WSJ : Here’s What Higher for Longer Means for the Stock Market

Here’s What Higher for Longer Means for the Stock Market
Stocks are still trading near record levels, but some investors say further gains may be more difficult

Expectations that the Federal Reserve would aggressively cut interest rates this year have helped propel stocks to repeated records. Now that the case for rate cuts is weakening, scrutiny of the bull market is intensifying.

The S&P 500 has added 7.4% this year and is off a mere 2.5% from its all-time high, set March 28. Stocks have marched higher since 10-year government-bond yields peaked at 5% in late October. That also fueled an “everything rally,” driving up prices for other asset classes from gold to bonds.

But some investors are beginning to worry that future gains in the stock market may be more difficult to come by. Wednesday’s hotter-than-expected inflation report raised questions about whether the Fed can deliver cuts this year without signs of an economic slowdown. At the beginning of the year, Wall Street penciled in six, or even seven, interest-rate cuts through 2024, but now some investors are beginning to doubt that the Fed would lower rates at all.

That could spell trouble for stocks. The yield on the benchmark 10-year Treasury note ended the week at 4.499% after posting on Wednesday its biggest one-day rise since 2022.

Higher yields make stocks less attractive than holding Treasurys to maturity, and they increase borrowing costs across the economy for everything from corporate debt to mortgages to car loans.

“It changes the math,” said Quincy Krosby, chief global strategist for LPL Financial. “You have to recalibrate, you have to adjust, and the rate regime must be in concert with where the valuations are.”

Here are some areas of the stock market that are vulnerable to higher rates:
The small-cap focused S&P 600 index tumbled 3% last week. That included a 2.9% drop on Wednesday after the inflation report, the largest one-day percentage decline since February. Small-caps, which tend to derive most of their revenue from inside the U.S., are especially sensitive to the trajectory of the economy.

One big reason: Small stocks generally devote a much larger share of operating profit to covering interest on debt than larger ones do. The ratio of operating income to interest expense within the S&P 600 was 2.3 times as of March, according to Dow Jones Market Data. That compares with 7.6 times for S&P 500 companies.

They generally issue more floating-rate debt than bigger companies, so their loan payments fluctuate with benchmark interest rates. When rates go up, that means higher interest expenses dent their bottom lines and leave them more at risk of defaults.

About 44% of debt among companies within the Russell 2000, another small-cap index, was floating-rate at the end of last year, compared with 10% for the S&P 500, according to data from Lazard Asset Management.

Adding to the crunch: About 40% of the companies in the Russell 2000 didn’t turn a profit over the past year, compared with 10% in the S&P 500, according to J.P. Morgan Asset Management.
Tech stocks have led the market’s advance since early 2023, powered by a surge in investor enthusiasm for artificial-intelligence technology. The largest companies have strong balance sheets and big cash piles that should insulate them against the effects of higher rates. But some investors worry that their popularity could begin to work against them if sentiment darkens.

The S&P 500’s information-technology sector accounts for nearly 30% of the market-value weighted index, more than twice the size of any of the other 10 sectors. If investors decide to take profits, tech stocks are a natural place to look.

“Looking at the actively managed mutual funds that are out there, cap-weighted index funds, it’s all the same stuff. Is Microsoft or Nvidia the largest holding; is it Amazon?” said Emerson Ham III, senior partner at Sound View Wealth Advisors. “If you did get a bad cycle in the market, large tech stocks could have a problem.”

When the Fed started its interest-rate-increase campaign in 2022, the tech sector closed the year down 30% and the consumer-discretionary sector, home to the likes of Amazon.com and Tesla, declined nearly 40%.

Cyclical stocks that are sensitive to the performance of the economy, such as utilities, consumer staples and industrials, lose their appeal when interest rates are higher, in particular because they are often seen as dividend plays.

The S&P 500’s utility sector boasts a dividend yield of 3.4%, consumer staples pays 2.4% and industrials has a 1.4% yield. Those all seem measly when compared with the 4.5% risk-free rate on government bonds. Besides, the stocks aren’t offering enough extra yield to compensate for the risk of a slowdown in business activity from higher interest rates.

Industrial conglomerate 3M offers a dividend yield of 6.6%, and its shares are down 0.1% this year; consumer-staples company Walgreens Boots Alliance has a yield of 5.6%, and its shares are down about 30%; and American Electric Power pays 4.3%, and its shares are up 1.1%. All three are underperforming the S&P 500.

Around 40 stocks in the S&P 500 have a dividend yield above that of the 10-year Treasury note, according to FactSet. Two years ago when the Fed had just started its interest-rate campaign, there were 94 stocks that offered a higher yield.
Higher interest rates propel depositors to move money to Treasurys and money-market funds for higher returns, contributing to lower deposits at banks. Meanwhile, banks have had to shell out more interest to yield-hungry depositors, particularly hurting the bottom line at small and midsize banks. Wells Fargo said Friday it expects net interest income, or profit from lending, to decline by 7% to 9% in 2024.

Delinquency rates could also creep higher if interest rates remain high, which could increase loan losses for banks.

Higher interest rates have also pushed up mortgage rates back toward 7%, a level they haven’t seen since December. That has kept many would-be home buyers on the sidelines, leading to sharp declines in mortgage activity at the big banks, a source of revenue.

The S&P 500’s real-estate sector is down 7.2% this year, the worst performer of the 11 segments and the only group in the red.

