☀️☕️ Overstocked EV Supply Chain

Happy Halloween! 🎃 👻 

📝 Focus

• Overstocked EV Supply Chain

📊 In the Markets

• Mickey D’s Loving it

📖 MoneyFitt Explains

🎓 Japan’s Yield Curve Control

📝 Focus

Overstocked EV Supply Chain 

Tesla's stock dropped almost 5% on Monday, a loss of $31bn in market capitalisation (number of shares X price per share) following news that key supplier Panasonic was slashing its domestic electric battery production by 60% compared to the first quarter on weaker-than-expected sales of some models to Tesla. 

Panasonic, which just announced record net profits of ￥288 billion driven in large part by huge subsidies for its EV battery business in the US, had already stopped some production lines in Japan to reduce battery stockpiles, and the reduced production will likely last at least until March.

As we wrote last week, the EV space is, after several years of (generally) justified hype and (arguably) unjustified valuations, finally coming under pressure, with high interest rates, combined with the Tesla-initiated price war, disrupting the entire electric vehicle industry.

.... ▷ This development raises concerns not only about softening EV demand in general but particularly for higher-priced models that may not qualify for government incentives since Panasonic's batteries have been used in Tesla's older, costlier models like the Model X and Model S. 

..... ▷ Meanwhile, Warren Buffett-backed electric vehicle manufacturer BYD achieved a record-high net profit of Rmb10.4 billion ($1.4 billion) in Q3, marking an 82.2% increase compared to the previous year. 

While this demonstrates strong growth, it's notably slower than the company's 144.7% profit increase in the second quarter. 

BYD is facing growing competition and declining demand in the world's largest car market, which is leading to one of the unintended consequences of the EV price war: massive numbers of non-EVs as well as EVs being exported around the world.

..... ▷ Also on Monday, Onsemi's share price fell by 22% after weaker-than-expected fourth-quarter guidance and job cuts of another 900 employees (having already laid off 1,360 so far this year) despite delivering better-than-expected third-quarter results. 

Fears of slowing electric vehicle (EV) demand impacting chip orders from the auto sector also contributed to the tumble⁷.

Onsemi, formerly ON Semiconductor, was spun off from Motorola's Semiconductor Components Group in 1999 and designs, manufactures and supplies semiconductor products and solutions. Unlike many peers, it owns and operates its own manufacturing facilities and does not outsource semiconductor manufacturing to foundries like TSMC, i.e. It is not “fabless.”

Onsemi is investing heavily in EV-related technologies, such as silicon carbide (SiC) power semiconductors that extend EV range. SiC semiconductors are more efficient and durable than traditional silicon semiconductors, making them ideal for use in EVs. 

Meanwhile, X, previously known as Twitter, has informed employees that the company is now valued at $19 billion. 

X issued equity, in the form of restricted stock units, to employees at $45 per share, resulting in a $19 billion valuation. The share price is not comparable with the $54.20 that Elon Musk paid in October 2022, as it is actually a different company with a different number of shares.

This represents a significant decline from the $44 billion Musk paid when he acquired the platform, representing partly changes in market valuations but more the incineration of equity value under Musk’s leadership.

📊 In the Markets

Asia-Pacific markets started the week mixed ahead of key economic data from around the region, including monetary policy decisions from Japan after the second day of BOJ meetings. 10-year Japanese government bond yields crept up to 0.893%, closer and closer to 11-year highs. 

In July, the BOJ effectively allowed a higher yield by broadening the range of yields from 0.50% to 1.00% on either side of the target in its controversial Yield Curve Control🎓 policy, and the market is looking for the next adjustment.

Over in Hong Kong, a judge in a winding-up hearing has given Evergrande, the poster child of everything wrong with the Chinese property sector, "one last opportunity" to present a revised restructuring plan or face liquidation. Not holding our breaths.

European stock markets closed mildly higher on Monday despite the ongoing conflict in the Middle East.

Weaker German household consumption offset increased investment as the economy contracted by 0.1% in the third quarter, though revised GDP figures for the previous two quarters showed that Germany didn't shrink as initially reported. 

But it was still bad: The IMF, which doesn’t necessarily have any greater insights or better data than any other economists, forecasts Germany to be the worst-performing major economy this year, with a projected 0.5% GDP contraction. This is far weaker than the 2.1% growth expected from the US. 

Meanwhile, the UK is moving ahead with its crypto industry regulation plans, requiring companies to gain authorisation from the Financial Conduct Authority (FCA) to operate after legislation next year. 

The regulations are designed to both safeguard cryptocurrency “investors” and lure crypto businesses to base in London and foster innovation in that space.

And then Wall Street started the week on a strong note after the previous week's pounding, with mega-cap stocks such as Microsoft, Amazon, and Apple leading the way. 

General Motors, unsurprisingly, reached a tentative deal with the United Auto Workers union to end a six-week strike that was the first coordinated walkout by the three largest US carmakers. Ford and Chrysler-maker Stellantis settled first, leaving GM in an impossible position and perhaps fortunate to come out with a deal similar to its rivals.

The Federal Reserve's two-day monetary policy meeting ends on Wednesday, November 1st, with a 95% probability of unchanged rates at 5.25-5.50%, based on implied probabilities by traded futures prices (CME FedWatch Tool.) 

Six months ago, the probability of 5.25-5.50% in the November FOMC meeting was 2.2%.

Mickey D’s Loving it

McDonald's beat the best guesses of Wall Street’s Well-Paid Finest with its third quarter results, driven by demand for affordable meals amid ongoing inflation and helped along by successful product launches (Cheesy Jalapeno Bacon quarter pounder anyone?) and promotions including affordable meal bundles after successful tests in markets like Germany.

Consumer spending remained “pressured,” but McD’s saw signs of “trading down” as middle- and high-income consumers sought to stretch their food dollars further in the face of ongoing inflation and price hikes across the industry. 

McD’s also managed to continue attracting lower-income consumers as well thanks to its massive scale and ability to maintain relatively lower prices, even as industry foot traffic declined. The company's shares initially rose by 2% but later eased to close up 1.7%.

..... ▷ MCD shares are down about 12% over the last 6 months, vs flat for the S&P 500.

Some of the pressure on the prices has come from traders extrapolating the popularity of diabetes treatment-based GLP-1 weight-loss drugs like Novo Nordisk’s Ozempic / Wegovy (semaglutide) and Eli Lilly’s Mounjaro (tirzepatide).

..... ▷ A recent survey by UBS found that 15% of Americans have considered using Wegovy or other weight loss drugs in the past year.

This supports the idea that there is a growing demand for appetite-suppressing weight loss drugs, which could potentially lead to a decline in sales for fast food restaurants like McDonald's.

..... ▷ Additionally, a recent study by the University of California, San Francisco, found that people who used Wegovy lost an average of 15% of their body weight over a period of 68 weeks. 

This is a significant amount of weight loss, and it is possible that some people who are trying to lose weight are choosing to avoid fast food restaurants as well as packaged foods and sugar-loaded soft drinks like Pepsico’s products, though PepsiCo’s CEO, Ramon Laguarta, recently stated that the impact of weight loss drugs on the company’s business has so far been "negligible".