Weekly Business Roundup
Publication 7- Fines Galore, Stocks Post Worst Results in 50 Years, and Fed-Preffered Inflation Measures Showed Elevated Inflation Levels
Published Sunday, June 3rd 2022
This week, U.S GDP showed a contraction in the first quarter, America pledged to station more troops in Europe amidst heightened tensions with Russia, and inflation held far above the Fed’s target level in May.
Business
Credit Suisse Employee Found Guilty On Money Laundering Charges
Credit Suisse Group AG and a former employee were found guilty Monday in a Swiss federal criminal court of helping a Bulgarian crime ring launder money related to cocaine trafficking.
The court found Credit Suisse didn’t do enough to prevent money laundering by members of the crime ring, which prosecutors said moved tons of cocaine into Europe and washed millions of dollars through Credit Suisse. It fined Credit Suisse around $2.1 million and ordered it to pay around $20 million to the Swiss government.
The former employee, who prosecutors said regularly accepted suitcases of cash from one of the ring members that went beyond allowed limits, was given a 20-month suspended sentence. A person from another bank and two members of the crime ring were also found guilty of money-laundering charges.
Credit Suisse said it would appeal the decision. It noted that the alleged offenses date to more than 14 years ago. It had said it was astonished to be charged when prosecutors brought the case in December 2020. The bank on Monday said it is continually testing its anti-money-laundering framework and has been strengthening it over time. The former employee’s lawyer said she wasn’t sufficiently trained by the bank, and will appeal.
The court said Credit Suisse made it possible for the crime ring to launder money through the bank between July 2007 and December 2008 by failing to adequately monitor its accounts and make sure the business complied with anti-money-laundering rules. The crime ring allegedly recruited a Bulgarian wrestler and others in his orbit for operations transporting drugs and laundering money.
Credit Suisse had argued that prosecutors were alleging deficiencies based on rules and principles that didn’t apply at the time. It said previously that outside lawyers and consultants had reviewed its systems against money laundering and found its organizational setup was “correct and appropriate” in the period being probed. Prosecutors initially charged the bank with deficiencies between 2004 and 2008 but had to narrow the time frame because too much time had passed.
The conviction hits Credit Suisse as it tries to turn a corner on financial losses and other scandals, including more than $5 billion in losses related to the collapse of family office Archegos Capital Management.
On Tuesday, Credit Suisse will update investors on plans to cut costs this year to help offset falling revenue in some divisions. It previously said it expects to post its third consecutive quarterly loss for the three months ending June 30.
Ernst & Young Pay Hefty Fine In Relation To Ethics Exam-Cheating Scandal
Ernst & Young agreed to pay a record $100 million fine and to admit that some of its auditors cheated on required ethics exams in recent years, according to a settlement order released on Tuesday.
The Securities and Exchange Commission said the penalty is the largest fine ever imposed on an audit firm, and stemmed partly from EY’s failure to report the scandal to regulators who had asked the firm about such misbehavior.
The case is the latest reputational setback for a profession entrusted with overseeing the reliability of public companies’ financial statements. KPMG LLP, another of the Big Four accounting firms, was fined $50 million in 2019 over ethical violations including claims that some auditors cheated on training exams.
“It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said SEC Enforcement Director Gurbir Grewal. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct.”
SEC Enforcement Director, Gurbir Grewal
EY said that “nothing [at the firm] is more important than our integrity and our ethics.” It said the firm doesn’t tolerate cheating on exams, adding that its “response to this unacceptable past behavior has been thorough, extensive, and effective.”
The settlement could complicate an effort by the firm’s top leaders to split EY into separate auditing and consulting firms. The executives would have known about the SEC’s investigation as they planned for the possible breakup.
“It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things”
Stocks Post Worst First Half of a Year in More Than Five Decades
Global markets closed out their most bruising first half of a year in decades, leaving investors bracing for the prospect of further losses.
Accelerating inflation and rising interest rates fueled a monthslong rout that left few markets unscathed. The S&P 500 fell just over 20% through Friday, suffering its worst first half of a year since 1970, according to Dow Jones Market Data. Investment-grade bonds, as measured by the iShares Core U.S. Aggregate Bond exchange-traded fund, lost 11%—posting their worst start to a year in history. The blue-chip Dow Jones Industrial Average lost 15%.
Stocks and bonds in emerging markets tumbled, hurt by slowing growth. And cryptocurrencies came crashing down, saddling individual investors and hedge funds alike with steep losses.
About the only thing that rose in the first half was commodities prices. Oil prices surged above $100 a barrel, and U.S. gas prices hit records after the Russia-Ukraine war upended imports from Russia, the world’s third-largest oil producer.
