It’s Sunday once again, and oh boy, did we have a chaotic week!
Turbulence is likely to continue in the week ahead. With uncertainty around the US banking system and February CPI data coming in, it’ll no doubt be another interesting week.
With that being said, here’s a rundown of what’s been going on this week… Brace yourself!
Key Events
A US Ban of TikTok Is Becoming More Likely
It looks like TikTok is on the firing line once again. A new bill proposed by the US Senate, if approved into law, would allow the US government to “ban or force the sale of foreign-owned technologies, applications, software or e-commerce platforms that are deemed a threat to national security.”.
While this doesn’t state TikTok specifically, the company has come under increased scrutiny in recent months amid concerns that the app can be – and likely has been – used to gather data about US citizens. Some even argue that the app could be used to spy on government officials, and as such, TikTok has already been restricted on federal government devices. 44 states have either taken, or are considering taking, a similar approach. Even some universities have banned the company’s domain from their network.
This legislation isn’t a done-deal, though, as the idea of an outright ban poses freedom-of-speech concerns and could in fact breach the First Amendment.
In response to these raised concerns, TikTok, to its credit, is attempting to put minds at ease. For example, it has opened a “transparency centre” at its Los Angeles HQ, allowing visitors an open view into the company’s algorithms and content moderation tools. The company also moved US data to US-based servers; though, this was met with new questions, as this data was still reportedly accessible in China.
This week, in an attempt to ease these same privacy concerns in Europe, TikTok unveiled a “European data security plan” aimed at protecting user’s information across Europe.
It’s not currently looking favourable for TikTok. If the company were to be banned in the US, however, this would set off two things. First, it would boost the prospects for other social media platforms, particularly Instagram and Facebook. Secondly, and more worryingly, it would further degrade the already-poor relationship between China and the US.
Stock Market News
The Collapse of Silvergate Bank
Earlier this week, a relatively small US-based bank declared that it could no longer continue to operate, and chose to voluntarily close and liquidate.
However, Silvergate is no ordinary bank. In 2016, Silvergate changed its business model, moving from traditional banking (of which it was a relatively small player), to the cryptocurrency market. The company was the first bank to offer real banking services to new cryptocurrency businesses, providing liquidity and essentially acting as a ‘bridge’ between crypto and fiat currency.
Silvergate grew from there, becoming a publicly traded company in 2019, hitting a valuation of over $4bn in 2021. Following the crash in cryptocurrency prices, along with the bankruptcy of FTX, things started to deteriorate quickly. Making matters worse, FTX’s ex-CEO, Sam Bankman-Fried endorsed Silvergate Bank just before FTX’s collapse… As you can imagine, this did not help; customers fled the platform as quickly as they could.
In January, the company reported that around $8bn of deposits were transferred out of the bank. Naturally, the bank did not have this much cash available, and were forced to sell investments at a loss to cover the withdrawals.
Thankfully, the money held at Silvergate is a drop in the bucket compared to the overall banking system, but its failure has come at an awful time. The confidence in cryptocurrencies was already at rock bottom; it’ll be interesting to see where things go from here.
The Collapse of Silicon Valley Bank
Just two days after the announcement of Silvergate Bank’s demise, Silicon Valley Bank, the 16th largest bank in the US holding over $175bn in deposits, also collapsed over a mere 48-hour period. From Monday, the company will be under the authority of US FDIC regulators, and its collapse marks the largest banking failure since the 2008 financial crisis. It also marks the second largest banking failure in US history.
The story of Silicon Bank is a bit more tragic than that of Silvergate, and much further reaching (depending on how regulators handle things next week). As it turns out, this banking failure may have been entirely avoidable by simply better communicating to its customers. With any luck, this will be an isolated incident; time will tell.
First thing’s first, it’s important to know why Silicon Valley Bank (SVB) is different to most banking institutions. SVB provides credit to a huge portion of Silicon Valley start-ups. Put simply, SVB has been the key source of funding for the tech start-up world, providing financial services that many other banks would not dare touch, helping to push innovation forward as we’ve seen over recent years.
The short-and-sweet version, according to current reports, is that things started to go sideways when the company’s management made a poor decision to sell $21bn of their hold-to-maturity investments at an almost 10% loss. Why? Because they were ‘underperforming’. The management team decided to sell these bonds at a loss to switch them out to a higher-yield. To fill the loss, they intended to sell bonds to the public and raise extra cash via venture capital. The reasoning behind this cash raise was not communicated well at all, and it spooked both investors and customers. So much so, that it initiated a massive bank-run; customers withdrawing their money en-masse. Withdrawals exceeded $42 billion in just one day. As with all financial institutions, stability is based on trust; once that trust disintegrates, the whole system falls apart. For SVB, that trust had eroded and everything unravelled.
