suppliers. I don't think the inventory correction that started in the third quarter of '06 is going to be over until the middle of '07. From there, we will see “if” those drivers that most forecasters are citing kick end demand into a higher gear.

For many investors, it's becoming painfully clear that to make money in the chip sector you do not have to invest in semiconductor companies that chase Moore's Law or the bleeding edge of manufacturing. Companies that make low-end products, even things like passives and diodes, have done very well on the financial front. Keep that in mind as you look at investment opportunities. “Old tech” is not synonymous with “losing money.”

On the equipment front, '06 was a great year, and it appears as though the first half of '07 will be driven by memory spending. It's hard to find a forecast that is not bullish on the outlook for memory (DRAM or NAND). Those that read my website know that I have been very keen on companies with business models that can be linked to the run-rate of the semiconductor fab. The preference here is to focus on the materials companies and those that supply consumables and services to chipmakers.

Overall, '07 is unlikely to be as good as '06, but it will be a decent year. There are plenty of applications and devices heading toward the end markets to support demand for electronic goods. I don't see anything that will prompt the markets to blow out to the upside or collapse it into the abyss. It's pretty clear that the cycle amplitudes are becoming more muted. That makes a case for thinking longer term, which is exactly my game plan.