The Saturday - 9/19/20 Pre-Launch Edition
Republished from a Pre-Launch Email
Back by popular demand.
It feels weird not discussing the latest TikTok and WeChat developments, but that dispute twists and turns so quickly that any story would be stale by the time I click send. I'll just say this: the fact that the world's two biggest economies are at war over an app that teenagers use to record 10 second lip sync videos is incredible.
It's obviously a complex, multi-faceted issue, but I prefer thinking about it as nothing more than a spat over dance-off videos. I would also kill for this dispute to be resolved in a televised Trump v. Jinping dance-off, but that's neither here nor there.
With that out of the way…
To Buy or To Wait?
(Note: I purposefully want to keep these emails short, but please indulge me on this topic.)
My wife and I are on the market for a house / condo / shoebox(?) and so are many of our friends, but there is a lack of consensus about how prices and inventory will change over the next 9-12 months. With the Fed announcing near-zero rates through 2023, the "buy now while rates are low" argument is... not as compelling.
My initial thought is that patience is a virtue. Without wanting to downplay the suffering caused by COVID-19, homeowners have not yet felt maximum pain thanks to extensive deferral programs, foreclosure moratoriums, and ripple effects of the Fed's $40B/month MBS purchasing program. When those payments become due and foreclosure courts re-open for business, some might struggle to keep their home and need to sell. Others might even want to sell before then, in order to lock in equity gains.
Enter the WSJ with an interesting piece on the house-rich-but-cash-poor and the state of the housing market:
Some 3.5 million home loans—a 7.01% share—were in forbearance as of Sept. 6, according to the Mortgage Bankers Association. Many more borrowers are behind on their payments but not in forbearance programs with their lenders.
This makes sense. Defaults up, prices down. At the same time, however:
Investment firms Blackstone Group Inc., Koch Industries Inc., J.P. Morgan Asset Management and Brookfield Asset Management Inc. have each made nine-figure investments in single-family rental companies eyeing expansion.
But wait, there's more:
Invitation Homes said in a presentation to investors this month that it is planning a sale-leaseback program as another channel to add to its 80,000 homes.
Maybe that's enough to keep prices up?
"Housing affordability" has historically been synonymous with homeownership affordability. I'm not sure that holds up anymore. Today, individual homeowners no longer only compete against each other; they have new, growing competitors, with different incentives, objectives, and resources.
Put differently, home prices are no longer solely dictated by how much average consumers are willing (and can afford) to pay to own the roof over their heads. Home values must now also factor in how much investors with 5% (levered) target returns and historically low cost of capital are willing to pay for those properties' stream of income.
That's an entirely new paradigm. I'm not settled on what this shift ultimately means, but it's real.
The Most Efficient Car Manufacturer of All-Time
Piper Sandler raised their Tesla price target to $515. For those wondering, that's $515 post-5:1 split. The fittingly named Twitter user @WallStCynic dug through Piper's DCF model in a 3-part thread, best summed up by the following:
· In February, Piper projected Tesla's 2025 revenue to be $114B. Piper further estimated that $12B in capex from 2021-2024 would be required to reach this target.
· Seven months later, Piper's 2025 revenue projection doubled to $239B. Estimated 2021-2024 capex? The same $12B.
Either Elon is a genius or Piper needs to call its analysts back into the office.
DB Compliance Win?
It's been a difficult couple of years for Deutsche Bank. It's stock is down 84% over the last ten years and, to use the Robinhood valuation scale, Germany's crown jewel is barely worth two post-COVID LYFTs. DB's also been rocked with a few compliance scandals, which might help explain the drop in stock price.
Well, 2020 has been a strange year. Case in point, DB recently entered into what can only be described as an amazing settlement with OFAC over its latest compliance violations.
True to form, DB was accused of processing payments for sanctioned Russian financial institutions. This time around, however, DB at least "had a [money laundering] program in place" and cooperated with the investigation. So, rather than seeking the full $75,000,000 in statutory penalties, OFAC lowered the fine to $583,100. A 99%+ discount.
DB probably spent more on outside counsel fees than on the fine, and yet I doubt they will complain about it. How 2020 is that?
Drivers Beware
In 2018, an autonomous Uber vehicle struck and killed a pedestrian. This was the first autonomous driving fatality. Uber was not charged after the incident, but the Maricopa County Attorney just announced charges against the back-up driver, individually, for negligent homicide.
The back-up driver was watching The Voice on her phone, instead of watching the road, so I guess this isn't all that surprising. Still, this is a matter of first impression for the autonomous driving industry and the decision to charge the driver instead of the company is now the first and only precedent.
One might wonder if the outcome would be different in states that hold drivers to be employees rather than contractors.
Luxury and Speculation
Last November, LVMH and Tiffany's agreed to the terms of an acquisition where the French giant would take over the American luxury icon for $16B. Closing was to be a months long process, but then a pesky pandemic soured things, the French government sought to use the deal to get leverage in trade negotiations, and now the deal is going nowhere fast.
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.
Still, I thought this short story perfectly captured present-day investor exuberance: betting that LVMH remains acquisition-happy, investors have apparently been driving up the price of half a dozen potential targets. Keep in mind, LVMH hasn't indicated any interest in these other companies. But maybe LVMH is interested!
Markets are wonderful. Have a good weekend.