The damage doesn’t just stop there, however. It’s come to light that $3.3bn held to back USDC (a well-known ‘stable-coin’, which is supposed to equal exactly one dollar at all times) were held with Silicon Valley. This has, in turn, resulted in a mass selloff of USDC, reducing its value significantly below one dollar.
The true implications of SVB’s collapse are currently unknown, as it all depends on how quickly regulators make their assessments. However, here are just a few of the potential impacts ahead for the start-up space:
- Many companies will have millions of dollars of cash with SVB, but will only be FDIC insured up to $250,000. If regulators are unable to return all deposits to customers, companies will take a huge loss.
- Companies who rely on SVB’s financial services and have the majority of their cash deposited with the bank, may not have access for weeks – even months – to come. They could be cut off from their cash, unable to pay bills or their employees.
- Huge publicly listed companies have cash held with SVB, which may impact valuations significantly. For example, Roku holds around 26% of its cash and cash equivalents (a whopping $487 million) with the bank. Roblox holds around 5% with the bank.
- Without SVB, it’s unclear if another bank will take its place and function as a go-to for start-ups. There’s a possibility that it will become much, much more difficult for start-ups to receive financing, impacting future innovation. The CEO of Y Combinator (a company specialising in funding and supporting start-ups), Garry Tan, suggests that innovation could be set back by up to 10 years.
Next week, we’ll hopefully hear from regulators and get a better view of where things will go from here.
Tesla (TSLA) – Further Price Reductions, New Probe Into Quality Issues
For the second time this year, Tesla have decided to reduce the price of their S and X models in the US. The Model S saw a price reduction of around 5%, while the Model X saw a roughly 9% reduction.
As it currently stands, analysts are unsure whether this is to stoke waning demand before the quarter ends, or to flush out inventory ready for the “Hardware 4” variants. This newer version of the vehicles is expected to come with cost reductions; meaning a reduction in price may not have a significant impact on profit margins.
On another note, the US National Highway Traffic Safety Administration (NHTSA) has reported that it’s investigating two cases where 2023-built vehicles (both Model Y) were missing a key bolt in the steering wheel. Without this bolt, the steering wheel can simply detach, even while driving (if the force from the driver is higher than the friction between the wheel and column splines). In both cases the NHTSA are investigating, that’s exactly what happened. The steering wheels came right off, while driving; not ideal!
Now, while this sounds terrible, it’s worth remembering that anything Tesla related is often blown out of proportion in the media. Almost every car maker makes these kind of production errors and require investigations and/or recalls. In fact, in 2022 alone, Ford issued over 60 vehicle recalls affecting over 8 million vehicles!
Around 99% of Tesla’s recalls in 2022 were fixed via an over-the-air update, rather than a physical recall. By comparison, Ford only fixed 1% of their vehicles via a software update. This resulted in millions of vehicles needing to be physically recalled. Tesla’s build quality is far from perfect, but they’re statistically safer, with fewer physical recalls (so far).
Company Earnings Reports for W/E 12th March 2023
On Thursday, I covered the earnings reports of the following 4 companies. Click here to find out what happened:
- Docusign (DOCU) – Q4 Earnings
- Darktrace (DARK) – H1 2023 Earnings
- Restaurant Group (RTN) – FY 2022 Earnings
- Legal & General Group (LGEN) – FY 2022 Earnings
Next Week
US CPI (Inflation) Data for February 2023
On Tuesday, we’ll get the US inflation reading for February 2023.
Expectations are that the headline year-over-year figure will come in at 6.0%, significantly lower than January’s 6.4%. The month-over-month figure is expected to be 0.4%, slightly lower than January’s 0.5%.
Core CPI (excluding food and energy) is expected to fall slightly to 5.5%, compared to 5.6% in January.
UK Spring Budget
On Wednesday, Jeremy Hunt will reveal his Spring Budget. This will be his first full budget as Chancellor, so will very much be in the spotlight. This budget will be released alongside economic and fiscal forecasts from the OBR (Office for Budget Responsibility), something Liz Truss rejected at her Autumn Statement.
Company Earnings
Here’s a list of the companies I’ll be covering next week (subject to change):
- Adobe (ADBE) – 15th March
Let me know your thoughts on this week’s events, in the comments below!
