Weekly Business Roundup
Publication 11- Amazon Agrees To Buy Roomba Maker iRobot, Bank Of England Makes Biggest Rate Hike Since 1995, and July Employment Report Shows Labor Market Still Tight
Published Sunday, August 7th 2022
This week, market volatility hurt Berkshire Hathaway’s earnings, the U.S trade deficit narrowed following an increase in energy exports, and tensions between the U.S and China escalate as China execute military drills around Taiwan.
Business
Amazon Buying Roomba Maker iRobot for $1.7 Billion
Amazon.com Inc. is buying Roomba maker iRobot Corp. for $1.7 billion, giving the online retailer another connected-home product that deepens its ties to consumers’ homes.
Amazon agreed to pay $61 a share for iRobot in an all-cash deal. The price, which includes a small amount of debt, represents a 22% premium to iRobot’s closing price of $49.99 on Thursday.
IRobot introduced its Roomba vacuum in 2002 and has sold more than 40 million units since. The wireless, smart-vacuum learns and maps spaces to clean dust and messes. It is a staple of Amazon’s Prime Day shopping bonanza, having been a featured product for eight straight years.
IRobot in May had projected reaching sales of $1.6 billion to $1.7 billion this year. It withdrew that guidance on Friday in light of the deal and other challenges.
Roomba would join other Amazon-owned products like the Alexa virtual assistant speaker and Ring video doorbell that together give the retailer more ways to power smart homes.
IRobot would be the fourth-largest acquisition by Amazon, ranking behind the 2017 acquisition of Whole Foods for $13.7 billion, an $8.5 billion purchase of movie studio MGM in March and last month’s agreement to buy 1Life Healthcare for $3.9 billion.
The deal comes as iRobot is struggling. On Friday, it reported a 30% drop in second-quarter sales, which came in at $255.4 million, and a net loss that widened to $43.4 million, or $1.60 a share, from $2.8 million, or 10 cents a share, in the year-ago quarter.
IRobot said that the latest quarter’s results were hurt by reduced orders, supply-chain problems and a stronger dollar.
The company said that it is also laying off 140 employees, or about 10% of the global workforce, as well as taking other measures to cut costs by up to $10 million this year.
IRobot Chief Executive Colin Angle will remain in his position upon completion of the acquisition, which requires approval from shareholders.
Berkshire Hathaway’s Earnings Fall as Market Volatility Weighs On Results
Berkshire Hathaway Inc.’s earnings slid in the second quarter as market turmoil weighed on the company’s massive stock portfolio.
The Omaha, Neb.-based company, which owns businesses ranging from insurer Geico and railroad BNSF Railway to sportswear maker Brooks Running, posted a loss of $43.8 billion, or $29,754 a class A share equivalent. That compared with a profit of $28.1 billion, or $18,488 a share, in the year-earlier period.
Berkshire’s operating earnings, which exclude some investment results, rose to $9.3 billion from $6.7 billion a year earlier. Earnings grew at all of the company’s major units, including its railroad, utilities and energy, as well as insurance underwriting operations.
Chief Executive Warren Buffett has said he prefers looking at operating earnings to gauge the company’s performance, since accounting rules require Berkshire to include unrealized gains and losses from its investment portfolio when it reports its net income. When markets slide, as they have this year, they can be a substantial drag on Berkshire’s earnings, even if its underlying businesses are doing well.
Berkshire Hathaway Chief Executive and Chairman, Warren Buffett
“We believe that investment and derivative gains and losses…are generally meaningless in understanding our reported quarterly or annual results or in evaluating the economic performance of our businesses,” Berkshire said in a statement accompanying its results.
The S&P 500 has fallen 13% in 2022 as decades-high inflation has forced the Federal Reserve to swiftly raise interest rates. Rising prices for everything from freight to labor to raw materials have also weighed on companies, including Berkshire’s subsidiaries.
