“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman
Before I saw that quote from Hussman on Twitter, I was contemplating how the trading patterns this year in bond and precious metals markets remind of the way they were trading in 2008 before the financial system de facto collapsed. Similarly, the tech stocks right now remind me of the blow-off top that occurred in tech stocks in January/February 2000 just before the Nasdaq collapsed. Whether intentional or not, the Fed has quickly re-inflated the tech bubble that was punctured in September 2018.
Semiconductor stock bubble – The tech bubble in the late 1990’s was led by the semiconductor sector and the dot.coms. 98% of the dot.coms taken public during that time are no longer around. The semiconductor industry is “hyper”-cyclical. It has a beta of 11 vs. the economy. Right now the global economy is in melt-down mode. Just ask the IMF, BIS and World Bank. The Fed and Trump have recklessly reflated the stock bubble that led to the all-time high in the stock market. The semiconductors closed at an all-time high on Friday. It’s sheer insanity given that industry fundamentals are melting down.
The semiconductors seem to be the most responsive to trade war headlines that promote optimism. But the stock prices of these companies have completely disconnected from reality. Every possible consumer-driven end-user product market that uses semiconductors is contracting. As an example, Samsung warned on Thursday that it’s Q1 profit would be down 60% from Q1 2018, citing declines in prices for memory chips and lower demand from OEMs for screens, like the OLED display that Samsung makes for Apple’s iPhone.
Samsung’s inventory is now twice the size of two of its primary competitors. One of those competitors is Micron (MU – $41.72), which admitted that its inventory had soared to 137 days and was on its way to 150+ days in the current quarter. The slashing of capex by chip manufacturers has barely begun.
Semiconductor sales fell 7.3% in February from January and 10.6% from February. Globally semiconductor sales fell across all major categories and across all regional markets (not just China) in February. In North America, chip sales were down 12.9% from January and 22.9% from February 2018 (vs. down 7.8% in February in China sequentially from January and down 8.5% from Feb 2017).
The trade war has nothing do with the sales crash in the chip industry. And the “green shoots” seen in the “blip” in China’s PMI which ignited the stock market last Monday is not confirmed by the PMI data coming from Japan and South Korea, two of China’s largest trading partners. In short, when semiconductor stocks reverse from this insane run higher, they will literally rip in reverse. DRAM average selling prices (ASP) plunged over 20% in Q1 2019. The ASP is projected to drop another 15-20% in Q2 and a further 10% drop in Q3. So much for the 2nd half “recovery” that several chip company CEO’s saw in their crystal ball during the latest quarters’ conference calls (Micron, Lam Research, etc).
Inventories of all categories of semiconductors are extremely high because the demand for the end-user products (smartphones, autos, electronics) is plummeting, which means the inventory of those products is soaring as end-user demand contracts. The best news is for shorts looking for contrarian signals is that Cramer has been on his CNBC show recently pounding the table on chip stocks. This can only mean that his Wall Street sources are trying to move big blocks of stock out of their best institutional clients.
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The commentary above is an excerpt from my latest Short Seller’s Journal. In that issue I present a detail rationale with data to explain why the U.S. economy is tanking and I provide several stocks to short, along with put option suggestions and capital management advice. You can learn more about this weekly newsletter here: Short Seller’s Journal information.
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