#167 - The World Millennials Grew Up In Is Over, Status As A Service and The Uber Profitability Question
Three Paradigms that are shifting
Big Tech Generals are shot dead
Meta is killed
Profitability of Uber…
Netflix ad platform
Realestate in Canada
Twitter and Elon!
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Some thoughts on US markets going into the FOMC rate hike:
US stocks have tended to rally the day of a Fed announcement, but they give back those gains the next day and end up basically flat a week later.
Here is how the S&P 500 has traded during/after the last 3 Fed meetings, where the FOMC raised rates by 75 basis points each time (as it is expected to do again tomorrow):
- June 15th: +1.4 percent (day of), -3.3 pct (next day), -0.8 pct (1 week after the day of the announcement)
- July 27th meeting: +2.6 pct, +1.2 pct, +3.3 pct
- September 21st meeting: -1.7 pct, -0.8 pct, -1.9 pct
- Average: +0.8 percent on the day of the meeting, -1.0 pct the day after, +0.2 pct over the week after the meeting
Market expectations for future Fed policy going into tomorrow’s meeting, using Fed Funds Futures prices
- Tomorrow will almost certainly see a 75 basis point increase (90 pct odds), taking Fed Funds to 3.75 – 4.00 percent.
- December is a coin toss between 50 and 75 basis points, at 48 percent odds for each. Expect markets to scrutinize everything Chair Powell says for signs of which way he is leaning. It is worth remembering that the last FOMC projections were for Fed Funds to end the year at 4.4 percent, which implies a 50 bp increase in December.
- Futures currently expect the size of Fed rate increases to slow in Q1 2023. They place the highest odds on Fed Funds in March at either 5.00 – 5.25 percent (41 pct) or 4.75 – 5.00 percent (32 pct). The most likely path for the former is a 50 bp hike in December and 2 hikes of 25 bp apiece in February/March. The latter might come from either 50 bps in December and 25 in February, or 75 bp in December and nothing in the new year.
Last Weeks Recap:
Amazon, Meta, Google, and Microsoft missed their estimates and/or gave very weak guidance. They sold off and the main indexes didn’t even blink.
The Nasdaq 100 and the S&P 500 still finished the week deep in the green. People wanted a “market of stocks” environment. This is what we are having right now. While some of the mega-caps are struggling, there are plenty of stocks from various sectors that are breaking out after earnings and following through. I don’t know if this is just a short squeeze before another rug pull, but last week certainly provided good opportunities to make money on both the long and the short side, if you were nimble enough.
One can make the argument that the market is currently betting that the Fed is going to somehow pivot.
Other central banks (ECB, Canada, Australia) have already said that they plan to slow down with their rate increases.
The Bank of Japan is already doing more QE.
Can the Fed also blink and fold?
I would not bet on it, so I would expect further volatility next week. If the market really wants to continue to rally, it doesn’t matter what the Fed is going to do or say next Wednesday. News is always explained based on the price action:
The Fed raises 75bps and stocks go down – “What did you expect? They said they will keep raising”.
The Fed raises 75bps and stocks go up – “The worst has already been priced in”.
See. It is easy to come up with a viable explanation after any price move.
The real question here is how do you make money or at least, how do you make sure that you don’t lose too much of it?
The earnings season is still young. There are plenty of companies left to report. Fresh news leads to big short-term moves and sometimes, to big longer-term moves. In the meantime, I am keeping an eye on volatility and correlations. If two of the main three indexes (SPY, QQQ, IWM) close below their 20-day EMA, plus the VIX finds itself in the 20-22 range, this bounce can be considered over.
💸Reformed Millennials - Post of The Week
Venture capital funding for Web3, a buzzy concept which VCs have poured billions of dollars over the last two years.
Many technologists consider Web3 to be the next iteration of the internet. Its aim is to be more transparent and accessible than the current version, which is largely controlled by a few tech giants. Web3’s core architecture is based on block chains and other decentralized technologies, with the hope that these systems can engage users in more creative and fairer ways than the current, largely ad- and mass attention-based model.
VCs hope Web3 will offer better monetization of direct to consumer business models by decentralizing the internet’s architecture. For example, there are video games that use NFTs or virtual currencies to pay players for achieving in-game objectives. VCs and Big Tech have therefore invested tens of billions of dollars to get a first mover advantage on this potentially large and “new new” opportunity for digital commerce.
Once the infrastructure is developed to build out decentralized applications, users will be able to create everything from new games to social networks and financial platforms. This approach disrupts traditional gatekeepers and enables a new middleman-free digital economy. Creators and users will, in theory, be able to monetize their own activity rather than paying economic “rents” to Big Tech.