The rate whipsaw has hit smaller banks harder than big ones. The KBW Nasdaq Bank Index, which includes heavyweights such as JPMorgan, has advanced 2.1% this year, while an index of regional banking stocks is down 13%.
Shares of oil-and-gas companies are making another run after being among the top performers in 2022. Rising oil prices boost revenue for oil-and-gas providers, while big companies in the sector trade at a discount to the overall market. Exxon and Chevron trade at about 13 and 12 times their earnings over the past 12 months, respectively; the S&P 500 trades at roughly 20 times.

The S&P 500 energy sector is up almost 10% over the past month, beating every other corner of the broad index by at least 3 percentage points.

WSJ : Certain Biotech Investors Get an Early Look at Results. Is That Fair?

Certain Biotech Investors Get an Early Look at Results. Is That Fair?
Private investments in public equities, or PIPEs, are all the rage in biotech, but some investors resent the sharing of nonpublic information

There’s a hot new trend for healthcare investors, but it’s generating quite a bit of controversy.

Publicly traded biotech companies are increasingly turning to PIPEs, or private investments in public equities, to help them get through a volatile period in equity markets. In the first quarter, U.S. biotechs raised a record $5.7 billion using the approach, according to Jefferies data.

PIPEs have been around for a while. They were once seen as a funding option used mainly by distressed companies frozen out of the public capital markets, but now they are being used by highly respected investors and companies.

The PIPE boom has proved symbiotic for cash-starved companies as well as for a few dozen specialist biotech investors such as Adage Capital, RA Capital, Logos Capital and Janus Henderson. For biotech companies, it is a cost-effective way to raise money and attract experienced investors while avoiding the choppier public markets. For fund managers, it is an opportunity to invest at an attractive price and band together to salvage companies they often already are invested in.

The problem, though, is that the PIPE boom is leaving out many investors, some of whom complain that it is essentially a form of legal insider trading. That is because many PIPEs give a select group access to nonpublic information, such as data from a cancer study that is about to be published. Once the deal is locked up, PIPEs are announced to the public, often alongside the information, leading to major share gains.

“These deals make generalist investors feel like the deck is stacked against them,” said Daphne Zohar, founder and chief executive officer at privately held biopharmaceutical company Seaport Therapeutics. “As a CEO, I’d prefer not to use this mechanism because I want to do what’s best for all of my shareholders.”

The dirty secret is that unequal access to information has always been an aspect of capital markets. But the sheer volume of PIPEs is upsetting generalist investors, who are being left out. As it transforms from a niche feature of the biotech market to a more prominent financing option, it could lead to regulatory backfire.

“You have a situation in which the access to these deals is extremely limited; it seems like there are a dozen to two dozen parties that are kind of controlling the vast majority of the deal flow,” says Jared Holz, a healthcare equity strategist at Mizuho. “We’ve never in the history of the sector seen PIPEs being done at such a velocity.”

Anger about the way information and shares are being parceled out is leading some investors to voice their disapproval. In some cases, it is also leading to legal action. Earlier this month, Bloomberg reported that an investor sued senior leaders of Taysha Gene Therapies TSHA -8.70%decrease; red down pointing triangle saying its board and top executives manipulated the timing of positive disclosures and a PIPE to maximize profits for themselves and a group of investors tied to them.

According to the shareholder complaint, Taysha deliberately sat on positive early-study results for its gene therapy. Then, on Aug. 14, Taysha publicly announced both the promising data and the $150 million PIPE transaction, the lawsuit says, per Bloomberg. Participants in the stock placement “realized near immediate gains of $205 million,” the suit says. Taysha declined to comment.

Another concern is that, while there are strict rules around trading the information shared during PIPEs, these deals could be leading to what is known as shadow insider trading—a pervasive problem in biotech whereby an investor learns information about Company A and then uses it to make an investment in Company B. One such case, which wasn’t tied to a PIPE, is now at the center of a high-profile Securities and Exchange Commission lawsuit, which alleges that Medivation executive Matthew Panuwat purchased options tied to the shares of Incyte INCY -1.95%decrease; red down pointing triangle, a rival drugmaker, because he knew they would pay off when the market heard Pfizer was buying his company in 2016.

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Seo Salimi, a partner at law firm Paul Hastings LLP, which advises biotechs on financing deals, said that when a company puts together such deals, it isn’t always sure how the market will react to news.

“There are plenty of instances where companies, especially in oncology, have put out data which hits the primary and secondary endpoints, but the stock price goes down,” he noted.

Investors in PIPEs say that picking on the funding method is missing the broader point: Without them, many companies would struggle to raise cash in the current environment of high interest rates.

“You have companies that spend years running a clinical trial, taking big risks to get these drugs to patients, then watch it all come crashing down because of the volatility in public markets,” says Oleg Nodelman, founder and portfolio manager at EcoR1 Capital, a biotech investor. “This approach gives biotech companies an opportunity to meet their funding needs in difficult times.”

PIPEs are likely to carry on for a while, but their attractiveness might decline due to market forces. In February, large PIPEs led to over 40% average stock-price increases immediately after the deals were announced, according to Jefferies. But as PIPE volumes surged in March, the average stock increase declined to over 16% following the announcements. “Perhaps companies are draining this well too rapidly,” the analysts noted.

PIPE deals aren’t going away anytime soon, and neither is the controversy that surrounds them.

