Market likely to take cue from path of chip stocks

The Insider

Your Money

September 12, 2004|By BILL BARNHART

EACH DAY on Wall Street, investors hang on the latest move in crude oil prices.

Gasoline prices at the pump this summer did not march to record highs in lockstep with crude oil. Consumer price inflation remained benign.

Yet daily trading in crude oil futures dominates the news.

This year's advance in oil prices to record highs represents a fear factor in the global economy, not an inflationary imbalance in the supply and demand for energy.

It's hard to guess when the fear factor will subside. But here's a clue: Watch semiconductor stocks.

Semiconductors, not oil, are the basic commodity of the 21st century. The demand for microchips used in computers and communication devices is a better indicator of growth.

When chip stocks rally, the stock market is likely to follow. Last year's stock market responded to steady gains in semiconductor stocks, despite higher oil prices.

This year, the pattern reversed course, as chip stocks fell.

The semiconductor industry opened 2004 with great optimism, as the horrors of the technology bubble faded.

"People were anticipating a huge end demand and anticipating that components would be in shortage, so they were over-ordering," said Ambrish Srivastava, an analyst at Harris Nesbitt.

"Intel exiting the second quarter had historically high inventories," he said. "That was something that told you something was out of whack."

In midsummer, an economic slowdown ordered by the Chinese government and global fears implied in record-high oil prices took a toll.

The third quarter, normally the strongest three-month period for the semiconductor industry, has started out soft.

"What we're seeing is pretty much around the world, demand less than we expected," Andy Bryant, chief financial officer at Intel Corp., told analysts recently.

Ashwani Kaul, senior market analyst at Reuter Estimates, said year-over-year earnings per share for semiconductor companies are expected to drop by 9 percent in the current quarter after more than tripling in the second quarter.

"The slowdown in demand caught a lot of people by surprise," he said. "A lot of companies overseas are cooling it down, especially in China."

Semiconductor sales represent a barometer of economic prosperity, which in turn appears to be stalled by global fears embedded in oil prices.

But don't carry the comparison too far, says Jeff Rosenberg, a semiconductor stock analyst at William Blair & Co.

"You shouldn't be confused with oil prices rising and semiconductor prices falling," he said. "Prices in semiconductors will naturally go down over time, because costs are being reduced."

A temporary inventory bulge in semiconductors is not a basis for judging the sector.

"It's a cyclical industry; it always has been," said Terry Daniels, an analyst at A.G. Edwards. "It is a deflationary industry; it always has been."

The ability of semiconductor makers and users to drive costs lower is a counterforce to the ability of world politics to drive fear higher.

When the chip market turns up again, it will mean that ingenuity is winning over fear.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney

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