Citi’s $1.3 million autocalls on Semiconductor ETF to face industry headwinds, contrarian says

By Emma Trincal

New York, June 18 – Citigroup Global Markets Holdings Inc.’s $1.3 million of 0% autocallable barrier securities due June 15, 2023, linked to the VanEck Vectors Semiconductor exchange-traded fund come as the industry is already in a downtrend, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

“This may not be the best time to buy,” he said.

The notes will be called at par plus a premium of 15.7% if the ETF closes at or above its initial level on June 17, 2022, according to a 424B2 filing with the Securities and Exchange Commission.

If the final level of the ETF return is positive or flat, the payout at maturity will be par plus 1.25 times the ETF return. The payout will be par if the final level of the fund is less than its initial level but greater than or equal to the barrier level, 90% of the initial level. If the ETF finishes below the barrier level, investors will be fully exposed to the decline of the ETF.

Volatile underlying

“The call in one year is unlikely,” he said.

“You’re starting at such a high point.

“The big danger is to buy at these elevated prices. The 10% barrier is almost nothing if we go back to recent lows.”

If the share price was to revisit its $216.14 low of March, the decline would be of about 14%. If it fell back to its September low of $162.44, the price would be 35% lower, he said.

The fund peaked in Feb. 16 and has exhibited a bearish pattern since, he noted.

“It’s an extremely volatile ETF, making lower highs since February. Most investors don’t realize that making lower highs is a bearish behavior.”

Insiders’ behavior

As a value investor, Kaplan pays attention to insiders’ buying and selling and interprets news headlines as contrarian signals.

“I’m looking at what insiders are doing, not so much the crowd,” he said.

“Right now, if you look at the various stocks in the fund’s portfolio, you’ll see record insider selling.”

The sell/buy ratio is also at a record high for many of the holdings of the ETF, he added.

“This suggests that insiders are heavily selling. This bearish behavior reflects the top executive’s perception of the industry. It’s a negative one. You can’t really ignore that,” he said.

Headlines

The bearish sentiment contrasts with the dominant news narrative, he said.

“One may not realize that we’re in a downturn because of all the noise around a so-called shortage of semiconductors, which has pushed people to buy the shares of those stocks compulsively. They’re hoping that prices of semiconductors are going to explode. They have it backward. We’re heading toward a massive surplus.

“This so-called shortage is just media talk. It’s a false narrative. We’re just seeing prices fluctuating due to natural causes. The shortage cycle was brief and is now behind us,” he said.

Pandemic-driven demand

Kaplan explained why the fund saw large inflows last year. Growing number of American workers were forced to stay at home during the pandemic.

The stay-at-home orders pushed up the prices of remote-work stocks from technology to communication services and from internet to semiconductors.

“Demand for computers went up a lot last year. Companies bought devices for their employees. People upgraded their own equipment,” he said.

“There was an unexpected need to buy all kinds of tech with people working from home.”

Frantic buying

But the lockdowns also fueled recession fears, which led manufacturers to cut back, he added.

“People bought ahead in a frenzy. By the end of last year, beginning of this year, prices were way out of line.”

That’s when the shortage fears influenced manufacturers as well. Obligated to plan ahead they decided to ramp up production in January, he said.

“At this point, equipment has already been upgraded. People have already purchased all kinds of devices. They’re going to be buying much less.

“When the media talk about shortage, they are projecting the recent past.”

“Smart people – the insiders – have already figured out what’s going on.”

The growth in demand was a rare and short-lived occurrence similar to the heavy buying of toilet paper during the lockdowns, he said.

“Semiconductors will get very cheap. I expect the ETF to continue to drop, and it’s going to drop a lot more,” he said.

Leading indicator

Kaplan’s outlook for the ETF was not optimistic.

“The two-year period for this note is not ideal. We may perhaps get to a bottom in 2023 or 2024,” he said.

Semiconductors are a leading indicator. They tend to fall and rise ahead of the broader market, he noted.

The ETF for instance hit a low in November 2008, four months ahead of the S&P 500 index bottom.

“The S&P 500 has made higher highs since February, but the semiconductor ETF has not,” he said.

It’s impossible to predict by how much and for how long semiconductors will remain in a bearish cycle.

Bear territory

But for Kaplan, the bear market in this industry started in February.

He drew a parallel with the dot.com crash.

“Going back to early 2000, everybody was buying a computer, many for the first time. People wanted to use the internet. The same story of a supposedly shortage in semiconductors was being told exactly the same way at the time.”

Then came the crash. From March 2000 to October 2002, the ETF dropped 84.4%.

“I’m not saying it’s going to drop 85%. But the timing of the notes ending in June 2023 doesn’t seem too favorable,” he said.

If the current bear market for the ETF was to last as long as the one seen in 2000-2002, the underlying of the notes may fall to its lowest point around the fall of 2023.

“This trade is coming out at a particularly bad time, close to the bottom of the cycle,” he said.

“If it was a five-year, it would be a different discussion.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on June 15.

The Cusip number is 17329FYY4.

The fee is 0.9%.

© 2015 Prospect News.
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