WSJ ; Alleged Rent-Fixing of Apartments Nationwide Draws More Legal Scrutiny

Alleged Rent-Fixing of Apartments Nationwide Draws More Legal Scrutiny
Lawsuits contend that software company enables landlords to set prices illegally

Legal pressure is mounting on a property-management software company facing allegations that it illegally fixes apartment rent prices at buildings across the U.S.

State and district attorneys general in Arizona and Washington, D.C., are suing RealPage, and more than a dozen of its landlord customers. North Carolina’s attorney general is also investigating whether the company’s technology breaks antitrust laws.

The Justice Department in November said a civil lawsuit in Tennessee alleging that RealPage illegally fixes rents should go forward. Justice officials have been considering their own civil enforcement action and opened a criminal investigation into the company, according to people familiar with the matter.

The department is investigating whether RealPage is facilitating price-fixing, these people said.

RealPage’s algorithmic pricing system analyzes huge troves of information about the apartment rental market. It then recommends to landlords how much to increase rent for each lease renewal, or what to ask for newly vacated apartments.

At issue is whether the use of this pricing system amounts to an illegal rent-setting cartel among landlords, artificially boosting the rents paid by apartment tenants over many years.

RealPage denies any wrongdoing.

The legal heat on RealPage and apartment building owners is part of a government effort to police business practices it deems anticompetitive and that result in higher prices for consumers.

The Justice Department and Federal Trade Commission have brought antitrust charges against tech companies such as Amazon and Google, while pursuing price-fixing cases in more obscure corners of the American economy, such as poultry processing and vehicle exporting.

But President Biden has made rental building owners a particular focus. “We’re cracking down on big landlords who break antitrust laws by price-fixing and driving up rents,” he said last month during his State of the Union address.

In the U.S. Senate, meanwhile, Sen. Ron Wyden (D., Ore.) introduced the Preventing the Algorithmic Facilitation of Rental Housing Cartels Act in January.

Any rulings against RealPage could have legal ramifications for other business sectors, such as online retail, where companies also use algorithms to make pricing decisions.

Wider business implications
“The amount that this could impact consumers, you’re looking at billions of dollars potentially,” said Maurice Stucke, a former federal antitrust prosecutor and a law professor at the University of Tennessee, Knoxville.

Arizona Attorney General Kris Mayes alleges that, in Phoenix and Tucson, RealPage pooled nonpublic pricing data from competing building owners, then fed the data into an algorithm that told landlords to push rents higher than they might have otherwise. RealPage then discouraged landlords from deviating from the algorithm’s suggested rents, according to the attorney general’s filing.

“There is no competitive rental market in Arizona anymore, ” Mayes said in an interview. “Because RealPage sets the price.”

In a statement, a RealPage spokeswoman said its pricing systems were designed to be compliant with federal laws.

Any nonpublic rent data, RealPage said, isn’t tied to any particular firm and plays a secondary role in determining rents. The company said its algorithms sometimes recommend lowering rents.

“A severe shortage of supply in the rental market has led to rising housing costs,” the spokeswoman said, “not the use of revenue management software.”

Texas-based RealPage was founded in 1998. It acquired the YieldStar pricing platform from publicly traded landlord Camden Property Trust in 2002. Private-equity firm Thoma Bravo purchased RealPage in 2021 for nearly $10 billion.

RealPage’s legal troubles began with more than two dozen class-action lawsuits brought by renters from Seattle to New Jersey. Other tenants have since sued a competing software firm, Yardi Systems, making similar allegations, which Yardi also denies. The lawsuits seek monetary damages for renters.

Federal charges could prove disastrous not only for RealPage but also for the many landlords and property managers who use its technology. That includes some of the largest real-estate companies on Wall Street.

Publicly traded apartment owners, such as Equity Residential and UDR, are among the companies named in the complaint brought by the Washington, D.C., attorney general. Equity, UDR and other landlords have denied participating in a rent-setting cartel.

It is unclear which landlords the Justice Department might be targeting in its investigation. RealPage said its software is used to price about 4.5 million rental apartments nationwide.

Landlords pulling the plug?
RealPage’s assurances that its technology complies with federal laws might not ease the fears of property owners open to litigation. Some apartment developers are now weighing the new risks of using the technology at recently constructed buildings, said Parker Miller, an antitrust attorney representing corporate clients at the Alston & Bird law firm.

“We are certainly advising clients to be prepared for a world without RealPage-style revenue management,” he said.

In a class-action lawsuit brought by tenants in Tennessee, three real-estate companies recently made preliminary settlement agreements, though the terms aren’t yet public. Another large property firm, publicly traded AvalonBay Communities, was dropped from the lawsuit because its contract with RealPage had prohibited the use of nonpublic pricing data.

In Colorado, a state bill would ban landlords from using certain algorithmic pricing systems to set rents. Drew Hamrick, general counsel for the Apartment Association of Metro Denver, a landlord group, says he could see a compromise in which software companies would make the same information they use to set rents available to prospective tenants.

“You’ve got a situation where the housing provider has more sophisticated information about real-time pricing than does the consumer,” Hamrick said. “Disproportionate information is not good for a free market.”

FT : Water companies pay £2.5bn in dividends in two years as debt climbs by £8.2

Water companies pay £2.5bn in dividends in two years as debt climbs by £8.2bn
In 32 years since privatisation £78bn has been paid out of utilities

Water companies in England and Wales paid £2.5bn in dividends and added £8.2bn to their net debt in the two financial years since 2021, according to research by the Financial Times.

