All Things Business
Publication 2 - Bitcoin Takes a Beating, Inflation Remains Elevated, and China's Lockdowns Spark Global Worries
Published Sunday, May 15th 2022
In this week’s news, an Elon Musk tweet prompts speculation, cryptocurrencies took a hammering, and the global economy continues to pose challenges for investors, businesses, and governments, with U.S inflation figures remaining far from the Fed’s target levels and China’s supply chain issues creating international threats.
Business
Elon Musk Puts Twitter Deal on Hold
Elon Musk tweeted pre-market on Friday, saying “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users.” The business magnate linked a Reuters article about a recent Twitter securities filing with those statistics. The San-Fransisco-headquartered corporation warned that its estimate is based on a sampling of accounts and that “the actual number of false or spam accounts could be higher than we have estimated.”
Chief Exectuive of Tesla and SpaceX, Elon Musk
Shares of the Twitter Inc. shot down pre-market on Friday, and fell as low as $43.33 in open trading, upon concerns that Musk was no longer confident in his proposed acquistion of social-media-giant. The Tesla and SpaceX chief executive later tweeted confirming his dedication to the purchase of the company- “Still committed to acquisition.”
Speculation of Musk’s indesicion was sparked by the recent performance of Tesla stock. Shares of the automotive company are down 29% in the last month, after the chief executive’s announcement of his intention to purchase Twitter.
Daniel Ives, an analyst at Wedbush Securities, theorized that Musk might be using Twitter’s recent disclosure to get out of or renegotiate the deal, due to the beating Tesla stock has taken. “Leveraging his stock and potential sales of Tesla is a huge overhang on the stock,” Mr. Ives said, as Musk’s purchase of the social-media company would require a sale of at least $8.5 billion worth of Tesla shares, as well as massive debt financing and private investors.
“Still committed to acquisition.”
SoftBank Report Their Second Record Annual Loss in 3 Years
Japanese conglomerate SoftBank Group published their results for the fiscal year ended March 31st, on Tuesday. The multinational corporation reported their second record annual loss in three years, this time a loss of $13.2 billion, and also disclosed a huge $26.2 billion depreciation in market value of it’s gigantic Vision Fund portfolio, which builds stakes in young, high-growth tech firms, in just the first 3 months of the year. The Vision Fund’s poor performance was partially offset by gains in their non-tech portfolios.
SoftBank Building
SoftBank’s long-serving chief executive, Masayoshi Son, assured investors of it’s financial stability in a video presentation recently, claiming the company’s cash resources are sufficient to cover upcoming bond maturities, and other debt obligations.
“We put up an umbrella when it rains. We need to think flexibly, depending on the situation. But it is the time to strengthen our defense now,” said the 64-year-old CEO.
Masayoshi Son, Chief Executive, SoftBank Group
In 2020, SoftBank created the somewhat contentious Northstar Fund, which has a focus on using the Tokyo-headquartered firm’s surplus cash to make investments. Son took a personal interest of 33% in the venture, with the company holding the rest of the equity. The Japanese CEO is liable for approximately $2.5 billion as a result of Northstar’s first-quarter performance.
“It is the time to strengthen our defense now”
Bitcoin Bites The Dust
Cryptocurrencies have had a tough week, with turbulence from the world’s largest stablecoin, Tether, and Bitcoin plunging to it’s lowest level since 2020. The digital currency fell 10% on Thursday from it’s level on Wednesday at 5pm EST, to $25,402.04, the cheapest it’s been since December 2020. The volatile asset also experienced it’s longest losing streak since March 2020, following seven-days of consecutive losses.
Tether, the stablecoin directly connected to the U.S Dollar, moved briefly but dramatically on Thursday, when it fell to $0.94 at 3.30am EST, marking the first time the USD-tied instrument split from it’s target level of $1.00 since August 2020, when it climbed to $1.01. The coin recovered to it’s usual $1.00 level at 11.30am EST, but the short-lived price discrepancy has unsettled traders, and has added to the nervousness that already exists in the current economic environment.
TerraUSD, another stablecoin, also experienced a shock during the week. The coin, which too aims for a constant $1.00 price level, began it’s descent on May 9th, and has since plummeted about 83% to $0.17, as at 8am EST, May 13th.
The instability of the stablecoin market, who’s purpose is to be a reliable storer of value and a medium of exchange, has sent a ripple effect through a number of coins, and sent some into a frenzy, albeit, most recovering to their regular levels.
