Category Archives: Business

Business

Forget GameStop, Treasury Yields Are The Thing to Watch

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Treasury bonds have been falling hard lately. Their interest rates are up significantly as a result:

The yield on the 10-year note, a bellwether for borrowing costs on everything from mortgages to corporate loans, has jumped to near 1.5% from around 1% in a matter of weeks, lifted by increased expectations that vaccines and government stimulus efforts will accelerate growth and inflation.

And the sell-off is making its way into the stock market today:

The sell-off in the bond market ricocheted into equities, pushing the broad S&P 500 down 2.3 per cent and the tech-heavy Nasdaq Composite down 3.3 per cent by afternoon on Wall Street.

A lot of this is the side effect of something good: people are getting vaccinated, new vaccines are coming, and economic stimulus could boost the economy further. That picture is leading investors to expect greater economic growth in the future, along with greater inflation (see the Feb 22 post):

Signs of a renewed economic boom, in tandem with pockets of price pressure, color that move in rates. Bianco Research notes today that Wall Street economists now expect U.S. real GDP growth of nearly 5% this year

But higher rates on Treasury bonds could affect other markets negatively in several ways:

  • Higher Treasury yields tend to mean higher rates in other areas. This could make it more expensive for companies to borrow to fund expansion, etc. That would hurt their shares.
  • If Treasuries offer more interest, that makes stocks less attractive by comparison.
  • Treasury yields, especially the 10 year note, tend to drive mortgage rates. Higher mortgage rates mean a weaker real estate market.

Nonetheless, the Fed remains committed to low interest rates and a loose monetary policy:

In his remarks to the House Financial Services Committee, [Federal Reserve Chairman Jerome] Powell said it could take more than three years before inflation reached the Fed’s target of 2%. That helped to reiterate the message that the central bank was in no rush to pare back on stimulus anytime soon, Deutsche’s Reid said.

I think that if rates spike too high, Powell will probably get the Fed in there buying lots of bonds (with printed money, if necessary) to get the rates back down. He doesn’t want to see higher rates derailing the economic recovery.

A slower rate rise may be less problematic:

“If it is stable and steady, it is easier for equities to digest,” O’Rourke said in an interview. “A quick spike has the potential to create a shock.”

Overall, this situation concerns me and it’s one I’m going to watch. But I am pretty confident that Powell will put a stop to extreme increases in Treasury yields.

For more on recent developments in financial markets, check out these posts:

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Photo: “Jerome H. Powell, governor of the Federal Reserve Board, discusses how markets currently function” by BrookingsInst is licensed under CC BY-NC-ND 2.0

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Business

Second Short Squeeze Is On As GameStop Triples in 1 Day

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GameStop shares have tripled in under 24 hours. Naturally, the blue chip investors behind the rise had a solid case for their optimism. After all, what about the ice cream cone?

Believe it or not, a GameStop board member posting a picture of a McDonald’s ice cream cone is one theory being bandied about to explain the red hot rally. Maybe it’s a sign? Or…maybe he just likes ice cream.

Also, the CFO was pushed out shortly before this rally, but it’s entirely unclear what that means for the company’s strategy.

There is no case for this rise based on the fundamentals, but there may be a technical one. I wrote about the possibility of a second short squeeze recently, and it may be happening. Shares short as a percentage of the float (stock that can be traded without restrictions) remains at 78%. Short sellers are losing a fortune:

Short-sellers are estimated to have lost $818 million on Wednesday from their bearish bets on videogame maker Gamestop

That’s losses of around 6.5% of the company’s entire market cap, in a single day. Ouch. (If you’re unfamiliar with short squeezes, check out this post for a quick explanation.)

But with repeated halts in GameStop trading and the fact that Robinhood could block buying again, it’s going to be hard for Wallstreetbets to wring the most out of this trade.

And either way, buying into a company with weak fundamentals just because there may be a short squeeze and the price could head higher is a very risky proposition. You don’t want to be caught holding shares in a moribund company once the short squeeze dissipates. And that could happen at any time.

