Today you're Henry Blodget. But tomorrow? Rodney Dangerfield, perhaps. Jonathan Joseph, a Salomon Smith Barney analyst, knows the feeling. He managed to rally long-dormant semiconductor bears with a July 5 call to arms that drove the industry's leading index down 9.3%. Amid potshots from rival firms, Joseph managed for one day to galvanize investors with a contrarian report citing a host of industry-specific and macroeconomic factors. But the pendulum swung back on Joseph with stunning speed, as the chip stocks bounced back 4.5% the next day. Ironically, driving the rally was a big bullish bet on the semiconductor industry -- placed by the trading desk at none other than Joseph's firm, Salomon Smith Barney. It's unclear whether that trade -- covering some $56 million worth of the Merrill Lynch Semiconductor HOLDRs, a security that tracks the semiconductor stocks -- was executed for Salomon or for a client. But someone, either within the firm or at one of its clients, made a multimillion bet against Joseph's view. "Someone said this call is bunk," says a West Coast hedge fund trader who watched the trade post. "The irony is where the trade was executed." Salomon declined to comment, except to say Salomon is "the leader in trading semiconductor stocks. Market participants recognize and appreciate this when deciding who should execute their trades."
In his July 5 call, Joseph cut the chip sector to neutral from outperform, pointing to higher inventories, softer prices and a spike in spending as possible signs of a top. In the note, he cut his ratings on Advanced Micro Devices, National Semiconductor, Silicon Storage Technology and Texas Instruments. (Of those companies, Solly has performed recent underwriting for Advanced Micro and Silicon Storage.) The note flew in the face of months of bullish sentiment on chips and took the air out of semiconductor stocks, which had surged 66% since the beginning of the year. The next day, analysts at other firms predictably took exception, mocking Joseph's thesis in their reports like, "End of the Cycle? We Don't Think So." Firms such as J.P. Morgan and ABN Amro rebutted the analyst's comments. Less predictably, Glen Yeung, an analyst who covers semiconductor-equipment stocks for Salomon, issued a note seeking to protect issues he covers from Joseph's attack on the chip stocks. "While it is undeniable that the fortunes of chipmakers will ultimately impact equipment fundamentals ... we believe the fundamentals will get better before they get worse," Yeung wrote.
The Other Shoe
Then, on July 6, Solly's trading desk crossed 643,000 shares of the semiconductor HOLDRs, according to AutEx/BlockData, a division of Thomson Financial. Traders who watched the trade post say it was a buy, or a bet that the sector would go up. That trade accounted for nearly half of the 1.4 million shares traded in the HOLDRS that day. In the weeks preceding July 6, daily volume in the HOLDRS averaged around 200,000 shares. That Solly would be involved in a big chips trade isn't surprising. According to AutEx/BlockData, Salomon is the leading volume trader of the 16 names listed in the Philadelphia Stock Exchange Semiconductor Index. Since Jan. 1, it has accounted for 9% of all the trades in those names tracked by AutEx. The next most active firm, Morgan Stanley Dean Witter has made 8% of the trades in those names.
Whatever the story behind the big Solly block trade, Joseph isn't surprised. "Traders take positions against the analysts all the time," Joseph says. "Their loyalty is to the tape and nothing else. And I want to make clear that there is never any discussion whatsoever between the analyst and the desk before a research call is made." So far, the July 6 trade has been a good one; the HOLDRS are up 13% since then. That means those 643,000 shares are now worth about $65 million, or $9 million more than when they crossed Solly's desk. Not bad pay for a little more than a week's work.