The updated figures mean that the 16 water monopolies have paid out a total of £78bn in dividends in the 32 years between privatisation in 1991 to March 2023, according to the research, which is based on regulatory data and then adjusted for inflation.

The £78bn payout is nearly half the £190bn the companies spent in the same three decades on infrastructure. The utilities meanwhile chalked up more than £64bn net in debt over the same period, despite being sold at privatisation with no borrowings.

The research comes amid fears that the financial crisis at the UK’s largest water utility, Thames Water, may spill over to other companies. Its parent company defaulted on debt earlier this month after its investors baulked at having to plough more money into the utility.

Other debt-laden water companies are wrestling with higher financing costs on borrowings, as well as historically steep construction, energy and labour prices. Meanwhile, a political and public outcry has erupted over service quality and pollution.

“Thames Water is a canary in a gold mine,” said one water company investor. “You’ve got the biggest water company teetering on the brink and we are all watching. It’s all the investors are talking about.”

South East Water, SES Water and Southern Water are all under close watch by regulator Ofwat over their financial stability. Southern Water was rescued from the brink of bankruptcy in an Ofwat-brokered deal with the Australian infrastructure manager Macquarie in 2021 but the utility was forced to suspend external dividends until at least 2025 following a credit rating downgrade last year.

Investor jitters come as Ofwat is pushing them to inject more cash into the utilities. It is not clear whether investors — which include sovereign wealth funds, private equity firms and pension funds — will play ball. Few equity injections have been made since privatisation.

Thames Water, for example, had received no new equity since privatisation until it received £500mn in the form of a loan bearing 8 per cent interest from parent company Kemble.

“It’s just not the model they’re used to,” said Adam Leaver, professor of accounting at Sheffield University. “They invested in a company they thought would use borrowed money. They weren’t expecting to inject cash of their own. Now the companies have too much debt, they haven’t invested enough in infrastructure and some of the more recent shareholders are screwed.”


Ofwat wants to lower utilities’ debt. It is pushing them to reduce gearing — a measure of debt to assets — from a sector average of around 68 per cent to 55 per cent by April 2025. 

Peter Hope, head of regulatory finance at Oxera Consulting, said water companies will need to change how they run their finances in the next few years, given the step change in investment that is expected. “In broad terms, the industry will have to go from a situation of not having retained any earnings since privatisation, to having to retain for the next 25 years almost all of the earnings.” 

In addition they will have to inject £5bn equity by 2030, and £8bn in the five-year period following, according to his calculations based on the 55 per cent gearing ratio assumed in Ofwat’s modelling. “Even this does not take into account the need for future increases to replace aged assets and deal with resilience and climate change,” he added.


Northumbrian Water, Yorkshire Water, Thames Water and Southern Water declined to comment. Dŵr Cymru, South East Water, SES Water, United Utilities, Affinity Water, Anglian Water, Bristol Water, Portsmouth Water, Severn Trent, South Staffordshire, Sutton & East Surrey Water and Wessex Water did not reply to requests for comment.

Water UK, which represents the industry, said investors have pledged to inject £6.5bn in new equity as well as raising debt as part of their £96bn investment plan by 2030. Investors’ willingness to finance the plan relies on a decent regulatory settlement, it added.

Ultimately, costs are paid for by customers through bills and companies have asked for these to be increased by as much as 70 per cent by 2030.

An additional issue for investors is that rules introduced by Ofwat in March last year restrain dividend payouts if they put companies’ financial resilience at risk or if they underperform on social or environmental metrics.

The restrictions to dividends are an obstacle to investors, whose primary duty is to satisfy their shareholders, some of which are pension funds with thousands of retirees depending on the income.

The water companies tend to have corporate structures with multiple layers, many of which exist to raise finance. Ofwat only regulates the operating company and counts all payments out of that as dividends, even though investors argue that these are often used to service debt at the other entities rather than to directly enrich shareholders.

Leaver said: “In the absence of dividends, which are often used to service the debt at the holding companies, the financial companies will go bust pretty quickly.”

The FT’s research is based on data provided by Ofwat, inflated to 2023 prices using the financial year average CPIH.

The regulator does not adjust dividend figures for the 32-year period for inflation, giving it a nominal cumulative total for the period of £52bn.

The prospect that Thames Water may face temporary renationalisation has put the utilities in the public and political spotlight.

All 16 companies have been criticised for service failures, including tipping unknown quantities of sewage into waterways, high leakage rates or water outages. The Environment Agency is conducting its largest ever criminal investigation into potential widespread non-compliance by water and sewerage companies at more than 2,200 sewage treatment works, while Ofwat is also running its own investigation into the issue.

“The government needs someone to come in and be prepared to put some money in,” said one water company investor. “But it’s not an attractive environment at the moment . . . there’s every risk that you’ll lose your shirt.”

FT : This tech IPO revival does not come with a blockbuster pipeline

This tech IPO revival does not come with a blockbuster pipeline
Transition, as in Rubrik’s case, complicates the financial picture and could weigh on valuations

Lossmaking young tech start-ups are advised to approach IPO roadshows with an eye-catching tale of future growth and some flattering numbers to back it up. In 2024, that is not happening. The tech companies attempting to rekindle the US IPO market are not particularly young. The stories they have to tell about growth are complicated.  

Cybersecurity company Rubrik, based in Palo Alto and backed by Microsoft, is hoping to list shares while in the midst of a business model transition. Founded in 2013, it reported a loss of $354mn on $628mn of revenue in its last fiscal year. 

