Author Archives: Scalper1

Time To Jump On The Band Wagon And Put On Some Asia Trades

Various Hedge Funds Shorting China It probably all started with George Soros’s comments during the World Economic Forum meeting in Davos, Switzerland. Where he said a hard landing for the Chinese economy was inevitable and he was, therefore, betting against Asian currencies as a result. Since then, reports are surfacing of various Hedge Funds taking on the powerful Chinese government in plays against its stocks and currency. Kyle Bass’s Hayman Capital sold most of its other investments to concentrate its exposure to China. It is 85% invested in shorting Asian currencies, including the Yuan and Hong Kong Dollar. They are playing a long term bet with a return horizon stretching 3 years. Greenlight Capital Inc. has options on the Yuan heading south and billionaire trader Stanley Druckenmiller and hedge fund manager David Tepper also have short positions against the Renminbi. Other Hedge funds mentioned by the WSJ as being short include the Carlye Group, Scoggin Capital, and ESG Short China Fund. This is happening at a time when the Chinese government is showing concerns for a Soft landing and taking on this government could prove risky as it has the largest foreign reserve holding worldwide at $3.9 trillion. The situation in China The markets at home have not had a great start to the year and economic data has not been as strong as forecast previously. Latest NFP figures came out much lower than expected and attention has been focusing on China being the catalyst as fear of a global recession begins to build. The economic slowdown in China has been gaining speed, the last two GDP growth figures were both lower than previous at 6.9% and 6.8%. The PMI index for manufacturing is currently at 48.4 and has been below 50 since July last year. Levels below 50 indicate a contracting economy. But the biggest concern for investors is that the contraction may be larger than the government controlled statistics office is actually reporting . The Chinese currency was selected by the IMF as a Reserve currency last November 30th; this was due mainly to its widespread use in international trade. The effect of the Yuan joining the select club of reserve currencies still remains to be seen but initially, it has had little impact. Capital outflows for the last quarter were down by $843 billion HML, although the average capital flow from 1998 to 2015 has been a negative $325.54 billion HML, we are still considerably low and capital flows have not been more negative since 2008. Click to enlarge Last January 12th, there was a run on Yuan short trades in Honk Kong forcing the overnight lending rate, to finance short positions, up to 66% nearly 10 times the normal rate, which fell back down to 8% the next day. Despite the firepower of the Chinese government, there are still limits to what it can do and for how long it can sustain any intervention. How to play the market It’s not easy to short sell Chinese stocks; foreign investment in Chinese A shares is not even permitted. However, you can gain exposure to Chinese equity through a number of ETFs. Each ETF tends to focus on different segments of shares. SPDR S&P 500 (NYSEARCA: GXC ) is the most comprehensive, but iShares China Large-Cap (NYSEARCA: FXI ) is the largest and most traded fund, with $4.65 billion AUM. The Yuan is fairly accessible through most online brokers and so is the Hong Kong Dollar. If futures are the preferred vehicle, then the CME also quotes USD/CNH futures. Contract size like the other FX futures is $100,000 which may be large but margins are low at CNH 15,000 for front contracts and CNH 16,100 for back-end contracts. Futures allow you to hedge your Long contract by selling another contract month. For choice, I would prefer being long the back-end and short the front. As my view is that long-term Asian currencies will depreciate but short term, they may bounce back up. If your online broker has access to the Honk Kong exchange (HKEx) then you could still gain exposure to the Chinese stock market with the use of futures. The exchange offers various indices; my choice would be for the Hang Seng Index Futures HSI, tick value is HK$50. Or MHI, the mini Hang Seng Index which has a tick value of HK$10. If you really want to gain exposure to the mainland and corporations operating there, then you should go for the CES China 120 Index. If the slowdown in the economy continues, then the Chinese government will also probably lower interest rates in an attempt to spur the economy. The government has already cut interest rates 5 times since the beginning of 2015. The Hong Kong exchange quotes 3-month HIBOR HB3 and 1 month HIBOR HB1. For choice, I would prefer buying the 3-month contract as it should feel any interest rate cut in a greater way. The notional size of this contract is HK$5,000,000 and one tick equals HK$125.00, initial margin is HK$1,820. Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: How does that look now? Thanks.

