Newsletter - May 10, 2022
Oil / Commodities
Tech
- The outsized gain that turned Cathie Wood into one of the world’s most famous proponents of active fund management is quickly evaporating as some of her favourite stock picks tumble. After years of trouncing the market and just days after Wood issued a broadside against passive investing, her flagship ARKK ETF now looks set to give up all the outperformance it once enjoyed against the S&P 500 index. Wood’s strategy of picking stocks involved in disruptive innovation has fallen victim to the tech meltdown as investors flee high-priced growth shares in an environment of rising interest rates and high inflation. The fund has still gained about 127% since its inception in October 2014. But the S&P 500 had a total return of 136% over the same period. The situation worsened Monday when ARK Innovation slumped almost 10%, compared with a 3% slide in the U.S. benchmark index. The shift in sentiment against tech stocks has created a perfect storm for Wood. Rising interest rates eat into equity valuations while concerns about economic growth have cooled speculative ardour, putting shares of companies betting on new technologies particularly at risk. But the ARK Next Generation Internet ETF still handily beaten the S&P 500 since inception even after tumbling from its high.
- Sony is facing fresh challenges in its critical video game division as component shortages and supply chain disruptions risk hampering production of the flagship PS5 hardware. The company said it sold 11.5 million units of the $500 device in the fiscal year ended March 31st and would aim to sell roughly 18 million units in the current fiscal year. Both figures are well behind initial targets of 14.8 million and 22.6 million, respectively. The lower target set for the current year stems from supply chain complications because of the pandemic, including recent lockdowns in China. Shanghai, a key center for tech production, has largely been under lockdown since the start of April. The 18 million figure is currently Sony’s best estimate for current fiscal year PS5 sales. A downside risk would be if there is a further worsening in the supply chain, including the potential widening of lockdowns in China. The PS5 has been plagued by supply constraints from component shortages and logistics disruptions since the product’s release in November 2020. Microsoft’s Xbox hardware has begun to outpace PlayStation in recent months. Another concerning sign is the trend of user activity on the PlayStation platform, with both MAUs and number of PlayStation Plus subscription service declining in the March quarter. But Sony reassured that there is still positive growth despite some weakening of stay-home entertainment demand. In other news, the company has also announced a buyback plan of 200 billion yen or as many as 25 million shares over the next year, representing 2.02% of the total outstanding.
o https://www.bloomberg.com/news/articles/2022-05-10/sony-s-profit-surges-on-healthy-film-game-music-growth?srnd=premium-asia
- More banks are pulling away from SPAC deals due to risks. Goldman Sachs is ending its involvement with most of the SPACs it took public and pausing new U.S. SPAC issuances. Bank of America has also scaled back work with some SPACs and could retreat further as it evaluates its policies surrounding the deals. New guidelines from the SEC have sucked air out of the SPAC balloon observed over the past two years, which was already rapidly deflating thanks to souring markets, jittery regulators and dwindling returns for the deals. The new rule proposals would require SPACs to disclose more information about potential conflicts of interest and make it easier for investors to sue over false projections. They would also require underwriters of a SPAC to also be underwrites of the SPAC’s subsequent deSPAC. That expansion of underwriting liability poses a greater risk for investment banks. Citigroup paused IPO of new U.S. SPACs until it gets more clarity on the potential legal risks posed by the guidelines. Together, Bank of America, Goldman Sachs, and Citigroup accounted for more than 27% of U.S. SPAC deals since the start of 2021, overseeing about $47 billion of related transactions.
- Intel is rolling out new processors designed for data centers, a lucrative market where it is facing tougher competition from Nvidia and AMD. The new line-up will include updated AI chips, fresh versions of Intel’s Xeon processors and semiconductors that help connect telecommunications networks. For the first time, Intel will also sell graphics chips designed for data centers, challenging Nvidia’s turf. The new products are designed to bolster Intel’s position outside of CPUs, its traditional strength, and push deeper into AI. Cloud service providers pioneered the use of AI to make sense of the flood of data created by smartphones and internet applications. Many of those programs work better with so-called accelerators, which specialize in handling certain parts of data manipulation. Intel will start selling standalone GPUs called Arctic Sound starting in the third quarter. Dell, HPE, and Cisco all plan to offer computers featuring the new chip. The company is also updating its Habana Gaudi and Greco AI accelerators, chips that are used to train and run AI software as it makes decisions based on data received. The new version will be built on better product technology and compare favourably to Nvidia products in the market. Voice and image recognition are two applications that can take advantage of such accelerators.
