New China ban threat puts U.S. chip-equipment makers at forefront of tech stock rout



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Chip equipment makers led technology stocks lower Tuesday following reports that U.S. sanctions could spread to businesses like Semiconductor Manufacturing International Corp., China’s largest chip fabricator.

Shares of KLA Corp.
KLAC,
-7.74%
,
Lam Research Corp.
LRCX,
-6.86%
,
and Applied Materials Inc. AMAT all fell more than 6% as U.S. stock markets opened on Tuesday following Labor Day holiday weekend, while the PHLX Semiconductor Index SOX was down nearly 3%.

Over the weekend, reports surfaced that SMIC could be added to a U.S. “entity list” like telecom equipment maker Huawei back in May. On Monday, when U.S. markets were closed, SMIC
981,
+3.07%

shares dropped more than 20% in Hong Kong trading.

Meanwhile, the U.S. tech-heavy Nasdaq Composite Index
COMP,
-2.33%

was down 2.6% and the S&P 500 index
SPX,
-1.50%

was off 1.8% Tuesday.

Investors may be worrying that SMIC is just another one of many Chinese companies to get added to the list, given President Donald Trump’s recent bellicosity toward Chinese-owned apps TikTok and WeChat .

“Will the Trump Administration stop with only Huawei and SMIC?” speculated Evercore ISI analyst C.J. Muse in a Tuesday note. “Hard to say,” he said, warning that other chip makers in China could be next. Should the potential ban be limited to SMIC, then chip-related stocks have been oversold, Muse said.

Tech stocks have been getting battered since last week, when the tech sector gave up in two sessions at least half of seven week’s worth of gains from a strong earnings season .

Morgan Stanley analyst Joseph Moore said adding SMIC to the list “certainly would be a negative impact to our semiconductor capital equipment coverage”. Moore noted that SMIC had plans of spending $6.7 billion in capital equipment this year alone.

“The bigger issue is that the China risk factor for semiconductor capital equipment continues to grow, as U.S. Commerce Department actions continue to impact new areas,” Moore said.

Susquehanna Financial analyst Mehdi Hosseini took a much less fearful view of the development, remarking that “policy has also proven a double edged sword as efforts of the past few years in isolating China have not really proven a winning strategy”.

Hosseini said “with secular trends suggesting a bright future for chip consumption and thus [semiconductor capital equipment], especially as more of the demand shifts to cloud/commercial end markets, the pull backs caused by such headline risks can also offer a buying opportunity, in our view.



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Weekend reads: An early warning sign for Tesla’s stock


The tech-heavy Nasdaq Composite Index, after a long and steady rally this year, suffered its biggest two-day loss since mid-March to close out the week.

Before those declines, there were warning signs from Wall Street analysts who ordinarily shy away from rating any stock a “sell.” Shares of Tesla
TSLA,
+2.78%

had more “sell” ratings than “buy” ratings, and so did 62 other stocks in the Russell 1000 Index
RUI,
-0.85%
.

William Watts explains why it’s too early to call the tech-stock decline a correction.

Related Tesla and tech stories:

• Tesla’s stock story is one of newbs and rubes — but not quite the way you think it is

• Tesla’s stock sinks again to kick off a correction after disclosure of another large seller

• After Apple and Tesla stock splits, read this before jumping in

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Weekend reads: Following Tesla and Apple, more stock splits are coming and they can help you make money


When companies’ share prices move very high, some consider splitting the shares so that the lower prices will attract more investors. This can be a positive for stock performance over the long term.

Tesla Inc.
TSLA,
+1.83%

will split its stock 5-for-1 on Aug. 31 and Apple Inc.
AAPL,
-0.08%

will complete a 4-for-1 split the same day.

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SPX,
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BUXX,
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Foot Locker got a Q2 boost from government stimulus but Q3 could be a different story, analysts say


Foot Locker Inc. shares jumped 7.8% in Monday trading after the athletic retailer said it expected better-than-expected fiscal second-quarter earnings, but analysts are concerned that once the government stimulus funds dry up, so will demand.

For the second quarter ending August 1, Foot Locker
FL,
+1.78%

expects same-store sales to rise 18%. Earnings per share are expected to be 38 cents to 42 cents, and adjusted EPS is expected to be 66 cents to 70 cents.

The FactSet consensus was for a same-store sales decline of 23.6% and a loss of 40 cents per share.

“As we continued to reopen stores throughout the quarter, we saw a strong customer response to our assortments, which we believe was aided by pent-up demand and the effect of fiscal stimulus,” said Richard Johnson, chief executive of Foot Locker, in a statement.

