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birb_cromble  13d ago (text post)   1041 thread views

Weekly Finance Thread (without clever alliteration)

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I submitted an offer to purchase 100 shares of Spacex as a participant in its IPO through my broker. I'll let you guys know if I get allocated any. The odds are improved by the larger-than-usual allocation to retail for this IPO, of course offset by the interest in this particular IPO.

Spacex is offering 555,555,555 shares for $135 each to raise about $75B.

Google is issuing new equity. A quick search suggests this is the first time they have done so since their IPO.

In the last eighteen months, we have seen Google go from funding their spending with cash flow, to issuing bonds, to issuing equity. Am I missing something here? It seems like a bigger deal than the news coverage would suggest.

See my comment below, but I'm guessing that running LLM queries on the largest search engine in the world even when nobody asks for it costs a lot of money and doesn't add much value, especially when you put it at the top. At least make people scroll past a couple sponsored results before they see it!

I have a vague theory that they're weaponizing their financials and using this equity raise to try and suck all the money out of the room before the big three can IPO.

I read something to this effect. This offering would let Google suck up money alongside Anthropic before OpenAI can manage to IPO.

The conspiracy parts of the internet (i.e. the most entertaining parts) are freaking out about the SpaceX IPO and changes to various market indices that will be Bad News. This seems to the background. The S&P500 is not one of the indices, though, according to that link. Anything to it, or usual internet financial panic?

SpaceX is an overpriced unprofitable business and the type of fuckery Musk has done to push it into big indices is incredible, but the fact that literally everyone and their dog is aware of this makes me think it will be a non event. Some people are predicting SpaceX IPO to be a liquidity vacuum and the claim is not baseless, but again - literally everyone is aware of this and is salivating for things (ie semis and other shiny stuff) to go down because SpaceX is gonna print like 100 new billionaires and thousands of millionaires in the next 6 months thanks to insane valuation and fast unlock schedule. What's more likely to happen is all these guys waiting for a dip get left on the sidelines, coping that next big IPO, which I think is Anthropic, is what tips the market and gets them a good entry

The only reason Musks can do fuckery to push it into indices is because a lot of people want to buy the stock and will let him IPO 50+ billion at a 2 trillion valuation.

He personally will likely not cash out much in the IPO. And it really is a great company I would love to buy at some point. I am likely hoping that the mess up the IPO like Meta and I get to buy it between $500b and a trillion. Starlink has potential to be a cash flow machine. xAI is interesting but I have no idea if frontier models will be profitable and it’s going to burn a ton of cash. And SpaceX innovation is insane.

I won’t buy the IPO though unless I see an opportunity arb the indexes but I would really like to own it someday.

The bigger issue isn’t the etf inclusion it’s an issue that our biggest companies don’t go public now because of regulations (complicated). It should have been listed years ago. Valuations on it are tough but it’s obviously a very valuable company.

Looping in @Mantergeistmann. My pet theory is that the whole thing is a massive cash grab to bootstrap xAI while the funding dries up for Claude and ChatGTP. The latter two keep saying they want to do IPOS soon, even though the CFO of xAI said the company is nowhere near ready, and there's talk that venture capital is pretty much tapped out. Meanwhile, these companies have contracts requiring them to spend eye-watering sums over the next few years, mostly on data centers that are already behind schedule. In the AI space, ChatGTP is the one everyone knows and has the top because of inertia, Claude is the "better" one that all the smart people use, and Gemini is the one backed by Google that everyone uses all the time without realizing it. The others are all bit players with no real path forward, xAI included.

If Musk can turn xAI into a barnacle riding the hull of another IPO, he can secure a lot of cash that would keep the company afloat. Since he's a true believer, I doubt he cares whether SpaceX suffers that much because he'd rather be the AI guy that he currently isn't. Claude and OpenAI are pushing for their IPOs out of desperation, where he at least has a legitimate one. Why else bundle xAI in with it when it was already part of another company? The other suspicious thing is that I've read reports of Grok getting progressively shittier since the merger was announced. There's some discussion that it's because of NSFW stuff, but that doesn't explain why people on the Heavy plan are getting rate limited to hell (it used to be practically unlimited image generation, now I've seen reports that it allows as few as 15 per day, which is less than you used to get on the free tier). The explanation I see is that since he already has a bunch of subscribers under opaque ToS that allow arbitrary limits, he needs to cut monthly compute costs to make the company look better to investors than it is, and can do so without losing too much revenue since only a small number of subscriptions will come due and not be renewed.