Berkshire’s railroad unit, for instance, saw a 20% increase in the cost of operations in the second quarter, largely driven by a steep rise in the cost of fuel, as well as wages.
“In terms of inflation in our own businesses, it’s extraordinary how much we’ve seen,” Mr. Buffett said at the company’s annual shareholder meeting earlier this year.
Despite rising price pressures and cooling economic activity, many of Berkshire’s businesses managed to grow in the second quarter as they passed on higher costs to customers. BNSF Railway introduced a fuel surcharge and was able to make more revenue per railway car, while Forest River Inc., which manufactures RVs, pontoon boats and shuttle buses, reported fetching higher average sales prices for its vehicles.
Other businesses were stung by inflation. Geico reported having to spend more on claims from its auto-insurance customers as a result of rising prices in the car market and shortages of car parts necessary for repairs. That weighed on its underwriting business.
Meanwhile, Berkshire continued to increase its investments in the stock market in the second quarter.
Much of its cash went into the energy sector. Berkshire began purchasing shares of Occidental Petroleum Corp. in February and quickly became the company’s biggest shareholder, growing its stake to 17% at the end of the second quarter. The company has bought more Occidental shares since then, bringing its stake to about 19%.
“We believe that investment and derivative gains and losses…are generally meaningless in understanding our reported quarterly or annual results or in evaluating the economic performance of our businesses”
China Evergrande Backs Out of Plan to Build World’s Largest Soccer Stadium
The final whistle has sounded for China Evergrande Group’s global soccer ambitions.
The embattled Chinese property giant is canceling a contract to build what was slated to be the world’s largest soccer stadium, and is returning land-use rights for the site to the government of Guangzhou in its home province.
Evergrande’s Project To Build The World’s Largest Soccer Stadium
Evergrande said it would receive a refund equivalent to about $818 million, and intends to use the money to help repay a mountain of debt. The property conglomerate, which has around $300 billion in liabilities, defaulted on its U.S. dollar bonds last year and has failed to pay some of its debt in mainland China.
The massive stadium project had been a high-profile symbol of the excesses of Evergrande, which spent freely on activities far removed from its core real-estate business during the years when it was flush with cash. Evergrande bought Guangzhou’s soccer club more than a decade ago for 100 million yuan, the equivalent of about $15 million at current exchange rates, and used it to help promote its brand as the developer rolled out residential projects in cities across China.
The Guangzhou Evergrande Football Club won national accolades after clinching the Asian Champions League title in 2013—becoming the first Chinese club to win the tournament in more than two decades. The following year, Alibaba Group Holding Ltd. bought part of the team for 1.2 billion yuan, and it became known as the Guangzhou Evergrande Taobao Football Club. The deal came about after Jack Ma, Alibaba’s founder and then-chairman, had drinks with Evergrande’s chairman and founder, Hui Ka Yan.
The team is an eight-time champion of the Chinese Football Association Super League, the country’s top professional soccer league. The club dropped both corporate sponsors from its name last year, and is now just known as the Guangzhou Football Club. Evergrande also sponsored a soccer school to groom and train young players, and boasted about its contributions to the country’s sports developments in its annual reports.
Several other Chinese developers also bought soccer clubs as China launched a national campaign in 2016 to become a “world-leading soccer power by 2050” through youth promotion and league development. Chinese President Xi Jinping has also spoken about his passion for the sport on numerous diplomatic occasions.
Chinese President, Xi Jinping
In April 2020, Evergrande paid about $1 billion for the land-use right of a parcel located in Guangzhou’s Panyu District. At the time, the developer said it would turn it into the world’s largest and most technologically advanced soccer stadium—a lotus-shaped spectacle that would be able to accommodate 100,000 people. It was to be called the Guangzhou Evergrande Football Stadium.
The stadium will “compete with global landmarks such as the Sydney Opera House and the Dubai Burj Khalifa for its beauty” and will be an important landmark as Chinese soccer goes international, said Xia Haijun, Evergrande’s former chief executive officer, at the ceremony that marked the beginning of construction.
