#140 - Canadian Housing Market is Hanging On By a Thread, Morgan Housel and Complexity vs Simplicity and If You Have To Eat Poop, Don't Nibble
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In this week's episode of Reformed Millennials, Joel talks about the Canadian Real Estate Bubble, the most recent carnage in the stock market and how to deal with people who sell complexity.
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Correlations between stocks went up significantly in the past few days. Tech stocks are not the only ones under pressure. They have been joined by basic materials. Everything is getting sold; even the defensive sectors like consumer staples and utilities. I see two main reasons behind the recent weakness:
The market is pricing in an aggressive interest rate hike. Stocks went down significantly in the two weeks ahead of the FOMC meetings earlier in the year – Jan 25-26 and March 15-16. The next meeting is May 3-4th. It seems we are seeing something identical right now. Stocks bounced after the FOMC meeting the past two times.
After the Netflix earnings fiasco and lower guidance, the market is worried that other companies will report similar issues and it is pricing them in advance just in case. Remember that financial markets move based on sentiment and expectations in the short term. They often panic before they ask questions. The silver lining is that the worst might be discounted ahead and see more constructive price action after the majority of earnings reports are behind us.
Keep in mind that the first half of 2008 was somewhat similar to 2022. Basic materials were strong while the rest of the market was weak. At some point, even commodity-related stocks started to break down and then the entire market accelerated lower. Pay attention when correlations go to 1.0. It’s a sign of widespread liquidation.
What’s next? We are in the midst of earnings season.
The next three weeks will be heavy in reporting. What I have noticed so far is that stronger than expected earnings reports are getting little to no market love – the upside gaps are smaller and they are often getting faded. See Tesla (TSLA) or United Airlines (UAL) for example. Downside earnings gaps on the other side are following through. Look at ISRG, VZ, HCA from last Friday. With the risk of saying the obvious, upside earnings gaps do a lot better during bullish markets and downside earnings gaps find better tractions during bearish markets.
Some thoughts on Elon & Twitter:
I think Elon owning Twitter for Elon is genius.
Jeff Bezos is already tweeting conspiracy theories and the deal is not even closed yet.
The last guard of business ‘titans’ bought sports teams. These teams mostly suck as businesses, because they rely so heavily on television advertising deals where the billionaire must suck up to corporations for revenue and hope the asset value appreciates…
Elon who could technically buy the entire NFL if he wanted to, has his own version of a sports team. The Dallas Cowboys, the Lakers, The Red Sox and Real Madrid all in one. He should be able to tell corporations to piss off and pound sand – including banishing Jeff Bezos from Twitter to whine on his own platforms (Twitch and The Washington Post).
I really doubt he opens his arms to Fat Nixon (Donald trump) because in the end, this is now Elon’s congregation and it is bad business for Elon to share the bully pulpit with another bully that could mess with his congregation.
Web 2.0 is bully chess and Elon is in a checkmate position.
SO WHY WASN'T THERE ANOTHER BUYER FOR TWITTER? WHY DIDN'T GOOGLE OR DISNEY PONY UP THE CASH?
From the Wall Street Journal:
Twitter Inc. accepted Elon Musk’s bid to take over the company and go private, a deal that would give the world’s richest person control over the social-media network where he is also among its most influential users. The $44 billion deal marks the close of a dramatic courtship and a change of heart at Twitter, where many executives and board members initially opposed Mr. Musk’s takeover approach. The deal has polarized Twitter employees, users and regulators over the power tech giants wield in determining the parameters of discourse on the internet and how those companies enforce their rules. The two sides worked through the night to hash out a deal in which Mr. Musk plans to take Twitter private in a deal that values the company at $54.20 a share.
There was speculation about alternative offers for Twitter. What seems clear is that those alternative offers did not materialize, and the most obvious reason why is Twitter’s anemic cash generation.
Twitter’s free cash flow from operating activities was $630 million in 2021 and has averaged $976 million annually for the last three years. This matters because leveraged buyouts (LBOs) depend on free cash flows; typically in an LBO:
An acquirer borrows the money necessary to take a company private.
The company’s free cash flows are used to cover interest payments while the now-private company is restructured and rebuilt.
The repackaged company is brought back to the market via an IPO, which provides the funds to pay back the principal (and provide a profit).
Assuming that a Twitter LBO was 90% debt and 10% equity, matching Musk’s offer would require $4.4 billion in cash and $39.6 billion in debt; if we were generous to Twitter and assumed $1 billion in free cash flow, that would necessitate an interest rate of 2.53% just to cover the interest payments. However, interest rates for BBB-rated debt — speculative but investment-grade — are at 4.51%. That would limit borrowing to only $22 billion (I don’t actually know what grade Twitter debt would be, but triple B sounds close enough).
So it seems that there really isn't someone willing to come in and the Twitter employees at this point and that's probably alright.
Twitter is likely going to be a better company in private. It will be able to make many of the changes it needed to make for nearly a decade now that its business isn't subject to interrogation every 3 months.
The main benefit of being public is cheap debt/equity financing. It drops your cost of capital significantly, and for that cheap money, you are expected to expose your business to an enormous amount of criticism. Elong doesn't really need cheap money. He's worth nearly 300 billion...
As a dedicated user of Twitter, I'm optimistic that Elon and his team of engineers can cull the bot army, bring identity to the platform, and hopefully improve everyone's experience for the better.
💸Reformed Millennials - Post of The Week
Winning Time - The Rise of the Lakers Dynasty
I absolute love Winning Time on HBO.
Kareem Abdul Jabbar, however, did NOT.
I read his blog post about the series (please do read it) and I completely understand his points.
Thank goodness for the internet and Kareem’s blog. His post is fantastic. He is a great writer and I am so glad he explains what he sees as wrong with the series.
If I were HBO, It would be smart to link to this blog post as a way for people to get more from the show... I'm sure they won't.
After reading Kareem’s post, I am more inclined to watch the documentary that the Lakers are doing themselves and the Magic Johnson documentary on Apple TV.
All of this is art and drama both physical and digital and in this case can be weaved together as a complete interactive story package for those interested in an amazing era of sports, culture, and business.
Berkshire week is here:
Berkshire is commonly referred to as underperforming, with Mr. Buffett having lost his touch. We'll see lots of Berkshire in the news over the week.
Berkshire's stock is up 12.2% versus a 10.0% decline in the S&P 500. For the past year, Berkshire is up 23.6% versus 3.6% for the index. Over two years, Berkshire returned 81.3% cumulative versus 57.4%. For the two years that's 34.6% annualized versus 25.5%.
🔮Best Links of The Week🔮
The New Climate Bargain: How Canada Can Manage Energy & Environmental Security - RBC Economics
Ukraine's Geography and Economy - Peter Zeihan
GM says it will produce an electric Corvette! - MSNBC
Bored Ape Yacht Club Instagram Hacked, NFTs Worth Millions Stolen - Vice
Twitter Has a Poison Pill - Matt Levine at Bloomberg
Odd Lots Episode from the podcast - Joe and Tracy