The Case for Semis and Banks

 | Oct 28, 2011 | 7:00 AM EDT  | Comments
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Two groups befuddle: semis and banks. I heard all day yesterday that neither group is doing well -- so why should it run? There's no denying the facts. They are awful. There is no revenue growth for the banks and there was a wave of missed quarters for the chips.

But there's a considerable short base in the banks that is paper-thin, and the semis have astonishingly low inventories, making it so a positive outlook on any growth -- or on any avoidance of collapse in Europe, a huge tech center -- can spur the group.

How big is the short base? Some of what makes a good trade is that it has worked and worked and worked again. I can't emphasize how horrible the banks have been. With the exception of BB&T (BBT) and U.S. Bancorp (USB), I saw no real loan growth. They aren't allowed to raise their dividends or buy back stock in any large amounts. MetLife (MET), while not a bank, reported a huge quarter and yet the Fed specifically said no to higher dividends for the well-run company. We have stress tests upcoming, and who knows these days what the regulators have in store for them? Fee raises get flagged by the government as a reason to hate the banks or pull your money out of the fee-raisers. The huge debit card fees have been taken away. Who understands Dodd-Frank?

That said, there will be no banking collapse in Europe in the short term. The short-as-proxy play is over. The economy seems in some ways to be getting better. We keep hearing that non-residential housing is coming around, and that can be a source of loan growth. There are plans in the works to try to de-gum the housing crisis. Who knows if either will work, but after these huge short wins, why take chances? Plus, just in terms of pure bottom psychology, the real mover of things here -- can it really get worse for Goldman Sachs (GS) than being the lead story in the New York Times because of a gigantic loss? Goldman Sachs can make money every day from doing nothing. It might just do that for a spell and just not hire anyone new and let the attrition work its magic. Now that we know that the book seems really scrubbed, it makes sense, doesn't it?

Semis are a tougher call. I blanched when I saw the Avnet (AVT) quarter. But then I recalled that it could not have been any worse when Avnet bottomed last time, and maybe it is a little bit better. The inventories are too low to do the job. Novellus (NVLS), which had been very downbeat, gave you some real inventory hope on its call. So did Texas Instruments (TXN). Cypress Semi (CY) truly said awful things, but how awful can it be with that huge dividend and monster buyback? Broadcom (BRCM) gave a terrible outlook but its core business is very strong. So is Qualcomm's (QCOM), with big smartphone sales confirmed this morning by a rip-snorting quarter from Samsung just announced because of Galaxy sales.

Now along comes Advanced Micro Devices (AMD) after the close with a very solid forecast, and this roadkill could be resurrected. And let's not forget both Intel (INTC) and ARM Holdings (ARMH), which had both good earnings and good outlook.

So, how about this: Future is brighter than past for semis because of inventory build and possible improving economy, and it is hard for the banks to get any worse. You add in the short base and the fact that people are looking for anything that is lagging the market so it can catch up now that the cyclicals have officially taken off, and your results? Banks and techs.

Buy 'em.

And that's just what people are doing.

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