Foot Locker is scheduled to report fiscal second-quarter earnings on August 21.

See:Versace parent Capri Holdings and Ralph Lauren slump as luxury sales takes a hit during pandemic

“While encouraged to see Foot Locker take advantage of a better near-term environment, the results directionally do not appear surprising given several tailwinds during May-to-June (pent-up demand, fiscal stimulus) which were well documented by others (Hibbett Sports/NPD Group) and seem likely to prove temporary,” wrote Baird analysts led by Jonathan Komp.

Hibbett Sports Inc.
HIBB,
+1.07%

gave a business update in July that shows second-quarter same-store sales on track for a 70% same-store sales increase.

Still, Baird analysts note a recent slowdown in sales at major retailers and brands, including Foot Locker, after a strong June and early July.

“We also are uncertain at this stage of how potential executive actions cutting the weekly federal unemployment payout to $400/week from $600/week previously and providing the option for a temporary payroll tax holiday through year-end (likely less impactful than Cares Act checks) may impact overall spending, with [Foot Locker] in our view highly sensitive to discretionary spending conditions,” Baird wrote.

Baird rates Foot Locker stock neutral with a $29 price target, up from $24.

A Stifel report also shows that athletic spending is likely tied to government stimulus over the coming months, with sports and lifestyle stocks remaining “largely rangebound” after reporting their most recent earnings.

“Underwhelming response from the market, we believe, reflects indications that the consumer recovery has hit a glass ceiling in July and August,” wrote analysts led by Jim Duffy. “Further stimulus is needed to support consumer discretionary fundamentals through an unconventional back-to-school period and holiday.”

See:The back-to-school season will be a ‘dud’ one analysts says, but the NRF is forecasting a record breaker

For the near-term, Stifel analysts favor names including Nike Inc.
NKE,
-0.38%

, Lululemon Athletica Inc.
LULU,
-2.68%

, Crocs Inc.
CROX,
+0.21%

and Yeti Holdings Inc.
YETI,
+0.04%

Raymond James analysts are more upbeat about Foot Locker’s preannouncement.

“Consumer demand is hot right now and not just in the United States due to brand strength in Nike’s basketball/running sneakers (Air Force One and Air Jordans), growing usage athleisure and comfort apparel, pent-up demand from deferred spending in March and April, stimulus checks, and other competitors remaining closed,” wrote Matthew McClintock.

“We believe Foot Locker should be the dominant beneficiary of Nike’s decision to focus on a few global key retail partners and the COVID-19 pandemic likely accelerated Nike and Foot Locker’s partnership.” 

Raymond James rates Foot Locker stock outperform with a $35 price target, up from $30.

Foot Locker stock is down 22% for the year to date while the Consumer Discretionary Select Sector SPDR ETF
XLY,
-0.36%

is up 13.5% and the S&P 500 index
SPX,
-0.98%

has gained 3.7% for the period.



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This $20 billion bond fund produced outsized returns by capitalizing on market turmoil, and is set to do it again


With bond prices high and yields low, an income-seeking investor might wonder if it is even worth owning a bond fund these days.

There are several reasons, underlined by the performance and characteristics of the Guggenheim Total Return Bond Fund, along with the possibility that interest rates may keep falling and stay low for many years.

This year has turned out to be a paradise for borrowers, with record-low interest rates in the U.S., but it has also become a difficult environment for fixed-income investors. You simply have to get used to much lower yields than you enjoyed in years past.

Then again, money managers can take advantage of market turmoil to scoop up discounted securities, setting up gains and relatively good yields for the long term.

Anne Walsh, chief investment officer for fixed income at Guggenheim Investments, explained how the $19.6 billion Guggenheim Total Return Bond Fund
GIBAX,
-0.10%

has outperformed its benchmark by a wide margin this year. She co-manages the fund with Scott Minerd, Guggenheim’s chairman and global chief investment officer, and Steven Brown, senior managing director of the firm.

