Whitney Tilson
Thu, May 6, 2021|Whitney Tilson

U.S. Unemployment Claims Fell; Cars Make a COVID Comeback; Auto shortages leading to skyrocketing car prices; Biden's $4 Trillion Economic Plan, in One Chart; Cheers to Eli Broad; Jeers to the Sackler family

1) Here's more evidence this morning that the "mother of all economic booms" is underway: U.S. Unemployment Claims Fell to 498,000 Last Week. Excerpt:

Jobless claims dipped below 500,000 last week for the first time during the COVID-19 pandemic as layoffs decline and hiring accelerates...

With more than two-fifths of U.S. adults now fully vaccinated, Americans are spending on restaurant meals, travel and other services that they had shunned over the past year due to fear of COVID-19 and business restrictions. At the same time, government stimulus is boosting economic activity more generally.

2) The boom is disrupting supply chains and causing shortages across numerous industries. One of the largest is autos, where demand is soaring, as this Bloomberg article notes: Cars Make a Covid Comeback, and That Means Burning More Oil. Excerpt:

After being stuck in their homes for so long, people are itching to get out again. It's a boon to newly reopening economies, with consumers ready to start spending more at gas stations, convenience stores, restaurants, hotels and attractions. Daimler, BMW, and Toyota Motor (TM) all started the year with sales at records, and things are so hot that used car prices in the U.S. are soaring to all-time highs.

The jump in vehicle sales is a strong sign that this is more than just a passing fad. Like the ubiquitous face mask, the car renaissance could be the latest example of how COVID-19 makes a lasting impact on our lives. The change could usher in an era of heavier traffic jams and longer commutes. All the extra driving will send gasoline consumption soaring, but with that also comes a rise in pollution. The increase in gasoline use that the International Energy Agency projects for this year alone would add as much as 1.5 billion pounds of carbon emissions per day.

Rising demand for cars is a major contributor to the white-hot economy, as this New York Times article highlights: Auto sales helped get the American economy off to a good start in 2021. Excerpt:

In the first months of 2021, what was good for the auto industry was decidedly good for the American economy.

Spending on motor vehicles and parts rose almost 13 percent in the first quarter, making a big contribution to the increase in gross domestic product, the Commerce Department reported Thursday. Strong sales of new and used vehicles were propelled by consumers who had delayed purchases earlier in the pandemic and by others who – because of the virus – wanted to rely less on public transit or shared transportation services like Uber (UBER).

Two rounds of stimulus payments since late December were a big factor. Low interest rates, readily available credit, rising home values and stock prices, and strong trade-in values for used models also eased the path for consumers.

In fact, demand in the first quarter was robust enough that the auto industry was able to post healthy results despite a shortage of computer chips that forced temporary shutdowns of many auto plants.

A friend who's an expert in the car industry recently sent me his take on auto sales in the U.S. and gave me permission to share it:

Thanks to the government's enormous stimulus, both fiscal and monetary, demand for new cars is robust. If an automaker has cars available to sell, they sell:

Here are Q1 U.S. sales numbers, year over year:

  • Kia – up 16%
  • Hyundai – up 28%
  • Toyota – up 20%
  • Lexus – up 32%
  • Volvo – up 40%
  • Buick – up 35%
  • Cadillac – up 23%
  • GMC – up 10%
  • Jeep – up 8%
  • RAM – up 16%
  • Chrysler – up 32%
  • Alfa Romeo – up 25%
  • Honda – up 14%
  • Acura – up 33%
  • Subaru – up 23%
  • BMW – up 20%
  • Volkswagen – up 21%
  • Audi – up 33%
  • Tesla – up 25%

I could go on, but you get the point: The entire industry had a huge Q1 in the U.S. market, with sales increases, rarely, if ever, seen before.

That brings me to my second point, however. I regularly visit a wide range of car dealers and, compared to a month or so ago, dealer lots today are EMPTY. Inventories are down by something like 70% or even 80%. Some dealers used to have 250 cars in stock and now they have just 20. As a result of such low inventory, their sales have fallen dramatically just over the last 30 days.

Why has this happened?

By the end of last year, most automakers had recovered from the supply disruptions that took place when the pandemic hit in Q2 2020. But now the shortages of semiconductors – and other components – are starving the industry, resulting in factory shutdowns, limited production, and low inventories.

And, as this Wall Street Journal article notes, it doesn't look to get better anytime soon: Global Chip Shortage Set to Worsen for Car Makers.

