Nvidia had better get used to breathing at high altitudes.
After more than doubling its revenue in the second quarter, behemoth chipmaker Nvidia saw its stock price hit an all-time high Thursday morning before settling back down to roughly $472 per share. Nvidia’s success has been driven by a demand for the highly advanced processors required to train the newest artificial intelligence models. Earlier this year, the California-based tech company achieved another milestone when its market cap surpassed $1 trillion, something only five other businesses can currently say. Tesla and Meta were once on that list, too, but have since fallen back into the lowly hundreds of billions. If you’re looking for a real money fight, Elon, we’d suggest a cage bout with Nvidia CEO Jensen Huang.
Morning Brief
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Pension plans are 2023’s hottest new market.
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Student loans are likely to take a toll on retail.
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US chip goal has a labor issue.
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Finance
Corporate America Keeps Dumping Pension Plans
(Photo Credit: Israel Andrade/Unsplash)
The few companies that still have traditional pension plans on their books can’t get rid of them fast enough. What that means for you, dear pensioner, isn’t entirely clear…
A record number of corporate pension schemes have been offloaded to insurance companies through the first half of 2023 in both the US and the UK, according to a Financial Timesreport on Thursday. The unique phenomenon is a near complete byproduct of — what else? — rising interest rates.
Pension Tension
Policy reforms and the rise of the 401(k) have turned corporate pension plans into something of a rare breed, at least in the US. And those that continue to live on — often closed to new employees — faced increasing tumult in recent years, especially in the pre-inflation era of ultra-low interest rates. Those rates of yesteryear inflated the value of liabilities and shoved scores of pension schemes into debt. But because pension plans’ assets generally consist of government bonds and highly rated corporate debt, today’s high interest rates are re-fueling scheme funding levels.
That’s effectively shifted the scales in favor of pensioners. Case in point: the UK’s Pension Protection Fund calculates that the collective deficit among the roughly 5,000 plans it monitors has shifted from roughly $166 billion in 2020 to a surplus of $542 billion today. The reversal of fortune has essentially resurrected the bulk annuity market, in which pension sponsor companies pay a premium to transfer some or all of their retiree obligations to eager insurance companies:
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Roughly $22 billion of corporate pension liabilities were sold to insurance companies in the first six months of the year, according to the FT. The phenomenon has been driven by a series of $1 billion-plus deals, including one that saw AT&T offload $8 billion of obligations to Athene.
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The UK, meanwhile, has seen over £20 billion ($25 billion) in pension obligations offloaded to insurance companies. Both figures represent record highs.
Last year, analysts at JPMorgan wrote in a note that over $750 billion of pension obligations in the $2.5 trillion sector will be passed to insurance players by 2030.
Heads Up: But wait a minute, who exactly benefits from these exchanges? For sponsor companies, the sudden change in fortune is an obvious balance-sheet relief. For insurers, getting paid to take on pension obligations represents an important new source of potential revenue. For actual pensioners, well, it’s still up for debate. Insurance companies must maintain minimum capital requirements, offering some baseline level of security. That’s good. But regulators and watchdogs have already warned about the industry’s capacity to absorb some schemes and its brazenness in stepping into a realm outside its core expertise. That’s bad. Oh well, it’s only a few million people’s entire life plans on the line.
– Brian Boyle
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Retail
Stores Brace for Slowdown as Student Loan Repayments Loom
October 1: It’s the date college grads — and their favorite stores — have been dreading.
With student loan payments returning this fall, retailers have told investors that sales are likely to face headwinds in the coming months as Americans put more money into chipping away at their combined $1.75 trillion of educational debt.
Take a Break
The Trump administration paused student loan payments in March 2020, giving 44 million Americans a financial break. Two years later, the Biden administration went even further, proposing student loan forgiveness that would wipe away up to $20,000 of debt for everyone who owed money. But the Supreme Court rejected the program’s constitutionality this summer.