Former Evergrande Chief Executive Officer, Xia Haijun
Evergrande’s original plan was to invest as much as 12 billion yuan in the project. The stadium was supposed to be finished by the end of 2022. Construction has begun, but the project is far from completion.
Evergrande became engulfed by liquidity problems last year and is working on a debt-restructuring plan while it tries to deliver on promises to complete numerous unfinished residential property developments across China. Last month, Mr. Xia was ousted from Evergrande after he was found to have been involved in questionable borrowing arrangements.
After the developer returns the land-use right to the Guangzhou Municipal Planning and Natural Resources Bureau, the money Evergrande receives will go into a government-designated escrow account that will be used to pay back the company’s debts. That includes outstanding secured debt owed to state-owned Citic Trust Co., unpaid project construction fees, expenses related to the presold commercial housing and the unpaid wages of employees of Evergrande’s project companies, according to a stock-exchange filing.
“[The stadium will] compete with global landmarks such as the Sydney Opera House and the Dubai Burj Khalifa for its beauty”
Economics
U.S. Added 528,000 New Jobs as Unemployment Rate Fell to 3.5%
U.S. employers added a robust 528,000 jobs last month, helping the economy recoup the 22 million positions lost early in the pandemic, as hirers clamored for workers despite a slowdown in economic growth.
The jobs recovery took nearly 2½ years and included a stretch in the first half of the year when payrolls grew faster than during any other post-World War II period that also featured the start of an economic contraction. The unemployment rate dropped to 3.5% last month, a half-century low also seen just before the pandemic in early 2020, the Labor Department said Friday.
Stocks closed mostly lower and bond yields rose on Friday, with the tech-focused Nasdaq Composite recording the steepest declines.
The labor-force participation rate—or the share of adults working or seeking a job—ticked down to 62.1% in July from 62.2% a month earlier. While the economy has recovered all the jobs it lost since February 2020, there are still 623,000 fewer people in the workforce, a factor that has pushed up wages due to a demand for workers that is well above the number of available workers.
Wage growth was stronger than economists anticipated in July, with average hourly earnings rising 0.5% from June and 5.2% from a year ago. Wage growth in June was also revised higher, indicating that earlier data overstated the magnitude of a recent deceleration in the brisk pace of wage growth.
Job gains were widespread last month. Employers in leisure and hospitality added jobs at a solid clip, as restaurants and bars continued to recover. Payrolls also grew in healthcare and professional and business services, which includes many white-collar jobs.
Industries vulnerable to the Federal Reserve’s interest-rate increases also performed well in July. Construction firms, manufacturers and finance companies all added to payrolls.
By defying expectations of an economic slowdown, the report will make it harder for the Federal Reserve to dial back the pace of rate increases at its meeting next month. The behavior of wages is particularly important to the Fed right now because of concerns that companies are raising wages because they can pass higher labor costs on to consumers as a result of the current inflationary environment.
“We’re not in a recession yet,” said Greg Daco, chief economist at EY-Parthenon, a consulting firm. “But I hate to be overly enthusiastic and then in 28 days we might get a less optimistic report.”
Businesses have continued to hire despite two straight quarters of economic contraction, cooling consumer spending and rising risks of a recession. Overall employment also has nearly returned to prepandemic levels. But demand for workers in some sectors is cooling as the economy transitions away from the red-hot expansion that followed the elimination of Covid-19-related restrictions on business activity.
Some companies such as Walmart Inc. and Robinhood Markets Inc. are cutting staff, but overall layoffs are slowly rising, according to weekly unemployment claims.
U.S. job openings remained elevated but fell in June to their lowest level in nine months and fell by 600,000 from May, according to a separate report from the Labor Department released Tuesday. Total job openings remained well above the number of unemployed workers looking for a job.
