© Reuters. FILE PHOTO: Employees work on the production line of American infant product and toy manufacturer Kids2 at a factory in Jiujiang, Jiangxi province, China June 22, 2021. REUTERS/Gabriel Crossley/File Photo
By Timothy Aeppel
(Reuters) – Along with the supply-chain headaches everyone is fighting – from clogged ports to empty store shelves – Ryan Gunnigle is focused on the potential for the opposite problem: gluts.
“Customers are just flinging crazy orders right now, so it’s hard to determine the real level of demand,” said the chief executive of Kids2, the Atlanta-based toy company best known as the maker of Baby Einstein and other baby-oriented brands. Business always surges around the holidays, but this year has been turned on its head by the pandemic.
A key danger in the current environment, he said, is that companies will order too many goods as they scramble to fill orders, especially in the run-up to the holidays, which could quickly lead to piles of unsold electronic baby books and high chairs once the crisis eases.
Some economists also see signs of a demand peak, easing inflationary pressures in coming months.
Nancy Lazar, head of economic research at Cornerstone Macro, said in a seminar on Friday that spending on items like furniture and computers – which exploded during the pandemic – have already cooled and that demand for many consumer goods will lessen in 2022. This drop in demand will come as supply chain blockages ease, “both putting downward pressure on prices,” she said.
Global producers all face similar risks.
The natural response of retailers and other businesses reliant on distant factories – including Kids2, which produces in China – is to hike orders because they worry about running out of goods before their stocks can be replenished. That magnifies the problem as the rush creates an even stronger surge of orders at far-flung factories, a process known as the bullwhip effect. The pandemic and an energy crisis in China make the situation especially fraught.
Gunnigle said he sees signs of the supply situation easing a bit, including a slight drop in the cost of booking shipping containers and fewer “blank sailings,” when one of their cargo boxes misses its spot on a ship out of China.
“We’re starting to see things flow a little bit easier,” he said.
That said, the curve balls keep coming, making it difficult to plan amid so much uncertainty.
Consider the power shortages roiling Chinese factories in some regions of that country. Gunnigle just learned, for instance, that the Chinese factory that produces baby teethers for Kids2 has halted production until the energy problem is resolved. That producer uses a type of plastic that has soared in cost, which together with surging energy prices makes it uneconomical to produce, he said.
‘PADDED’ LEAD TIMES
Gunnigle is in a good position to gauge the danger of piling up too many goods. While many of his competitors have set up shop in other countries, he has doubled down on China – recently opening the first phase of a factory complex on the banks of the Yangtze river in central China at a cost of $20 million.
That factory, together with a joint-venture plant, makes half of the goods the company sells worldwide – with most of the rest coming from other Chinese factories. “I think our response time has been a lot better than our competitors because of that,” he said, noting that as early as May, Toys2 added up to two-and-half months to the time it expected to receive goods from China – on top of the normal average of 70 days.
“We’ve really padded our lead times,” he said. “Not just in manufacturing – but in our estimates of the time it takes to get to the port, get things on boats, time to unload the boats.”
Earlier this year, the bottleneck was in China. Having his own factory and a tight relationship with his joint-venture producer allowed him to quickly shift production toward producing things that were facing the biggest bottlenecks. The company also prioritized which goods it put into its containers, to maximize shipments of the most in-demand items.
The problem has now shifted to the United States, focused on Southern California, where earlier this month more than 100 ships were awaiting access to the ports of Los Angeles and Long Beach.
That will change yet again in coming months, said Gunnigle, who said his operations team is now focused on bottlenecks that will form in China at the end of this year and the beginning of next, “because containers on the West Coast and East Coast are not being returned to China fast enough to replenish goods coming from China to support Q1 demand.”
All the company’s early work is one reason he is keeping a close eye on the risk of oversupply. “There’s a lot of inventory in the pipeline,” he said. “I just want to make sure we don’t get stuck with too much.”
Morgan Stanley: bear market rally to continue
One of Wall Street’s best-known bears, Michael Wilson, thinks the S&P 500 will rise another 7% before turning down, so the bear market rally will continue for now, writes Market Watch.
