HAS THE TECH RUN TOPPED OUT?
by ilene - November 19th, 2009 3:31 pm
HAS THE TECH RUN TOPPED OUT?
Courtesy of The Pragmatic Capitalist
Merrill Lynch downgraded several semiconductor names this morning citing unfavorable cyclical
“We are downgrading our view on the sector given unfavorable indications from our cyclical framework. In particular, our industry model suggests that following a period of rapid replenishment of inventory and normalization of semi shipments to true consumption levels, inventories in the supply chain are approaching a level suggesting a modest overshoot versus equilibrium levels. While we see limited risk to near-term estimates, we think the longer this persists the greater the risk of a correction in the supply chain. Barring a sharp upturn in the global economies, this, in our view, renders the risk reward associated with ownership of chip stocks unattractive.”
Notable Calls has more details:
In some ways, the firm thinks the current backdrop reflects a striking contrast to the conditions that prevailed at the time of Merrill’s upgrade. Specifically, at the time, supply chain inventories were at abnormally depressed levels, economic forecasts were poised to improve but as yet depressed, and indications of an inflection in electronic demand had just started to manifest themselves. Fast forward two quarters, and the picture looks completely different. To wit economic growth forecasts have trended higher, as have expectations of electronic demand growth, and supply chain inventories are perking above what they’d consider to be a normal equilibrium level. Last but not the least, sentiment around growth prospects for the group has also seen a marked improvement. Simply put, the ideal mixture of investor skepticism coupled with the potential for sharp upward revisions – which served as potent fuel for the semiconductor rally – no longer prevails. This then begs the question: What is the incentive to own chip stocks, esp. on the heels of a spectacular move up (SOX +83%) over the last 12 months?
For those looking for real world confirmation of the potential inventory adjustment being forecasted by Merrill’s industry model, the firm would point to indications from the Asia PC supply chain suggesting a material downward bias