“We’re not in a recession yet, but I hate to be overly enthusiastic and then in 28 days we might get a less optimistic report”
Bank of England Makes Biggest Rate Rise Since 1995 as Inflation Soars
The Bank of England raised interest rates by the most in a quarter-century Thursday even as it predicted the U.K. economy will fall into recession later this year, underscoring global central banks’ urgency in fighting a surge in inflation.
Bank of England Building, London, England
The rate increase to 1.75% from 1.25% was the largest since 1995 and the first half-point increase since the bank was granted independence in 1997. The move mirrors recent rate hikes by the Federal Reserve and the European Central Bank, reflecting fears that the longer inflation is allowed to persist, the harder it will be to bring down.
The Bank of England offered a particularly bleak outlook for the U.K., saying the economy was poised to enter a recession that would last for five consecutive quarters starting in the final three months of this year, a downturn as long as the one that followed the financial crisis but not as deep, the bank said. It added that inflation would continue to rise well above its current four-decade high and that household income would fall sharply.
While the half-point increase was broadly expected, the dire warning about the fragility of the U.K. economy and stagflation, the toxic combination of no economic growth and inflation, took markets aback. The British pound fell against the dollar immediately after the announcement before paring its losses and the yield on the U.K.’s benchmark 10-year bond fell.
“I think it was the monetary policy equivalent of a horror show,” said Elliot Hentov, head of macro policy research at State Street Global Advisors. “It is all-round bad: High inflation, deep recession, long recession, cuts to real income, a loss of purchasing power, wealth and prosperity and they are probably right too.”
Sharply raising borrowing costs during a looming recession will do more damage to the economy short-term. But many central banks are betting that bigger rate increases now, while price shocks like higher energy prices from the war in Ukraine are still relatively recent, will help prevent inflationary expectations from taking root among businesses and consumers, and avoid a longer period of damaging rate increases down the road.
The trade-off is one that central bankers are struggling with around the world. Global inflation is the highest since the early 1980s, a product of an end to Covid-19 lockdowns, global supply-chain issues and soaring energy and food prices.
The price shocks have ended a sustained period of ultralow interest rates that followed the 2008 financial crisis, causing banks from Mexico to Malaysia to scramble to hike borrowing costs. Brazil’s central bank has jacked up its key rate to 13.25% from a record low of 2% in 2021.
Eight out of nine Bank of England officials voted for the larger-than-usual increase. The bank has increased borrowing costs at six straight meetings of its monetary policy committee, its longest such streak since the late 1990s.
The hawkish view on inflation is shared by the U.S. Fed, which last week undertook its second consecutive 0.75-percentage-point interest rate rise, raising its benchmark federal-funds rate to a range between 2.25% and 2.5%.
“We have some sympathy for this argument and have highlighted that monetary policy tightening has been particularly damaging in past episodes when inflation had already been allowed to get out of control,” Jennifer McKeown, head of global economics service at Capital Economics in London, wrote in a note to clients on Thursday.
“I think it was the monetary policy equivalent of a horror show. It is all-round bad: High inflation, deep recession, long recession, cuts to real income, a loss of purchasing power, wealth and prosperity and they are probably right too”
U.S. Trade Deficit Narrows as Energy Exports Rise
The U.S. trade deficit narrowed sharply in June to its lowest level in six months as a rise in shipments of energy products pushed up exports, while cooling consumer appetite weighed on imports.
The trade gap in goods and services shrank 6.2% in June to $79.6 billion after seasonal adjustment, the Commerce Department said Thursday, down from May’s revised deficit of $84.9 billion. That marked the first time the deficit has been below $80 billion since December 2021.
Exports grew 1.7% to $261 billion, helped largely by higher shipments of energy and food products. Imports fell 0.3% to $340 billion, reflecting sizable declines in American purchases of autos and food items.
International trade has been a resilient spot for the U.S. as broader economic growth slowed and inflation soared. The war in Ukraine has caused countries to seek alternatives to Russian energy, pushing up demand and prices for U.S. energy products.