Free from the burden of paying off student debt — and combined with unemployment benefits, a covid stimulus check, and widespread vaccination — formerly strapped consumers kicked off a spending spree that’s still going. But with those payments returning, plus inflation and high borrowing rates, companies like Target, Walmart, and Levi’s are bracing for a slowdown:
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A recent report from TransUnion found that one-fifth of borrowers are expected to pay off $500 or more in loans each month. That’s likely to reduce consumer spending by $9 billion each month, which also increases the possibility of recession, according to an Oxford Economics study.
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A Bloomberg analysis found that the phrase “student loan” was mentioned at least 40 times in earnings calls held during the current quarter by companies in the S&P 500, the most since the term first appeared in the early 2000s.
“The upcoming resumption of student loan repayments will put additional pressure on the already strained budgets of tens of millions of households,” Target CFO Michael Fiddelke “We remain cautious in our planning.”
Shopping is So Meh: Bloomberg columnist Leticia Miranda posited that consumers aren’t necessarily pinched, they’re just bored with material goods. In the past two years, Americans binged on everything from TVs and gaming consoles to exercise bikes and new furniture. Miranda argues people just have enough stuff at this point, and they don’t really need much else. Instead, consumers have shifted over to experiences in travel and leisure. Right now, international flights and hotels are booming with US customers. Maybe when the revenge vacations end, revenge shopping will return.
-Griffin Kelly
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Sponsored by Motley Fool
There’s A Gold Rush Coming…
But it’s not in the hills of California or the valleys of Colorado.
It’s in the crowded, cluttered, growing-like-crazy AI industry.
Of course, like past gold rushes, the real money isn’t in panning for the end product – it’s in selling picks and shovels to those who are getting in on the frenzy. And The Motley Fool thinks this one company may be poised to be the ultimate supplier for all AI companies.
Why? Simple – they make the chips used to power artificial intelligence.
Based on the rate the industry is growing and the reliance these companies have on this chip, The Motley Fool thinks this just might be their single best stock recommendation ever.**
What Netflix was to streaming, this company could be to AI… sounds like a pretty promising opportunity to us.
The US tech industry has big plans to make more computer chips domestically, but it’s hitting a key obstacle: a lack of trained workers.
Some Asia-based chipmakers are turning to importing labor to their US plants from overseas to boost production — and that’s ruffling feathers with domestic workers.
Chipping Away At a National Shortage
Taiwan Semiconductor Manufacturing Co said this week it needs to bring in up to 500 workers from its home country as a “temporary” measure while it gets two semiconductor chip factories in Phoenix up and running. But The Wall Street Journalreported Thursday the move riled local labor activists, who say the company “showed a lack of respect for American workers.” The Arizona Building and Construction Trades Council, which represents 14 trade unions and about 30% of the workers at the Phoenix site, urged Washington to halt the project until American labor was guaranteed.
TSMC invested $40 billion in the Phoenix plants. It expects to file for up to $15 billion in tax credits under the $53 billion CHIPS Act, the Biden administration’s attempt at outrunning China’s lead on the semiconductor industry. But that goal isn’t attainable if the US can’t produce enough engineers ready to take the jobs that foreign companies could import. In July, the Semiconductor Industry Association and Oxford Economics published a study that found that the US faces a “significant shortage” of skilled labor able to meet the demand for chips that’s expected to skyrocket well into 2030:
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The US needs to grow its workforce by nearly 115,000 jobs by the end of the decade to meet semiconductor production goals. But 67,000 of those jobs might go unfilled, and 41% of those unfilled jobs will be engineers.
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Last week, President Biden signed an executive order banning some US investments in China, including semiconductors and certain AI systems.
Codependent no more: TSMC provides almost all of the most advanced semiconductor chips in the US. It’s argued that the high costs of manufacturing here, combined with the CHIPS Act’s recent restrictions on expansion of its plants in China, is making it harder to do business. But Biden’s perspective may be that you can’t reform a codependent relationship with a controversial ally without setting some boundaries.
Fast fashion: Shein partners with Forever 21 to expand reach.
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