So I looked this up and apparently this is the coldest take out there, though I'm always proud of myself for coming to the same conclusions the experts do on my own. It could still be a shrewd business move if OpenAI and Anthropic run out of cash in the near future, but he could have just bought Anthropic outright.

It's a pretty solid take, but one thing stands out as odd:

Since he's a true believer, I doubt he cares whether SpaceX suffers that much

By all accounts, isn't he also as much or moreso a true believer in space exploration, specifically trying to get to Mars?

Yes, he's already the world's premiere space guy, and in the modern world that doesn't hold as much sway as being the world's premiere AI guy, which he clearly isn't. If he cared about SpaceX suffering then he wouldn't have made the wholly illogical decision to merge it with a money sink like xAI a couple months before launching an IPO. Since there's no real SpaceX competitor, the company can stand to suffer a little for the benefit of Elon's massive ego.

xAI is interesting but I have no idea if frontier models will be profitable and it’s going to burn a ton of cash.

If it were just SpaceX, I'd probably buy the IPO. The inclusion of xAI is what has me balking, for better or for worse.

And it really is a great company I would love to buy at some point. I am likely hoping that the mess up the IPO like Meta and I get to buy it between $500b and a trillion.

It is, but not at $2 trillion, or even $1t.

our biggest companies don’t go public now because of regulations (complicated)

Are you sure this is the reason? I haven't researched much but it seems more like it's just +EV for them to milk the private markets for all they have and only then IPO and milk public markets.

Morningstar is valuing SpaceX at around $780B. Do you think that's fair?

Just based on the S-1, I'd put it somewhere between $600B and $750B.

How is one supposed to go about answering that question? As far as I can tell the stock market is voodoo, and there is no "correct" value for a company.

We have this technology called excel. You then estimate revenue and margins for the next ten years. After that you general take the tenth year cash flow and assume it grows at the rate of nominal gdp forever.

Then take the 10 year interest rate in US treasuries and add a risks premium like 3.5%. Then use some function in excel that takes the cash flows in my first paragraph and discount every year until then at like 8% (4.5% + 3.5%) per year.

This will give you the current stock price. Due to the efficient market hypothesis whatever price you see in your brokerage account should be + or - about 5% of what your excel gave you.

So if we apply this formula to, say, Tesla, do we get it's current price? From what I understand, it's worth more than all the other auto companies combined, so either it's overvalued, or they're undervalued. With that in mind, what does it mean for the price to be "wrong"? What's supposed to happen if the "efficient market" doesn't get the price "right"?

Terminal Value Calcs. I think I simplified and said you just project 10 years of cash flows and then throw on a terminal growth rate. If the market is efficiently pricing then it’s basically assuming legacy automakers are whip and buggy manufacturers that don’t have a terminal growth value and instead terminal growth is negative.

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With that in mind, what does it mean for the price to be "wrong"? What's supposed to happen if the "efficient market" doesn't get the price "right"?

That depends significantly on the reasoning why one thinks that may be the case. The unfortunate part is that it's about the same level of impossibility to know for sure that you've gotten that reasoning right as it is to know for sure what the underlying value of future cash flows is.

That said, if we are allowed to handwave a bit, it has been suggested by far greater financial minds than I (e.g., Matt Levine), that some stocks are sometimes priced above the current value of their future cash flows because of memes (e.g., Gamestop). If that's the case, then one would expect that the price would follow the dynamics of memes, which may or may not be at all similar to the dynamics that one would expect the price to follow if one thought that it was primarily being priced by more 'traditional' concerns. What is "supposed" to happen depends significantly on things like, for example, how long one thinks that it will primarily follow the dynamics of memes or whether that component will eventually disappear and such.

Obviously, there are many directions that any company may end up taking, and there could be many different underlying reasons why a (slightly-modified) "reasonably-efficient market" doesn't get the price "right". For example, a company may be engaging in fraud, and perhaps the vast majority of market participants are unaware of this fraud. What has sometimes happened in the past in such cases is that the company runs out of money, suddenly declaring bankruptcy and surprising everyone by telling them that their shares are a claim on $0 worth of shareholder equity. In other cases, an external party discovers the fraud, and as that information spreads through the market, many people want to sell, but no one wants to buy, and the price quickly collapses. Other dynamics can occur if there are other factors.

One rule of thumb I've seen is 10x revenue. It seems to work fairly well in the general case.

What does "work well" mean, though. What's supposed to happen when you get the price right, vs. when you get it wrong?

I'll try to describe it in a way that's probably not 100% accurate, but simple enough to explain briefly. When you buy a share in a company, you do so because you believe that it will provide value back to you over time. Most commonly, this is done as either a dividend (traditionally) or as a share buyback (more common these days).

