Moody's Gloomy China Outlook

Moody's outlook on China’s credit rating changed from “stable” to “negative.” [The Daily Peel... ]( December 6, 2023 | Peel #600 Silver banana goes to... [SRS Acquiom. ](=) In this issue of the Peel: - In November, we saw job openings fall by 617k to 8.7mn total openings from the Job Openings and Labor Turnover Survey (JOLTS). - Gitlab and Apple had a ripe day, while Albemarle and Sphere Entertainment suffered share price declines. - Moody's outlook on China’s credit rating changed from “stable” to “negative.” However, they maintained their long-term rating of A1 on the sovereign bonds. Market Snapshot Happy Wednesday, apes. Get the popcorn ready for the entertainment of the day as big dawg bank CEOs prepare for a stern talking to and authoritative finger wave from Congress’s annual oversight meeting today. Hope they take after JPow and let the F-word rip once in a while. Regardless of how entertaining the meeting is, however, it’s sure to be more entertaining than equity markets were yesterday. U.S. indexes were basically flat once again, ranging from a 0.22% fall in the Dow to a 0.31% gain in the Nasdaq, but the Russell went crazy with a 1.34% selloff. Somehow, the geniuses over at WSO managed to outperform, rising 0.4% on the day as they can apparently outperform the market (for a day) but couldn’t pass a test in college without ChatGPT… not that I can judge. Anyway, bonds tried their best to give us a little flare of excitement. Yields fell to their lowest levels since summer. The 10-year fell as low as 4.175%, a level not seen since late September, while the 2-year is hovering around 4.5% for the first time since late July. Let’s get into it. Paradise Means Leaving Thumb Drives Behind [image](=) You’ve got enough things to worry about. A thumb drive full of deal docs and data shouldn’t be one of them. With SRS Acquiom, it doesn’t have to be. Because once your files are up and organized on the VDR, they can stay there until you decide to take them down. Since there’s no additional charge to keep the VDR open, it’s totally up to you whether and when to close it. In the meantime, all that confidential data stays as secure as ever. It gets better: transparent, flat-rate pricing for however many users and uploads you need, for as long as you opt to keep the VDR open. No pay-by-the-page nonsense or unexpected upcharges here. It’s obviously a win-win as far as VDRs go. It’s also one more way SRS Acquiom maximizes efficiency throughout the deal process— from due diligence, to payments, all the way through post-closing. That’ll keep your clients happy and you looking great at what you do. Need more convincing? [Here’s more convincing](=) > Banana Bits - Maybe it’s actually possible for Nvidia shares to go down, especially as the de-stocking of semis is in the cards, [according to JP Morgan.]( - Even OpenAI still [doesn’t really have any idea why]() OpenAI forced CEO Altman to go on a… uhhh… little vacation, let’s call it. - The richest man alive is [asking for $1bn]()—you wanna lend a dollar? Macro Monkey Says JOLTed Lower Unlike our planet, the temperature in the job market seems to finally be moving in the right direction. As this Friday brings us a jobs report more anticipated than your MD anticipates ripping lines this weekend (if they can wait that long), the previews of that report are kicking off a little early this week. And those previews began yesterday with the JOLTS report. Since C-19 showed up and absolutely crushed the national vibe for a good 30-ish months, your parents have constantly reminded you that there are “1.7 jobs open for every unemployed person,” or whatever the figure may be. But now, Mom and Dad might finally have to get off your back. The Job Openings and Labor Turnover Survey, the only survey we know of that isn’t entirely composed of statistical noise, seeks to measure the total number of job openings, new hires, and broader labor turnover. "... this Friday brings us a jobs report more anticipated than your MD anticipates ripping lines this weekend ..." They do this by surveying ~21,000 “establishments,” mixing in some spicy statistical sauce to control for seasonality and noisy outliers, and coming up with 4 models estimating the factors laid out above. In November, we saw: - Job openings fall by 617k to 8.7mn total openings - The job opening rate moved 0.3% lower to 5.3% - Quit rates stay at 2.3% for the 4th month in a row - “Finance and Insurance” was hit the hardest of any sector compared to September, with job openings falling 2.3% (shoutout to all you December grads) While the total figure of job openings has been declining gradually for some time, the rate picked up in October and further solidifies what now appears to be emerging as the consensus view—that the economy will slow down in 2024. Whether that happens, becomes a recession, or doesn’t happen at all, most economists still anticipate a fairly robust month in October. According to the WSJ, consensus