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Will Semiconductor ETFs See A Brighter 2016?

The semiconductor industry has been on a roller coaster ride in recent times. The space hogged investors’ attention in 2014 only to plunge the very next year. The struggling PC market took all the shine out of this segment. Two independent research firms – Gartner and International Data Corporation – validated the fact. As per Gartner, PC shipments in 2015 totaled 288.7 million units, marking an 8% decline from 2014. Meanwhile, according to IDC, PC shipments witnessed a decline that was “the largest in history ” breezing past the 9.8% drop registered in 2013. In fact, the fourth quarter of 2015 marked the fifth successive quarter of global PC shipment decline, pointing at soft holiday season sales and a shift in consumers’ PC purchase preference, per Gartner. Both firms agreed that the launch of Windows 10 in third-quarter 2015 had an insignificant impact on PC shipments during the all-important holiday season. This was because customers upgraded their existing PCs rather than buying new ones. Also, a strong greenback, higher inventories in the semiconductor and electronics supply chain are also held responsible for this decline, per the research agencies. What’s in Store in 2016? However, most research agencies expect things to improve in 2016. In any case, the wind is in favor of the broader technology sector. As a result, semiconductor, the value-centric traditional tech area should expand modestly this year, primarily in the second half. Value-oriented trading should be in focus this year thanks to a paradigm shift in global economy. Policy tightening in the U.S., an accommodative stance in most developed economies, and lack of clarity about China’s currency movements should keep value investing busy throughout this year. Secondly, IDC predicts that the take-up of Windows 10 by corporates is likely to pick up and consumer purchase will be steady by the second half of 2016. Also, attractive PCs at affordable prices, the need for higher security and improved performances will eventually drive consumers toward an upgrade. The World Semiconductor Trade Statistics (WSTS) predicts the global semiconductor market to grow 1.4% to $341 billion in 2016 and 3.1% to $352 billion in 2017. This explains that moderate optimism is prevailing around the area. All regions are expected to post positive growth in 2017 with the Americas leading the way. Also, this tech sub-sector might shoot up on the requirement of its products in emerging technology applications like tablets and smartphones despite subdued PC shipments. If this was not enough, the semiconductor space is consolidating rapidly with a number of deals announced lately. ETFs to Play The latest discussion definitely tells you to park your money in semiconductor ETFs, especially after a down year like 2015. At present, there are four regular semiconductor ETFs namely Market Vectors Semiconductor ETF (NYSEARCA: SMH ), iShares PHLX Semiconductor ETF (NASDAQ: SOXX ), SPDR S&P Semiconductor ETF (NYSEARCA: XSD ) and PowerShares Dynamic Semiconductors Fund (NYSEARCA: PSI ) . Why to Look Beyond SMH? Of these, only SMH has a Zacks ETF Rank #3 (Hold) while the other three have a Zacks ETF Rank #1 (Strong Buy). Investors should note that SMH has as much as 18.6% exposure in Intel Corp., the biggest weight of the basket. Though Intel has exposure in three other ETFs, the weight is not as much as it is for SMH. As a result, the recent underperformance by the Intel stock post earnings cast out SMH from the ‘Strong Buy’ league. Below, we highlight three other semiconductor ETFs in detail for the interested investors. SOXX in Focus This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 U.S. firms. The fund has amassed $409.3 million in its asset base. The product charges a higher fee of 48 bps a year from investors. Intel (NASDAQ: INTC ) takes the fourth spot at 7.8% of total assets. XSD in Focus This fund tracks the S&P Semiconductor Select Industry Index, holding 42 stocks in its portfolio. It is widely spread across a number of securities as none of these allocates more than 3.44% of the assets. The product has a definite tilt toward small cap stocks at 65% while the rest is evenly split between the other two market cap levels. The $196.7-million fund charges 35 bps in fees per year. PSI in Focus This fund tracks the Dynamic Semiconductor Intellidex Index, holding 29 U.S. securities in the basket. Intel makes up for 5.2% share in the basket and not in the top-three holdings. This $50.7-million ETF charges 63 bps in fees. Original Post

