Semiconductor HOLDRs (ETF) (SMH)

Semiconductors have been doing good lately, and this ETF is a fine selection of them, so I incline myself form this ETF instead of being picking different semiconductor companies separately

Semis too low.

SMH mimics the SOX semi index. In the last decade the total return on SOX has dipped below SP500 3 times: 1998, 2002, and now. Previous trough to peak returns: 550% and 150%. Will SOX reach 1300 again (350 now)? Not this year. Will a recession hit causing semi growth to slow? Probably. But given the low inventory levels and lack of liquidity with which to buy new capacity, I'd be willing to bet that the growth we'll see in this up cycle (starting mid-08) will be much more profitable than '02-'04 for the top players.

Semi-Conductor cycle as usual. Wait and watch this sector bounce back in 7-10 months from now.

Unprecedented build up in capacity along with price wars between Intel and AMD is pulling the average sales price down. Companies serving the wireless handset face slower sales due to gradual shift to lower end phones. Companies likes Intel and Texas Instruments feel China to be a bright spot to cash on and growth from the branded personal computer segment dominated Dell and Hewlett Packard is on the down turn. The much-hyped launch of Windows Vista has turned out into a bubble and there is nothing much to expect till the second half of 2007 for things to stabilize. Top three holdings Texas instruments, Intel and Applied material account for around half the funds corpus offering little diversification.

Semiconductor HOLDRS ETF represents ownership of United States-traded common stock of companies that develop, manufacture and market integrated circuitry and other products known as semiconductors, which allow for speed and functionality in components used in computers and other electronic devices. Majority of the companies represented in the fund are large caps growth stocks. The ETF has market cap of approximately $1.37 billion and is trading at a price to earnings multiple hovering around 20.

Macroeconomic issues like rising energy prices, inflation and signs of recession has reduced the investors enthusiasm for growth stocks of which semiconductors form a major part. The past returns of the fund has not been impressive with average annualized return for the past three years at a negative of 5.44% and losing another 7% in the previous year. Further inventory congestion and options backdating scandals add worry to the industry and chances of beating the market looks dim.

New Windows operating system is going to require more memory. Look for this holding to increase in price over the new several months as people need to upgrade their computers in order to use Windows Vista.