- Match Group accused Google in a lawsuit of acting as a monopolist with its app store billing rules, the latest escalation in a brawl over the mobile app industry. Match Group, which operates dating apps like Tinder and OkCupid, alleged that Google breaks federal and state laws and abuses its power with a requirement that app developers use its billing system on Android devices. Google and Apple have been facing enormous legal and political scrutiny in recent years over the commission fees and billing restrictions they levy on developers in their app stores. Congress is currently weighing a bill to force Google and Apple to change their business models. In response to public pressure, Google has already halved its 30% fee for some apps. But the company said it would tighten its rules that require the use of its billing system for in-app purchases, citing security concerns. Google gave a June 1st deadline to comply or be removed from its Play Store. Match is forecasting $42 million in additional costs for Google’s Play Store during 2022. That is on top of the $100 million in payments to Google the company expects to make, citing Match customers use the company’s in-app billing system three times as often as they use Google’s own service.
- The brutal rout in tech stocks this year is shaking analysts’ confidence in once high-flying megacaps. Brokerage firms expect shares of the so-called FAANG companies in aggregate to trade for less in the next 12 months than they had projected at the start of the year. share price targets for FAANG stocks have fallen by more than 17% on average in 2022, putting that measure on track to decline over the year for the first time on record. The turnabout in sentiment reflects the bear market that has hit the Nasdaq 100 index this year, triggered by Federal Reserve interest rate increases, the impact of surging inflation on consumer demand, and supply chain snags, all of which have fuelled fears of an economic slowdown. There is a massive change to how companies are being valued, setting a reality that interest rate hikes and runaway inflation will continue to impact prospects of high-growth companies. While some tech stocks are facing earnings challenges, the issue in this current market rout is not so much earnings but valuations. It is starting to feel like the market has had enough with stocks that were trading at excessive valuations.
- In the two decades since the dot-com crash, investors have been bracing themselves for another bubble to burst. Yet year after year, tech firms like Facebook and Google continued to enjoy uninterrupted expansion and unwavering faith among investors that it would continue. Even the financial crisis of 2008 barely registered a blip. But now, there is serious talk among entrepreneurs and investors that the correction everyone feared might finally be happening. Growth stocks that have extended a beat and raise have not been able to dodge the fate of a selloff. Given how intrinsically technology is woven int our lives, and how it will pioneer new avenues through AR, streaming services, AI and more, the broader tech boom of the past two decades seems set to continue in the long-run. But investors must navigate through some uncertainty first. The tech-heavy Nasdaq 100 has already dropped about 23% since November 2021. That is as steep a drop as it experienced in March 2020 with the onset of global COVID lockdowns. If it keeps sliding by a couple more percentage points, it will mark the largest decline ever in a single year. FAANG stocks have lost roughly $2 trillion in value since the start of the year through May 6th. As companies hurt most by the pandemic see their fortunes swing back into positive territory, tech’s lockdown darlings are suffering from a reassessment of value that arguably looks over done for some. Signs are pointing to a mood shift among tech firms and those who invest in them. Facebook is pausing hiring, a previously unfathomable prospect. SPACs have declined in number, leading to far fewer late-stage exits for tech companies this year. layoffs are also cropping up among tech start-ups and newly public tech firms. The current declines might not be over yet, as many of the factors driving the rout – high inflation, supply chain disruptions and the long-time coming reassessment on value – promise to stick around for a bit. But with technology products plugged so deeply into our daily infrastructure, tech valuations will continue growing for the long haul. Although the current rout is painful, it will not last forever.
- Dating app Grindr has agreed to go public through a SPAC in a deal that values the combined company at $2.1 billion including debt. The dating app is merging with Tiga Acquisition Corp., which debuted in November 2020. The transaction will provide Grindr with an estimated $384 million, which the company will use to pay down debt and strengthen its balance sheet.
o https://www.bloomberg.com/news/articles/2022-05-09/grindr-to-go-public-through-tiga-spac-at-2-1-billion-valuation?srnd=technology-vp
Electric Vehicles
- Li Auto forecast second-quarter revenue that missed market expectations as supply chain snarls and surging materials costs squeeze margins. The company said Tuesday it expects sales of 6.16 billion yuan to 7.04 billion yuan for the current quarter ending June 30th, well down on average analyst estimates of 11 billion yuan. The EV maker also reported a net loss of 10.9 million yuan for the first quarter ended March 31, and revenue of 9.56 billion yuan, in line with expectations. Vehicle deliveries totalled 31,716 units. The company continues to forge towards commencing deliveries of its second model, the L9, in the third quarter.