If you’re interested in GameStop and the Wallstreetbets phenomenon, check out some of these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Business

AMC Stock Is Acting Like COVID Never Happened

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AMC burnt over $900 million in the first 9 months of last year*. That presented a bit of a problem.

They had just $429 million in cash left going in the fall of 2020, and that would be gone in a matter of months. So, to stave off bankruptcy, AMC went into fundraising mode, big time.

AMC got a surprisingly good reception from investors and was able to sell over $500 million in new stock and borrow a further $400 million. Since then, additional stock sales have boosted their cash hoard to over $1.3 billion.

This fundraising bought AMC at least a year’s worth of breathing room, even if 2021 is no better than 2020, which seems unlikely. But there’s one little problem…

AMC had just over 100 million shares outstanding in the fall of 2020, per their latest quarterly report. It now has close to 500 million shares outstanding. So, every dollar AMC makes in the future (if it makes any) is now 20 cents as far as shareholders are concerned. Each dollar of profit is only worth 1/5 as much if your shares represent a portion of the company that’s only 1/5 as large as before. This is called dilution.

So this must have cratered AMC’s stock, right? Wrong. In fact, it’s actually up! On December 30, 2019, the stock traded at 7.32. It’s at 8.27 as I write this.

Investors are saying that a share of AMC is actually worth more than it was before COVID annihilated its business and dilution took away 4/5ths of the ownership rights in each share. That makes no sense.

I suspect this stock is being traded on the basis of memes and pure speculation. Indeed, it’s currently mentioned on Reddit’s Wallstreetbets more than any other stock. The price is pretty much impossible to justify rationally unless AMC suddenly makes far greater profits than ever before. Why would that happen all of a sudden, even as COVID is still with us?

That said, I have to applaud CEO Adam Aron and everyone at AMC for doing whatever it takes to save this company. Even the CEO was furloughed in March 2020 to conserve cash! That’s what I call leadership. However, it doesn’t make their stock a good bet at the current price.

I’m going to leave this one to the crowd at Wallstreetbets.

For more on the Wallstreetbets phenomenon, check out these posts:

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*See 11/4/20 10-Q report cash flow statement, cash used in operating and investing activities.

Photo: “AMC Theaters” by JeepersMedia is licensed under CC BY 2.0

Business

Tesla’s Shares Are Priced For a Future Where Tesla Makes Every Car on Earth

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Reading about the enormous run-up in shares of Tesla, Inc., I wondered something…is Tesla bigger than the entire rest of the auto industry?

The answer is: almost. Tesla’s market cap ($655 billion), is nearly equal to the combined market caps of Toyota, GM, Ford, VW, Daimler, Fiat, BMW, Honda, Hyundai, Nissan, Mazda, Subaru and Aston Martin ($750 billion), per Yahoo Finance data. That’s pretty much the auto industry, with the notable exception of SAIC of China.

So, will Tesla make every car on earth? Probably not. Indeed, what scenario investors are expecting is unclear:

It doesn’t make sense that nearly all the cars sold in the world in the future will be Tesla vehicles, nor does it make sense that the size of the global auto market will double.

Therefore, Tesla’s massive market cap compared to the largest legacy auto companies in the world seems to suggest that investors believe other businesses outside of pure auto unit sales will play an extremely large role in Tesla’s future business model.

Tesla has come out with some interesting non-auto products like its solar roof tiles and Power Wall, but does that make it worth three times as much as Toyota, the next largest auto company by market cap ($213 billion)?

Keep in mind, Toyota sold almost 10 million vehicles last year. That’s nearly 20 times as many as Tesla.

I’m a huge fan of Tesla and Elon Musk. I think it’s an amazing company and Musk is one of the greatest innovators and entrepreneurs of all time. But, it’s hard to justify the stock’s current level.

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Photo: “Tesla Chairman Elon Musk” by kqedquest is licensed under CC BY-NC 2.0

Business

Palantir Insiders Are Dumping The Stock. What Do They Know That You Don’t?

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The lock-up that stopped insiders at Palantir Technologies from selling their shares recently expired. And boy, are they excited!

