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Thursday Failure – Supply Chain Issues for Toyota to Cut 40% of Production

As we've discussed , we are cutting back our positions .   CASH!!! is one of our best hedges against a market downturn and we've been reluctant participants in the rally recenty but the combination of resurging Delta infections, continuing (and worsening) supply chain disruptions and a possible end to the constant supply of FREE MONEY that has been propping up the markets is simply a bit too much to stay bullish around – so back to CASH!!! we go. If this were a one-time, one-off event, I would not be so concerned but Toyota's (TM) recent problems are the very big tip of the iceberg that we've been seeing from miles away.  The Global semiconductor shortage is NOT improving and another wave of Covid doing things like shutting China's ports certainly isn't making things better.  The CEOs of various semi companies have just warned us that these shortages will persist into next year and companies only now are starting to actually run out of chips to the point where production becomes impossible. Chip shortages are like cash-flow shortages.  A company like Toyota makes about 1M cars a month and, like any clever manufacture, they have enough chips for 3-6 months ready at the factory – in case there's some kind of supply disrubtion like the one we just had.  Now, the supply of chips didn't go to zero during the crisis but let's say they have been getting 30% less chips for the past year – how long does it take to wipe out their supply of chips?  30% less for a year is a 4-month supply that has to come from somewhere and now TM is scraping the bottom of the barrel and they have to simply make less cars until they get more chips.  It's not that drastic – TM expects a 40% reduction for 2 weeks should be enough but that's 500,000 cars that won't be made x $40,000 per car is $12.5Bn but think about the effect this will have on their suppliers and dealers as well.  And don't forget the nice people who make money financing you car.   And, of course, it's not just Toyota.  In fact, they are one of the best-managed companies in the World so it's likely far worse for many …

Poets&Quants | Where Top MBAs Work In Hedge FundsAs we've discussed, we are cutting back our positions.  

CASH!!! is one of our best hedges against a market downturn and we've been reluctant participants in the rally recenty but the combination of resurging Delta infections, continuing (and worsening) supply chain disruptions and a possible end to the constant supply of FREE MONEY that has been propping up the markets is simply a bit too much to stay bullish around – so back to CASH!!! we go.

If this were a one-time, one-off event, I would not be so concerned but Toyota's (TM) recent problems are the very big tip of the iceberg that we've been seeing from miles away.  The Global semiconductor shortage is NOT improving and another wave of Covid doing things like shutting China's ports certainly isn't making things better.  The CEOs of various semi companies have just warned us that these shortages will persist into next year and companies only now are starting to actually run out of chips to the point where production becomes impossible.

Chip shortages are like cash-flow shortages.  A company like Toyota makes about 1M cars a month and, like any clever manufacture, they have enough chips for 3-6 months ready at the factory – in case there's some kind of supply disrubtion like the one we just had.  Now, the supply of chips didn't go to zero during the crisis but let's say they have been getting 30% less chips for the past year – how long does it take to wipe out their supply of chips? 

30% less for a year is a 4-month supply that has to come from somewhere and now TM is scraping the bottom of the barrel and they have to simply make less cars until they get more chips.  It's not that drastic – TM expects a 40% reduction for 2 weeks should be enough but that's 500,000 cars that won't be made x $40,000 per car is $12.5Bn but think about the effect this will have on their suppliers and dealers as well.  And don't forget the nice people who make money financing you car.  

And, of course, it's not just Toyota.  In fact, they are one of the best-managed companies in the World so it's likely far worse for many
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