The Cashflow Memo
Oil Supply/Demand and Natural Gas (Exhibits C & B)
The oil demand/supply balance has tightened. Russian production is down at least 1 million barrels per day due to the Ukraine conflict. This decline in Russian supply is meaningful as they export not just crude oil but also refined products. Saudi Arabia and UAE are holding back over 1 million barrels in spare capacity. Without these cuts, we'd face oversupply. But the $85 WTI oil price is attractive.
U.S. natural gas production held at 102 bcf/d in late 2023, lower than the 2024 estimate of 104 bcf/d. Power demand growth from data centers is a positive driver.
Federal Government Finances (Exhibit A)
The federal cash flow deficit was $1.4 trillion last year. Hopefully regular budgeting processes resume, forcing an acknowledgment that COVID-era overspending was excessive and inflated the national debt. A $1.4 trillion deficit is far from perfect but better than continuously rising deficits year-after-year. Fiscal prudence will be positive for taming inflation.
Assessing China Exposure (Pages 20-1)
We examined each company's exposure to China across sectors like tech, energy, retail, finance and autos. Some key observations:
- Semiconductor companies like NVIDIA, AMD and TSLA have significant revenue/supply chain linkages to China that are difficult to disentangle quickly.
- Major retailers like Walmart and Amazon sell many goods sourced from China. Proposed tariff hikes would severely impact their costs and margins.
- Oil majors have limited direct China exposure as crude is a global market.
- Financials operate globally but can likely protect themselves from major fallout in a conflict scenario.
- Tesla produces over 1/3 of vehicles in their Shanghai factory and now face slowing demand and increasing restrictions in China.
No matter the sector, it's clear the world's two largest economies are deeply intertwined in complex ways. Unraveling these linkages would be extremely disruptive but may become necessary if U.S.-China relations deteriorate further.
Outlook on Tesla's Valuation
Tesla's growth trajectory and disruptive potential are unmatched versus legacy automakers. But does this justify its premium valuation?
China's increasing restrictions and rising EV competition from BYD and others create significant headwinds. A $100 stock price cannot be ruled out if these pressures intensify.
Ultimately, Tesla is not just another automaker. It aims to be as indispensable as Apple is for personal computing and communications. If Musk's vision materializes, today's valuation may actually prove to be a bargain. We will discuss this and more in detail next week.
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🇨🇳Assessing China Exposure - Memo Pages 1-20 (e2414)