Economics
U.S Inflation Report Shows Extreme Inflation Remains
The Labour Department released it’s April consumer-price index (CPI) data on Wednesday, with the report showing the first drop in inflation in eight months. The report revealed inflation decreased slightly to 8.3% annually, although missed economists’ estimated figure of 8.1%. That number is down marginally from March’s reading of 8.5%.
U.S CPI, 12-month change
Source: Labour Department, Wall Street Journal
Despite it’s popularity among economists, the CPI is not the Fed’s preferred measure of inflation. Instead, the central banking organisation favour the Personal Consumption Expenditures Price Index, or the PCE price index, which measures inflation based on what business are selling, whereas the CPI is measured by what househoulds are buying. Most recent PCE data showed an annual increase of 6.6%, with the next report due May 27th.
In fact, the Fed’s preffered inflation measure is a variation of the PCE, known as the ‘core PCE’, which is defined at the Personal Consumption Expenditures Price Index excluding food and energy costs. The exclusion of the two volatile commodities gives a more stable reading of inflation. The most recent core-PCE figure showed an annual change of 5.2%, more than two-and-a-half times larger than the Fed’s target inflation rate.
Jerome Powell Elected for Second Term as Fed Chairman
Jerome Powell, who has served as Fed Chairman since 2018, has been elected to serve a second four-year term for the federal agency, following an 80-19 vote on Thursday in the 69-year-old banker’s favor. He now faces a series of significant economic challenges, with inflation raging, a tattered supply-chain, and a war across the Atlantic Ocean kicking up a gear.
Powell adressed the issue of inlation seperately on Thursday on a radio program. “The process of getting inflation down to 2% will also include some pain, but ultimately, the most painful thing would be if we were to fail to deal with it. Ultimately, we’d have to go through a much deeper downturn,” said the Chairman, signalling the Fed’s willingness to push the economy into a recession to tame inflation. In 2022 so far, the Fed has raised it’s benchmark interest rate twice, most-recently by 0.5% - the largest rate hike since 2000.
Federal Reserve Chairman, Jerome Powell
One factor that continues to elevate inflation is the price of gasoline, and more specifically, diesel. The energy-dense fuel has seen prices skyrocket to record highs recently, despite the easing of duties aimed at non-renewable energy sources. The war in Ukraine is amongst the factors leading the acceleration of prices. The national-average price of diesel at the pump reached $5.62 per gallon, an increase of $1.50 in just two months, according to the U.S. Energy Information Administration.
National-Average Price of Diesel v Gasoline
Source: U.S. Energy Information Administration, WSJ
“The process of getting inflation down to 2% will also include some pain, but ultimately, the most painful thing would be if we were to fail to deal with it.”
USD Remains Strong Despite Inflation Pressures
History has shown that, generally, when inflation elevates, the U.S Dollar gets weaker. This time around, however, the dollar is getting stronger.
The world’s reserve currency has climbed to highs against it’s trading partners that haven’t been seen in decades, despite inflation being at 40-year highs. The U.S. Dollar Index, which tracks the currency against a basket of others, is reaching levels unseen since 2002, and is up approximately 14% year-over-year.
The head of inflation trading at Barclays, Chris McReynolds, put the strength of the dollar down to the accelerated weakness of other economies, despite the instability of the U.S economy, stating “The U.S. economy was much less damaged by Covid than others.”
The sturdiness of the dollar comes with the report of a record government surplus in April from the Treasury Department. The U.S government boasted a surplus of $308 billion, breaking the previous record of $214 billion, set in April 2018. The report showed the largest year-over-year dollar-increase in history, from a deficit of $226 billion in April of 2021. The deficit was a product of a government decision to postpone the annual tax filing deadline by one month to May 17th.
April government receipts showed a robust 97% annual increase, to $864 billion, another record figure. (Government receipts, also known as revenue receipts, represent the total revenue a government makes in any given period, and include taxes, interest and dividends on government investment, and other receipts for services rendered by a government).
The record U.S government budget surplus is a direct result of a near-double in receipts, and a strong economic recovery from the pandemic, which allowed officials to decrease COVID-19 relief spending. Total government outlays, or expenditures, for April declined accordingly by 16% to $555 billion.
