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The market yawned through another weak reading on economic sentiment Friday as investors grow increasingly uninterested in Chicken Little stories about the American consumer.

While consumer spending is an important component of gross domestic product, personal consumption has done nothing but rise for the past five years. Retailers from

Wal-Mart

(WMT) - Get Walmart Inc. Report

to

Saks Fifth Avenue

(SKS)

have reported strong December results compared with last year's. The market knows consumers are borrowing and spending, regardless of their sentiment.

By far the bigger problem of the last few years was the sharp decline in corporate spending that hit in mid-2001, followed by flat spending almost ever since. Now, perhaps, that is about to change, and investors might be wise to start thinking about where corporate America will start spending its money.

Such logic was behind Credit Suisse's decision to initiate coverage on

Alcan Aluminum

(AL) - Get Air Lease Corporation Class A Report

with an outperform rating this week. Similarly, with aluminum prices rising, the dollar weak and the economy expanding, Morgan Stanley recommended

Alcoa

(AA) - Get Alcoa Corp. Report

as a core holding.

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Another sector that seems poised for prosperity could be semiconductor equipment. J.P. Morgan analysts not only expect bookings to rise nearly 20% per quarter through the second quarter but for many companies to deliver upside surprises in the coming earnings season. Many of the stocks already sport stratospheric valuations, however, and while many Wall Street firms see more upside, the names are big gambles.

Back in November, the turnaround in semi equipment was confirmed when demand for the goods finally reached parity with supply. This measure, known as the book-to-bill ratio, had been sharply out of balance for more than a year, reflecting massive excess supply.

Morgan believes the uptrend will continue and isn't above recommending its clients take a flier on

ASML Holdings

(ASML) - Get ASML Holding NV ADR Report

,

KLA-Tencor

(KLAC) - Get KLA Corporation (KLAC) Report

,

Lam Research

(LRCX) - Get Lam Research Corporation (LRCX) Report

,

Varian

( VSEA),

Brooks Automation

(BRKS) - Get Brooks Automation, Inc. Report

and

Cymer

(CYMI)

.

Lehman Brothers analysts also see opportunities in these stocks. KLA-Tencor increased its booking guidance from plus-5% to plus-20% for the second quarter of 2004. Lehman responded by raising its price target to $68, indicating an opportunity for a 17% gain from the current $56.37.

At the same time, ASML says that it is ramping orders much faster than expected, causing SNS Securities to say that "the ramp in sales and return to attractive profit margins will happen much faster than anticipated." SNS calls the company "excellently positioned to benefit from the market upturn."

While these are bullish signs for the economy, there are any number of reasons to be cautious about the stocks. First, both the aluminum stocks and the semi-equipment stocks rose sharply in 2003. Second, manufacturers have yet to prove that the economic recovery is translating into any real pricing power. Excluding food and energy, the producer price index dropped 0.1% in November, halting a five-month advance. Even in an environment that includes a historically weak U.S. dollar, competition from Asia is keeping prices down.


Source: St. Louis Fed


Source: St. Louis Fed


Source: St. Louis Fed