Pelosi’s Trip to Taiwan Is a Risk to More Than Just the Chip Industry

The political tension is overlaid by vast economic risk because Taiwan, an island with a land mass slightly larger than Maryland, dominates the global production of microchips.

Neither the U.S. nor China can do without its output, which accounts for more than 90% of the most advanced chips vital for cutting-edge weaponry as well as powering devices from smartphones to autos and medical equipment.

The chairman of the most significant producer, Taiwan Semiconductor Manufacturing Company, warned that a Chinese invasion would bring about the “destruction of the world’s rules-based order” and could render its factories, which are key suppliers to

Apple
,

Advanced Micro Devices
,
and

Nvidia
,
as “nonoperable.”

That scenario would knock current U.S. recession concerns into a cocked hat and make recent semiconductor shortages look trivial. But China, whose imports from Taiwan totaled a record $189 billion last year, would see its economy battered too.

Overnight, Hong Kong’s

Hang Seng Index
fell 2.4%, China’s

Shanghai Composite
was off 2.3%, and yields on 10-year U.S. Treasury notes dropped by up to 9 basis points to touch a four-month low.

Efforts to make both superpowers more silicon self-sufficient aren’t without problems.

China must navigate a U.S. export ban on chip-making equipment.

Intel

is unhappy that companies funded via the Chips and Science Act will be barred from expanding advanced production in China for a decade. And TSMC’s $12 billion plant in Arizona should be operational in 2024, but its output is unlikely to be as cheap as the chips it makes in Asia.

—James Ashton

*** Join Barron’s associate editor for technology Eric J. Savitz today at noon as he speaks with Dan Niles, founder and senior portfolio manager of Satori Fund, on the outlook for tech shares. Sign up here.

***

BP Posts Soaring Profit Fueled by Rising Energy Prices

BP

is the latest oil supermajor to post its most profitable quarter in years. It joined

Exxon Mobil

and

Chevron

in benefiting from soaring energy prices as economies rebounded and demand boomed post-Covid lockdowns, as well as supply being restricted due to sanctions on Russia following its invasion of Ukraine.

• BP credited “exceptional” oil trading and strong refining margins for its adjusted profit to surge to $8.5 billion, up from $2.8 billion in the same period the previous year and well ahead of analysts’ forecasts. It recorded profit of $6.2 billion in the first quarter.

• It raised its dividend by 10% and announced a further buyback of $3.5 billion of stock. It also has allowed for $800 million to cover a new levy on the profits of U.K. oil and gas proposed by the U.K. government last month.

• Last week, rival

  
  
  Shell
  
  also saw strong performance in its refining and gas trading divisions. Exxon Mobil on Friday said soaring energy prices and increased production helped it shatter a previous record for quarterly profit, while Chevron boosted its forecast for stock buybacks.

What’s Next: The Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, have their regular meeting this week to decide whether to increase supply. BP forecasts that oil prices will “remain elevated in the third quarter” due to reduced levels of spare capacity, with inventory levels significantly below the five-year average and “ongoing disruption to Russian supply.”

—Rupert Steiner

***

Pinterest Surges as Elliott Confirms It Is Biggest Shareholder

Pinterest

stock surged 21% in after-hours trading Monday, after activist investor Elliott Management Corp. confirmed it has become the company’s biggest shareholder, calling new CEO Bill Ready the “right leader” to oversee the social-media company’s next phase.

• Ready said Pinterest accelerated its investment in shopping and e-commerce. Second-quarter revenue rose 9% from last year, to $665.9 million, but adjusted per-share earnings of 11 cents fell short of expectations.

• Like other tech companies, Pinterest has slowed hiring significantly, finance chief Todd Morgenfeld told The Wall Street Journal. Advertising-focused companies, including Pinterest,

  
  
  Snap
  ,

  
  
  Roku
  ,
  and

  
  
  Meta Platforms
  
  have warned that advertisers are pulling back spending.

• Pinterest reported 433 million monthly active users in the second quarter, slightly beating analysts’ expectations, though that is about the same as the first quarter and down 5% from the second quarter last year.

• Ready, an

  
  
  Alphabet
  
  alum, succeeded Ben Silbermann in June, and Silbermann is now Pinterest’s executive chairman. Pinterest said it is seeing strong competition from video-based platforms.

What’s Next: Pinterest expects third-quarter revenue, on a percentage basis, to grow in the mid-single digits from last year, though foreign exchange will have a slightly higher impact than the second quarter. Adjusted operating expenses are forecast to increase by a low-double-digits percent from the second quarter.

—Connor Smith and Janet H. Cho

***

Deal-Making Activity in U.S. Expected to Slow Even More

Deal making has slowed to a trickle in the U.S., with about $1 trillion of deals struck this year through late July, The Wall Street Journal reported, citing Dealogic. It is the lowest in five years excluding 2020 and a nearly 40% drop from the same period in 2021. Still, Monday featured a smattering of deal news.