U.S. exports of industrial supplies and materials, which include natural gas and petroleum products, rose 6.5% in June from a month earlier. Also included in the category is gold, whose exports rose by more than $1 billion to nearly $5 billion.
Higher oil prices have been a boon for the energy industry, with Exxon Mobil Corp. , Chevron Corp. and Shell PLC reporting a record in collective profits in the second quarter.
Imports fell in June after rising slightly in May, a trend economists expect to continue in the coming months as U.S. growth decelerates. While consumers have continued to spend at a steady pace even as inflation cut into their purchasing power, their sentiment has deteriorated.
A July survey of consumer sentiment from the University of Michigan showed little change from June, when it hit historic lows.
The labor market has also shown several signs of cooling, though businesses have continued to hire as they try to overcome a shortage of available workers. Initial jobless claims, a proxy for layoffs, last week held near their highest levels of the year. Meanwhile, U.S. inventories are building on wholesale and retail levels.
The International Monetary Fund lowered its forecast for U.S. economic growth for 2022 to 2.3% from its April forecast for 3.7%. The U.S. economy grew 5.7% in 2021.
U.S. gross domestic product fell 0.9% on an annualized basis in the second quarter, following a 1.6% drop in the first quarter, the Commerce Department said last week. Trade contributed to the economy with exports jumping 18% while imports increased 3.1%.
World
China Boasts of Ability to Blockade Taiwan as Military Exercises Continue
China escalated its military and diplomatic warnings over Taiwan on Friday as it registered anger at House Speaker Nancy Pelosi’s visit to the island. Beijing for the first time sought to demonstrate its ability to militarily blockade Taiwan and it suspended some cooperation with Washington, while sanctioning Mrs. Pelosi.
House Speaker, Nancy Pelosi, in Taiwan
The new actions, including suspension of climate talks, illustrate how Beijing’s fury at Mrs. Pelosi’s visit promises to complicate efforts in the U.S. and Chinese capitals to halt a downward spiral in relations between the world’s two biggest economies. Both governments have identified climate issues, for example, as the rare area they see room to collaborate.
In the second day of military exercises that appear unprecedented in scope and proximity to Taiwan, China dispatched warplanes toward the island and its naval forces patrolled sea lanes within range of Taiwan’s military bases and its biggest commercial ports.
Beijing says the action demonstrated an ability to seal off the island. Encircling Taiwan, military analysts say, would give Beijing leverage in a crisis to force submission by the island’s government without an invasion.
At least 68 Chinese warplanes and 13 warships carried out maneuvers off Taiwan’s coast on Friday, Taiwan’s Ministry of National Defense said. During the operation, some of the aircraft and ships sent by China’s military crossed the median line in the Taiwan Strait, a notional boundary that Taipei says demarcates areas of de facto control, the ministry said.
China says it also flew missiles directly over Taiwan for the first time, though Taiwan says their path through the atmosphere limited the risk.
U.S. Secretary of State Antony Blinken, in Cambodia for a regional meeting, described the actions as a “significant escalation.” The White House, meanwhile, said the aircraft carrier group USS Ronald Reagan would remain in the region to monitor the situation. The White House also summoned Chinese Ambassador Qin Gang to protest Beijing’s actions and warn against manufacturing a crisis.
U.S. Secretary of State, Antony Blinken
China claims self-governed Taiwan as sovereign territory and characterizes threats to that position as one of the few issues that could spark war with the U.S. The U.S. takes no position on Taiwan’s sovereignty but is legally obligated to help the island defend itself, including by selling it weapons.
Beijing says a visit to Taiwan by the third-ranking U.S. politician, Mrs. Pelosi, violated American agreements to honor a One China Policy and may encourage politicians on the island to seek independence. It says it is within its rights to take action to defend its sovereignty. “China has been compelled to act in self-defense,” Jing Quan, a minister in China’s Embassy in Washington told reporters Friday.
Amazon building up that nice pile of subsidiaries that are generating them nice cash flows. Great move imo!
Nice work as always man!