When you make that purchase, you have to decide how much you believe you'll get back, and how quickly you'll believe it'll happen. Deciding that can involve a lot of different factors. One easy one is to look at their revenue. A company that's earning ten billion dollars a year is more likely to pay back your investment quickly then a company earning a buck fifty a year.

Share price reflects that belief of ROI. Higher prices represent a confidence that the company will have a better payoff, and company valuation is usually a function of share price.

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Talking to my founder about it, one big reason is that people simply don’t want to be constantly at the mercy of twitchy stockholders who see your company purely as a Number Go Up machine and don’t understand that a ‘bad quarter’ can just mean people don’t buy ice cream in midwinter.

Plus the compliance costs are absurd, which ties into regulation.

On the latter yes. The big cap private investors would just become like some form of ArK invest and do same mkt cap public companies. Regulations made it harder to be public and the companies didn’t want to go public. Then capital formed to invest in them as privates.

There's definitely some fuckery afoot. The NASDAQ 100 is changing specifically to allow SpaceX to list early and the S&P is "considering it". The NASDAQ 100 specifically is pretty bad because they don't float adjust their holdings. On top of that, SpaceX has an unusual lockout structure that lets holders unload early.

Beyond that, the share voting structure is fairly unique. Musk holds a special share of stock that has 10x voting power, so you're never going to have input as a minority owner.

Per their S-1, SpaceX's only profitable line of business is starlink, and starlink may only be profitable because they're booking many of its costs to the rocket division. Even if they aren't, we're starting to see competition that will hurt those numbers. Their other lines of business are not profitable - xAI, in particular, is nothing but a highly efficient money incinerator at this point. One of their biggest revenue lines is renting hardware to Anthropic.

Altogether, this IPO looks almost custom-designed to leave excitable retail investors holding the bag.

Altogether, this IPO looks almost custom-designed to leave excitable retail investors holding the bag.

I'm not concerned as much with excitable retail investors as I am boring folks like myself with lots of ETFs tied to indices.

If you're holding a lot of QQQ, you might want to consider your risk tolerance.

Morningstar is not bullish.

I'm so dull that I use QQQM as my "fun speculation stock picking" minor percentage.

Weekly Wealth thread?

"Frinance."

Party-pooper take: alliteration is almost immediately too cute when used a few times, so no reason to keep running with it

Kevin Warsh has been sworn in as fed chair, and markets have been digesting his recent statements in an attempt to predict future movements in the federal funds rate.

What are your predictions on rate changes over the next year?

From my perspective, Warsh is in a tight spot. Inflation is stubbornly sitting above the 2% target, which would suggest a series of rate increases, culminating around 5.5 - 5.75%. Comments from major bond investors have said the same. Unfortunately, the debt to GDP ratio is high enough at this point that there may be a ceiling to how high he can go before the US starts seeing structural problems.

My prediction is that we'll see a single token rate increase this year, and the Fed will make excuses for why they don't go higher. Particularly, I believe that they will claim that most of the inflation is transient due to the Iran conflict, and that AI-driven productivity gains are inherently deflationary.

Prediction: At least one rate cut this year. No hikes. High inflation masked by changing the metric used to measure it. Junk food costs like a can of coca cola represent true inflation and can't be hidden easily.

Any business owners around here? No, minority shareholding doesn't count.

I've been wondering if doing it for the product vs doing it for the money is a useful distinction. From what I've noticed, doing it for the product leads to a wider array of outcomes, but doing it for the money has a better modal/median outcome.

Yeah, long-time business owner here. Incorporated; people working for me

I sell a service rather than a product, and loved it at first, but over time it's just become business. The reality is that customers can't tell their asses from holes in the ground and they're lucky that I have personal reasons (like integrity) to be honest. I've observed very little correlation between how good we are versus how appreciated we are. Probably my most important skill is expectation management and making sure that the client is happy regardless of the actual facts on the ground. Success can be ignored and failure overlooked, and they often are.

Originally it was all a lot more personal but as I've transitioned to serving bigger clients everything is shrouded in opaque layers of management. Corporations have their own logic and there's not much connection between winning that game and loving what I do. It's much more about organization, discipline, and persistence; as well as grit to keep moving even when big deals go down in flames for no apparent reason, which happens a lot. Things are much harder post-covid. It's like everything got tighter and meaner and less competent.

And don't get me started on the subject of insurance. Easily half my time goes to managing the ins and outs and documentation and back and forth etc. And that's before we talk about how many kinds there are and how much I'm paying.