Palantir stock sank as much as 13% on Tuesday after regulatory filings showed the company’s co-founder Stephen Cohen and two other top executives offloaded 2.7 million shares.

And they’re not the only ones:

Just a month after Palantir went public last year, CEO Alex Karp and co-found Peter Thiel sold a combined 41.45 million shares, for more than $400 million.

These sales go way beyond what it would take to have financial security or fund most any lifestyle. To me, it suggests that they think the company has gone about as far as it’s going to and it’s time to cash out.

In a company destined for greatness, you would expect to see the insiders holding onto their shares. They wouldn’t want to miss out on the amazing times ahead!

But that’s not the case here. I agree with them. Palantir is overvalued with a questionable business model and should be making money by now, 18 years since its founding. But it’s never made a dime.

The picture isn’t all bleak: a certain number of insiders are buying. But seeing these huge sales by the founders and top executives would definitely give me pause.

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Photo: “PandoMonthly – April 2012 – Sarah Lacy Interviews Peter Thiel” by thekenyeung is licensed under CC BY-NC-ND 2.0

Business

SPACs Are a Bubble and Nikola’s Fake Truck Is Proof

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So Tesla is doing great, right? And I sure would love to make as much money as Elon Musk! So let’s make our own vehicle startup.

What should we call it? Hmm, picking a name is hard. Let’s just go with Tesla’s first name, Nikola!

Now we have to make a truck. But making the whole engine thingy is a pain! How about we just let it roll down a hill, take a video and raise lots of money? Yay!

Believe it or not, this is exactly what Nikola, the electric truck startup, did. And they even admitted it…once they were caught. But hey, they didn’t technically lie:

Nikola described this third-party video on the Company’s social media as ‘In Motion.’ It was never described as ‘under its own propulsion’ or ‘powertrain driven’.

How is this company with no real product even public? That’s where Special Purpose Acquisition Companies, or SPACs, come in. A SPAC raises money from investors to buy a private company to acquire. They’re exploding in popularity:

Amid the global stock market volatility, last year’s $83 billion haul by SPACs was six times the amount raised in 2019 and nearly equaled the figure mustered by IPOs.

Nikola went public via a merger with a SPAC in March of 2020. Just a few months later, it wound up under a federal investigation for securities fraud. Its stock is down from a high of over 60 to barely 20.

What made this SPAC want to acquire such a questionable company? SPACs collect a big fee if they acquire a company, but if they don’t acquire anything, there’s no fee. This gives the people who created it (“sponsors”) a strong incentive to acquire anything, regardless of merit:

More than 300 SPACs need to pull that off this year or risk being liquidated. But with only so many quality targets to go round, and SPAC founders’ strong incentive to close deals — even at the expense of shareholder value — SPACs may well end up in a negative spiral of poor quality/bad press/tighter regulation.

Since so many new SPACs are being created, and there are only so many quality private companies to go around, they’re getting less and less picky:

Then there is the fact that many firms taken public by SPACs have little to show in terms of business plan or revenue, in some cases triggering shareholder lawsuits by disgruntled investors.

Typically, a company with no profits isn’t a good candidate to go public. A company with no revenue is even more suspect. Maybe that’s why they’re not going the traditional IPO route.

Indeed, research on a large pool of SPACs and normal IPOs (127 SPACs and 1128 IPOs) show that the SPACs do much worse:

SPAC firms are associated with severe underperformance in comparison to the market

If they have such a well-documented record of underperformance, why are SPACs so popular? My hunch is it has to do with the fees for the sponsors, which are often several times greater than for a traditional IPO. That’s peachy for the sponsors, but I think investors are better served by avoiding all but the strongest SPAC deals. You’ll probably just wind up paying too many fees and buying an inferior company.

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Photo: “Nikola Two Semi Truck” by 666isMONEY ☮ ♥ & ☠ is licensed under CC BY 2.0

Business, Podcasts

How to Build a Network, from Bumble Founder Whitney Wolfe Herd

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The dating app Bumble recently went public, making founder and CEO Whitney Wolfe Herd a billionaire at the ripe old age of 31. I heard an interview with Herd a while back, and her genius at marketing really struck me.