estimates peg Friday’s drop in last month’s payroll additions at 190k. That’d be slightly below the 239k average monthly payroll additions seen this year through September, and that itself is way below the 375k per-month average seen in 2022. And don’t even get us started on 2021. Back then, monthly payroll additions reached an average of a ridiculous 562k. For reference, that figure was 178k in 2019 and 193k in 2018—back in the good ol’ days before C-19 went on its vibe-killing rampage. "Labor markets showing this much strength can be both good and bad." Labor markets showing this much strength can be both good and bad. To Fed Chair JPow, it’s been bad, but for those of us that need, y’know, money, there hasn’t been much to complain about. Most of the time, sizable job additions are welcomed as this indicates that the economy is doing a good job of putting people in a position to sustain themselves (thanks, economy!). But, when we get into the extremes as we have over the past few years, this is what lays the foundation for wage-push inflation. And that, apes, is what has been scaring JPow for the better part of the last 3-years. A too-strong labor market where demand was off the rails while supply, via the labor force participation rate, dipped well below the historical average, allowing employers to drastically push up wages to keep their talent with them. That labor market strength and solid wage growth that came with it may have, in part, fueled the inflationary environment we’ve been living through, but it also allowed consumers to spend and save more money. Increased spending leads to outsized economic growth, so despite the inflation created, it was still a lose-win scenario. Now, that trend appears to be going the way of planking, jean jackets, and not letting your kid use an iPad at the dinner table—it’s just no longer in style. I actually have no clue if jean jackets are still in style, but I feel like you never see them anymore. Please roast me if I’m wrong, but we can (almost) confirm that the Duane “The Rock” Johnson-strong labor market of the post-pandemic era may finally be starting to atrophy. Fortunately for The Rock, that probably won’t happen until he lays off the roids. What's Ripe Gitlab (GTLB) $58.99 (↑ 11.45% ↑) - Twelve years later, and look who decided to turn a profit! Gitlab investors rejoiced as the firm posted its first operational profit in its history, but then again, it was on an “adjusted” basis… which, according to the recently passed Charlie Munger (RIP), is Latin for “bullsh*t.” - But as they do, investors were eating up that bullsh*t like Thanksgiving dinner. The software development platform did post a strong report for their latest quarter, however, delivering $0.09/sh on the bottom line vs a $0.01/sh loss expected. - Sales came in strong as well, and thankfully so for investors because that’s become the dominant line item this earnings szn. Revenue of $149mn beat out the estimates for $141mn, with Gitlab citing the most 2023 reason ever for driving revenue—the rollout of more advanced AI tools. Apple (AAPL) $193.42 (↑ 2.11% ↑) - “Welcome back to the $3tn club,” said no one to Apple because they’re the only ones there. Investors were happy, but they’ve been dreaming of this day ever since they got kicked out. - It’s a place Apple hasn’t been since way back in… August. The surge comes at the hands of BofA analysts who asserted in a report released yesterday that app store revenue was already up a big 11% just this quarter alone. - The analysts go on to say that, given recent nerves related to China’s ban on iPhones at government locations, the good news is even more welcome with open arms by investors. But then again, when exactly isn’t Mr. $3tn loved by investors? What's Rotten Albemarle (ALB) $113.26 (↓ 5.60% ↓) - Turns out lithium might’ve been a worse investment than FTX. Maybe that’s a stretch, but wow. - Spot lithium prices, an element which Albemarle is a massive producer of, have plummeted from $85k/ton to below $25k/ton now—a >70.5% fall starting at the end of 2022 into early 2023, according to [Goldman via the FT.]() - Needless to point out, as lithium prices fall, producers will make a smaller margin, which investors tend to not be the biggest fans of. Can’t imagine why, but it appears the element common in EV batteries and other goods has fallen heavily out of demand along with the rest of the green economy. - Investors used to be green with envy of the EV market, but now they appear to be greened out from getting a little too high on the sector. Sphere Entertainment (SPHR) $28.41 (↓ 15.50% ↓) - Oof. How could a company whose main asset looks so dope ever see its share price go down? Apparently, dilutive capital raises will do the trick. - On Tuesday, Sphere Entertainment announced their intention to offer $225mn worth of convertible senior notes due 2028 with the option for holders to purchase an additional $33.75mn. With $451.74mn in cash on their balance sheet