The semiconductor industry and the exchange traded funds (ETFs) that track the sector aren’t any more immune to the affects of a decline in consumer demand, tight credit markets and a global recession than any other major sector. But this could also be good for the consumer in the long run. How?

  • Most companies in the sector have invested heavily into new facilities and infrastructure to support a spike in consumer demand, which has tumbled just as fast as the global economy. 
  • Experts state that spending is expected to decline as much as 50% from its 2007 peaks, which is putting many in a rut looking for help to cover the expenses that came with expanding and improving infrastructure, states Jim Farrish of Green Faucet.
  • Several semiconductor companies in Asia have been forced to turn to their governments for bailout help, which could produce a glut as companies continue to produce despite government support. 
  • To make it even worse, there is no incentive for these companies to cut back production because 70% of their costs are fixed. 
  • Lastly, the fall in demand has had little influence as production remains steady and inventories continue to rise.  In fact, inventories have ballooned from $3.8 billion in September to $10.2 billion in December, a 168% increase. 

From a consumer perspective, this may be a good thing as it may spark the innovation of new products, but from an investors point of view, one should definitely be mindful of what’s going on with these companies and the sector and really do his homework if considering to add it to a portfolio.

 Take a look at the iShares S&P North American Technology Semiconductor (IGW), which is down 4% over the past month.

 

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.