The Saturday - 10/31/2020
Volume 1, Issue 6
Morning!
Today is Halloween: a day mired in controversy, with fervent proponents claiming it’s a holiday and detractors derisively scoffing at that thought.
While I don’t feel too strongly about the issue, I probably lean towards “not a holiday.” Candy corn just doesn’t do it for me. Now, if people gave away doughnuts… I’d dust off my Elmo costume and demand a three-day weekend!
Apparently, Inspire Brands also likes doughnuts. The owner of Arby’s, Buffalo Wild Wings, Jimmy John’s, and Sonic is forking over $11B to take Dunkin’ (formerly, Donuts) private. How about that for a Halloween fact?
While we’re at it, here’s another one: in addition to its fast food empire, Inspire Brands also has an affiliate called Self Esteem Brands that owns over 4,000 gyms. Now THAT is vertical integration. Farm to Table has nothing on Fast Food to Treadmill.
It’s Saturday October 31, 2020.
Big Numbers
This week had a lot of large companies report Q3 results, but who wants to start off their weekend with Earnings Per Share and Q4 Revenue Guidance metrics? Certainly not me.
That said, some quarterly results are more interesting than others. Take Amazon’s, for example. The e-commerce giant reported Q3 revenue of $96B and projects Q4 revenue in excess of $120B. For scale, Ethiopia boasts $96B in GDP and Morocco $118B. Good times for Bezos.
The company, whose self-imposed minimum wage is $15/hour, also now employs over 1.12M full-time employees. If all these people lived in a Foxconn-like factory town, which they thankfully do not, it would be the 10th largest city in America.
I guess my point is that Amazon is huge? You already knew that. Moving on.
One Mighty Ant
Next week, there will be a new record holder for largest IPO of all-time when Ant Group’s stock begins trading publicly on the Shanghai and Hong Kong exchanges. The Jack Ma-controlled fintech company is best known as the owner of Alipay, an app that offers a broad range of payment, lending, and investment products to over 1 billion users worldwide.
The record-setting IPO is projected to raise north of $34B, at a valuation exceeding $300B. While those are dizzying figures for a new issue, over half of China’s population purportedly uses Alipay. Given the country’s size and growing middle class, that might be enough to substantiate the valuation. Two things to note.
First, we often think of America and New York City as the capitals of the mega-corporation world, but a survey of the largest IPOs in history (in nominal terms) suggests otherwise. From the WSJ:
The largest IPO ever on an American exchange was a Chinese company and Jack Ma has now personally founded two companies (Ant and Alibaba) that have had bigger IPOs than the largest American IPO to date (Visa). This isn’t to say that American companies are no longer dominant; Apple, Microsoft, Amazon, and Google-parent Alphabet remain the four largest companies in the world by market cap. It is a sign, however, that future growth lies (at least partially) in the Orient.
Second, going back to Ant, there are some indicators that seem a little… bubble-ish? On Thursday, Ant announced that retail pre-orders for its to-be-listed stock exceeded $2.8T. Yes, a “T”.
In other words, orders from individuals alone are roughly equal to the size of the historically large American COVID stimulus package and exceed “the value of all the stocks listed on the exchanges of Germany or Canada.” Viewed yet another way, the issuance is 8x oversubscribed before accounting for institutional demand.
How can this be? According to the WSJ article linked above, a Chinese investor “used all the funds in his Hong Kong brokerage account, equivalent to about $52,000, to secure a 95% margin loan and place a roughly $1 million order.” This same investor described the offering as “a must-have regardless of the price.” That usually ends well.
He wasn’t alone. Other investors took on 10x+ leverage to place bets ranging from $5,000 to over $1M with Chinese brokers such as Futu Securities. Meanwhile, Hong Kong brokerage Bright Smart Securities is offering $50B in leverage at up to 95% margins. Again, this is all tied to a “mere” $34B issuance.
If it feels like you’ve seen this movie before… you literally have. Or maybe this time’s different and Selena Gomez doesn’t get the nuance. I don’t know. Whatever.
The cherry on top of the sundae? Last weekend, Jack Ma spoke at a conference in Shanghai and used the platform to lambast the Basel Accords, arguing that “many of the world’s problems stemmed from only talking about risk control.” Yup.
Ant shares start trading this upcoming Thursday.
Things Corporations Say
Last month, we briefly discussed the bitter litigation around LVMH’s $16.2B acquisition of Tiffany’s, summing up the dispute as follows:
It’s not that juicy of a story. Tiffany's probably isn't worth $16B in the post-COVID world; a theory supported by the fact that Tiffany's is suing to enforce the deal and LVMH is counter-suing to get out of it.
On Wednesday, the two luxury companies renewed their vows, agreeing to move forward with the deal at a $425M discount. That’s less than a 3% price reduction; not bad for a jewelry retailer in the middle of a pandemic!
My favorite part of this story is LVMH’s tone and posturing throughout the transaction’s lifecycle:
Last November, when the original deal was entered into, LVMH execs described Tiffany’s as a “sleeping beauty.”
Last month, in its suit to kill the deal, LVMH called the American company “a mismanaged business […] with no end to its problems” and “particularly unfit for the challenges ahead.”
On Thursday, after agreeing to new terms, LVMH Chairman Bernard Arnault stated that he was “as convinced as ever of the formidable potential of the Tiffany brand.”
You can’t make this up! I’ve always kind of admired lawyers’ and corporations’ willingness to say whatever suits their fancy on any given day, no matter how outlandish or inconsistent. It’s also why it’s good policy to take their statements with a grain of salt. They’re ripe with self-interest… and irony.
ETF Stuff
On Wednesday, the SEC voted to both relax and strengthen rules governing leveraged ETFs, as part of a strange compromise between two factions in its ranks.
For background, ETFs are pools of assets (such as stocks) that trade as a single security (i.e. ETF themselves are effectively stocks), giving investors an easy means of diversifying their portfolio and tracking a given index. For example, SPY is an ETF that tracks the S&P 500; if the S&P 500 goes up 1% on Monday, SPY will also go up 1%.
Leveraged ETFs, on the other hand, are ETFs that use debt or other financial products to juice up performance, resulting in their being (intentionally) more volatile than the underlying assets and indices. If a given index goes down 1%, a corresponding triple-leveraged ETF would go down 3%. Used well, these can be powerful investment products, but they also swing wildly and trend towards zero on the long-haul due to “volatility decay.” OK, back to the story.
Previously, only pre-approved companies could set-up leveraged ETFs, but those ETFs could seek to dramatically amplify their respective index’ movements. Under the new rule, companies no longer need pre-approval to issue leveraged ETFs. As a compromise, however, ETFs targeting investment returns above 200% that of their underlying index are now banned. (Existing ETFs above the 200% threshold were grandfathered in.)
This is a bizarre rule that will almost certainly leave both sides unhappy. Those who care about giving investors as many tools as possible to build comprehensive portfolios will lament the fact that an entire suite of products has just been outlawed. Those more concerned about protecting investors from themselves will point out that the floodgates have been opened to new entrants with only marginally “safer” products.
If anyone can explain why the new rule is better than the old rule, please let me know.
Have a great weekend!