After the Dow Jones, S&P 500 and Nasdaq Composite joined their strongest weekly gains since at least May last Friday, Wilson, who is chief strategist and head of U.S. equity markets at Morgan Stanley (NYSE:MS), told clients that there could be another 5% to 7% before the downward trajectory of U.S. stocks resumes during the latest bear market recovery.
Wilson has held a bearish view of the stock market for about 2 years and correctly predicted a sell-off this year.
Wilson explained in a research note sent out to clients on Monday that a pullback in the 38-50% drop in the stock market this year “would not seem like something unnatural, not consistent with the previous bear market rally.”
While growth concerns have triggered a sell-off in commodities and lowered inflation expectations, the fact that the U.S. economy is already slowing and heading toward recession means that any market rally is likely to be short-lived, and U.S. stocks are likely to eventually fall.
Wilson mentioned in the note that the bear market is not over yet, although it may appear otherwise in the next few weeks as the market takes the rate cut as a sign that the Fed can still manage a “soft landing” and prevent a meaningful revision to earnings forecasts.
U.S. stocks rose last week as investors now hope the slowing economy and falling commodity prices may inspire the Fed to raise interest rates less sharply. Federal funds futures, a derivative used by investors to bet on the pace of the Fed’s monetary policy changes, estimate with a high probability that the Fed will be forced to start cutting interest rates again as soon as next summer.
They also consider the lower peak in the federal funds rate: it will peak around 3.5% at the end of 2022 instead of 3.75% just a couple of weeks ago. Wilson also pointed out the drop in Treasury yields: the 10-year Treasury bond yield went from 3.230% to a low of 3.07% on Friday before rebonding again on Monday.
Wilson expects the S&P 500 index to fall to around 3,400 points if the U.S. Federal Reserve manages to get a “soft landing” for the economy — which Fed Chairman Jerome Powell said last week would be “a very difficult thing to do.”
Wilson expects that if the U.S. economy plunges into recession, the S&P 500 index will fall to around 3,000 points. In any case, Wilson believes that U.S. stocks are still highly valued because the risk premium — that is, the measure of compensation that investors receive for the extra risk of owning stocks instead of bonds — remains about 300 basis points higher than the 10-year Treasury bond yield, which is considered a “risk-free rate.”
Easing chip shortages to help Volkswagen in H2 – CEO
© Reuters. FILE PHOTO: Volkswagen logo is pictured at the 2022 New York International Auto Show, in Manhattan, New York City, U.S., April 13, 2022. REUTERS/Brendan McDermid/File Photo
BERLIN (Reuters) – Volkswagen (ETR:VOWG_p) sees a strong second half of 2022 and expects progress in catching up with rival Tesla (NASDAQ:TSLA) as easing chip shortages start to offset supply chain bottlenecks and rising costs, the carmaker’s CEO said on Tuesday.
“We are earning more than ever,” Chief Executive Herbert Diess said at a works meeting, adding Volkswagen is ramping up electric vehicle volumes in its biggest markets in Germany and China thanks to easing semiconductor shortages.
This should allow the carmaker to narrow the Volkswagen-Tesla gap this year and meet its goal of becoming market leader by 2025 if it seizes the moment while the U.S. electric car maker burns cash on large investments, the CEO said.
“Elon (Musk) has to ramp up two highly complex factories in Austin and Gruenheide at the same time – as well as expand production in Shanghai. That’s going to take strength out of him,” Diess said.
Reliance Chairman Mukesh Ambani steps down as director of telecom arm
© Reuters. FILE PHOTO: Mukesh Ambani, Chairman and Managing Director of Reliance Industries, arrives to address the company’s annual general meeting in Mumbai, India July 5, 2018. REUTERS/Francis Mascarenhas
BENGALURU (Reuters) – Reliance Industries Chairman Mukesh Ambani has stepped down as director of Reliance Jio Infocomm Ltd, the conglomerate’s telecom arm said on Tuesday.
Reliance Jio said https://refini.tv/3Nrs773 it has appointed Mukesh’s son and non-executive director Akash Ambani as the chairman of its board. Akash has been involved with the telecom unit since its launch in late 2016, where he started as a director.
India’s telecoms sector had been upended after the entry of Jio, which triggered a price war that forced some rivals out of the market and turned profits into losses.
Jio, which started out offering mobile teleservices, has been aggressively investing in services like internet broadband and forging ties with handset makers to launch low-cost smartphones and providing 5G services.
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