☀️☕️ Chips with Coke and an Apple?

16 November 2022

Happy Wednesday!

📝 FOCUS

• Wholesale prices didn’t go up in October!

• Walmart. Save Money. Live Better. Buy Back Shares

• Chips with Coke and an Apple? Buffett buys some TSMC

📊 IN THE MARKETS

HK / China stocks had another great day on apparently thawing US-China relations after the Xi-Biden meeting in Bali. This comes on top of continued bullish sentiment from the long-awaited but small reopening steps (still with the dynamic-zero-Covid rhetoric) and various property measures (very welcome, but mere Band-Aids for a massive structural problem.)

Both gaming, messaging and social media giant Tencent and e-commerce titan Alibaba shot up 11% to lead the Hang Seng tech index up 7%. Alibaba didn't disclose the final sales tally of this year's massive annual Singles Day shopping festival for the first time since it started it in 2009, only saying it was "in line" with last year's. Weak industrial production and retail data in China were largely ignored.

Meanwhile, Amazon boss Jeff Bezos is planning to give away almost his entire US$124 billion fortune while still alive (starting with US$100 million to charities picked by Dolly Parton!)

📝 FOCUS

Wholesale prices didn’t go up in October!

In an echo of the consumer inflation report last week, US wholesale inflation (in the producer price index) was up by less in October than expected and also by less than in the previous month. At 8% over October 2021, it's obviously still a very large number, but market watchers are looking ahead and seeing peak inflation behind us (June saw PPI up by 11.3%), especially with trends in upstream producer prices usually leading prices for consumers in the shops.

"Core" PPI prices (excluding food and fuel) were expected to be up 0.3% compared to September but actually came in FLAT. (In September, core PPI was up 0.2% over August.)

Peaking inflation is suggesting to bullish investors that the Fed may consider a slower pace of interest rate hikes and possibly (just possibly) less time spent at a lower peak interest rate.

Walmart. Save Money. Live Better. Buy Back Shares

Besides the wholesale inflation numbers, the main focus for US investors was on results for Walmart, the world’s largest retailer, after it had issued two profit warnings earlier this year because of rising costs and misjudged inventory. In the end, Wall Street's highly-paid analyst earnings forecasts were too low at $1.32 per share as WMT clocked in at $1.50 (adjusted for big opioid crisis fines) and the company raised guidance for the full year (to a drop of 6-7%, rather than the 9-11% expected 3 months ago.)

Interestingly, the discount king increased its share of Americans’ grocery budgets, reportedly benefiting from wealthier consumers feeling the pinch from decades high inflation and trading down. Three-quarters of the market share gain was from shoppers with annual incomes of over US$100,000 (only one-third of US households make more than that.)

Walmart shares traded up over 6% pretty much out of the gate, adding US$24 billion in market value (number of shares times the share price) partly from the better-than-expected results and partly from the US$20 billion share buyback that was announced. That's about 5% of Walmart's market value of US$400 billion and is over 20 days of daily trading in the stock.

At the other end of retail: Perhaps buying cheaper groceries is helping wealthy people to keep splurging on luxury items?!? Global luxury goods sales are up 15% this year, despite the economic slowdown and potential impending recession. LVMH saw third-quarter sales up 19%, while Hermès and Kering, which owns Gucci, saw an increase of 14% (though actually, much of the strength was driven by the superrich.)

Chips with Coke and an Apple? Buffett buys some TSMC

92-year-old investing legend Warren Buffett’s Berkshire Hathaway bought a US$4.1 billion stake in 91-year-old Morris Chang's giant chipmaker Taiwan Semiconductor Manufacturing Company. News of the stake increased the market value of TSMC by over US$40 billion to a market cap of over US$400 billion, with the US-listed shares rising by over 10%. Even after the rally, TSMC shares are trading more than 40% below its all-time high, reached earlier this year.

The stake is much smaller than Buffett's US$126 billion in Apple but is very significant because of his past resistance to tech investing. Not by coincidence, TSMC makes the chips for Apple's iPhones and Macs.

TSMC is the world's biggest "semiconductor contract manufacturer", or "foundry" 🎓, words which totally understate the pivotal role its manufacturing technology plays in the development of the world's most advanced processor chips, used in smartphones, computers and military and space equipment.

Its central role in much of the electronic (and military) world and location primarily in Taiwan (in a deep ecosystem that keeps ahead of its peers) places it in a tricky geo-political situation given US-China tensions.

TSMC's "silicon shield" for Taiwan is based on the idea that the US would step in to rescue its source of cutting-edge chips if Taiwan was invaded, but now, for strategic and competitive reasons, the US wants TSMC to move more production to the US. Taipei is, naturally, resisting, though TSMC does already have a plant under construction in Arizona which will make chips for Apple from 2024.

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