Revenue growth was less than 5 per cent. But the company waves aside such uninspiring figures by explaining that it is in the process of moving from short-term contracts to longer, cloud-based security subscriptions for larger clients. It points investors towards subscription annual recurring revenue. This increased by 47 per cent over the same period. 

Rubrik boasts an advisory board chaired by Chris Krebs, the former director of the US Cybersecurity and Infrastructure Security Agency who was fired by president Donald Trump for contradicting claims about election fraud.

The company’s gross margins exceed 77 per cent and customer retention rates are high. But transition complicates the financial picture. That could weigh on the valuation.


PitchBook notes that cyber security valuation multiples topped 9 times sales at the end of last year. On that basis Rubrik might expect a market cap close to $6bn. But Reddit’s recent IPO suggests it might be wise to consider pricing close to, or below, its last $4bn valuation.

Reddit’s IPO also came in the midst of a transformation. Its revenue growth dropped from 37 per cent in 2022 to 21 per cent in 2023. The company is attempting to move away from its reliance on digital advertising and is selling data licences to companies training artificial intelligence models, such as Google.

The IPO was hailed as a success and a sign of confidence in listings. But Reddit met its fundraising goal by opting to join markets with a market value of $5.4bn — about half its last private valuation. It was rewarded with a gratifying price jump on the first day of trading. 

Down round IPOs may put off big listing candidates such as Databricks, Stripe and Plaid. The IPO pipeline for 2024 is likely to be filled by smaller names with more pressing funding needs.

>>> Snap One to be acquired by Resideo (REZI) for $10.75 per share (8.14)

Snap One to be acquired by Resideo (REZI) for $10.75 per share (8.14)
  • Resideo Technologies, Inc. (NYSE: REZI), a leading manufacturer and distributor of technology-driven products and solutions, and Snap One Holdings Corp. (Nasdaq: SNPO), a leading provider of smart-living products, services, and software to professional integrators, today announced a definitive agreement pursuant to which Resideo has agreed to acquire Snap One for $10.75 per share in cash, for a transaction value of approximately $1.4 billion, inclusive of net debt. Upon closing, Snap One will integrate into Resideo's ADI Global Distribution business.
  • The transaction will combine ADI's strong position in security products distribution and Snap One's complementary capabilities in the smart living market and innovative Control4 technology platforms, which is expected to drive increased value for integrators and financial returns. Together, ADI and Snap One will provide integrators an increased selection of both third-party products and proprietary offerings through an extensive physical branch footprint augmented by industry leading digital capabilities.
  • The transaction is valued at approximately $1.4 billion, including forecasted net debt of Snap One at the closing of approximately $460 million. This represents a 7.4x multiple on Snap One's Adjusted EBITDA for the twelve months ended December 29, 2023, as further adjusted by including Resideo's projected annual run-rate synergies of $75 million.
    The transaction is expected to be completed in the second half of 2024, and is subject to customary closing conditions, including receipt of applicable antitrust and other regulatory approvals.

Electrek : Tesla lays off ‘more than 10%’ of its global workforce

Tesla lays off ‘more than 10%’ of its global workforce

Tesla has announced layoffs of “more than 10%” of its global workforce in an internal company-wide email.

For the last few months, it has looked like Tesla might be preparing for a round of layoffs. Tesla told managers to identify critical team members, and paused some stock rewards while canceling some employees’ annual reviews. It also reduced production at Gigafactory Shanghai.

Then, over the weekend, we heard rumors that these layoffs were about to happen, which came to us from multiple independent sources, as we reported on yesterday. The rumors indicated that layoffs could be as high as 20%, and in addition we heard that Tesla would shorten Cybertruck production shifts at Gigafactory Texas (despite CEO Elon Musk’s recent insistence that Cybertruck is currently production constrained).

Now those rumors have been confirmed – though with a lower number – in a company-wide email sent by Musk, which leaked soon after it was sent. The full text of the email is below:

Over the years, we have grown rapidly with multiple factories scaling around the globe. With this rapid growth there has been duplication of roles and job functions in certain areas. As we prepare the company for our next phase of growth, it is extremely important to look at every aspect of the company for cost reductions and increasing productivity.

As part of this effort, we have done a thorough review of the organization and made the difficult decision to reduce our headcount by more than 10% globally. There is nothing I hate more, but it must be done. This will enable us to be lean, innovative and hungry for the next growth phase cycle.

I would like to thank everyone who is departing Tesla for their hard work over the years. I’m deeply grateful for your many contributions to our mission and we wish you well in your future opportunities. It is very difficult to say goodbye.

For those remaining, I would like to thank you in advance for the difficult job that remains ahead. We are developing some of the most revolutionary technologies in auto, energy and artificial intelligence. As we prepare the company for the next phase of growth, your resolve will make a huge difference in getting us there.

Thanks,
Elon

Additionally there are reports that some employees have already been locked out of system access.

While we don’t have an exact percentage, “more than 10%” means at least 14,000 employees will be laid off, as Tesla’s employee headcount is somewhere on the order of 140,000 total employees (Notably, Tesla’s headcount has not experienced as much “rapid growth” in recent years as it has in the past, making that line of the email ring somewhat hollow).


And we don’t know which specific teams will be most or least affected by Tesla’s layoffs, but two well-known Tesla executives are now missing the “Tesla-affiliated” badge on twitter – Drew Baglino and Rohan Patel.