The formula for government surplus is as follows:
Total Government Receipts - Total Government Outlays
Investing
Analyst’s Report- T. Rowe Price Group (NASDAQ: TROW)
By Ben Slye
Business Explanation
T. Rowe Price Group, Inc. is a publicly owned investment manager. The firm provides its services to individuals, institutional investors, retirement plans, financial intermediaries, and institutions. It launches and manages equity and fixed income mutual funds. The firm invests in the public equity and fixed income markets across the globe. It employs fundamental and quantitative analysis with a bottom-up approach. The firm utilizes in-house and external research to make its investments. It employs socially responsible investing with a focus on environmental, social, and governance issues. It makes investment in late-stage venture capital transactions and usually invests between $3 million and $5 million. The firm was founded in 1937 and is based in Baltimore, Maryland.
By The Figures
Price (as at close, Friday, May 13th): $121.96
Market Cap (as at close, Friday, May 13th): $27.72 billion
P/E Ratio (as at close, Friday, May 13th): 9.64
Dividend Yield (as at close, Friday, May 13th): 3.64%
52-Week Range: $121.02 - $224.56
ROE: 31.6%
ROIC: 27.1%
10-Year Revenue CAGR: 10.8%
10-Year FCF CAGR: 14.0%
10-Year Equity CAGR: 11.6%
Management
CEO Robert Sharps has been with T.Rowe since 1997. He was elected president of the financial-services company in February 2021.
Before his election to head of the firm, he was the lead portfolio manager of the Institutional Large-Cap Growth Equity Strategy for 15 years until December 2016. In 2017, he was named head of Investments and group Chief Investment Officer, a position he held until 2021. In February of that year, he became president of T.Rowe and became CEO in January 2022.
Analysts believe Sharps is yet to prove how effective he is in the CEO position. Before him, William Stromberg served as Chief Executive of T.Rowe, from 2016-2021. Under Stromberg the company saw robust growth, increasing their revenue at a rate of 10.78% on average, their EPS at a rate of 19.33%, and their equity at an average rate of 13.87%. He averaged an ROIC of 23.65% and an ROE of 26.83% while as CEO. The stock grew 190.49% under his management.
China
Chinese Consumer Demand Sinks & COVID-19 Lockdowns Spark Supply Chain Woes
Global inflation is at multi-decade highs, and suppliers are feeling the effects. As inflation washes up consumer demand, suppliers are feeling the pressure, especially in China. The recent Covid outbreaks in cities across the People’s Republic has proved that the Xi Jinping’s ‘Zero-Covid Tolerance’ practices are very much still in use, and has contributed to significant production slowdowns, as workers are being quarantined.
Xi Jinping, Chairman of the Chinese Communist Party
Source: South China Morning Post
The damage Covid-19 has had on China’s trucking industry is resulting in huge operational headaches for Shanghai’s port, which facilitates 12.5% of the east-Asian nation’s revenue.
The hold-up is a direct consequence of China’s trucking crisis, and is causing empty containers to be stacked on docks, waiting for cargo deliveries. The Eastern city, with a population of 25 million, usually has one of the busiest container ports in the world, and accounts for more than 25% of all containers heading to the U.S and Europe.
Artistic Rendition of Shanghai’s Port
Source: producereport.com
In the west, port operators are frantically clearing cargo, a difficult thing to do with current consumer demand levels. The cargo-clearing frenzy comes upon fears of an overload of inventory when China’s lockdowns finally cease.
In April, China’s exports rose 3.9% year-over-year, nosediving from March’s 14.7% year-over-year growth, according to China’s Customs Bureau. Imports were unchanged from 2021 levels.
Rory Green, head of China and Asia research at consulting firm TS Lombard in London, noted China’s perilous economy as being “a massive headwind for global growth.”
As stated by HSBC, China accounted for 18% of global GDP, just more than the E.U, at 17%, but less than the U.S, at 24%. The three account for roughly 60% of the world’s GDP, and the disruption of economic stability in all are most certainly a cause for concern.
Shanghai’s executive vice-mayor, Wu Qing, announced to the press on Friday morning that the city aims to have the Covid outbreak completely under control by May 20. The confidence from the vice-mayor comes despite reported cases increasing for the first time in 19 days.
Wu Qing, Executive Vice-Mayor, Shangai
“[China’s weakness] is a massive headwind for global growth.”
Inflation at the moment is making a fool of these low interest savings accounts. If your not experiencing the highest irr's at the moment, your money is biting the dust!
Hopefully people begin to realise how stupid bitcoin is an investment now...