☀️☕ Let’s talc about bankruptcy

1 February 2023

🐪 Happy Wednesday! Hello, February 2023. Yup.

US large-cap S&P 500 closed 1.46% UP ▲ Tech-heavy Nasdaq Composite closed 1.67% UP ▲ Pan European STOXX Europe 600 closed 0.26% DOWN 🔻 HK’s Hang Seng Index closed 1.03% DOWN 🔻 Japan’s Nikkei 225 closed 0.39% DOWN 🔻

📝 Focus

Let’s talc about bankruptcy (J&J)

📊 In the Markets

Over half of high-income Americans save NOTHINGExxon made US$6.3 million an hour last yearMaybe a soft landing, world! Even Europe! Not you, UKMore than a wee DRAM (Samsung Electronics)

📖   MoneyFitt Explains

🎓 Chapter 11 Bankruptcy 

📝 Focus

Let’s talc about bankruptcy (J&J)

Back in August last year, Johnson & Johnson announced it would stop selling its iconic talc-based baby powder globally in 2023, more than two years after it ended sales in the US and Canada. Too bad for you, international babies! 

The company’s facing over 40,000 lawsuits from consumers and their survivors claiming that the talc, a clay mineral, was contaminated with asbestos (a known carcinogen) and caused cancer, which J&J vehemently denies… though a 2018 Reuters investigation found that J&J had known for decades that asbestos was present in its talc products. J&J has already lost many consumer lawsuits and paid out many billions in damages. So in October 2021, J&J spun off a subsidiary called LTL Management (a name including neither the words “baby” nor “cancer”) and assigned all its baby talcum powder business and claims into it… and it immediately declared bankruptcy. 

 J&J didn’t tell the FDA that at least three tests by three different labs from 1972 to 1975 had found asbestos in its talc – in one case at levels reported as “rather high.”

That’s the infamous “Texas Two-Step”, a corporate move that involves filing for Chapter 11 Bankruptcy Protection 🎓 to limit the absolute amount of liability that a company would face, especially if the outcomes are uncertain. It’s not an entirely cynical move (maybe only 99%) to shirk all responsibility, as it would mean that incoming lawsuits of various sorts and from multiple different plaintiffs at different times could potentially be dealt with more fairly and in a more organised way by a specialised bankruptcy judge in terms of financial compensation. And it would actually be funded by the parent company J&J to the tune of US$61.5 billion, the value of J&J’s consumer business after stripping out the baby-cancer-talc-lawsuit business. (At the time of the Two-Step, J&J had a AAA credit rating and US$31 billion in cash and marketable securities, which was plenty.)

The baby-cancer-talc-lawsuit claimants objected and said they were entitled to regular trials and that J&J should face their lawsuits individually in civil courts (with potentially much larger punitive damages added to the claims). The bankruptcy court disagreed, but the claimants appealed and on Monday won in a federal court, which said that:

“Because LTL was not in financial distress, it cannot show its petition served a valid bankruptcy purpose and was filed in good faith,”

J&J will appeal this decision to the Supreme Court. Either way, its family-friendly image has taken a beating. Another giant company with a familiar name, Post-It Note maker 3M, is also trying to use the Texas Two-Step to resolve the largest mass tort litigation in US history (230,000 personal injury claimants), related to allegedly faulty Combat Arms earplugs causing hearing loss among US soldiers.

(As an aside, The American Academy of Pediatrics has for over 40 years recommended against using baby powder, not for the talc/asbestos connection but because the tiny particles of talc can be easily inhaled and potentially cause shortness of breath, obstruction of the airways and serious lung damage with some babies developing pneumonia and respiratory failure from inhaling the powder.)

📊 In the Markets

What the US central bank, the Fed, watches and battles is consumer price inflation, but what it worries about (to oversimplify massively) are labour costs, which increased at their slowest pace in a year in the fourth quarter as wage growth slowed down – this made traders happy heading into Wednesday’s Fed interest rate decision. Even though the labour market remains tight, the Employment Cost Index, the broadest measure of labour costs, rose only 1.0%, slightly lower than expected. (The ECI shows compensation per employee hour worked in terms of money wages and salaries, including noncash fringe benefits and represents labour costs for the same jobs over time.) The concern is that higher wages push up costs, which turn into higher prices, which leads employees to demand higher wages and on and on. 

Loads of results before, during and after trading hours, along with other news, like PayPal axing 2,000 workers (7% of its total), China automaker Geely looking to list its British luxury Lotus cars unit on NASDAQ and parcel delivery company UPS forecasting a recession.

SNAP’s are worth noting – the shares plunged by 14% in after-hours trading (through the NASDAQ exchange, but outside the official daily trading period). It registered an adjusted loss of 18 cents a share compared to a profit of 11 cents that Wall Street’s Finest was expecting, so investors freaked out again (…as they did after the 3Q results miss when it fell 28% the next day, and after 2Q’s miss when it fell 39%.) After dropping 82% last year amid a dismal digital ad spend industry exacerbated by Apple’s April 2021 user tracking consent policy changes (which killed social media platforms’ ability to tailor advertising to users), traders expect worse to come in 2023. Ads account for almost all of its revenue. Snap predicted revenues would fall up to 10% this coming quarter, while Wall Street analysts had been expecting a slight uptick. Meta, Twitter and Pinterest are all facing the same headwinds.

