According to a Reuters story today: “Shares of chip equipment makers Novellus Systems Inc. NVLS and KLA-Tencor Corp. KLAC rose sharply on Tuesday after they expressed optimism about the second half.” Yea, its always about next quarter, next half or next year for the semis. Its been that way for most of the last two years. Today, Novellus (NVLS) said second-quarter profit grew 8.8 percent. They essentially matched LOWERED expectations which they were forced to adjust lower on June 28th ahead of last night’s announcement. The Wall Street Journal described its report in this way, “Novellus Systems gained on stronger-than-expected earnings.” Yes, stronger than expected (lowered) expectations!!! Is that where we are? As long as you get the number to a level where you, the CFO, knows its beatable a week or two from now? The stock rose $3+/share!!! It was the smallest increase in earnings over the preceding 12-months. Second-quarter orders fell 19 percent to $332.2 million from the preceding three months. They also lowered its next quarter sales range to between $380 million and $395 million versus the previous expectation of $400.4 million. The stock closed at $29.90 on June 27th, before its warning. Since then, news concerning the strength of its current and immediate future has deteriorated across the board; first with its June 28th warning and then again with its lowered forward guidance last night. Sequentially, Novellus’ Revenues increased from $396.97 million to $416.30, but Receivables grew even faster from $371.7 million in Q1 to $421.89 this quarter rendering the growth in revenues primarily a function of channel stuffing. Revenues in the year ago quarter were also $410.07—essentially unchanged. No year/over/year growth in revenues!! Also of note, just yesterday, the semiconductor's own business affiliation association, the Semiconductor Equipment and Materials International group said that sales of equipment used to make microchips are expected to rise just 1-percent for all of 2007. Again, the semiconductor and capital equipment group couldn't’t look less dull and toppy from a fundamental point of view. But not being mortgage or housing apparently is enough for the bulls, I guess. Of course, based on this “overwhelmingly, ebullient” earnings report, the entire capital equipment sector literally exploded higher—even as most of these stocks were already at or near 52-week highs. Lam Research (LRCX) in particular is now trading higher than even its peak price of April 2000. Throw in what KLA-Tencor’s (KLAC), John Kispert said during an afternoon meeting with analysts. He said bookings, which are cancellable, rose a whole 2-percent during its usually strong June quarter. He also said he is “optimistic” about industry spending on NAND flash memory in the second half of 2007; even though this product sector has experienced a crunching glut which drove some NAND prices collapsing as much as 70-percent earlier this year. I’m always baffled by the market’s ability to continuously grant the CEO’s and CFO's of this group benefit of the doubt in spite of their histories, broadly speaking, of being far too optimistic just as business is deteriorating. Of course, this group, more than any other industry, was also the subject of numerous option “backdating” issues and more recently they have nearly institutionalized the “leveraged stock buyback.” Given that its executives are compensated with high levels of stock and option grants, these occurrences always smack of conflicts of interests. But again, more than probably any other industry, investors seem to always take the bait with mouth wide open. So the semis went en fuego today, setting a new 52-week high—even as Best Buy (BBY), the stock best representative of “end demand” for this group, spent most of the day plumbing near 2-year lows. Conclusion: Almost no remaining viable investment options compared to the copious amounts of excess debt and credit (money supply) equals higher prices, for now…..The other major news for the day was the release of the totally useless PPI (Producer Price Index) and oil broke above $75/barrel…. Also, The NAHB/Wells Fargo housing market index dropped four points to the lowest since January 1991 and the third lowest reading in the 22-year history of the survey. Also, Bear Stearns’ (BSC) “High Grade Structured Credit Enhanced Leveraged Fund” may be worth nothing according to sources cited in the Wall Street Journal. Its other less leveraged (read: safer) fund is estimated to be worth 9-percent of its original value….The Dow Industrials closed at a new record high.
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