23 December 2022
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US large-cap S&P 500 closed 1.45% DOWN 🔻 Tech-heavy Nasdaq Composite closed 2.18% DOWN 🔻🔻Pan European STOXX Europe 600 closed 0.97% DOWN 🔻 HK’s Hang Seng Index closed 2.71% UP ▲▲Japan’s Nikkei 225 closed 0.46% UP ▲
📊 IN THE MARKETS
China stimmy, Better US growth, “shadow banking”, Tesla (him again), Chipmakers Micron-Nvidia-Intel, CarMax
📝 FOCUS
FTX: Guilty as charged! Now for SBF, the main course.Champagne Days
📖 MoneyFitt EXPLAINS
🎓 Semiconductor Companies – fabless and foundries
📊 IN THE MARKETS
Still time for that Santa Rally to kick in, but Thursday’s trading hasn’t helped, with stocks diving as the year-end sell-off resumed following a brief respite. A strong economy with bad company news combined for a nasty pre-Christmas eggnog.
Earlier in the day, however, Hong Kong stocks rose sharply after China signalled more pro-growth measures in the face of massive healthcare system hurdles to reopening, while its central bank pledged to help overcome the slow-motion train wreck that is the local property market. Factory activity and retail consumption data in November showed a deepening economic slump, hence the abrupt opening for which the healthcare system was and remains woefully unprepared. But the stock market was happy, so that’s great.
US third-quarter economic growth (the gross domestic product, or GDP) was unexpectedly revised from 2.9% UP to 3.2% while the red-hot labour market stayed… red-hot, with fewer jobs lost (weekly initial jobless claims) than expected. This fueled fears that the Federal Reserve, the US central bank, would continue its aggressive tightening. In other words, interest rates risked being higher for longer, exactly as the Fed has been saying. It’s not that the market didn’t believe the Fed (though some thought the tough talk was just that) but that they do, but think they’re wrong and risk plunging the economy into an unnecessarily deep recession.
Rates that are too much higher for too much longer may even push enormous amounts of hidden US Dollar debt (“off-balance sheet” or, more scarily, “shadow bank” debt) over the cliff, too. The Bank of International Settlements (the bank for central banks) says a growing share of global dollar users are financial customers, not banks: Pensions, insurers and hedge funds. (Remember former UK PM Liz Truss and her stupid mini-budget? The hidden and badly managed financial derivative exposure behind the LDI pension fund crisis it revealed may be a preview of things to come.)
On the bad company news front, we have Tesla, Micron (Nvidia and Intel) and CarMax.
Tesla dropped 8.88% (= US$38 billion in market value lost) as it doubled discounts on key models in the US to boost flagging sales. Not what Tesla shareholders need to hear after US$40 billion of sales from Elon Musk (yes, him again) this year along with his tortuously public distractions running his new plaything, Twitter. Purchases might be getting pushed out into next year to benefit from additional subsidies, or demand could simply be softening, with worse to come. “Tesla drifting” indeed.
(Twitter is now on track to be “roughly cash flow break-even” next year, having been previously tracking toward a “negative cash flow situation of $3 billion per year” before Musk’s cost cuts. It’s unclear if that figure was before or after advertisers deserted the chaotic platform.)
Memory semiconductor chipmaker 🎓 Micron reported quarterly EPS (earnings per share, or profits divided by the number of company shares) of a 4-cent loss against the average forecast of highly-paid Wall Street analysts of a loss of 1-cent per share. It also slashed investments, suspended bonuses and plans to cut 10% of its workforce. Basically the classic behaviour of every company in a highly cyclical industry. Every. Single. Time.
This sent the semiconductor sector down overall, including graphics chipmaker Nvidia (an AI and crypto play) – even though the businesses are quite different.
While on the subject of graphics chipmakers, faded semiconductor superhero Intel is splitting its graphic chips unit into two to better compete with Nvidia and Advanced Micro Devices. Both NVDA and AMD are fabless chipmakers (AMD spun off its manufacturing arm as Global Foundries, GFS, now the world’s third-largest.) Intel is also pushing its own foundry business to compete with TSMC, the undisputed leader in the field. Many battles on many fronts against entrenched leaders.