Meanwhile, Gautam Adani’s US$2.4 billion share sale ended up fully subscribed as friendly investors pumped funds into his flagship Adani Enterprises, with 92% of the offer sold in the face of Hindenburg Research’s scathing report.

Over half of high-income Americans save NOTHING

It’s not how much you earn, it’s how much you keep that matters.

Over half of US consumers earning more than US$100,000 are living paycheck to paycheck, meaning they’re managing to pay their bills, but that’s it. This was up from 40% just a year earlier. These are high income earners… US$100k a year is double the average US income… and over half are saving and investing NOTHING. (That’s the top 17% of American workers, or 21 million people.)

And one-third of them are struggling to pay their bills as they come due, according to PYMNTS in their latest survey, up from a quarter (of a smaller number) a year earlier.

More broadly, close to two-thirds of all Americans overall were living paycheck to paycheck at the end of last year, up from 61% the year before, and of those nearly 40% were struggling to pay their bills.

Exxon made US$6.3 million an hour last year

Exxon Mobil posted a US$12.75 billion fourth-quarter net profit, a billion dollars under the best efforts of Wall Street’s Finest, but still ended up with US$55.7 billion for 2022, a historic high for the Western oil industry backed by windfall gains following Russia’s invasion of Ukraine.

Given the correction in oil prices and halving in European gas prices, Big Oil may be peaking after two years of phenomenal growth and mega profits. However, it will still be raking in money for quite some time, rewarding shareholders with dividends and buybacks. (Rival Chevron last week said it plans to buy back US$75 billion worth of its shares and hiked its quarterly dividend.)

Maybe a soft landing, world! Even Europe! Not you, UK

The International Monetary Fund raised its 2023 global growth outlook slightly thanks to “surprisingly resilient” demand in the United States and Europe, easing energy cost pressures and China’s reopening economy. The IMF upgraded its world GDP forecast by 0.5 percentage points to 3.2% global growth in 2023. Note that the IMF matters (a lot!) but doesn’t have any data that isn’t available to the rest of the world, well resourced (and well-paid) Wall Street analysts included.

The “outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining,”

… But not you, Britain. The IMF sees the UK economy shrinking by 0.5%, the only large economy expected to shrink, thanks to “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets” and exacerbating a cost-of-living crisis. The previous forecast for 2023 was a 0.2% decline. Even Russia is expected to do better.

Meanwhile, the Eurozone economy grew in the final quarter of 2022, though only just, clocking in 0.1% growth from the third quarter. Not a recession is not a recession! I’d take that.

More than a wee DRAM (Samsung Electronics)

Samsung Electronics, a giant semiconductor and consumer electronics conglomerate and South Korea’s biggest company, reported earnings in 4Q of US$3.5 billion, its lowest quarterly profit since 2014, driven largely by memory chip prices falling by double-digit percentages in 2022 (though the company also makes smartphones, displays, fridges and ovens etc.) Samsung is the third largest semiconductor company on earth, after Nvidia and TSMC, with a market value (number of shares X share price) of US$340 billion.

But what was striking was that even in the current, very painful memory chip (DRAM) industry downcycle, the company said it would stomach further pain by continuing to invest for the mid to long term and will maintain capex levels similar to 2022’s. Breaking ranks with its smaller industry peers, the world’s biggest memory chipmaker said it had no plans to reduce DRAM production even in the face of plummeting prices after massive industry over-expansion during the pandemic when demand went through the roof. Historically, the DRAM sector has been among, if not the most, cyclical tech subsector.

By using its scale, deep pockets and continuing to invest in R&D, Samsung looks like it is seeing a good opportunity to not only increase market share but position itself for even greater technological and manufacturing leadership going into the next upcycle against the likes of SK Hynix and Micron.

📖 MoneyFitt Explains

🎓 Chapter 11 Bankruptcy   

When a distressed company, usually one with far too much debt, “files under Chapter 11” of the United States Bankruptcy Code, it means its assets are “protected” from creditors in the sense that the company is allowed to maintain control over its business or property while it reorganises its finances so it can repay its debts over time. Operations are heavily restricted, and the company may have to sell some of its assets.This way, it can help save jobs and avoid liquidation, though in some cases, it may just be a matter of time before it happens anyway. (In a liquidation, or Chapter 7, the company is wound up and ceases to exist, with all remaining assets after expenses and taxes divided fairly among creditors. Only what is left over, if anything, would go to the shareholders.)The company or person owing money is called the “debtor” and the companies or people who are owed money are called the “creditors.” Creditors include the taxman (always the taxman), any banks that lent money, suppliers and employees, but not shareholders.Any reorganization plan must be in the best interest of the creditors (not the shareholders) and may involve a court-appointed change of management to do so.

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