She had just created Bumble…now, how can she get anyone to sign up?

…we ran as fast as we could to the fraternity row, and went into the frat houses and said a different pitch, and said, “Hey guys, I bet you have no other way to access hundreds of sorority girls right now. Download the app, because they’re all waiting for you! They’ve all just downloaded this app and they’re all waiting for you to like them.

This is incredible marketing genius, even if it involves a little white lie. Hurry boys, and you can have all the ladies to yourself! (What man will say no to that?) Quickly girls, the most desirable boys are waiting for you! With 2 meetings, she solved the problem of how to get enough people on the app to make it a real network.

This interview is truly a master class in marketing and worth a listen in its entirety. The quote above is from about the 10:10 mark.

I only wish I had been in on that IPO!

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Photo: “File:TechCrunch Disrupt San Francisco 2018 – day 2 (30647055838).jpg” by TechCrunch is licensed under CC BY 2.0

Business

Payment for Order Flow Really Does Help Investors, Research Indicates

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Citadel CEO Ken Griffin claims that even though they pay Robinhood to execute their trades, investors are getting a better deal than they would in public stock markets:

Citadel CEO Ken Griffin said Thursday that the system has been “very important to the democratization of finance. It has allowed the American retail investor to have the lowest execution cost they’ve ever had.”

Sounds hard to believe, right? I’m naturally skeptical they’re giving those small investors a worse price and keeping the difference. However, one of the few recent studies to analyze payment for order flow (PFOF) finds the opposite:

Focusing solely on execution prices, we find that the cost of liquidity on exchanges utilizing the PFOF model is 80 bps higher than on exchanges utilizing maker-taker pricing. Nevertheless, when taker fees are incorporated into the analysis, the cost of liquidity on the PFOF exchanges is 74 bps lower.

More here.

In other words, the prices the PFOF model gave investors were a bit worse, but when you consider the commissions they would’ve paid otherwise, they came out ahead. This study was limited to options, not stocks, but many Robinhood users trade options as well.

On the other hand, Citadel has been fined before for offering worse prices than public markets. Until we see a comprehensive data set on Citadel-completed trades versus comparable ones on public markets, this will remain a difficult question to answer. I know of no such data currently available to the public.

If Robinhood or Citadel came out with something like that, I think it would go a long way toward allaying the concerns of investors and regulators.

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Photo: Citadel CEO Ken Griffin. “Ken Griffin with computers” by insider_monkey is licensed under CC BY-ND 2.0

Business

Palantir Is Losing $100 Million a Month With No End in Sight

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Reddit’s Wallstreetbets loves Palantir Technologies, a Denver-based maker of data analytics software. The merry band of traders mention it more than any other stock, but the company has serious problems.

Big Losses

Palantir claims to make products that analyze data better than anyone else. If that’s true, why has the company never made a profit in 18 years?

“They’re massively unprofitable and they’ve never been able to figure it out,” [NYU Business Professor Scott] Galloway said, noting that it took Google three years to earn a profit, and Amazon seven.

Defense News

Revenue is increasing but losses are increasing much faster, as sales/marketing and general/administrative expenses explode. I don’t see how signing a few more government contracts is going to get them out of this.

In fact, Palantir spends more on sales and marketing than it does on R&D, per their latest quarterly report. This seems strange for a company whose whole value proposition is some technical “secret sauce”. Its sales and marketing expenses are massive, over half a billion dollars in just 9 months. Where is all this money going?

One clue from their latest quarterly filing:

we typically acquire new opportunities with minimal risk to our customers through short-term pilot deployments of our software platforms at no or low cost to them.

They provide costly free trials to customers, and that seems to be killing their financial results. But if that’s what customers are used to, can they move to another, more profitable model? That could be particularly difficult for a company that’s dependent on winning more and more business from the same group of customers. They’ve probably come to expect their free trial.