Now, investors seem to be in agreement about only one thing: More volatility is ahead. That is because central banks from the U.S. to India and New Zealand plan to keep raising interest rates to try to rein in inflation. The moves will likely slow down growth, potentially tipping economies into recession and generating further tumult across markets.
“That’s the biggest risk right now—inflation and the Fed,” said Katie Nixon, chief investment officer for Northern Trust Wealth Management.
Chief Investment Officer for Northern Trust Wealth Management, Katie Nixon
The good news for investors is that markets haven’t always done poorly after suffering big losses in the first half of the year. In fact, history shows they have often done the opposite.
When the S&P 500 has fallen at least 15% the first six months of the year, as it did in 1932, 1939, 1940, 1962 and 1970, it has risen an average of 24% in the second half, according to Dow Jones Market Data.
One reason markets have often snapped back after big pullbacks: Investors have eventually stepped in, wagering prices have fallen too far. Fund managers currently have larger-than-average cash positions, smaller-than-average equities positions and a markedly high degree of pessimism about the economy, Bank of America found in its June survey of investors. Those factors, among others, make markets look “painfully oversold”—and thus potentially ripe for a rally, the bank’s strategists said in a separate report.
“That’s the biggest risk right now—inflation and the Fed”
Economics
Fed’s Preffered Measure Of Inflation Shows Prices Stayed High In May
Inflation remained elevated in May, measured by the Federal Reserve’s preferred gauge, driven in large part by a jump in energy and food prices.
Consumer prices rose 6.3% in May from a year earlier, the same as in April but down slightly from 6.6% in March, as measured by the Commerce Department’s personal-consumption expenditures price index, which it reported Thursday. The March rise was the fastest since January 1982.
The so-called core PCE index—which excludes volatile food and energy prices—increased 4.7% in May from a year ago, down from 4.9% in April. On a monthly basis, core prices rose a seasonally adjusted 0.3% in May, the same pace as in each of the prior three months.
The Fed faces the challenge of tightening monetary policy enough to curb inflation without also stamping out growth—what economists often call a “soft landing.” Officials approved the biggest interest-rate increase since 1994 on June 15, lifting the benchmark federal-funds rate by 0.75 percentage point to a range between 1.5% and 1.75%. Most Fed officials have said they want to raise the rate to between 3% and 3.5% by the end of the year.
The labor market remains strong, fueling robust growth in people’s incomes and propping up spending despite high prices. However, some signs of cooling have emerged recently: Consumer spending growth slowed in May to its slowest pace this year. Unemployment claims have picked up slightly in recent weeks, though from a historically low level. The 390,000 jobs U.S. employers added in May were slightly below the average monthly pace of growth earlier this year. Job openings dropped in April from the record reached in March.
The housing market, which is among the most interest-rate-sensitive parts of the economy, has shown signs of softening as mortgage rates have climbed, with sales of previously owned homes falling in May for a fourth straight month, the National Association of Realtors said.
Those signs, along with the prospect of the Fed sharply increasing interest rates this year, are stoking fears of a possible recession. Fed Chairman Jerome Powell said Wednesday that the central bank had to increase rates rapidly to avoid inflation becoming entrenched even if that raises the risk of an economic downturn.
“Is there a risk we would go too far? Certainly there’s a risk,” Mr. Powell said. “The bigger mistake to make—let’s put it that way—would be to fail to restore price stability.”
Federal Reserve Chairman, Jerome Powell
Mr. Powell has said the central bank wants to see clear and convincing evidence that price pressures are subsiding before slowing or suspending rate increases.
While the Fed tends to focus on the PCE price index, the public and many investors tend to be more aware of the Labor Department’s consumer-price index, which climbed 8.6% in May from a year earlier, the fastest pace since December 1981, when inflation was retreating from double-digit highs as tight monetary policy thrust the economy into a deep downturn.
“Is there a risk we would go too far? Certainly there’s a risk. The bigger mistake to make—let’s put it that way—would be to fail to restore price stability”
U.S GDP Shows First-Quarter Contraction
The U.S. economy entered the second quarter on shakier footing than previously thought.
Consumer spending, the economy’s main engine, was much softer in the first quarter than previously reported, according to Commerce Department gross domestic product revisions released Wednesday. Spending grew at a revised annual rate of 1.8% in the first quarter, down from a previous estimate of 3.1%.
The updated numbers revised the first-quarter contraction in economic output to an annual rate of 1.6% from 1.5%. The weaker estimate on the first three months of the year comes amid signs the economy is slowing in the second quarter, as consumers confront elevated inflation and higher interest rates.