Applied Materials Loots Lam Share, But KLA Customer Heist Foiled

Applied Materials ( AMAT ) filled a Lam Research ( LRCX )-size hole in Q1 market share, but likely didn’t snag a chunk of KLA-Tencor ‘s ( KLAC ) customer base, Semiconductor Advisors analyst Robert Maire said Friday. The “zero sum game” pits Applied Materials against a Lam-KLA combination. Analysts theorize that once Lam and KLA merge — expected later this year — the duo could surpass Applied Materials as the No. 2 chip gear maker. Combined, Lam-KLA would have a $21.5 billion market value to Applied Materials’ $21.4 billion, as of Friday. ASML Holdings ( ASML ) leads with a $37.8 billion. Shares of all four rose Friday on Applied Materials’ Q1 beat and Q2 guidance surprise late Thursday. Applied Materials stock gapped up as much as 10% In early trading on the stock market today , and was up 9%, near 19, in afternoon trading Friday. Shares of Lam and KLA were up 3.5% and 2%, respectively. ASML stock was up more than 2.5%. Collectively, IBD’s 36-company Electronic-Semiconductor Equipment was up nearly 3% Friday afternoon. Applied Materials Results ‘Well Short Of Others’ Maire sees the stock rebound as temporary. Applied Materials’ Q1 was “well short of others in the industry.” Its $2.28 billion in orders and $2.26 billion in sales for the quarter ended Jan. 31 were down 6% and 5%, respectively, from the prior quarter, the analyst notes. Silicon system orders of $1.27 billion and display orders of $183 million fell 12% and 6%, respectively, from the prior quarter. But service orders of $773 million rose 1.5% sequentially and set an all-time quarterly record. Current-quarter guidance for $2.37 billion to $2.49 billion in sales,  and 30-34 cents earnings per share ex items, easily topped analyst consensus . Maire expects chipmaking tool orders to rise 25% this quarter, but suggests that 30%-40% sequential growth would be stronger. Lam’s March-quarter guidance was weak, however. “Applied Materials looks to have orders up substantially in the current quarter,” he wrote. The guidance “begs the question of whether there was some shift from Lam to Applied Materials in the current quarter.” Pacific Crest Securities analyst Weston Twigg says the math supports a market share gain by Applied Materials. Wafer fab equipment (WFE) spending fell 4% in 2015 vs. Applied Materials’ 2% year-over-year growth in silicon systems. He models 3% silicon sales growth over 2016 vs. a 2% year-over-year increase in industry-wide WFE sales. Applied Materials, however, says equipment demand will be flat in 2016 vs. 2015. Twigg maintained his overweight rating and 20 price target on Applied Materials stock. OLED Displays Tick Up Calendar 2016 will split between Nand (flash memory) and DRAM (dynamic random-access memory), Applied Materials said. Nand will dominate the first half of 2016, while DRAM, logic and foundry sales will pack the tail end. Service sales continue to “rock and roll” and will likely offset a trough in the tool business cycle, Maire wrote. But Credit Suisse analyst Farhan Ahmad sees Applied Materials’ bounding on its OLED (organic light-emitting diode) investments. OLED displays don’t have a backlight and thus are thinner than traditional LCDs (liquid crystal displays). Ahmad bumped his price target on Applied Materials stock to 23 from 22.50 and reiterated an outperform rating. OLED displays are being adopted into TVs, computer monitors, smartphones and hand-held game systems. Ahmad sees Applied Materials’ investment in OLED technology as driving 10% year-over-year growth in 2016 display sales. Applied Materials CEO Gary Dickerson told analysts during the earnings conference call that the company is “growing beyond the semiconductor.” “It is clear that the industry is becoming highly dependent on materials innovation, especially as they introduce new technologies like OLED,” he said. “This plays to our strengths and significantly expands the market.” OLED expands Applied Materials’ total addressable market by a factor of three vs. LCD, Dickerson said. Combined, OLED and LCD technologies put the display business on track to reach $1 billion in fiscal 2018 revenue, Needham analyst Y. Edwin Mok wrote in a report. Mok upgraded Applied Materials stock to buy from hold and reiterated a 22 price target.

