2024 Week 6

When it comes to the labor market it’s tough out there. It hasn’t stopped unionization efforts and reshoring and worker shortages have tipped the negotiation scales in the favor of labor. 

The broader global trend of domestic onshoring continues as Sony and Toyota work to bring a second TSMC factory to Japan. Having learned from the pandemic supply chain issues and looming stand-off with China, industry is rightly trying to reduce the risk of future chip supply interruptions. 

The stock market continues to befuddle, and it recently drew the comparison of the Magnificent 7 to the Tech Bubble 5. While conditions aren’t the same, questions arise about the future performance of these household names held by every 401k and mutual fund. The answer always lies in: watch what people do, not what they say. It may, indeed, be the economy stupid. 

Finally, another doomer prediction from former fed DiMartino Booth who recently took to YouTube to talk about why spending, debt and interest rates are a problem. I don’t disagree with the sentiment, but phrases like “wall of maturity” and predictions of “big layoffs ahead” are intended to get clicks and views. 

If you follow folks like DiMartino Booth and Peter Zeihan you are familiar with the somewhat hyperbolic delivery. It sells books and newsletters, but it is showmanship at best. Most of the predictions and conclusions are directionally accurate, and if someone weren’t shouting you probably would never pay attention.

TOPICS

• Labor Market
• Domestic Semiconductor
• Corporate Debt
• Stock Market

Labor Market

Reshoring and manufacturing resurgence of labor unions. South no longer a low cost producer.

• (Seeking Alpha)
  • Majority of Volkswagen’s Tennessee employees vote to unionize
  • Volkswagen (VWAGY, VWAPY) offered employees an 11% pay hike
  • Chattanooga plant employees 4,000 autoworkers

OBSERVATION - Tough market out there

• (Seeking Alpha)
  • Layoff season continues to roil across tech industry
  • Companies are continuing to streamline costs and improve efficiencies amid constant pressure to match the growth and profit expectations of investors.
  • Tech companies that have announced job cuts so far this year include Snap (SNAP), PayPal (PYPL), Google (GOOG, GOOGL), Microsoft (MSFT) and Salesforce (CRM).

Domestic Semiconductor

Strategic divestiture abroad for Taiwan semi; strategic onshoring for Japan.

• (CNBC)
  • World’s biggest chipmaker TSMC to open second Japan factory with backing from Sony, Toyota
  • Aims to bring the factory into operation by the end of 2027
  • Highlights the Japanese government’s push to onshore manufacturing of semiconductors

Corporate Debt

OPINION - Directionally correct but I disagree both the predicted magnitude or timing. This will be a slow roll.

• (Danielle DiMartino Booth)
  • Corporate debt - Wall of maturity, costs of refinancing is up 40%
    • Big layoffs to cut costs, getting pushback on price increases
  • Consumer sentiment
    • Expecting zero rates (not going to happen
    • Layoffs spinning off to other sectors; manufacturing
  • Fed policy expectations - Expecting a March rate cut that won’t happen

Stock Market

OBSERVATION - What the data indicates rather than what the media says.

• (Keith Fitz-Gerald)
  • Political strategist James Carville coined the phrase, “it’s the economy, stupid” when it came to explaining core messages to be used as a part of Bill Clinton’s successful 1992 presidential run.
    • Now… It’s earnings.
  • More than half of the S&P 500 has reported Q4 results as of Tuesday with earnings up 8.1% from a year ago while sales are up 3.2%.

OBSERVATION - Looks very similar

• (Seeking Alpha)
  • The Magnificent 7 vs. the Tech Bubble 5
  • Outperformance by the 7: Apple (AAPL), Amazon (AMZN), Alphabet (GOOG) (GOOGL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA)
  • Five largest stocks in March 2000: Microsoft, Cisco (CSCO), GE (GE), Intel (INTC) and Exxon Mobil (XOM).
    • The group fell significantly short, realizing just 8% growth
    • Went on to underperform the S&P 500 by 21 pp over the next 24 months
  • One significant difference between the Magnificent 7 and the Tech Bubble 5 is their penchant to re-invest for growth. The Mag 7 re-invests 60% of their cash flow from operations