Tag Archives: semiconductor stocks

Semiconductor Chips Are The Modern Dutch Tulip Bulbs

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.

The Stock Market’s Great Fool Theory

The current stock market is the most dangerous stock market I have seen in my 34+ year career as a financial markets professional. This includes 1987, 1999-2000 and 2007-2008. The run-up in stocks has been largely a product of momentum-chasing hedge fund algos on behalf of the large universe of sophisticated hedge funds which are desperate for performance. In the context of the obviously deteriorating economic fundamentals, the performance-chasing game has become a combination of FOMO – “fear of missing out” – and the Greater Fool Theory – praying someone else will pay more for the stock than you just paid. There’s also likely some official intervention going on as well per the chart below.

Most, if not all, of you are aware of the degree to which the Trump Administration – primarily The Donald and Larry Kudlow – are using the ongoing the trade negotiations to issue opportunistic headline statements about the progress of a potential deal at times when the market appears ready to drop off a cliff and for which Trump’s advisors know the hedge fund fund algos will respond positively. This chart shows this “positive trade war news” effect (from Northman Trader w/my edits):

The problem with relying on this device is that eventually the market will fatigue of “false-positive” news releases and revert to bona-fide price-discovery.

To see an example of the algos’ response to a headline report and the subsequent “price-discovery” action, let’s examine the release of Bed Bath and Beyond’s (BBBY – $17.99) earnings. BBBY announced its Q4 2018 earnings on Wednesday this past week after the close:

The initial headlines reported an earnings “beat.” The algos drove the stock from its $19.40 closing price to as high as $21.27 on those headlines. But in the real world, the details of BBBY’s financial statements showed that sales declined both in Q4 vs Q4 2018 and for the full-year 2018 vs 2017. Even adding back the large impairment charge which BBBY took in Q4 this year, operating income was still down 37% vs Q4 2017. The stock closed Wednesday’s extended hours trading session 18% below the headline-driven high-tick. This is what happens when reality gets its claws into the market.

The best example of the Greater Fool Theory right now is the semiconductor sector. Semiconductors are “hyper” cyclical. The companies mint money in a strong economy and come close to hemorrhaging to death in recessions. The SMH ETF has gone up 55% since the Fed/Trump began re-inflating the stock bubble. Some individual stocks have nearly doubled.

I’m sorry I missed the opportunity to get long this sector on December 26th. But, given that the move up has been in complete defiance of the actual industry fundamentals, would I have held onto a long position until today? Probably not. The momentum-junkies have been chasing the sector higher with fury based on the faith in the “second-half of 2019” recovery narrative currently preached by CEO’s who have to deliver bad results in Q1 and take a chain-saw to guidance for 2Q. But the message is: “trust me, there’s a huge recovery coming in Q3”

Semiconductor CEO’s are notorious for rose-colored forecasts for the market out in the future. Interestingly, a German wafer manufacturer issued stern, if not refreshingly honest, guidance for 2019 when it said that previous guidance was “under the condition that order intake would need to revive meaningfully in the second half of 2019.” The Company went on to explain that “because of the general economic slowdown and geopolitical uncertainties as well as ongoing inventory corrections in the whole value chain, the timing of a market rebound is not visible.”

Wafers are the building block for semiconductors and integrate circuits. Siltronic is a leading global wafer manufacturer. If Siltronic is seeing a meaningful decline in wafer orders, it means the companies that make the semiconductors and integrated circuits are flush with inventory that reflects lack of demand from companies that use chips to manufacture the end-user products.

The higher probability trade right now is to short the semiconductor sector (along with the overall stock market). Trading volume across the board is declining, standard market internals are fading and sentiment is back to extreme bullishness (Barron’s cover two weeks ago wondered, “is the bull unstoppable?”).

I can hear a bell in the distance signalling the top. I suspect a large herd of price-chasers will realize collectively all at once that there’s going to be a rush to find the next Greater Fool but the Greater Fool will be those stuck at the top.

The above commentary is an excerpt from my weekly subscription newsletter. I bought puts on a semiconductor stock today that has gone parabolic despite horrendous numbers for Q4.  I’ll be discussing that stock and a couple others this Sunday. To learn more, click on this link:  Short Seller’s Journal information