The semiconductor stocks continued melting up last week until Intel threw some cold water on the Dutch tulip bulb price-chasing party. TXN reported Tuesday after the close. Revenues declined 5% from the year-earlier quarter. The management stated that “demand continued to slow across most markets. TXN then said Q2 revenues would drop 10% from Q2 2018. It said earnings would be down 13%. Management also explained that historically down-cycles last 4-5 quarters. With the Company 2 quarters into a down-cycle, it would seem that the “green shoots” sighted by some companies in Q1 are nowhere in sight. TXN insiders have been very heavy sellers of the stock.
The chart below is a good example of how the hedge fund algo and retail daytrader momentum chasers operate:
TXN closed around $116.50 before it reported. On the headline “beat,” TXN stock spiked up $6 almost immediately. Price-discovery then set in, as the after-hours traders dumped shares in response to the fundamental reality of TXN’s earnings report. The stock closed after-hours at $113.70, down nearly $9 from the initial reaction to the headlines.
But then on Wednesday Dutch tulip-mania gripped TXN’s stock price. TXN opened green from Tuesday’s regular close and traded as high as $118.99. This is despite the Company’s lowered guidance for the next few quarters. The last time TXN experienced a two-quarter sequential decline in revenues was in 2001 during a recession.
The only news that might have affected TXN’s stock price on Wednesday was a warning about possible further deterioration in its business that accompanied Amphenol’s Q1 earnings report. But Amphenol’s report should have affected TXN’s stock negatively. This market action is exactly like the price-chasing action in late 1999/early 2000.
Semiconductor stocks are the 2019 version of Dutch tulip bulbs. Recall the price of Dutch tulip bulbs rose to insanely high levels during the mid-1630’s, as people chased the price of Tulip bulbs higher, hoping to re-sell them for a profit. With no warning, the price crashed in February 1637.
That’s how the dot.com bubble behaved, including the sudden sell-off that began in March 2000 without any prior warnings other than common sense. I expect that is the same path that the chip stocks will follow. The chip stocks are melting-up in price in complete divergence from the underlying fundamentals. Whereas previously several companies expressed hope for green shoots in the second-half of the year, the last few companies to report (Siltronics, Nanya, TXN and Amphenol) have not mentioned the possibility of a recovery in the sector for the second half of the year.
Xilinx (XLNX) reported a “miss” on Wednesday after the close. Its stock plunged 17% on Thursday. Prior to that, the stock was trading at an insane 12x sales. XLNX’s data center business was down 12% sequentially and 7% yr/yr (the cloud growth is slowing).
Intel reported an obligatory revenue and EPS “beat.” But the market finally payed attention to guidance. INTC cut full-year and Q2 guidance. Management said customers were becoming more cautious, especially in China. Data center inventories are larger than was commonly thought. INTC also said it expected a much more difficult flash memory market. These are chips used in consumer electronics, scientific instrumentation, robotics and medical electronics. INTC stock dropped 9% on Friday.
The chip stocks are setting up for an epic sell-off. Trump can slap the Fed around like a race-horse’s ass while making juvenile demands for lower rates and more money printing all he wants. At some point the collapsing underlying economic fundamentals will remove the termite-eaten legs from beneath the market’s barstool.
The commentary above is an excerpt from the latest Short Seller’s Journal. To learn about the semiconductor stocks I’m shorting and recommending to my subscribers, please visit this link: Short Seller’s Journal information.