- China car sales plunged the most in two years in April as COVID lockdowns in the auto industry hubs of Shanghai and Jilin province smashed production and kept buyers out of showrooms. Passenger vehicle sales tumbled 35.7% last month from a year ago to 1.06 million units, the biggest decline since March 2020 as the pandemic kicked in and the lowest monthly total since February 2020. Tesla was among the hardest hit, shipping only 1,512 vehicles from its Shanghai plant in April, which was closed for three weeks during the month before resuming at reduced capacity. Even now, the facility is experiencing some logistics disruptions because of the city’s long-running lockdown. The pandemic continues to drive huge consumption of automotive inventory. Without an efficient refill of resources, there is an obvious decline in retail sales due to constraint supply. Sales of new-energy vehicles in China, on the other hand, jumped 78.4% year-on-year in April to 282,000 units. Month-on-month, related sales were down by around 37%.
- Tesla’s Shanghai factory is experiencing some disruptions and may see more curbs to production this week as Shanghai’s long-running COVID lockdown continues to impact supply chains. Giga Shanghai is currently facing issues with logistics. With Shanghai largely remaining under lockdown, Tesla faces challenges for delivery of supplies and materials. Given the fluid nature of the ongoing situation, the plant may be at risk for another shutdown later this week. One of the problems stems from a shortage of wire harnesses from Aptiv, which had to stop shipping supplies from a plant that supplies Tesla and GM after infections were found among its employees. More than 15% of U.S. companies with business in Shanghai reported their operations there remain fully shut. Nearly 60% of responded surveyed by the American Chamber of Commerce in China between April 29th and May 5th who have operations throughout China said production capabilities were slowed or reduced due to a lack of employees, difficulty to get supplies, or government-ordered lockdowns.
o https://www.bloomberg.com/news/articles/2022-05-10/tesla-halts-output-at-shanghai-plant-on-supply-issues-reuters-l2zidh8r
- CATL surprised the industry after growing revenues by 154% but earnings fell 24% in the first quarter, showing how steep raw material costs were. Even with these dismal numbers, its market share stayed flat at 50%. Soaring lithium prices pushed up raw material costs for cathodes at the eight largest European and American EV producers by an average of $1,700 per car in March based on spot prices. Across the supply chain, the sudden demand surge at a much sooner thane expected pace led to an unhealthy profit distribution within the battery food chain. Yet CATL’s margin compression seems to have taken everyone by surprise. An underappreciated factor for the company, however, is its dominance of lithium iron phosphate or LFP batteries. Market share of these cheaper, lower density powerpacks is growing rapidly, with over 50% in the year to April. Before January and March, the company produced over35 gWh of batteries, or around 60% of its total, and significantly larger than its next-best peer, BYD. But even costs of making LFP batteries have grown by over 300% compared to NMC batteries’ 100% increase in March. Battery makers now need to consider who should stomach the likely persistent cost inflation, especially when they can raise prices for powerpacks.
- Stellantis said its target to sell only EVs in Europe by the end of the decade could be upended by ongoing supply chain problems that have beset carmakers. The shift to EVs will only work if the region ensures access to enough clean energy, batteries, raw materials and charging infrastructure. Stellantis seeks to introduce more than 75 fully electric models by 2030, with annual sales of 5 million vehicles. A key challenge for the shift will be to keep EVs affordable for the middle class. Otherwise, the customer base will shrink and car companies with it.
- Abdul Latif Jameel, the third largest shareholder of Rivian, has no plans to sell down its stake in the EV maker after a lockup on the stock expired Sunday. Jameel, a Saudi-Arabia-based group, holds almost 114 million shares through a subsidiary called Global Oryx Co.
- Strong sales and the yen’s historic fall are projected to boost Toyota’s profit for the recent fiscal year, with the focus shifting to whether the world’s biggest carmaker can sustain growth in the face of economic headwinds and an uncertain supply outlook. analysts estimate that Toyota will show an operating profit of 3 trillion yen for the period ended March when it reports results Wednesday. That would top the automaker’s most recent forecast for 2.8 trillion yen. Analysts are predicting a 3.4 trillion yen profit for the current year, which began April 1st. Toyota sales have remained robust in recent months. While January to March unit sales dipped 4.2% from record highs seen a year earlier, it marked a recovery from the prior quarter’s 12% decline. Those bolstered figures led the carmaker to post its second highest unit sales figure ever for the recently ended fiscal year. A weakening yen, which recently high 20-year lows, is inflating the value of profits that Toyota earns overseas.