For instance, when Ford reported Q1 financial results last week, it said it will produce 1.1 million fewer cars and truck this year due to the semiconductor shortage:

  • 200,000 in Q1
  • 700,000 this quarter – half the normal amount
  • 200,000 in the second half of this year

Every automaker is going to be affected, as this WSJ article notes (Car Companies' Profits Have Outrun the Chip Shortage – but Not for Long), but the one with the most vulnerable stock is Tesla (TSLA), given its extreme overvaluation.

Offsetting this for the entire industry, however, is that car prices are skyrocketing and discounts are all but gone.

3) This is a fascinating chart in the NYT: Biden's $4 Trillion Economic Plan, in One Chart:

4) Cheers to Eli Broad... The business, arts, and education reform worlds (I knew him through the latter) lost a giant last week with his passing.

Broad founded two major public companies, Kaufman & Broad – now KB Home (KBH) – and SunAmerica – sold to AIG (AIG) – before dedicating his life to philanthropy. The NYT ran his obituary on the front page – where it belonged: Eli Broad, Who Helped Reshape Los Angeles, Dies at 87. Excerpt:

Eli Broad, a businessman and philanthropist whose vast fortune, extensive art collection and zeal for civic improvement helped reshape the cultural landscape of Los Angeles, died on Friday at Cedars-Sinai Medical Center in Los Angeles. He was 87...

Few people in the modern history of Los Angeles were as instrumental in molding the region's cultural and civic life as Mr. Broad. He loved the city and put his stamp – sometimes quite aggressively – on its museums, music halls, schools, and politics...

Together, the Broad Art Foundation and the Eli and Edythe Broad Foundation, which is devoted to education, science, and medicine, have assets of $2.4 billion and have dispensed hundreds of millions of dollars, putting the Broads among the leading philanthropists in the United States.

In recent years, the Broad Foundation gave more than $100 million to improve American public schools, establishing an academy and residency program to recruit and train school superintendents and other managers for local school districts, charter schools and departments of education.

The Broad Prize for Urban Education was created in 2002 to honor the four urban school districts that have shown the most improved student performance. Each year it distributes $1 million in scholarships of up to $20,000 to graduating seniors in the winning district and the three finalist districts.

"I want to give back, and I also have a big ego," Mr. Broad told Forbes magazine in 2003. "I'd rather be recognized for doing good than for just making money."

Here's an interview/profile 60 Minutes did on him in 2011.

5) Jeers to the Sackler family, whose pure evil has been exposed as never before in a new book I just read by Patrick Radden Keefe, Empire of Pain: The Secret History of the Sackler Dynasty.

Here's the review in the New York Times: Patrick Radden Keefe Lays Bare a Drug Crisis Fueled by Family Greed. Excerpt:

Put simply, this book will make your blood boil.

Some 500,000 Americans have died from opioid-related overdoses since 1999, and millions more have become hopelessly addicted. Not all of this wreckage can be laid at the feet of the Sacklers, but a lot of it can. By aggressively promoting OxyContin, their company, Purdue Pharma, ushered in a new paradigm under which doctors began routinely prescribing the potent and dangerously addictive narcotics. In the process, the Sacklers became fabulously rich, reaping, according to one expert's court testimony, some $13 billion...

Keefe combines this wealth of new material with his own extensive reporting – he spoke to more than 200 people (though the Sacklers themselves declined to be interviewed) – to paint a devastating portrait of a family consumed by greed and unwilling to take the slightest responsibility or show the least sympathy for what it wrought.

While other accounts of the opioid crisis have tended to focus on the victims, Empire of Pain stays tightly focused on the perpetrators...

Keefe weaves... a highly readable and disturbing narrative, shatters any illusion that the Sacklers were in the dark about what was going on at the company. The fingerprints of the Raymond and Mortimer branches are all over Purdue's misdeeds. OxyContin was their cash cow and they milked every last dollar from it despite knowing what it was doing to the country...

If there's one difference between El Chapo and the Sacklers, it's that El Chapo is paying for his crimes with a life sentence in a supermax prison in Colorado while the Sacklers get to hold onto their freedom and most of their money. But with the help of this damning book, there's one thing they'll never recover despite their penchant for putting their name on museums: their reputation.

If you don't have time to read this book, here's an article Keefe published in the New Yorker along the same lines: The Family That Built an Empire of Pain.

For more on this, see:

Best regards,

Whitney

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