Baglino is still listed as Senior VP of Powertrain and Energy on Tesla’s website, and Patel is Tesla’s Policy chair who has also served as an impromptu Tesla PR arm on twitter, commenting on news in the place of Tesla’s still incomprehensibly-nonexistent PR department.

While this may not mean anything, the badge does still exist and is shown on Franz von Holzhausen’s profile, so it is conspicuous that it is missing from the aforementioned executives.

The news follows a bad quarterly delivery report in which Tesla significantly missed delivery estimates, and had a rare year-over-year reduction in sales. While Tesla does not break out sales by geographical region, the main dip seems to have come from China, where Chinese EV makers are ramping quickly both in the domestic and export market.

Tesla will deliver its quarterly profits report next Tuesday, April 23. Analysts estimate that Tesla will still turn a profit of around 50 cents a share, down from 85 cents a share in Q1 2023.

In previous quarters, Tesla has guided for a “pause” inbetween growth phases, expecting that sales growth would be more modest until the release of next-gen vehicles like the ~$25,000 Model 2 (though Reuters recently reported that Musk wants to shift Tesla’s focus to a robotaxi model, which Musk denied just hours before announcing the robotaxi unveiling event).

Tesla’s layoffs come at a time when many other companies in the tech industry are laying off staff, in an apparent game of follow-the-leader while industry profits are still high.

Electrek’s Take
One issue I’ve always had with Tesla is that, if anything, it feels like headcount in the company is too low, not too high. There are so many issues that seem to fall through the cracks, and I think the reason for this is because Tesla employees are often overworked. This leads to burnout and turnover, a lack of institutional memory, and a lack of ownership for certain problems that don’t get solved.

Tesla owes a lot of its success to its “startup mentality,” where it’s all hands on deck to grow the company that is shaking up a couple of the largest entire sectors on earth – automotive and energy. The fact that it has shaken up these sectors so successfully is proof that this approach has been effective.


And that helps in recruiting as well – there are a lot of jobs that claim they are changing the world, but Tesla can really claim that it legitimately is on the vanguard of the changing transportation industry. That’s a great way to recruit the best and brightest, and as a result, the company hasn’t had to worry much about losing talent since it has such a recruitment advantage and can take its pick of the brightest minds out there (though that recruitment advantage could be changing, given Musk’s increasingly distasteful behavior).

However, Tesla is 20 years old now. It’s an enormous and established company. It needs to mature and have more established processes, less turnover, and more security for its employees. These sorts of things help reduce errors and increase morale.

While these layoffs are a reaction to a reduction in sales (but not a loss of money if analysts are to be believed – Tesla is likely still profitable, though we’ll hear more next Tuesday), they can’t be helping with morale.

Remaining employees will wake up to an email from a CEO who is increasingly absent as he spends all of his time addicted to an app he wasted $44 billion on (yet demands more stock while firing 10% of the company), see their already-large workloads get larger, and wonder if the feeling of changing the world is really worth all these newly-apparent downsides. Maybe they’ll wonder if getting poached by the new tech buzzword wouldn’t be so bad.

Which is a shame, because we do need Tesla to keep pushing things forward, and to keep attracting the best and brightest. While Pandora’s box is open and EVs are here to stay at this point, regardless Tesla’s ups and comparatively-rare downs, the rest of the industry is still trying hard to pump the brakes on the transition, even if it means America will be less competitive if they get their way.

Tesla is one of the few entities that is large enough and committed enough to dragging those timelines forward, whether the rest of the industry likes it or not. We need a healthy Tesla, and for that, we need good employee morale.

FT : Samsung boosts Joe Biden’s chipmaking ambitions with major Texas plant upgr

Samsung boosts Joe Biden’s chipmaking ambitions with major Texas plant upgrade
South Korean group set to outdo rival TSMC with cutting-edge 2nm chip production in US by 2026 as part of $40bn investment

Samsung Electronics will produce the latest generation of semiconductors in the US two years ahead of its rival Taiwan Semiconductor Manufacturing Company, in a further boost to President Joe Biden’s efforts to bring advanced chip production on to home soil.

US commerce secretary Gina Raimondo announced on Monday that the South Korean chipmaker was set to produce chips at the 2 nanometre level of miniaturisation at a new fabrication plant, or fab, it was building in the city of Taylor in Texas. It will be part of a $40bn investment in capabilities ranging from the manufacturing of microprocessors to advanced chip packaging and research and development work.

Samsung will receive up to $6.4bn in direct funding under the US Chips and Science Act, a week after the US government announced that TSMC would receive up to $6.6bn from the flagship subsidy programme to support its chip expansion plans in Arizona.

The first of Samsung’s new Taylor fabs will start making 2nm chips in 2026, according to a senior US official. TSMC is set to produce 2nm chips at an Arizona facility from 2028.

The Biden administration aims to increase domestic production of advanced chips from zero to 20 per cent of the world’s supply by the end of the decade, amid concerns that they could be cut off by a natural disaster or possible future conflict in east Asia.

“Much of the semiconductor supply chain . . . is concentrated in a couple of Asian locations, and that leaves the US supply chain incredibly vulnerable to disruption,” said Raimondo, adding that the new Samsung investment “puts us on track to hit our [20 per cent] goal”.

“We are now making these investments which will allow the United States to once again lead the world, not just in semiconductor design . . . but also in manufacturing, advanced packaging and research and development.”