Many economists have downgraded their forecasts for second-quarter GDP in recent weeks. Some estimate the economy expanded only slightly in the April-through-June period.
Spending at retailers fell in May for the first time this year, a sign consumers are struggling to stomach higher prices. Consumers’ short-term outlook for the U.S. economy dropped sharply on concerns about inflation, the Conference Board’s consumer-confidence survey showed.
Russia Default on Foreign Bond Payments
Russia defaulted on its foreign debt for the first time since 1918, pushed into delinquency not for lack of money but because of punishing Western sanctions over its invasion of Ukraine.
Russia missed payments on two foreign-currency bonds last week, according to holders of the bonds. The day marks the expiration of a 30-day grace period since the country was due to pay the equivalent of $100 million in dollars and euros to bondholders.
The default has been long in coming since the West all but unplugged Russia from the global financial system, creating payment obstacles Moscow couldn’t overcome. It wasn’t expected to cause any immediate ripple effects in markets or Russia’s economy. Russian bonds have traded for pennies on the dollar since days after the invasion, a sign that investors believed default was probable.
Russia last failed to pay its foreign borrowing during the Bolshevik Revolution when Vladimir Lenin, the newly installed communist leader, repudiated the debt of the Russian Empire. Russia defaulted on its ruble-denominated bonds during a financial crisis in 1998, but it was able to stay current with its overseas debt at the time.
Litigation over the lack of payment could span years. Russia has accused the West of manufacturing an artificial default, and has gone to great lengths in recent months to route money in roundabout ways to get the required payments into the hands of bondholders.
Finance Minister Anton Siluanov on Thursday said Western nations created barriers in order to “hang the label ‘default’” on Russia and called the situation a farce.
Russian Finance Minister, Anton Siluanov
Russia has plenty of money from oil and gas sales to pay its foreign debts, which are relatively small compared with the size of its economy. But allied Western governments have blocked the Kremlin’s ability to tap foreign bank accounts or use cross-border payment networks to move money.
World
U.S. to Increase Military Presence in Europe to Counter Russia
The U.S. will make its biggest military expansion in Europe since the Cold War, including its first permanent troop presence in Poland, as NATO prepares for two more members to join the alliance in response to Russia’s invasion of Ukraine.
The announcement, which follows a NATO pledge this week to increase its high-readiness forces sevenfold, comes despite Washington’s efforts to shift U.S. attention toward China and offers further evidence of how Russia’s war is upending international security.
“We’re stepping up. We’re proving that NATO is more needed now than it ever has been,” President Biden said Wednesday at the opening of the North Atlantic Treaty Organization summit.
The shift to China was evident in the release of NATO’s updated “Strategic Concept,” a mission statement for the decade ahead. China wasn’t mentioned in the last version, from 2010, but its economic and military might have caused a global reordering.
The U.S. in particular has pressed allies into confronting Beijing over its economic practices and human rights, while there is growing concern over intentions toward Taiwan and the Indo-Pacific.
The document states that China threatens NATO’s “interests, security and values,” through cyber operations and its control over technology, critical infrastructure, strategic materials and supply chains. It also says that deepening ties between China and Russia “run counter to our values and interests.”
The U.S., in its plan announced Wednesday, will add to the 100,000 troops it now has in Europe and deploy more military equipment to NATO allies. The additions include rotational deployments to Romania and the Baltic region, and a permanent Army headquarters base and other units in Poland, the White House said. Until now, the U.S. and other allies have only rotated troops in and out of NATO countries once under Soviet domination, not permanently located them there.
“We’re stepping up. We’re proving that NATO is more needed now than it ever has been”
Investing
Analyst’s Report- Tesla Inc. (NASDAQ:TSLA)
By Ben Slye
Business Explanation
Tesla design, develop, manufacture, sell and lease high-performance fully electric vehicles and energy generation and storage systems, and offer services related to their products. They generally sell their products directly to customers, including through their website and retail locations.
They also continue to grow their customer-facing infrastructure through a global network of vehicle service centers, Mobile Service technicians, body shops, Supercharger stations and Destination Chargers to accelerate the widespread adoption of our products.
They strive to lower the cost of ownership for their customers through continuous efforts to reduce manufacturing costs and by offering financial and other services tailored to their products.
Tesla stated in the ‘Business’ section in their 10-k that “Our mission to accelerate the world’s transition to sustainable energy, engineering expertise, vertically integrated business model and focus on user experience differentiate us from other companies”.
Tesla was founded on July 1st , 2003 by Martin Eberhard and Marc Tarpenning in San Carlos, California. Elon Musk (current CEO of Tesla) invested $6.5 million into Tesla in February 2004, which made him the majority stakeholder in the company. He remained a member of the board until he became CEO in October of 2008.
