Monday, November 13, 2006

Calls of Note Part 2

- This morning, Citigroup Investment Research (CIR) Chief U.S. Equity Strategist Tobias Levkovich is raising his rating on US semiconductors to overweight from neutral. As fundamental semiconductor analysts, they reiterate their positive view on the sector. The SOXX has risen about 15% in the past quarter, but the firm expects further appreciation, to our target of 500. While they recognize the potential for some pullback given the recent rally in the group and some noticeable deceleration in end-markets (handsets and PC's), given their already positive bias, the firm generally concurs with their US strategist. Top picks are Intel, IDTI, Intersil and Marvell, all of which they rate Buy.

While there is significant concern surrounding the high level of semiconductor inventories, firm's positive stance has been partially predicated on an inventory peak. As the chart below shows, when inventories have peaked (as illustrated by the highest point of semiconductor unit output above trend line) semiconductor stocks (the SOXX) have tended to be at or around their bottom. Thus, while bears still use inventories as an excuse to remain negative, they take the exact opposite stance, assuming by doing so, that the negative repercussions of high inventories are well understood by investors. Firm anticipates bears may turn more positive as inventories bottom in 1H07.

IDTI is firm's top small-cap idea, warming up to ALTR. Comm. IC stocks have seen the deepest cuts to estimates, reflecting the unexpected weakness in wireless and wireline infrastructure. No surprise, Comm. IC stocks have underperformed broader semiconductor stocks, down 20% YTD. Citi believes this creates opportunities in Comm. IC names, particularly given CIR's view that infrastructure spending will improve in 1H07. IDTI is top small cap idea, although, upon evidence of an improving communications end-market, they would look more favorably on Altera (ALTR). They reiterate their call for near-term trading weakness in TXN.

Notablecalls: While I think Citi will ultimately be proven wrong, one has got to respect the dynamics of the trading world. Sitting at my old trading desk I would load up on SMH (or alternatively ALTR) in the pre mkt and look to exit after the open. The problem with the call is that it does not take into account the likely upcoming weakness in the U.S economy. Also, note that CIR continues to be negative on Semi Capital Equipment space.

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