And in an entirely separate industry, used car dealer CarMax said it was pausing hiring, halting share buybacks and cutting costs after a, 86% plunge in third-quarter profits. The industry, which made an absolute killing during the pandemic, is struggling to sell cars above or even where they bought them, leaving huge amounts of unsold inventory on their books and in their forecourts.
📝 FOCUS
FTX: Guilty as charged! Now for SBF, the main course.
Former Alameda Research CEO Caroline Ellison and former FTX Chief Technology Officer and co-founder Gary Wang have both pled guilty to charges related “their roles in the fraud that contributed to FTX’s collapse.”
Ellison and Wang were facing up to 110 and 50 years in prison, and though white collar criminals rarely serve the entirety of their sentences, it’s a strong incentive to cooperate with authorities… i.e. rat on their former friend, colleague and accomplice. (SBF himself appeared in a US court yesterday afternoon and was released on a US$250 million bond, subject to home detention.)
What they pled guilty to was the charge that Ellison, the sultry wood nymph herself, following SBF’s instructions, manipulated the price of FTT (FTX’s made up crypto security token) by buying up huge amounts to artificially inflate its price. Wang created the “backdoor” software code that allowed Alameda to purposely –and not through errors or “poor internal labelling”– divert customer funds from FTX to Ellison at Alameda (in exchange for FTT) to do so.
(Meanwhile, Core Scientific, one of the largest bitcoin mining companies in the world, filed for Chapter 11 bankruptcy protection. The share price is down about 99% since it went public in January by getting injected into a SPAC (special purpose acquisition company, a blank cheque company.) Core Scientific estimates both its assets and its liabilities at between $1 billion and $10 billion. Wide ranges. Other mining firms like Argo and Greenidge have also recently discussed bankruptcy as the mining sector remains squeezed between the sharp decline in bitcoin prices this year and the rising cost of both power and borrowing. It joins other crypto companies like Celsius, Voyager Digital, FTX, BlockFi and probably Genesis in filing for bankruptcy this year, and may not be the last. And we’re back to FTX.)
Champagne Days
In yet another sign that the very wealthy live on another planet, Champagne sales are expected to reach a new record, with prices and volumes rising despite the soaring cost of living and impending (or recently arrived) recessions around the world.
Even with investment bankers getting fired and their bonuses slashed, and crypto bros back to offering “fries with that”, Rolex Daytonas have a waiting list of over five years, sales and profits at Hermès, Gucci-owner Kering and Cartier-owner Richemont have soared while Porsches and Ferraris (both now listed) are racing off the forecourts. And the richest man in the world is now Bernard Arnault, the chairman and CEO of LVMH.
Rising inequality seems to benefit the luxury sector in two ways. Obviously, the rich get richer and the wealthiest will not be impacted on the margin by changing costs at all. Prices of luxuries are not calculated as manufacturing costs plus a small margin on top.
Over the past five years, luxury-goods consumers in the West have become younger. One reason for that seems to be that as housing becomes ever more unaffordable relative to income, younger people are forced back into living with their parents. Small and not-so-small luxuries become affordable again with rents, mortgages and food costs basically disappearing.
Champagne all round!
And with that, we bid you and 2022 farewell as The MoneyFitt Morning takes a much-needed and hopefully well-deserved break to recharge and prepare for an amazing year ahead. See you again on January 2nd 2023!
Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.
📖 MoneyFitt EXPLAINS
🎓 Semiconductor Companies… Fabless and Foundries
Semiconductors are the basic building blocks of an ever-widening range of electronic products, far beyond just computers and electronic items. The word’s often used interchangeably with “microchips” or just “chips.”Semiconductor companies generally focus on one of two major product groups1) memory chips (DRAM etc, not storage – e.g. Samsung, Micron) and 2) logic microprocessors (CPUs and GPUs – e.g. Intel, Nvidia) though there are many others. (Semiconductor equipment makers are quite separate – e.g. ASML, AMAT, Tokyo Electron.)But there is another distinction: Whether or not they have their own factory (fabrication plant, or “fab”) or not (“fabless”, where they just do the design, such as Qualcomm, Broadcom, Nvidia… and Apple.)A fabless semiconductor design house needs its chips built by a contract manufacturer or “foundry” which invests enormous sums in its plant, equipment and, more importantly, people and processes. TSMC is by far the largest, most advanced and most profitable foundry in the world.
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