I'd be lying if I said it wasn't a soul-sucking grind but I do it for my family. Without them I'd probably be living out of a van by the ocean. I dream sometimes about the murals I'd paint on the sides.

How far away are you from being able to hire a general manager to take over the daily grind?

I run a consultancy as a sole proprietorship. It's not anywhere close to my primary source of income, but it gets me a nice pop of cash every now and then.

What do you mean doing it for the product, exactly? Like someone starting a pizza place because they love the idea of making pizza?

Yeah, more or less. Or because they love the idea of electric cars or reusable rockets, to name a more successful example.

What type of consultancy? It's something I've been off and on considering as a bit of a side gig for a while now.

I do software modernization for small companies running stuff that's 30-40 years old.

If you have any activity on the west coast of the US, would you mind establishing business with local credit unions? Their modernization is beyond horrible. I was just talking with a friend last night who lost his credit card, so he called up the bank to issue a new one and cancel any activity on his current one and they literally told him, “We can’t put a hold or freeze on your credit card because our system is down, call us back in a couple of hours.”

Jesus Christ.

I have done some work with credit unions, and I never want to do it again. I think I legitimately spent 10x more time fighting with auditors than I did actually fixing their problems.

"Can your system fully attest X?"

"Not formally"

"Then we can't certify it."

"Can the existing system?"

"No."

"Then why is it allowed?"

"It was granted an exemption."

"Can I do that?"

"No."

Are you the one putting all my favorite restaurants on Toast point-of-sale hardware?

Not toast, but yeah, I've done some of that.

To be honest, pretty much any POS system is a POS. I swear that the people who design, code , build, and sell them have never actually worked in a restaurant. It's one of the most egregious examples of not understanding the customer I've ever seen. Aloha is particularly bad.

Ever had a membership at a gym? The sign up registration is the easiest thing in the world, but God forbid you move cities or gym location or are just looking to cancel, you can’t leave without them attempting to rip your arm off on the way out. Same with publications like the WSJ.

In that case, the gym is the customer, not you.

Cancellation being a ball-smashingly miserable experience for the end user is a feature, not a bug.

What is your opinion on preferred stock?

I waffle between thinking it's a great mid point between bonds and equities in terms of risk, but then I look at the last few market downturns and it doesn't seem like that's actually true. It's hard to tell though, because preferred stock seems like it's uniquely vulnerable to the specific dysfunctions that caused the last few downturns. They're sensitive to interest rates, so 2022 smashed them. They're issued by financials more than other sectors, so the GFC did a number on them as well.

I'm thinking about picking up some PFF or PFXF to dip my toes into this instrument.

It’s prevalent for banks because the pref can be treated as equity for books purpose but debt for tax purposes (properly structured — see TRUPS). So it helps banks pass regulatory capitalization requirements (ie not overly levered) whilst maintaining (for the bank) tax efficiency (ie deductions).

Probably won’t issue any more of it now since how the UBS prefs were treated. But ya banks did like to issue it.

What happened with UBS?

When they merged with CS they wiped out the preferred equity which should be senior but gave basically a bribe of a few bucks to equity to get an easier merger vote.

A cursory search yields this FINRA allegation. tl;dr: UBS allowed its representatives to recommend that clients buy "syndicate" (presumably, UBS-associated) preferred stock (allowing UBS to pocket a 2-percent commission that it then shared with the representatives) and then sell the same stock at a loss 91–180 days later. (Sales of preferred stock were flagged for supervisory review only if they occurred after 0–90 days. This supervision was loose enough to fall afoul of a FINRA rule.) In a settlement, the company paid out 3.5 M$ (2.65 disgorgement, 0.5 fine, and 0.35 restitution), but did not admit any wrongdoing.

Was referring to AT-1 bonds of UBS which I guess are just similar to preferred but technically a different name. Higher yield than debt and junior to debt but was suppose to be senior to equity.

As someone who's lived through multiple currency debasements, anything fixed income has a very large psychological hurdle to pass before I consider it.

That being said, I like, and have owned this one: https://www.preferredstockchannel.com/symbol/c.prn/

It's SOFR+ so it's kind of inflation hedged, relatively safe and has a good yield. Due to some weird capital structure rules it's unlikely to get called, but it is still possible and a real risk.

As someone who's lived through multiple currency debasements, anything fixed income has a very large psychological hurdle to pass before I consider it.

“There are four kinds of economies: developed, undeveloped, Japan and Argentina.”

You get two guesses as to which one I'm at.

That being said, Japan seems to be in the innings of a very similar process right now.

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