First, here’s how the fund’s Class A
GIBAX,
-0.10%

and institutional shares
GIBIX,
-0.13%

have performed, with dividends reinvested, against its benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, and three exchange traded funds that aim to track the same benchmark:

Ticker

Total return – 2020 through July 31

Total return – first quarter, 2020

Total return – second quarter, 2020

Average return – 3 years

Average return – 5 years

Guggenheim Total Return Bond Fund – Class A

GIBAX,
-0.10%
11.53%

2.97%

5.63%

6.16%

5.52%

Guggenheim Total Return Bond Fund – Institutional

GIBIX,
-0.13%
1.68%

3.08%

5.70%

6.45%

5.86%

Bloomberg Barclays U.S. Aggregate Bond Index

7.72%

3.15%

2.90%

5.69%

4.47%

iShares Core U.S. Aggregate Bond ETF

AGG,
-0.11%
7.69%

3.10%

3.08%

5.62%

4.39%

Schwab US Aggregate Bond ETF

SCHZ,
-0.07%
7.87%

2.03%

4.29%

5.62%

4.38%

SPDR Portfolio Aggregate Bond ETF

SPAB,
-0.06%
7.64%

3.33%

2.77%

5.61%

4.38%

Source: FactSet

What really stands out this year is the fund’s second-quarter performance. The Federal Open Market Committee lowered its target for the federal funds rate to a range of zero to 0.25% on March 15, and also announced it would increase the size of its balance sheet by buying bonds. The Federal Reserve’s massive bond-buying activity has also pushed down long-term interest rates. Ten-year U.S. Treasury notes
TMUBMUSD10Y,
0.568%

were yielding 0.55% on July 31, down from 1.92% on Dec. 31.

Taking advantage of the turmoil in March and afterward

During an interview, Walsh explained how the fund has outperformed this year. At the end 2019, the fund was “very conservatively positioned,” with a high percentage of the portfolio in U.S. government bonds and only about a third in corporate bonds, she said. The portfolio had almost no securities that lacked investment-grade ratings. There were two reasons for such a position: Walsh and her team thought that with long-term interest rates already low, investors “weren’t compensated for risk,” and “there were signs of a coming recession.”

Walsh expected “a risk-off event,” a period during which investors would sell corporate bonds in a panic, setting up a buying opportunity. The previous major event of this type had been the credit crisis of 2008, with “some mini-cycles in 2011 and 2016,” she said.

Anne Walsh, chief investment officer for fixed income at Guggenheim Investments.


Guggenheim Investments

So after taking advantage of the market turmoil starting in March of this year, by selling highly liquid government securities and buying discounted corporate bonds, as well as asset-backed securities with attractive yields, Walsh said the portfolio is now about 60% corporate bonds, with 10% of that portion securities with ratings that are below investment grade. (The fund’s total portfolio is typically at least 80% investment-grade securities.)

Prices for residential mortgage-backed securities fell during March, as investors feared loan default risk. But this is another area where the market reality can outweigh investors’ worries. The U.S. housing market is now on fire, with homes in many markets not only selling immediately, but having their prices bid considerably higher than the asking prices. This action was described in a recent New York Post article.

The Guggenheim Total Return Bond Fund’s class A shares have a 30-day SEC yield of 1.91%, while the institutional shares have a yield of 2.27%. Those yields might seem low, but they are very good compared to 10-year U.S. Treasury notes (0.52% early on Aug. 4) and a yield-to-maturity of 1.07% for the Bloomberg Barclays U.S. Aggregate Bond Index, according to FactSet.

Walsh discussed the fund’s “carry advantage,” which means the higher rates are locked in for a relatively long time. The weighted average effective duration for the fund as of June 30 was 7.4 years, compared to 6.0 years for the index.

Looking ahead, she expects more buying opportunities as we head into the November elections, because of investors’ uncertainty.

Dire prediction

Lengthening the fund’s duration points to the Guggenheim team’s macroeconomic expectations. Walsh said the firm’s “base case” was that an economic recovery from the effects of the pandemic would take two to three years, with a “permanent change” for retail and other industries affected by the accelerating transition to online commerce.

And that long recovery means even lower interest rates. Walsh expects the yield on 10-year U.S. Treasury notes to fall further to around 40 basis points “in fairly short order.” The Guggenheim team’s longer-term prediction is for the 10-year yield to go negative by 2022.

Fund’s advantage

Walsh said Guggenheim is “unique in the industry” in its team approach to constructing and managing income portfolios, in contrast to “a lot of other asset managers that have a star system,” in which one portfolio manager who pretty much makes all the important decisions on strategy and portfolio makeup.

In a $40 trillion U.S. fixed-income market, Walsh believes “being expert in everything is beyond human ability.”

So Guggenheim has teams focusing on various sectors, asset classes, the economy, portfolio allocation and construction. This enables an “iterative process to build portfolios,” and for the team to “make much more thoughtful decisions on risk budgeting, allocation and portfolio assemblage,” Walsh said.



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