On Currencies That Are A Store Of Value, But Maybe Not For Long

Picture Credit: Dennis S. Hurd I get letters from all over the world. Here is a recent one: Respected Sir, Greetings of the day! I read your blog religiously and have gained quite a lot of practical insights in financial field. Your book reviews are very helpful and impartial. I request you to write blog post on dollar pegs in Middle East and under what conditions those dollar pegs would fall. If in case you cannot write about it, kindly point me to some material which can be helpful to me. Thanks for your valuable time. Now occasionally, some people write to me and tell me that I am outside my circle of competence. In this case, I will admit I am at the edge of that circle. But maybe I can say a few useful things. Many countries like pegging their currency to the US dollar because it provides stability for business relationships as businesses in their country trade with the US, or, with other countries that peg their US dollar, or, run a dirty peg of a controlled devaluation. Let me call that informal group of countries the US dollar bloc [USDB]. The problem comes when the country trading in the USDB begins to import a lot more than they export, and in the process, they either liquidate US dollar-denominated assets or create US dollar-denominated liabilities in order to fund the difference. Now, that’s not a problem for the US – we get a pseudo-free pass in exporting claims on the US dollar. The only potential cost is possible future inflation. But, it is a problem for other countries that try to do so, because they can’t manufacture those claims out of thin air as the US Treasury does. Now in the Middle East, it used to be easy for many countries there because of all the crude oil they produced. Crude oil goes out, goods and US dollar claims come in. Now it is reversed, as the price of crude is so low. Might this have an effect on the currencies of the Middle East. Well, first let’s look at some currencies that float that are heavily influenced by crude oil and other commodities: Australia, Canada, and Norway: Click to enlarge Commodity Currencies As oil and commodities have traded off so have these currencies. That means for pegged currencies, the same stress exists. But with a pegged currency, if adjustments happen, they are rather large violent surprises. Remember the old saying, “He lied like a finance minister on the eve of the devaluation,” or Monty Python, “No one expects the Spanish Inquisition!” That’s not saying that any currency peg will break imminently. It will happen later for those countries with large reserves of hard currency assets, especially the dollar. It will happen later for those countries that don’t have to draw on those reserves so rapidly. Thus, my advice is threefold: Watch hard currency reserve levels and project future levels. Listen to the rating agencies as they downgrade the foreign currency sovereign credit ratings of countries. When the ratings get lowered and there is no sign that there will be any change in government policy, watch out. Watch the behavior of wealthy and connected individuals. Are they moving their assets out of the country and into hard currency assets? They always do some of this, but are they doing more of it – is it accelerating? Point 3 is an important one, and is one seemingly driving currency weakness in China at present. US Dollar assets may come in due to an excess of exports over imports, but they are going out as wealthy people look to preserve their wealth. On point 2, the rating agencies are competent, but read their write-ups more than the ratings. They do their truth-telling in the verbiage even when they delay downgrades longer than they ought to. Point 1 is the most objective, but governments will put off adjustments as long as they can – which makes the eventual adjustment larger and more painful for those who are not connected. Sadly, it is the middle class and poor that get hit the worst on these things as the price of imported staple goods rise while the assets of the wealthy are protected. And thus, my basic advice is this: gradually diversify your assets into ones that will not be harmed by a devaluation. This is one where your government will not look out for your well-being, so you have to do it yourself. As a final note, when I wrote this piece on a similar topic , the country in question did a huge devaluation shortly after it was written. Be careful. Disclosure: None.

Should You Bet On Airlines ETF Despite Mixed Earnings?