Dependent on Fundraising

Palantir claims to be a data analytics company but acts more like a fundraising machine. It has lost $3.8 billion and raised $3 billion, cumulatively. It’s also taken on debt to stem the bleeding.

You see this pattern very clearly in their 2020 report. They lose $1 billion in cash, issue $900 million in stock, and pile on $200 million in debt for good measure.

They have under $2 billion in the bank now and lost $1 billion in 9 months. Without new fundraising, that gives them 18 months until they’re broke. Maybe they can easily raise more funds. Maybe they can’t. Either way, a mature company should not be in such a precarious position.

I’m harping on the losses because this is not a new company beginning to build technologies and starting to scale. This is a mature business. It should be making money by now. Amazon and Google were well known for accepting some losses early in order to build and scale their business, but were still able to make a profit in just a few years.

What, Me Worry?

Another major risk is that their business is heavily concentrated in a few big government clients. If they lose one of those contracts, they could be in big trouble:

three clients — which Palantir did not name — accounted for almost a third of revenues.

Defense News

CEO Alex Karp doesn’t seem concerned, though. Maybe he’s too busy enjoying his $600,000 travel stipend to go…where exactly?

For more content on the Wallstreetbets phenomenon, try some of these:

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Photo: Palantir co-founder Peter Thiel. “Peter Thiel” by jdlasica is licensed under CC BY 2.0

Business

There Could Be Another GameStop Short Squeeze, But Beware Weak Fundamentals

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GameStop shares have come back to earth since the short squeeze a few weeks ago:

But this story may not be over. GameStop remains one of the most heavily shorted stocks in the entire market:

This tells me that the epic short squeeze could happen again. Many short sellers still have their position. Maybe they’re wary of closing it out for fear their buying would set the stock on another upward tear? (If you’re not familiar with short squeezes, see this post for a brief explanation.)

But Redditors should be careful because the fundamentals of this business are weak. And you don’t want to be stuck holding a rotten stock if the squeeze doesn’t happen.

GameStop has 5,000 stores. Why? Where do you buy toilet paper, pillows, or plates today? Probably online, and videogames are going the same way. Publishers are selling them directly to the public online, and in general, people are losing the habit of going to physical stores.

If you got your games virtually or delivered from Amazon when stores were closed, why would you go back to the store once it’s open? You’ve already been forced to build a new habit by the lockdowns, and people don’t change habits readily.

And let’s not blame the lockdowns for everything. COVID only accelerated an existing trend. GameStop’s business has been shrinking for some time, and losses were actually even bigger in 2019. From Nov 2019 to Oct 2020, sales dropped from $4.3 billion to $3 billion, per their latest financial report.

Management talks about increasing online sales, and has had some very real success in growing that business:

…e-commerce sales, which increased 257.4% and 432.9% in the current quarter and year-to-date periods, respectively, compared to the prior year periods.

But where is the discussion of abandoning all physical stores? Why do those 5,000 stores make any sense in today’s environment? It’s a business model created in another time that made sense then, but doesn’t today.

When one part of your business is growing very fast (e-commerce) and another is producing consistent losses (stores), it’s pretty clear what you need to do. But I don’t see a willingness at GameStop to make those hard choices.

I get the impression management is really trying. When things got really tough in spring 2020, the top executives and the board took big paycuts of 30-50% (generally larger than those taken by hourly staff) and sold the corporate jet. That’s the kind of self-sacrifice you want to see from top leadership in a crisis. But can they bring GameStop to a new business model? I don’t see a lot of evidence of that yet.

Two months ago, before it attracted the attention of Wallstreetbets, GameStop was trading around 15. It could easily return there, based on the fundamentals. Wallstreetbets better hope for that short squeeze, and soon.

P.S. Another big focus for the Reddit crowd has been pot stocks. See more info about why their position is weak, how favorite Sundial Growers may be headed for bankruptcy, and how insiders are taking big loans at Sundial.

P.P.S. Don’t you love that sign?

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Photo: “the Great Hedge Fund Hei$t” by eyewashdesign: A. Golden is licensed under CC BY-NC-ND 2.0