2008 SEMI CAPEX Spending Forecast Continues to Shrink (Chart 1)

	Chart 1

Gartner recently reduced its near term forecast for SEMI CAPEX. Its vice president Klaus Rinnen commented, "2007 was marked by continued strong DRAM investments, shrugging off the realities of a market sector in oversupply, slower NAND spending growth, and disappointed hopes of a foundry spending revival. As we look to 2008, we expect the long overdue capital spending correction in the DRAM market to push the capital equipment market into contraction. Adding on the downside is another slow year from foundry and generally more cautious spending mood, with concerns about a U.S. economic recession rising."

North American Semiconductor Equipment Industry Posts November 2007 Book-to-Bill Ratio of 0.82 (Chart 2 & Chart 3)

	Chart 2

	Chart 3

North American-based manufacturers of semiconductor equipment posted $1.15 billion in orders in November 2007 (3-month average basis) and a book-to-bill ratio of 0.82 according to SEMI.

"November orders are 19% below one year ago, and at levels last reported in late 2005," said Stanley Myers, president and CEO of SEMI. "Semiconductor manufacturers have added a tremendous amount of 300mm capacity over the past year. This, combined with the overall booking trends, indicates that investments will slow in the near-term, which is consistent with concerns about the economy as a whole."

Japanese SEMI book-to-bill ratio drops in November (Chart 4)

Orders for Japanese SEMI equipment fell short of sales in November for the fifth straight month, as chipmakers kept spending plans in check said the Semiconductor Equipment Association of Japan. DRAM makers said they may cut spending.

	Chart 4

Economic Update

Thanks to my colleague Ed Henderson here is the “global economic preamble” to his December 2007, 26-page “Henderson Electronic Market Forecast.” See www.hendersonventures.com for more details.

Global Recession is Unlikely, However… (Chart 5)

	Chart 5

The last hurrah for near-term GDP growth

As discussed later, the global credit crisis appears to be intensifying. But there seems to be a disconnect between the pains in the financial markets and the growth rates chalked up by the regional economies during the third quarter. As shown in Chart 5, world Gross Domestic Product (GDP) accelerated from a 3.4% annualized pace during the second quarter to 3.8% in the third quarter. The speedup was sufficient to lift the 4-quarter moving average up 0.1 percentage points to 3.5% last quarter.

As might be surmised, the improvements were widespread. The United States, the Eurozone and Japan all posted accelerated growth during the third quarter. But the rejuvenated economic strength of the third-quarter postings reflects the monetary policies that were in place prior to the start of the credit crunch in August. The delayed reaction to higher consumer interest rates and tighter lending requirements will show up in 2008.

Debtors without borders

The ongoing credit problems got their start in August when the financial markets finally recognized that there was a speculative bubble in the U.S. housing industry, which was being largely financed by low-interest mortgages. Many times, those loans were peddled to homeowners who did not have the ability to make payments after the initial introductory “tease” rates were reset to much higher market rates.

At first, it appeared that the problem was both containable and isolated to the United States. But with the help of compliant rating agencies, Wall Street was able to repackage these mortgages as investment grade securities suitable to a wide array of international banks and financial institutions. Consequently, hundreds of billions worth of these mortgages are held outside the United States. Moreover, many countries such as the United Kingdom and Spain are experiencing speculative bubbles in their own housing markets. One of the first signs of international problems showed up at the United Kingdom’s Northern Rock Bank, which is now largely dependent on financial life support from the Bank of England. The bank’s stock suffered a 90+ percent drop in price. More recently, IKB Deutsche Industrie Bank and KFW Group, a German finance company, have signaled problems.

Even banks are having difficulties in getting loans (poetic justice?)

The ongoing credit crisis would be less troublesome if there were a clearer picture of the problem’s extent. That is, Wall Street sold the mortgages as so-called collateralized debt obligations (CDOs) to banks that held them as conduits/structured investment vehicles (SIVs) in off-balance-sheet accounts. While technically not part of the bank’s liabilities, a default on these mortgages would besmirch the bank’s reputation for a long time to come. And because the banks might be forced to bring these CDOs on their books at a time when their market values are were falling, they are husbanding their resources in order to be able to meet mandated capital requirements. In fact, HSBC Holdings, Europe’s largest bank, just recently shifted its SIV assets to their balance sheet. Banks are currently loath to lend to each other because the CDO exposure of a borrowing bank can be dicey without full balance sheet disclosure. Consequently, consumers and corporations are finding it increasingly difficult to secure loans, even at higher interest rates.

A continuing dirge of downbeat news

After a short period during which the subprime mess seemed to be contained, the meltdown now appears to have widened and deepened. First and foremost, the U.S. default rate in subprime mortgages is climbing at a time when the inventory of unsold residential housing has ballooned to more than 10 months. Naturally, prices are falling. For example, the Standard and Poor’s/Case-Shiller Housing Index shows that U.S. residential houses were worth 4.5% less in the third quarter of 2007 than they were a year earlier. Other unsettling news notes include:

• The Moody’s rating agency announced that it was reviewing the credit worthiness of an additional $119 billion worth of SIV debt.
• Citigroup, the owner of the largest U.S. bank, felt it necessary to solicit a $7.5 billion cash infusion from the Abu Dhabi Investment Authority (ADIA).
• The Bank of England cut its 2008 GDP forecast from a growth rate of 2.6% to about 2.0%.
• In an attempt to subdue rampant stock market speculation, China has frozen loans through the end of the year.
• Citibank and Merrill Lynch have, thus far, ‘fessed up’ to $22 billion of SIV losses.
• And the beat goes on...

Not all the news is bad

The arid financial landscape has received huge injections of liquidity, compliments of the world’s central bankers. In addition, the U.S. Federal Reserve Board (Fed) has lowered the Fed Funds Rate by three-quarters of a percentage point to stave off a possible recession. The recent drumbeat of bad news is likely to prompt another quarter percentage point reduction at the December 11th meeting (Custer 12/21/07 comment - this did happen). And the U.S. Treasury is attempting to orchestrate a voluntary agreement among CDO players to refrain from hiking mortgage interest rates when they are due to reset. That would, hopefully, significantly reduce the default rate. But this unprecedented plan also shows the depth of concern about the United States economy. While the actions being taken in the UNITED STATES and the other developed economies may help to prevent economic downturns, they would probably not be adequate if not for globalization. That is, the emerging-market economies are booming. Not only are they now largely self-sufficient, but their financial houses are in better shape than that of the United States. Consequently, exports to these fast growing countries, which now account for one-third of global GDP, will likely prevent a major economic downturn.

That said, all the major regions are predicted to experience slower growth next year than in 2007, as shown in (Chart 6 & Chart 7). Overall, global GDP is forecast to slow from a 3.9% rate of growth in 2006 to 3.5% this year, followed by a 3.1% nadir in 2008, as shown below. And the extended financial hangover of the debt crisis will prevent a return to 4.0% growth rates anytime soon. For 2009, a more modest 3.6% increase is predicted.

	Chart 6

	Chart 7

Solar/Photovoltaic Panel Industry – Timely News

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Happy Holidays and a Prosperous New Year!