Barron’s Weekend Summary: The new wave of US chip manufacturing reflects a paradoxical new reality
Sat, 14 Oct 2023 13:00 PM EST
Cover:
-The new wave of US chip manufacturing reflects a paradoxical new reality: Geopolitics are colliding with economics, and what’s good for one is pressuring the other, says Barron’s. The example they cite is Apple. Your next iPhone won’t be stamped Made in America. But pry open the casing in 2025 and you may see semiconductor chips that were etched into silicon in the Arizona desert. That’s because Taiwan Semiconductor Manufacturing plowing $40B into the project, aiming to crank out 600,000 wafers a year. Apple CEO Tim Cook, at a “tool in” ceremony last year, said Apple would be “proud” to be the fab’s biggest customer. That’s no coincidence. Apple is TSMC’s largest source of business, worth billions in annual revenue. Apple is looking for chip security, among many companies seeking to shore up supplies amid rising geopolitical tensions and fears over disruptions.
Interview:
-This week, Barron’s features its conversation with Henrietta Treyz, director of economic policy research at Veda Partners and, in particular, how she interprets the events in Washington DC for the benefit investors. And there is a lot to decipher these days, what with two wars, a massive buildup of government debt, a congressional spending fight, and a continued struggle over who will replace ousted House of Representatives Speaker Kevin McCarthy. Treyz has been helping investors understand the implications of politics and policy, most recently at Veda, where she is a managing director. Her advice: Know which lawmakers to watch, and understand what motivates them, to know how they will vote.
Tech Trader:
-Earnings season is coming. When it comes to tech stocks, they came out roaring in 2023, with the Nasdaq Composite rallying 32% over the year’s first six months. But the group’s momentum is gone, with the same index down 1% since June 30. The Federal Reserve has increased interest rates beyond Wall Street’s expectations. Meanwhile, the early mania over generative artificial intelligence has become more nuanced in the second half. Following the initial hype, there are concerns about the economics of AI, which involves costly investment in processors and other hardware, with an uncertain payoff. Those investments now threaten the “year of efficiency” margin improvements that Meta Platforms and other tech firms have been touting. It’s all unfolding amid new worries about the near-term prospects for corporate IT spending. Netflix kicks off the earnings parade Wednesday. Investors will likely focus on its password-sharing program, its still-nascent advertising-supported subscription tier, and the lingering effects of the labor actions in Hollywood, where actors remain on strike, even after a settlement by writers.
The Trader:
-The oil price’s response to the Gaza crisis has been largely muted even as the Israeli armed forces have launched heavy airstrikes on the densely populated territory and appear to be preparing for an imminent ground invasion of Gaza. Futures tied to the US price of crude oil spiked to around $86.50 barrel on Monday, from near $83 on Friday. That gain reversed over the next few trading days, with oil back to $83 a barrel by Thursday—meaning no additional premium for the events of the past week. That’s because, the U.S. is now a net exporter of crude and has a strategic petroleum reserve that can be used to smooth out disruptions to the global oil supply (even if it’s currently less full than usual). What’s more, the initial attack and response have done little to affect the supply of oil, which continues to flow.
-Federal Reserve officials seem ready to reverse course; and they’ve been going out of their way to dismiss the likelihood of another hike, largely because the bond market has been doing the central bank’s work for it. The inverse relationship between bond yields and stock prices held firm this past week. After a relentless rise since the late summer to a nearly 5% yield on the 10-year U.S. Treasury note—and several losing weeks in a row for major stock indexes—yields reversed and stocks bounced. Many Fed speakers have conceded that the surge in bond yields had resulted in tighter financial conditions—raising borrowing costs for business, consumers, and the US government.
Features:
-The North American power grid system will face a test today, Saturday October 14, as an annular solar eclipse, a so-called ring of fire, will cause the US’s solar energy output to swing. That’s because, the skies will darken for about three hours as the moon will block the sunlight, taking most solar-power generation in states from California to Texas offline. Grid operators in the affected states are bolstering backup supplies to get ready. The eclipse will start on the West Coast in Oregon and head toward the Sunbelt. While the shadow will pass solar hot spots like Arizona and Nevada, it will bring the most impact to California and Texas.
As California falls under partial shadow, solar output there could drop to less than a quarter of what is typical on a sunny October day, according to the California Independent System Operator, the organization that runs the state’s grid.
-Wall Street expects Rivian to post an operating loss of about $1.4B in the third quarter, but the losses shouldn’t surprise anyone. The car business is a scale business. For example, Tesla wasn’t consistently profitable until it was selling roughly 100,000 units per quarter. Rivian delivered just under 16,000 units in the third quarter. The per-car loss works out to about $90,000. When Tesla was delivering about 12,000 cars a quarter it was losing about $20,000 per car. But Tesla got its manufacturing plant in California for a song from General Motors and Toyota Motor. It was also selling relatively expensive luxury cars. Ford, one of the only traditional auto makers that discloses profits and losses by vehicle type, reported an operating loss of about $32,000 per car in its EV business in the second quarter. It sold about 34,000 all-electric vehicles and hybrids in the quarter.
Europe:
-Novo Nordisk said Friday that it now expects 2023 sales growth of between 32% and 38%, an increase from prior expectations of 27% to 33%. The company also said it expects operating profit growth to be between 40% and 46%, higher than previous estimates of 31% to 37%. Novo Nordisk attributes its improved outlook to the strong performance of Ozempic and its cousin drug Wegovy. The demand for these drugs has skyrocketed as patients use them to assist with weight loss. Analysts surveyed by FactSet expect Novo Nordisk to report third-quarter Ozempic revenue of $3.32B and Wegovy revenue of $1.07B. Novo Nordisk also noted that Ozempic showed strong success in a trial for kidney failure in diabetes patients. Because of the results, the company decided to end its study early.
Emerging Markets:
-no update this week
Commodities:
-Hamas’ surprise attack on Israeli territory has set off a conflict that in past eras would have upended oil markets. This time, the effect on prices lasted just one day and registered as a blip in the longer-term models of most analysts. But as war rages in the world’s largest storehouse of oil reserves, there are risks that the calm won’t last. The wild card this time is Iran, Israel’s most powerful foe and a growing force in oil markets. Past Middle East crises have often forced profound political shifts and more-prosaic changes in consumer behavior. The financial fallout is different this time. Brent crude, the international oil benchmark, rose 4%, to $88 a barrel, this past Monday, the first full day of trading following the attacks, before giving back nearly all of its gains in the following three days. On Friday, prices rebounded again, but largely because of the US increased enforcement of sanctions on Russian oil, raising the prospect that global supplies will fall. US consumers aren’t likely to feel the impact of the war; gasoline prices have dropped consistently. Stocks of oil producers, meanwhile, have mostly traded in the same range they’ve been in since August, about 10% off their 52-week highs.
Streetwise:
-Jack Hough said that US companies are expected to report zero quarterly earnings growth in the weeks ahead; and, he thinks that’s actually good news, given that for three straight quarters, earnings have fallen year over year. So zero is a step in the right direction. And things look even better with some adjusting, excuse-making, and outright fantasizing. Earnings season traditionally kicked off with results from Alcoa; because it was the first to report among companies in the DJIA. But it went through a Dow ejection, spinoff, name change, and private-equity buyout, so the company called Alcoa today is a mere smelting stub of the one from before. Along the way, earnings season needed a new kicker-offer.