• 
  
  Estée Lauder
  
  is discussing buying luxury fashion brand Tom Ford, the Journal reported, citing people familiar with the matter. The cosmetics giant, a Barron’s stock pick in July, has a longstanding licensing deal with Tom Ford’s beauty business. Estée Lauder declined to comment to Barron’s.

• 
  
  PepsiCo
  
  is paying $550 million in cash for 8.5% of Celsius Holdings, a maker of fitness energy drinks, and to become its preferred distribution partner. PepsiCo, which owns Rockstar Energy Beverages and Mountain Dew energy drinks, has a 5.1% share of the energy drink category.

• Electric and hydrogen fuel-cell trucking company

  
  
  Nikola
  
  is buying Romeo Power, a battery pack technology supplier, in an all-stock deal valued at roughly $144 million. Nikola would gain greater control over battery-pack technology and manufacturing.

• Greenlight Capital paid $37.24 a share for a stake in

  
  
  Twitter
  
  last month, amid the social-media platform’s lawsuit to force

  
  
  Tesla
  
  CEO Elon Musk to follow through with his deal to buy it. Greenlight’s David Einhorn didn’t say how many shares Greenlight bought.

What’s Next: Anu Aiyengar, the global co-head of mergers and acquisitions at

JPMorgan Chase & Co.
,
told the Journal deal activity is expected to be lower in the second half of this year in part because of the Russia-Ukraine war and because private-equity firms are staying on the sidelines.

—Janet H. Cho

***

More Budget-Minded Consumers Shopping at Dollar Stores

Budget-conscious consumers are buying groceries at dollar stores and eating more chicken sandwiches. With groceries costing 12.2% more than last year and energy prices up 41.6%, economists say lower-income families are trading down from name brands, The Wall Street Journal reported.

• Average spending at discount retailers jumped 71% between October 2021 and June 2022, but fell 5% at grocery stores, analytics firm InMarket said.

  
  
  Procter & Gamble
  ,
  maker of Tide detergent and Pampers diapers, expects organic sales growth of 3% to 5% in fiscal 2023, the lowest since 2019.

• 
  
  Dollar General
  
  has more than 18,000 stores and about 2,300 carry fresh produce. The retailer plans to add produce sections at 10,000 more stores in coming years.

• Although the price for boneless, skinless chicken breast has nearly tripled since early 2021, more restaurants including Panera Bread and Popeyes Louisiana Kitchen have added new chicken sandwiches to their menus, the Journal reported.

• U.S. consumers spent $2.4 billion on breaded chicken sandwiches in the June quarter, buying 678 million sandwiches, according to NPD Group. Chicken is more profitable per order than beef.

What’s Next: Fast-food chains raised prices for their breaded chicken offerings by an average of 5% in June, according to NPD. Labor shortages at meat plants and problems hatching chickens are expected to keep chicken prices high, executives and analysts said.

—Janet H. Cho

***

The Dollar’s Surge Has Been a Problem for U.S. Stocks

The U.S. dollar has surged this year, lifted by high inflation that has sent investors running for safe haven assets and rising interest rates by the Federal Reserve that pushed Treasury yields higher against foreign bonds such as the 10-year German Bund. Now, the dollar seems poised to weaken.

• The gap between the 10-year Treasury yield and the German 10-year Bund yield widened to about 2.1 percentage points recently, up from just under 1.7 percentage points earlier this year.

• The stronger dollar has hurt the U.S. stock market. The

  
  S&P 500
  is down about 14% from its January high. U.S. companies that generate sales overseas see fewer dollars when they translate those sales into a stronger dollar.

• About 40% of total sales from S&P 500 companies happen overseas, according to FactSet. Among the companies that said a stronger dollar hurt earnings in the second quarter were

  
  
  Microsoft
  ,

  
  
  Bristol Myers Squibb
  ,
  and

  
  
  Philip Morris
  .

• The dollar index is 105, down from a multidecade peak of 108 in mid-July, a sign it may be weakening. Falling interest rates could put more downward pressure on the dollar. The 10-year yield is 2.61% down from a multiyear peak of 3.5%.

What’s Next: Globally, central banks are raising interest rates, including the European Central Bank, which is battling inflation and a growing energy crisis. On Thursday, the Bank of England could raise rates the most in 27 years to combat 40-year high inflation of 9.4%.

—Liz Moyer and Jacob Sonenshine

***

Congrats to the winner of the July virtual stock exchange game! Be sure to join this month’s Barron’s Daily virtual stock exchange challenge and show us your stuff.

Each month, we’ll start a new challenge and invite newsletter readers—you!—to build a portfolio using virtual money and compete against the Barron’s and MarketWatch community.

Everyone will start with the same amount and can trade as often or as little as they choose. We’ll track the leaders and, at the end of the challenge, the winner whose portfolio has the most value will be announced in The Barron’s Daily newsletter.

Are you ready to compete? Join the challenge and pick your stocks here.

—Newsletter edited by Liz Moyer, Camilla Imperiali, Rupert Steiner, Joe Woelfel