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Morgan Stanley downgrades high flying chip sector to sell: ‘Indicators are flashing red’

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A technician inspects a 300mm silicon wafer at the Applied Materials Maydan Technology Center in Santa Clara, California.

David Paul Morris | Bloomberg | Getty Images

A technician inspects a 300mm silicon wafer at the Applied Materials Maydan Technology Center in Santa Clara, California.

Semiconductor stocks have soundly outperformed the market for years, but Morgan Stanley is now warning the red-hot sector has topped out.

The firm lowered its rating to cautious from in line for the semiconductor industry, citing rising chip inventory levels. The cautious ranking is Morgan Stanley’s lowest rating and means its analyst believes the sector will underperform the market over the next 12 to 18 months.

“The semiconductor cycle is showing signs of overheating. … Cyclical indicators are flashing red and any contraction in lead times and/or demand slowdown could lead to a significant inventory correction,” analyst Joseph Moore said in a note to clients Thursday. “Furthermore, elevated inventory and stretched lead times leave no margin for error as any lead time adjustment or demand slowdown could drive a meaningful correction. Risk/reward is the poorest it has been in 3 years.”

The iShares PHLX Semiconductor ETF is up 12 percent year to date through Wednesday compared with the S&P 500’s 7 percent return. Moore noted the PHLX Semiconductor Sector Index is up about 200 percent over the last five years compared with the market’s nearly 70 percent gain.

The analyst said inventory levels at chip distributors are at a 10-year high.

As a result, Morgan Stanley’s median earnings per share estimates for chip stocks are 2 percent below the Wall Street average for the second half of this year and 4 percent below the consensus for 2019.

“Given the risks we see to semiconductor companies from an overheated semi cycle, we have been conservative in our estimates for broad-based companies,” Moore said.

In terms of individual stocks, the firm is lowering its rating to equal weight from overweight for Applied Materials. Morgan Stanley also reduced its rating to underweight from equal weight for On Semiconductor.

— CNBC’s
Michael Bloom
contributed to this story.



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Global stock market sell-off not an isolated event

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A trader works at the New York Stock Exchange in New York, the United States, Dec. 4, 2018. 

Xinhua News Agency | Getty Images

A trader works at the New York Stock Exchange in New York, the United States, Dec. 4, 2018. 

The latest wave of heavy selling in financial markets is a clear sign of things to come, according to a new report from the world’s oldest international financial organization.

The Bank of International Settlements (BIS), an umbrella group for the world’s central banks, warned on Sunday that a normalization of monetary policy is likely to trigger a flurry of sharp sell-offs over the coming months.

“The market tensions we saw during this quarter were not an isolated event,” Claudio Borio, head of the monetary and economic department at the BIS, said in the report.

“Monetary policy normalization was bound to be challenging, especially in light of trade tensions and political uncertainty,” Borio added.



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Fed is missing critical inflation trend, economic forecaster worries

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A veteran economic forecaster is worried the Federal Reserve and Wall Street are looking at inflation all wrong.

According to Economic Cycle Research Institute co-founder Lakshman Achuthan, they’re largely missing a critical economic trend that shows inflation is in a downturn.

“Inflation is cyclical, and I don’t think everybody really understands that — in particular, the Fed and a lot of market participants,” he said Wednesday on CNBC’s “Trading Nation.” “They’re looking at the level of inflation, and it’s generally up there around near target. But what’s really important is the direction.”

Achuthan highlighted a chart as evidence the inflation cycle is rolling over. He believes it could have market-moving consequences because it could affect the Federal Reserve’s interest rate policy.

“This is just a couple years of inflation cycles here,” he said. “We have PPI growth now and CPI growth both sitting at around 10 and 11 month lows. It’s not simply about oil. The peak in these things happened back in July.”

Achuthan, a self-proclaimed former super bull, has been bearish this year. On “Trading Nation” last April, he turned sour on economic growth because leading indicators were pointing to a slowdown that was picking up momentum.

For Achuthan to become bullish again, he said two things need to happen: The Fed must become more aware of the inflation downturn and leading growth indicators must turn up. The Fed meets on Tuesday and Wednesday to decide whether to raise rates for the fourth time this year.

“With inflation ticking lower, they should consider stopping. But fixated on a 49-year low in the jobless rate and a 9 ½-year high in wage growth, it’s not clear that they will stop just yet,” Achuthan told CNBC by email.



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Harvard professor Roland Fryer faces reports of sexual harassment

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Harvard University professor Roland Fryer speaks at the Clinton Global Initiative in New York on Sept. 25, 2008.

Ramin Talaie | Corbis Historical | Getty Images

Harvard University professor Roland Fryer speaks at the Clinton Global Initiative in New York on Sept. 25, 2008.

A prominent Harvard University economics professor is being investigated for sexual harassment, according to a new report.

Roland G. Fryer Jr., a 2011 MacArthur “Genius” fellowship recipient, is the one of the latest powerful men to get flagged amid the #MeToo movement, which took hold last year. More than 200 men have lost their jobs or major roles as a result, the New York Times said in October.

A Harvard investigator found that Fryer was involved in “unwelcome conduct of a sexual nature” with four women who worked at Fryer’s research lab, the New York Times reported on Friday. The investigator learned that one person who made an accusation about Fryer took disability leave in response to Fryer’s behavior, according to the report.

Allegations about Fryer came to light earlier this year but Friday’s New York Times article provides new details.

One woman who worked in the lab reportedly said that Fryer regularly made inappropriate comments about women, but that his reputation for being vindictive made it difficult for people to speak up. And two women told the investigator they disapproved of how Fryer had put his crotch in the face of a woman at the lab by placing his foot on her desk, the article said.

Read the full article here.



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