By The Figures
(as at close, Friday, 1st June 2022)
Price: $681.79
Market Cap: $706.6 billion
P/E Ratio: 91.02
Dividend Yield: N/A
52-Week Range: $620.46 - $1243.49
ROE: 20.4%
ROIC: 14.4%
10-Year Revenue CAGR: 74.6%
10-Year FCF CAGR: N/A
10-Year Equity CAGR: 63.73%
Management
Tesla is run by the richest man on the planet Elon Musk, who has a net worth of around $233.7 billion. Musk as of the 31st of March 2022, owns 23.5% of all outstanding shares. Tesla’s CFO Zachary Kirkhorn holds 692,486 shares of Tesla stock, which is equivalent to $472.130 million. Below is a brief breakdown on both of their careers.
Elon Musk has served as Chief Executive Officer of Tesla since October 2008 and as a member of the Board since April 2004. Mr. Musk has also served as Chief Executive Officer, Chief Technology Officer and Chairman of Space Exploration Technologies Corporation, an advanced rocket and spacecraft manufacturing and services company called SpaceX, since May 2002, and served as Chairman of the Board of SolarCity Corporation, a solar installation company, from July 2006 until its acquisition by Tesla in November 2016. Mr. Musk is also a founder of The Boring Company, an infrastructure company, and of Neuralink Corp., a company focused on developing brain-machine interfaces. Prior to SpaceX, Mr. Musk co-founded PayPal, an electronic payment system, which was acquired by eBay in October 2002, and Zip2 Corporation, a provider of Internet enterprise software and services, which was acquired by Compaq in March 1999. Mr. Musk has also served on the board of directors of Endeavor Group Holdings, Inc. since April 2021. Mr. Musk holds a B.A. in physics from the University of Pennsylvania and a B.S. in business from the Wharton School of the University of Pennsylvania.
Zachary Kirkhorn has served as Chief Financial Officer of Tesla since March 2019. Previously, Mr. Kirkhorn served in various finance positions continuously since joining Tesla in March 2010, other than between August 2011 and June 2013 during which he attended business school, including most recently as Vice President, Finance, Financial Planning and Business Operations from December 2018 to March 2019. Mr. Kirkhorn holds dual B.S.E. degrees in economics and mechanical engineering and applied mechanics from the University of Pennsylvania and an M.B.A. from Harvard University.
Competetion
Tesla’s main competition includes: Ford Motors, General Motors, Honda Motors, Nio Inc., Hyundai, Toyota Motors and Volkswagen. The total combined revenue of Tesla and all of its competitors for 2021 is $1.078 trillion.
Tesla accounts for just 5% of this combined revenue, yet has a larger market cap than the other seven companies combined.
Disclaimer: Not financial advice. All Things Business and it’s authors take no responsibility for what you do with your money.
China
China Opts For New Economic Strategy
In the past when China faced economic challenges, it built and built. Now chock-a-block with skyscrapers, dams, roads and airports, the country is pivoting to new types of infrastructure in response to fresh economic turbulence.
Shanghai, China
Instead of rallying construction workers in hard hats, the government has produced blueprints to link databases, coordinate traffic flows and inhabit space. China is broadening the concept of infrastructure beyond dusty construction—primarily because it has already done so much of that kind of building.
A trusty salve, infrastructure was the main facet of $585 billion in government stimulus that China unveiled in response to the global financial system’s tailspin in 2008. In addition to staving off recession, the momentum of that spending burst hoisted China into the No. 2 spot among global economies, created the world’s longest rail and expressway networks, put some form of subway in over 50 cities, and ultimately made the nation the world leader in ports, dams and fifth-generation mobile stations.
A feat of state planning, it was the reprise of episodes in the 1990s when Beijing likewise sidestepped trouble by putting tens of millions to work constructing the foundations of a modern economy.
China’s needs are different now, as it faces some of the deepest economic challenges of its modern era. Weak real-estate conditions and its own strictures to combat the Covid pandemic have cast doubt on whether the government will achieve its goals for employment and 5.5% growth this year—already the lowest target in more than a quarter-century.
The old construction playbook makes less sense for China as a middle-income country—not only because so much infrastructure has already been built but also because of how it got done. Deep-pocketed lenders, cheap construction labor and disregard for environmental consequences were all factors underpinning past activity, with sometimes haphazard results like parallel highways and unneeded business districts.
If speed mattered in the past, need may be today’s bigger consideration. To start, government agencies have less financial wherewithal; government debt as a factor of China’s gross domestic product has more than doubled in the past decade.