Arista Networks’ Q4 Connects With Investors; Sellers Unplug Alliance

Starting what almost surely will be its first year with revenue of $1 billion, Arista Networks ( ANET ) connected with buyers, who drove the stock up by double-digit percentages Friday, while sellers unplugged Alliance Fiber Optics ( AFOP ), its stock falling by double digits, after both companies reported Q4 earnings late Thursday. Guess which did better. Both companies compete with bigger computer networking product makers  Juniper Networks ( JNPR ) and much bigger Cisco Systems ( CSCO ). Cisco stock was flat in early afternoon trading Friday, while Juniper was up 1%. Arista stock rose as much as 16% Friday and was up 11%, near 65, in early afternoon trading in the  stock market toda y, still 27% off an eight-month high of 88.56 set June 24. Meanwhile, Alliance’s Q4 results were hurt by cutbacks from its top customer,  Alphabet ‘s ( GOOGL ) Google. Alliance stock fell as much as 17% Friday, touching a nearly 16-month low, and was down 15% in early afternoon trading, near 12. It’s 45% off a nearly two-year high set July 24 at 22.35. Helped by Microsoft ‘s ( MSFT ) Azure public cloud, Arista said Q4 earnings jumped 51% to 80 cents per share minus items, as revenue rose 41.5% to $245.4 million. Wall Street analysts polled by Thomson Reuters expected 61 cents and $241 million. Arista provides a network operating system, data center storage and other products. Arista’s non-GAAP gross profit margin settled at 64%, near the high end of the 62%-65% range it had forecast, but that was down from the 67.4% in Q4 2014 and 69% in Q1 2014, said FBN Securities analyst Shebly Seyrafi in a research note. “Therefore, there is some downside risk on the (gross margin) line going forward,” he wrote. Still, he and other analysts said Arista had solid momentum. Arista guided the Q1 non-GAAP gross margin to 62% to 65%, and revenue at $232 million to $240 million. Analysts expect Q1 EPS to rise 14% to 57 cents, on sales up 30% to $233.48 million. Reiterating Needham’s buy rating with a 105 price target, analyst Alex Henderson said in a Friday research note that “the news should only get better over 2016. “We think the shift to (faster-bandwidth) 25G architectures will accelerate Arista’s share gains,” he wrote. “We think Arista could pick up 3-5 points of market share on a base of 12%, driving continued stronger-than-forecast growth. This company is best in breed.” Seyrafi had noted that when FBN began covering Arista in September 2014, “one of the key bear points” was that Microsoft revenue was “quite robust,” comprising 11% of total Arista sales, as Microsoft built out Azure. He thought, though, that revenue for Arista might decline after the buildout. Instead, Arista said 2015 revenue from Microsoft topped $100 million, 12% of total sales, “so sales to MSFT do not appear to be slowing down,” said Seyrafi. FBN retained its outperform rating with an 80 price target for Arista stock. So what’s happening with little Alliance Fiber Optics, where adjusted EPS crashed 80% to 5 cents in Q4, while sales fell 13% to $16.4 million? Google “plummeted from 45% of revenue to 20% in (Q4) as it sharply reduced inventory at the behest of its new (Alphabet/Google) CFO (Ruth Porat) and cut capex by 40%,” said Needham’s Henderson in a separate research note Friday. Alliance “was caught in the crossfire,” he said. “But all indications are that that’s over. Google is expected to meaningfully increase spending in 2016, and the shift to 25G architectures should strongly improve AFOP’s results. … Despite the miss in (Q4), we are maintaining our 2016 and 2017  EPS estimates and reiterating our buy rating and 20 target price.” Needham expects adjusted EPS of $1.18 for 2016, up from  95 cents in 2015. Image provided by Shutterstock .