The airline stocks have been highfliers since the second half of 2015 on dirt cheap oil prices and encouraging fundamentals. Earnings picture was also pretty decent for the space. Higher margin, lower debt, surging ancillary revenues and a host of modifications in operations helped the sector gain altitude (read: Highflier Airlines Earnings : Time for JETS ETF ). As a result, the pure-play aviation ETF U.S. Global Jets ETF (NYSEARCA: JETS ) lost just 5.5% (as of January 21, 2016) after accounting for all the global market issues. This was quite respectable when compared with the 11.7% losses put up by the broader market ETF SPDR S&P 500 ETF (NYSEARCA: SPY ) in the same timeframe ( read: The 13 Best and Most Interesting ETFs to Launch in the First Half of 2015 ). In such a backdrop, all eyes were fixed on airlines earnings this season. But sadly, major carriers fell shy of investors’ expectations. Greenback strength appears to be main reason behind this underperformance. Q4 Results in Detail The season unveiled with Delta Air Lines (NYSE: DAL ) missing on both lines in Q4 of 2015. Results were hurt by the strength in the U.S. dollar, with foreign currency movements having an adverse impact of $160 million. However, Delta’s shares added 3.3% despite the earnings miss in the key trading session of January 19. This is because the company, the bottom line of which grew 51% year over year on low oil costs, expects to generate over $3 billion in savings in 2016 on steeply plunging oil prices. This Zacks ETF Rank #1 (Strong Buy) stock has a Zacks Momentum & Value style score of ‘A’ and a Growth score of ‘B’, at the time of writing. United Continental (NYSE: UAL ) also came up with soft Q4 results this month as both earnings and revenues miss. Adjusted earnings were up substantially year over year on lower fuel costs. Revenues declined 3% on lower passenger revenues. Cargo revenues were also downhill while the other revenues improved 10.9%. However, its indicators are promising with a Zacks ETF Rank #2 (Buy), and Value score of ‘A’ and Momentum score of ‘B’. Shares also added modest gains of about 0.5% to close January 21, the day it reported earnings. Yet another leading U.S. carrier Southwest Airlines Co. ‘s (NYSE: LUV ) fourth-quarter 2015 bottom line matched the Zacks Consensus Estimate while the top line missed the same. But investors should notice that revenues grew 7.5% year over year helped by 3.3% and 119% expansion in Passenger and Other revenues, respectively. This Zacks ETF Rank #1 stock also boasts hopeful indicators of Momentum score of ‘A’ each and a Value score of ‘B’. LUV was up 0.5% post reporting earnings. Though these heavy-weight companies underperformed on earnings, the sector has seen sturdy performances by others. Alaska Air Group Inc. (NYSE: ALK ) reported earnings (on an adjusted basis) of $1.46 per share in the fourth quarter, beating the Zacks Consensus Estimate of $1.43. Earnings increased 55% year over year. Revenues of $1.38 billion were in line with the Zacks Consensus Estimate. The top line grew 5% on a year-over-year basis. The company also hiked its quarterly dividend by 38% to $0.275 per share. This star performance within the struggling pack offered the stock over 8.1% gains post earnings. ALK has a Zacks ETF Rank #1, a Value and Growth scores of ‘B’ and a Momentum score of ‘A’. Should You Buy JETS? By now, one must have realized from the indicators that the mood in the airlines industry is upbeat. The sector is in the top 4% category of the Zacks Industry Rank at the time of writing, giving strong cues of the upcoming flight in the entire industry. However, as company-specific risks seem higher, investors might play the trend via basket approach to tap the entire potential of the space. And to do so, what could be a better option other than the JETS ETF? The $46.8 million-fund holds over 30 stocks in its portfolio and is concentrated on a few individual securities, as it allocates about 70% to the top 10 holdings. American Airlines (12.46%), Southwest Airlines (12.37%), Delta Airlines (12.13%) and United Continental (10.54%) are the top four elements in the basket. Alaska Air holds the ninth position in the fund with 3.74% weight. The product charges 60 bps in fees. Link to the original post on Zacks.com