- Lordstown Motor shares sank as much as 19% after it pushed back a deadline to complete the sale of its Ohio assembly plant to Foxconn. Lordstown postponed the transaction by four days to May 18th and said Monday it will delay investment in tooling that would lower its production costs. Foxconn made $200 million in down payments on the $230 million purchase price for the Ohio plant. That marks the second delay of a deal that had originally been set to close last month. If it is not finalized by May 18th, and the deadline is not extended, Lordstown Motors would have to pay the money back, which it does not have the cash to do so. Lordstown Motors will have to raise $150 million in cash this year, down from initial plans calling for $250 million, because of the deferred tooling investment. But without that tooling, the cost to build the battery powered Endurance truck will exceed its sale price. While production is expected to start on time in the third quarter to build the first 500 trucks, the EV maker said some of those will not be delivered until 2023.
o https://www.bloomberg.com/news/articles/2022-05-09/lordstown-shares-sink-19-on-delays-in-finalizing-foxconn-deal?srnd=hyperdrive
Consumer / Retail
- AMC, the largest movie theatre chain in the world, reported first quarter results that beat analysts’ expectations, citing the rebound in moviegoing fuelled by films like Spider Man: No Way Home. The company posted a loss of 52 cents per share, compared with the 62 cents per share loss projected by analysts. Revenue soared to $785.7 million, beating the $769.9 million of average estimates. Ticket sales rose more than fivefold from a year earlier, when movie theatres were still mostly dark due to the pandemic. But AMC is still far from the more than $1 billion wroth of tickets it regularly sold in the first three months of the year before the virus took hold.
o https://www.bloomberg.com/news/articles/2022-05-09/amc-theaters-beats-first-quarter-estimates-as-moviegoing-returns?srnd=premium-asia
China Market
- All signs point to further losses ahead for Asian equities after a four-month slump that has wiped out over $2 trillion in value. China’s COVID curbs and rising U.S. interest rates are set to exert further pressure on the MSCI Asia Pacific Index, which has fallen almost 20% from a high reached in January. That has led to the gauge trailing its U.S. and European peers by more than three percentage points since then. The rout marks a triple whammy for Asia’s investors as regional bonds and currencies also reel under the weight of a stronger dollar and a slowing Chinese economy. Bearish calls on U.S. stocks from Morgan Stanley and Goldman Sachs suggest that equities as a whole may suffer further declines before reaching a turning point. Current catalysts for turning sentiment toward Asian equities around is if China reverses its COVID Zero policy and a genuine economic reopening occurs. But that looks unlikely, as Beijing doubles down on its COVID strategy over the past week even as pressure grows for it to relax curbs that are weighing on economic growth. If China lockdowns were to extend throughout the second quarter and beyond, supply chain disruptions would meaningfully start affecting almost all global hardware companies. At the same time, foreign funds have also withdrawn a net $41 billion from shares in Asia excluding China this year. China’s deteriorating macro-outlook is a worry and policy makers have yet to fully deliver on promises of easing. Meanwhile, SEA’s markets benefit from reopening, post-pandemic recovery, higher commodity prices and still relatively accommodative central banks compared to other regions.
- China is tightening pandemic restrictions in Shanghai and expanding a mass testing seep in Beijing as officials chase the elusive goal of wiping out COVID cases in the community. Despite falling case numbers, authorities are ramping up curbs. Some Shanghai neighbourhoods have announced quiet periods where residents are not allowed to go outside and deliveries are curbed, while more people are being shipped off to government-run isolation centers under a new definition of what it means to be a close contact. The moves underscore the lengths Chinese officials will go to for a virus strategy that is leaving China isolated and out of step with the rest of the world, where COVID is now widespread. Authorities have recently expanded the criteria for close contacts in Shanghai, with people living in the same building as a positive COVID case at risk of being removed to government-run isolation facilities if they have regular daily interactions. Across the country, plunging subway travel – down 22% from a week earlier in 11 large cities – and home sales declines of more than 50% compared to a year earlier underscore the economic turmoil China faces under the COVID Zero approach.