already, the perceived need to raise so much more could’ve set off alarm bells. - Regardless, investors always hate getting diluted. When purchasers of these notes get the option to purchase shares in 2028, they could reduce the sh*t out of the existing investor’s cut of the pie. - Plus, you know how you feel when one of your friends forgets their wallet and asks for cash or something? Yeah, investors feel basically the same when their portfolios do it, too. Thought Banana Moody’s Gets Bearish Ever since they downgraded their outlook on economic growth in the United States, Moody’s has been in a bit of a mood. Unfortunately for them, China got caught up in that moodiness on Tuesday. Essentially, China was slapped with a similar downgrade from the rating agency that the U.S. got hit with about a month ago. Moody’s has officially become the world’s biggest hater. Their outlook changed on China’s credit rating from “stable” to “negative,” but at the same time, they maintained their long-term rating of A1 on the sovereign bonds of the world’s second-largest economy. There were plenty of reasons for the downgraded outlook, most notably the anticipated additional relief Beijing will likely be forced to provide to support China’s real estate sector, other state-owned enterprises, and local governments. "Massive debt loads taken on by these entities have started to bite as the nation’s economy continues to struggle ..." Massive debt loads taken on by these entities have started to bite as the nation’s economy continues to struggle in the wake of the pandemic and “zero-C-19” policies implemented by the CCP. There are a few factors at play here, but arguably the most impactful is the downsizing of the country’s real estate market, according to Moody’s. One huge red flag for the rating agency was the loss of land sales revenue—which accounted for 37% of local government revenues prior to the start of the real estate collapse in 2021—which may not make a material return anytime soon or potentially ever. The need for support at these local governments, along with state-owned enterprises, some in the real estate sector directly, will require a heavy offloading of cash from the national to the local bodies. Needless to say, having less money at the national level puts a dent in China’s fiscal strength. But this is where we get to the real problem with China—demographics. Moody’s, later on in their report, pointed to their expectation for slower and eventually much slower growth experienced in the Chinese economy between now and ~2030. Growth expectations beyond 2030 are expected to sit at ~3.5%, a stark retreat from the (nice) 6-9% average experienced so far this century. "... China (along with other countries) is expected to hit a demographic disaster over the coming decade ..." This problem doesn’t get nearly as much attention as it should, but China (along with other countries) is expected to hit a demographic disaster over the coming decade as the country's population grows older. Abysmal birth rates, partially driven by the infamous One Child policy, have created a population that’s heavily top-weighted by retirees and elderly folks who rely on government assistance to live. With people living longer and fewer and fewer young people each year to work and pay taxes to support the elderly, the nation’s economy could very soon start to suffer from its own age. Moody’s didn’t include post-2030 growth estimates, but spoiler alert: they wouldn’t have been good. And China’s not alone here. Most developed nations face this exact problem as birth rates plummet while quality of life increases. In the U.S., high immigration rates have been our saving grace, but taking a look at Japan, western Europe, and other regions tells a slightly spookier story. One solution? Simply stop getting old. Easy enough, right? The Big Question: How much assistance will China have to provide to buoy its local governments and state-owned enterprises? To what extent will this actually slow economic growth? Is this demographic bomb closer to a pipe bomb or a nuke? Banana Brain Teaser Yesterday — A duck was given $9, a spider was given $36, and a bee was given $27. Based on this information, how much money would be given to a cat? Answer $18 ($4.5 per leg) Today — A storage bin is one-third full of grain. After 100 kg of grain is poured into the bin, it is half full. How much grain can the storage bin hold? Shoot us your guesses at vyomesh@wallstreetoasis.com. Wise Investor Says “Demographics are destiny.” — Auguste Comte How would you rate today’s Peel? [All the bananas]( [Decent]( [Rotten AF]() Happy Investing, Patrick & The Daily Peel Team Was this email forwarded to you? [Be smart like your friend](). [ADVERTISE](=) // [WSO ALPHA]() // [COURSES](=) // [LEGAL]() Don't want The Daily Peel? [Unsubscribe here](=). Click to [Unsubscribe]( from ALL WSO content IB Oasis Corp. (aka "Wall Street Oasis") 20705 Saint Charles St Saratoga, California 95070 United States