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Chip Equipment: U-Shaped Move

Stocks in this article: WFR AAPL NVLS

NEW YORK ( TheStreet) -- The semiconductor-equipment market's recovery, which we pointed out last week appears to have begun, will exhibit a U-shaped trend, based on proprietary leading indicators.

Our proprietary leading indicators, which determine inflection points in economic activity and which we utilize to show turning points in semiconductor-equipment sales, have turned positive for the past three months and are exhibiting U-shaped growth so far.

Based on past cycles, there is a corresponding shape to the semiconductor-equipment market, so we postulate that the growth will also exhibit a U shaped behavior.

For 2009, we forecast that the semiconductor equipment market will drop 46%. Most importantly, based again on our proprietary leading indicators, growth will continue through 2012, increasing 20% in 2010 and 49% in 2011.

Chip-Equipment Sales and the Economy
Source: The Infornation Network

Objective, concrete evidence comes from the positive activity in our proprietary leading indicators in the U.S. Both our long and short indicators turned up in late 2008, pointing to a business recovery cycle and giving visibility that the days of the recession are numbered.

Semiconductor-equipment companies are reporting sequential gains in revenue.

KLA-Tencor (KLAC) reported that new orders for the fourth quarter were $327 million, an increase of 19% over thre third quarter, while Novellus (NVLS) reported that second-quarter 2009 bookings were $111.2 million, up 43% off the low the company saw in the first quarter. Both noted that foundry activity had increased. KLA-Tencor's foundry customers comprised 53% of semiconductor systems orders in the fourth quarter vs. 40% in the third.

Singapore-based foundry Chartered Semiconductor (CHRT) raised its 2009 capital budget forecast by a third on growing demand, and we expect similar positive activity coming from Taiwan-based foundries Taiwan Semiconductor (TSMC)and United Microelectronics (UMC) as they report this week.

Foundries have been increasing market share over the past 10 years as fabless chip designers, with a clever chip design, can enter the market with nothing more than a PC and design software. Several semiconductor manufactures have shuttered their own fabs to save costs and have become fab-lit by contracting these foundries to manufacture chips for them.

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