An initial $17bn investment, part of a planned $40bn in total, was announced by Samsung in 2021 to build its first fab in Taylor, which will now make 2nm and 4nm chips.

The new capital spending adds a second fab that will also make 2nm and 4nm chips, as well as the construction of an advanced chip packaging facility for “2.5D packaging” of processor and memory chips.

Advanced packaging is a crucial stage in the production of artificial intelligence chips like Nvidia’s H100, which is used to train generative AI systems such as OpenAI’s ChatGPT.

TSMC, the world’s biggest contract chipmaker, carries out 2.5D packaging for Nvidia’s most powerful chips. But it currently has no plans for such an advanced packaging facility in the US.

“Right now, even chips that are made in the US are still shipped in many cases to Taiwan to be packaged, including the chips used in defence systems,” said Raimondo.

With its new plans for Taylor, Samsung will be able to combine the latest graphics processing units and its own high-bandwidth memory chips in advanced AI products packaged at its US facility.

Last month, Nvidia chief executive Jensen Huang wrote “JENSEN APPROVED” on a Samsung HBM3E chip on display at a developer conference in California, prompting speculation that Samsung was on course to secure the leading AI chip vendor as a customer.

“To meet the expected surge in demand from US customers for future products like AI chips, our [Taylor] fabs will be equipped for cutting-edge process technologies and help advance the security of the US semiconductor supply chain,” said Kye Hyun Kyung, president and chief executive of Samsung’s chip division, on Monday.

Lael Brainard, the White House economic adviser, said Samsung had also made a “series of commitments to enable it to manufacture chips directly for the Department of Defense”.

The senior US official also noted that Samsung’s R&D fab for developing future generations of chips would be only the fourth such facility in the world and the first built in the US by a non-US company.

Monday’s announcement was the sixth and final disbursement from the first round of Chips Act grants. US chipmaker Intel has received the largest sum, up to $8.5bn, while GlobalFoundries, Microchip Technology and BAE Systems have also received funding.

WSJ : Samsung Overtakes Apple as Smartphone Leader, IDC Says

Samsung Overtakes Apple as Smartphone Leader, IDC Says
The smartphone market’s recovery “is well underway,” the research firm says

Samsung 005930 -1.79%decrease; red down pointing triangle Electronics has overtaken Apple AAPL 0.86%increase; green up pointing triangle as the top smartphone provider in the first quarter, while Chinese companies took a bigger slice of the global market, according to preliminary data from research firm International Data Corporation.

Global shipments of Apple smartphones fell 9.6% on year to 50.1 million units in the quarter, IDC said late Sunday in its quarterly tracking of smartphone shipments. Samsung’s shipments fell 0.7% to 60.1 million units, making it the number one seller of smartphones worldwide.

Total smartphone shipments expanded for the third straight quarter, rising 7.8% on year to 289.4 million units, IDC said. Apple’s market share fell to 17.3% from 20.7% a year ago, while Samsung’s fell to 20.8% from 22.5% amid rising sales of Chinese companies Xiaomi and Transsion.

Xiaomi, the third largest smartphone shipper in the quarter, saw sales rise almost 34% on year to 40.8 million units, while Transsion shipments jumped 85% to 28.5 million. Oppo overtook Vivo to claim the fifth spot in the first quarter.

IDC said overall growth showed that the smartphone market’s recovery “is well underway” despite challenging macroeconomic conditions, and highlighted a trend of higher prices as consumers opt for more expensive smartphones knowing they will hold on to their devices longer.

Apple’s slip in rankings comes after it claimed the top spot in global shipments in the fourth quarter of 2023, when it was helped by the rising popularity of premium devices and the company’s aggressive trade-in offers and interest-free financing plans.

WSJ : How the U.S. Forged a Fragile Middle Eastern Alliance to Repel Iran’s Isra

How the U.S. Forged a Fragile Middle Eastern Alliance to Repel Iran’s Israel Attack
American-led effort was years in the making and hadn’t been battle-tested when Tehran launched missile and drone barrage against Israel

TEL AVIV—As hundreds of Iranian drones and missiles winged across the Middle East Saturday night, a defensive line of radars, jet fighters, warships and air-defense batteries from Israel, the U.S. and a half dozen other countries was already activated against the long-feared attack from Iran.

Almost nothing got through to Israel.

The formidable display of collective defense was the culmination of a decades-old but elusive U.S. goal to forge closer military ties between Israel and its longtime Arab adversaries in an effort to counter a growing common threat from Iran.

But the U.S.-led effort to protect Israel in the days and hours before the Iranian attack had to overcome numerous obstacles, including fears by Gulf countries at being seen as coming to Israel’s aid at a time when relations are badly strained by the war in Gaza.

Much of the cooperation Saturday night that led to the shooting down of the Iranian-directed barrage needed to be forged on the fly, and many details about the role played by Saudi Arabia and other key Arab governments are being closely held.

Israeli and the U.S. forces intercepted most of the Iranian drones and missiles. But they were able to do so in part because Arab countries quietly passed along intelligence about Tehran’s attack plans, opened their airspace to warplanes, shared radar tracking information or, in some cases, supplied their own forces to help, officials said.

The operation was the culmination of years of U.S. effort to break down political and technical barriers that thwarted military cooperation between Israel and the Sunni Arab governments, officials said. Instead of a Middle East version of the NATO alliance, the U.S. has focused on less formal regionwide air-defense cooperation to blunt Tehran’s growing arsenal of drones and missiles—the very weapons that threatened Israel Saturday.