Web3-related startups raised a record $30 billion in 2021 versus less than $5 billion in 2020, but funding has significantly slowed this year just like the rest of the VC market amid a more challenging macroeconomic environment and compressed valuations in both public and private markets. Here are the latest numbers:
Web3 startups raised $3.3 billion in Q3, an almost 50 percent drop from the prior quarter and down 65 pct from the quarterly peak of $9.3 billion in Q4 2022. That’s the lowest amount raised since the $1 billion reading in Q4 2020.
There were also just 408 deals announced, over 200 fewer than Q4 2021 (615) or the high of 637 in the first quarter of this year. This is the fewest deals since Q4 2020 (262 deals announced).
Overall, VCs have invested $17.7 billion into Web3 startups so far this year, far from 2021’s record of $30 billion.
So, what sorts of Web3 ideas are strong enough to still get funded in the current highly selective funding environment? There were some large rounds in Q3, such as:
Mysten Labs: a California-based developer of the Sui Layer 1 block chain, which closed a $400 million Series B at a +$2 billion valuation back in September. Layer 1 is a base block chain network – such as Ethereum – and its underlying infrastructure.
LootMogul: a California-based sports metaverse company, which raised $200 million in September. The “startup is looking to build virtual sports cities based on real-world brands and professional athletes”, according to Crunchbase.
Aptos Labs: a California-based startup that is creating its own Layer 1 system block chain, which raised a $150 million Series A after closing a $200 million investment that made it a unicorn just 4 months prior.
Even still, Crunchbase notes that “those deals were the exceptions more than the norm in the third quarter”. For example, there were just five +$100 mn rounds, or the fewest since Q4 2020 which had 2. By contrast, there were 21 and 26 of said rounds in Q4 2021 and Q1 2022.
**Why the drop off in funding specifically for Web3?**Crunchbase offers 3 reasons:
Big rounds have fallen off significantly across the board in the VC market. With Web3 relatively new, investors are focusing on industries they know better.
There are few exit opportunities given that Web3 is still a nascent technology.
As the virtual currency market has collapsed, so have deals in the digital asset and block chain space. For example, one of the largest proponents of virtual currencies and Web3 – VC giant Andreessen Horowitz – saw a 40 pct decline in value in its virtual currency fund in 1H 2022. Crunchbase data shows the firm only made 9 deals in these sectors in Q3 versus 53 deals from Q4 2021 to Q2 2022.
Bottom line: Big Tech largely controls today’s online platforms/stores/ad markets, so VCs like Andreessen Horowitz have invested heavily in startups to disrupt this business model with a decentralized architecture for the Internet. VCs view Web3 as better than Web 2.0 for creators as they can monetize direct to consumer and keep more of the money they earn. It’s true that VCs look at the world years out as opposed to worrying about day-to-day price action or quarterly performance like public equity investors. At the same time, investing in relatively liquid opportunities is especially hard just now, amid a largely closed IPO market and many public companies cutting back on M&A activity.
**VCs also understand that it is ultimately still very early days for Web3, with many kinks left to solve.**US Google Trends query volumes for “Web3” have been relatively stable this year, but searches are concentrated in DC, California, New York, Massachusetts and New Jersey, America’s major tech hubs. Ultimately, the success of a nascent technology hinges on new adoption, and Web3 has yet to create a new application that drives mainstream engagement and therefore profits. This is not to say Web3 can’t eventually deliver on its theoretical promise. But… A goal as large as “remaking the Internet” will take time and any payoff is likely years away.
🎙Podcast and Youtube Recommendations🎙
Tim Dillon interviews bill burr on his pod - here
Who cares about the Metaverse by Marques Brownlee - here
Marques is a tech homer but his hot takes always land and i think he’s really done a great job parsing out the opportunity and problems with the hardware and business model
🔮Best Links of The Week🔮
📺 Blackstone's Jon Gray covers a range of topics, but notably at the beginning on why he's bullish on UK assets (12 minutes ). Link
🚀 Matt Levine with a long read on the state of crypto. Link (40k words)
💥 Russell Napier shares how investors should prepare for an extended period of financial repression and elevated inflation. Link
NHL VALUATIONS 2022: LEAFS AND RANGERS LEAD, AVERAGE FRANCHISE WORTH $1B - Sportico Link
"Profits at two of the world’s largest oil producers soared as BP and Saudi Aramco reaped a windfall from historically high energy prices that have fuelled inflation and stoked a global cost of living crisis. Saudi Aramco reported its second-highest quarterly profits since listing its shares in 2019, generating net income of $42.4bn in the three months to September, as BP’s earnings more than doubled to $8bn, putting it on course for one of the most profitable years in its history." from the Financial Times Link