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Semiconductor Stocks Are Struggling. A Bottom Could Be Nearer. -- Barrons.com

Barron's · 01/06/2023 19:36

This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron's.

The Chips Are Really Down

UBS House View -- Daily U.S. UBS Jan. 6: Samsung Electronics on Friday reported a 69% decline in its quarterly operating profit, its sharpest drop in profits in more than a decade, amid slowing global demand and caution across the tech supply chain. The reporting period includes several weeks of shuttered production at Apple's primary iPhone assembly plant in Zhengzhou, China.

Our view: Supply-chain disruptions and unusually high demand for electronics during the pandemic pushed chip makers to increase memory production to record levels. Since then, sharper U.S. sanctions on China's chip sector have added to production complexities for global producers. Considering the rapid decline in profitability for global memory makers, these all mean we could see producers cut both capex and output.

We think this process may lead to a bottom in chip prices and thus bring forward our timeline for an anticipated recovery, with Asian producers leading the way. We see select opportunities in the Asia supply chain, although globally we remain least preferred on the IT sector.

Mark Haefele and Team

Fed Minutes' Hawkish Tone

The Weekly Speculator Marketfield Asset Management Jan. 5: Underpinning the negative trend for equity markets is the continued tightening of monetary policy. The [Federal Reserve's] publication of the December minutes makes it clear that the FOMC members still intend to hike interest rates in early 2023, and that the terminal rate is still open to debate.

We have been using 5.0% as a likely endpoint, but have emphasized that this is only a guideline. The committee still apparently feels that the risks of doing "too little" outweigh the risks of doing "too much," and unless economic data downshift early in 2023, the terminal rate may breach our target. The improvement of overall financial conditions (helped mostly by lower implied volatility and tighter credit spreads) was also an unwelcome development for the FOMC, which again implies things have to get worse in financial markets before monetary conditions can be allowed to ease.

Although we would resist the urge to "Kremlinize" the FOMC minutes, there was a generally harder tone to the December minutes that belied the downshift in the size of the rate hike to 50 basis points [half a percentage point]. Not surprisingly, changes to monetary policy are generally led by changes in the tone of discussion within the FOMC. Discussion remains in a hawkish stance, and it is likely to take several months before this ceases to be the case.

Michael Shaoul, Timothy Brackett

Gold and TIPS: Out of Sync

Chart In Focus McClellan Financial Publications Jan. 5: Gold prices are breaking out here in January 2023 after chopping sideways for all of December 2022. That is getting precious-metals investors excited. But there is a problem with this strength by gold. It isn't being confirmed by one of gold's fellow travelers: Treasury inflation-protected securities, and TIP, the iShares exchange-traded fund that owns various maturities of TIPS.

The neat thing about the TIP ETF is that it is well correlated to gold prices, or at least that is the case most of the time. Occasionally the two plots disagree, and when they do, that usually conveys useful information about what gold is going to do. Right now, we are seeing a bearish divergence, wherein the price of TIP trended downward in December 2022 while gold prices were trending upward. In the past, when we have seen such divergences, that has eventually meant that gold prices have to fall extra hard to get back in sync with what TIP's price has been doing.

It would be fun for gold investors if gold prices were going to start another great 1970s-style bull market. Maybe they will, someday. But right now, this bearish divergence between gold prices and the share price of TIP says that now is not the moment for that great uptrend to commence.

Tom McClellan

Greenspan on Black Swans

Alan Greenspan, former chairman of the Federal Reserve, is an economic advisor to Advisors Capital Management. The following commentary is from a year-end Q&A with him. Advisors Capital Management Covid-19 was unpredictable. Are there other black swan events you think about?

Greenspan: The black swan event I think markets, and really the world at large, ought to be most worried about is some kind of conflict erupting between China and Taiwan.

I noted in a previous article that, owing to unfavorable demographic trends, China may have reached the height of its economic influence for some time. All the while, Xi Jinping has methodically consolidated power and made himself essentially president for life. He has been fairly candid in his intention to eventually bring Taiwan back into the fold, and he may begin to feel his window is closing. I venture he would view it as a blemish on his legacy were he to leave it undone.

Taiwan has shown no willingness to acquiesce to Xi's plans, so the conditions for some type of conflict in the near future are there. The sheer amount of world trade that currently flows through that region, and the number of semiconductors fabricated by Taiwanese firms upon which the technologies we enjoy rely, make any conflict a potential nightmare scenario.

Energy Stocks' Great Year

The 22 Charts of 2022 Ned Davis Research Jan. 4: Energy stocks soared with commodities early in 2022, but as crude oil prices reversed, energy stocks continued to climb well into Q4. The S&P 500 Energy sector peaked for the year on Nov. 15, but it still rose 59% on the year and outperformed the S&P 500 by 78.5 percentage points, more than double its second-best year, 1980.

The Energy sector's weight ended the year at 5.2% of the S&P 500, up from 2.7% on at the end of 2021.

Ed Clissold, Joe Kalish, Thanh Nguyen

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January 06, 2023 19:36 ET (00:36 GMT)

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