Efforts to build an integrated air-defense system for the region date back decades. After years of false starts and minimal progress, the initiative gained momentum after the 2020 Abraham Accords brokered by the Trump administration, which established formal ties between Israel and the United Arab Emirates and Bahrain.

Two years later, the Pentagon shifted Israel from its European Command to Central Command, which includes the rest of the Middle East, a move that enabled greater military cooperation with Arab governments under U.S. auspices.

“Israel’s move into Centcom was a game changer,” making it easier to share intelligence and provide early warning across countries, said Dana Stroul, who until December was the most senior civilian official at the Pentagon with responsibility for the Middle East.

In March 2022, Marine Gen. Frank McKenzie, then the top U.S. commander in the region, convened a secret meeting of top military officials from Israel and Arab countries to explore how they could coordinate against Iran’s growing missile and drone capabilities. The talks, held at Sharm El Sheikh, Egypt, marked the first time that such a range of ranking Israeli and Arab officers met under U.S. military auspices to discuss countering Iran.

“The Abraham Accords made the Middle East look different…because we could do things not just under the surface but above it,” a senior Israeli official said. Joining Central Command enabled even more technical cooperation with Arab governments. “That’s what created this alliance,” the official said.

Despite the progress made, the U.S. goal of having Israel and the Arab states seamlessly share tracking data on Iranian threats in real time has never been fully realized because of political concerns, officials said.

Bilal Saab, a former Pentagon official who worked on security cooperation in the Middle East, said it was premature to speak of security integration in the region. “It was always going to be gradual, and [Saturday] was an important real-world first step,” said Saab, now a fellow at the London-based Chatham House think tank.

But cooperation between Israel and Arab government on air defense with the U.S. as an intermediary has become common, even with Saudi Arabia, which still hasn’t established diplomatic relations with Israel, Israeli and U.S. officials say.

This nascent air-defense alliance had never been battle tested when on April 1, a missile strike in Damascus, Syria, killed several Iranian officers, including Gen. Mohammad Reza Zahedi, who according to Iranian state media and U.S. officials, managed Iranian paramilitary operations in Syria and Lebanon. Israel hasn’t claimed responsibility for the attack.

Tehran quickly vowed to respond, and senior U.S. officials began pressing Arab government to share intelligence about Iran’s plans to strike Israel and to assist with intercepting drones and missiles launched from Iran and other countries toward Israel, according to Saudi and Egyptian officials.

Israel’s multilayered aerial-defense system has shown itself capable of defending the country against individual or small volleys of incoming drones and missiles. But officials and analysts say it could potentially be overwhelmed by a sufficiently large swarm of drones or a massive missile barrage.

The initial response from several Arab governments was wary, fearing that assistance to Israel could involve them directly in the conflict and risk reprisals from Tehran. After further talks with the U.S., the U.A.E. and Saudi Arabia agreed privately to share intelligence, while Jordan said it would allow use of its airspace by U.S. and other countries’ warplanes and use its own aircraft to assist in intercepting Iranian missiles and drones, the officials said.

Two days before the attack, Iranian officials briefed counterparts from Saudi Arabia and other Gulf countries on the outlines and timing of their plan for the large-scale strikes on Israel so that those countries could safeguard airspace, the officials said. The information was passed along to the U.S., giving Washington and Israel crucial advance warning.

With an Iranian attack all but certain, the White House ordered the Pentagon to reposition aircraft and missile-defense resources to the region and took the lead in coordinating defensive measures between Israel and Arab governments, according to the senior Israeli official.

“The challenge was to bring all those countries around Israel” at a time when Israel is isolated in the region, the official said. “It was a diplomatic issue.”

Arab countries offered help in defending against the Iranian attacks because they saw the benefits of cooperating with the U.S. and Israel, as long as it remained low profile, said Yasmine Farouk, a nonresident fellow at the Carnegie Endowment for International Peace, a Washington-based think tank.

“Gulf countries know they still don’t have the same level of support that Israel gets from the United States and see what they did [Saturday] as a way of getting it in the future,” she said.

The Iranian missiles and drones were tracked from the moment they launched by early warning radars in Persian Gulf countries linked to the U.S. operations center in Qatar, which transmitted the information to fighters jets from several countries in the airspace over Jordan and other countries, as well as to warships at sea and missile-defense batteries in Israel, officials said.

When the slow-moving Iranian drones came within range, they were shot down, mostly by fighters from Israel and the U.S. and in smaller numbers by British, French and Jordanian warplanes, officials said.

At one point, more than 100 ballistic Iranian missiles were in the air at one time heading toward Israel. The overwhelming majority were shot down by Israeli air-defense systems in Israeli airspace and outside it, a U.S. official said.

U.S. aircraft shot down more than 70 drones, and two U.S. guided-missile destroyers in the eastern Mediterranean intercepted as many as six missiles. A U.S. Patriot air-defense system near Erbil, Iraq, shot down an Iranian ballistic missile on its way to Israel, the official said.

Of more than 300 drones and cruise and ballistic missiles fired by Iran toward Israel, only a small number of missiles landed in Israel, causing minor damage to a military base in the southern part of the country, Israel’s military said.

An Israeli official involved in regional security cooperation efforts said that while there had been frequent sharing of intelligence on air-defense threats in the past, Iran’s attack Saturday “was the first time that we saw the alliance work at full power.”