- China’s stringent COVID Zero strategy has damaged foreign business’ confidence, with U.S. firms in the country slashing investments and lowering revenue projections as lockdowns hit operations and supply chains. More than half of the 121 companies polled by the American Chamber of Commerce in China have either reduced or delayed investment in the country, while nearly 60% of them lowered their income forecasts for this year following the latest outbreak. While China’s top leaders have pledged to support the economy, they have also defended the COVID Zero strategy that seeks to eliminate all infections. Before the latest wave of omicron-led outbreaks, China recorded $107 billion worth of net inbound foreign direct investment in the first quarter, up 12% from the same period last year. That is after it jumped by nearly a third in 2021 from 2020, as China’s control of the outbreak in those two years allowed the economy to quickly rebound, boosting profits and business activity. However, the recent increase of restrictions and growing concerns from foreign firms about COVID control policies are undermining that trend. If the lockdowns continue, they will likely further damage the prospects for economic growth and make it harder for foreign businesses to expand in the region. More than 15% of surveyed U.S. companies with operations in Shanghai reported their businesses in the region remains fully shut. Nearly 60% of the respondents who have operations throughout China said production capabilities were slowed or reduced due to a lack of employees, difficulty in getting supplies, or government-ordered lockdowns. 41% of surveyed respondents cited continuing damage from supply chain disruptions. Over 70% expect revenue or profit to be hit if the current COVID control measures remain in place for the next year. More than half of them also anticipate reducing investment and loss of expatriate staff in this scenario. Over a quarter of the companies have lost more than 30% of their foreign staff in China due to COVID restrictions and quarantines since the start of the pandemic. More than half of the respondents said the country’s handling of the pandemic has had a medium-to-severe impact on their ability to attract or retained skilled foreign staff. Nearly 40% of respondents said they were not satisfied with China’s COVID management, with top complaints over the length of quarantines, restrictions on travel to the country and lack of flights.
- Shanghai’s lockdowns are disrupting heath care services all the way in New York. Hospitals in the American financial hub is seeing a shortage of chemicals used in imaging tests. The hospital body also warned that supplies may be curtailed by as much as 80% for the next two months, even though the factory has now resumed production.
o https://www.bloomberg.com/news/articles/2022-05-09/new-york-hospitals-battle-supply-shortages-on-shanghai-lockdown
Russia-Ukraine Development
- French President Macron will speak Tuesday with Hungarian Prime Minister Viktor Orban to discuss proposed sanctions on Russian oil imports that Hungary is resisting. Ukraine’s economy is expected to contract by almost a third this year as the Russian invasion drags on. The EU is considering the issuance of joint debt to finance the country’s long-term reconstruction, which could end up costing hundreds of billions of euros. U.S. President Biden has signed into law a measure making it easier for Washington to send weapons and supplies to the government in Kyiv, while Democrats drafted a Ukraine aid package worth almost $40 billion, more than the $33 billion President Biden had requested from lawmakers last month.
o https://www.bloomberg.com/news/articles/2022-05-10/ukraine-latest-ebrd-sees-ukrainian-economy-slumping-30-in-2022?srnd=premium-asia
- Top Biden administration aides are increasingly convinced the ongoing Russia-Ukraine war could provide the U.S. with an unexpected advantage against China. U.S. officials see the conflict’s toll and the slew of sanctions placed on Moscow as leaving Russia hobbled for years to come. Combined with bolstered European defense spending, that means the U.S. may have a freer hand to accelerate its long-term shift toward China, viewed as America’s biggest future challenge. Officials acknowledged that the war’s outcome remains uncertain. And previous attempts to channel U.S. government attention toward Asia have ended up derailed by events in the Middle East and elsewhere. But even with so much of the administration’s bandwidth focused on Ukraine, the officials say they believe this time could be different. They and top lawmakers from both parties warn that Beijing is closely watching the U.S. and allied response to the invasion, drawing potential lessons for any tensions over Taiwan. The move toward Asia is seen as critical, with President Biden and his top aides saying China is increasingly trying to use its economic and military clout to bend the rules-based international order to its will.
o https://www.bloomberg.com/news/articles/2022-05-09/biden-team-sees-its-bid-to-curb-china-gaining-from-ukraine-stand?srnd=premium-asia
Market Update
- U.S. equity-index futures rallied as dip buyers emerged from the ruins of Monday’s rout, even though sentiment remained fragile over concerns about inflation and economic growth
- Haven demand eased, with the dollar halting a three-day advance and Treasuries steady
- Iron ore extended losses amid worries Chinese lockdowns will reduce demand
- Investors’ attention now turns to the U.S. April consumer-price index print on Wednesday; the numbers may provide clues on whether inflation is nearing a peak or increasing the threat of a 75 bps rate hike by the Fed, rather than the 50 bps move markets seem to have made peace with
- Oil declined below $102 a barrel; the outlook for crude remains clouded after the EU softened some proposed sanctions on Russia
- S&P 500 futures rose 1.1%
- Nasdaq 100 futures rose 1.7%
- 10-year Treasury declined 1 basis point to 3.02%
- Brent crude fell 1.2% to $104.65 a barrel
- Spot gold rose 0.4% to $1,861.41 an ounce