☀️☕ Tesla cheap at $420, Musk in Court, Twitter in (maybe) tatters

19 January 2023

Happy Thursday!

📊 In the Markets

• Layoffs, weak consumers... and higher interest rates

• Pay attention... Japan WANTS (some) inflation

• Tesla cheap at $420, Musk in Court, Twitter in (maybe) tatters

📝 Focus

• Man United fan bidding for Man United

📊 In the Markets

Layoffs, weak consumers... and higher interest rates

US markets weakened almost straight after from the open and ended down 1.6%, giving up two-fifths of the gains made so far year, leaving the S&P 500 up 2.3% since the end of December.

No single reason for the selloff, but news emerging from Microsoft and Amazon of 10,000 and 18,000 layoffs respectively didn't help sentiment and raised expectations of a recession. At the company level, this affects 5% and 6% of the workforce, respectively. The Amazon cuts were previously announced, but the cuts took place on Wednesday. In Microsoft's case, some of the reasons given were caution from its business customers and weakness in the Azure cloud computing businesses, though strategic investing and hiring in the generative AI space, such as OpenAI, would continue. (Adds to cuts across the tech space, like 11k from Facebook parent Meta and 8k from Salesforce, both relatively larger cuts at 13% and 10%. 97k tech jobs were cut in 2022 overall.) Wall Street often rewards companies for axing staff and ruining lives, but not today.

Added to this, sluggish retail sales, manufacturing output and producer prices added to the gloom. All are connected, of course. Retail sales, down for the second straight month, show that consumers are continuing to pull back on spending, including on cars and other manufactured goods. Producer prices, what the factories actually get for their products, were down in December, indicating weakening inflationary pressures. These sorts of readings are sometimes taken by Wall Street as bullish since the slowing economy (though with the labour market still red-hot) and lower inflation could mean that the Fed can ease up on the pace and extent of rate hikes, in a "bad news is good news" sort of way. But not today.

Meanwhile, James Bullard and Loretta Mester, the presidents of the St. Louis and Cleveland Feds (neither voting members of the FOMC this year), said on Wednesday that Fed rates needed to be above 5% this year. Bullard, in particular, saw no point in slowing down to a 0.25% pace at the next meeting in 13 days, unlike some of his colleagues in recent weeks. May as well get there "as quickly as we can." Mester was equally clear:

Investors are still saying that rates will most likely peak this year at UNDER 5%, with the CME Fedwatch Tool indicating, implied by actual futures prices, the expected path of rates this year.

The old market adage is "don't fight the Fed." Nobody really says that about the BOJ, especially not recently.

Pay attention... Japan WANTS (some) inflation

Japan's central bank, the Bank of Japan (BOJ), flexed its muscles and on Wednesday, after a 2-day meeting, defied market pressure and maintained its ultra-loose monetary easing policy, including keeping its short-term, overnight interest rate at minus 0.1%. (Yes, banks have to PAY the BOJ to keep money overnight with them.) So Japan's Yield Curve Control survived another meeting, meaning that the BOJ would continue buying unlimited amounts of 10-year Japanese government bonds, JGBs, to keep yields anchored around 0%, while allowing swings of plus or minus 0.50%. Technically, it would also sell those JGBs if prices went up and yields fell to minus 0.50%. (Bond prices and yields, the rate of interest based on that price, move in opposite directions.)

Over the last month, since the bungled widening of the band from 0.25%, traders have tried to break the BOJ's resolve. The central bank used the equivalent of about 6% of Japan’s gross domestic product (a measure of economic activity in terms of annual economic output) on buying bonds, which is clearly unsustainable. Without the prospect, for now, of higher interest rates, the Yen fell against major trading partners, including the US Dollar, while stocks rallied sharply to bring Tokyo from flat year-to-date to close up a healthy 2.7% for the year.

(When a central bank buys a lot of government bonds, it injects money into the economy, which can lead to an increase in the money supply and stimulate economic growth, potentially leading to inflation. Japan has struggled with deflation, the opposite of inflation, for decades. Besides delaying consumer buying, it increases the real, i.e. inflation-adjusted, value of debt, a burden which can be a drag on economic growth.)

Tesla cheap at $420, Musk in Court, Twitter in (maybe) tatters

While Elon Musk defends himself in court about his allegedly untrue 2018 Tweet from his car about having "funding secured" to take Tesla private at the hilarious --to him-- price of $420 (22% above the pre-Tweet level), the platform he used and later bought is, according to The Information news outlet, bleeding.

Apparently, Twitter’s daily revenue on Tuesday was 40% lower than the same day a year ago, with more than 500 of Twitter’s top advertisers pausing their ad spend on the platform since Musk's painfully long and convoluted takeover completed in October.

Taking Tesla private at that price would certainly have been better than the US$44 billion Twitter acquisition, which was, by some estimates, US$19 billion overpriced, i.e. actual value 43% lower. Even Elon Musk said he was 'Obviously Overpaying' for Twitter. His follow-up to that original Tweet was: "Shareholders could either to sell at 420 or hold shares & go private".

While Tesla's shares now look like they are trading 70% lower than that "bid" price, at under $130 yesterday, in fact, it would have been a great investment at $420 as the shares have had two stock splits 🎓 since that Tweet, 5-for-1 in August 2020 and 3-for-1 in August 2022. So adjusting for those, the $420 price would have been $28 per share and, relative to today's closing price (which isn't exactly the same as the "value" a shareholder would have from owning shares in a private company), would have been a steal.

📝 Focus

Man United fan bidding for Man United

Manchester United (MANU, listed on the NYSE) was put up for sale by the widely hated (by fans) American Glazer family back in November. British chemicals billionaire Sir Jim Ratcliffe has officially entered the race to buy the club he grew up supporting, man and boy.

Sir Jim already owns the Nice and Lausanne football clubs in Europe and had made an unsuccessful late £4.25bn bid (after the deadline) for Roman Abramovich's Chelsea in its forced sale last year only because Man U. wasn't for sale at the time.

The sale is being pitched as a once-in-a-lifetime opportunity to buy one of the world's great global sporting brands, which will be reflected in a price, including £2bn to revamp the storied Old Trafford stadium, likely much higher than that paid last year for Chelsea. A consortium led by Todd Boehly, co-owner of seven-time World Series winners Los Angeles Dodgers in baseball, and 17-time NBA champions Los Angeles Lakers in basketball, paid £2.5bn for Chelsea with a commitment to invest a further £1.75bn in the club.

From The MoneyFitt Morning 24-Nov-22

The American Glazer family, who own Manchester United (MANU), are considering selling the club. They bought it for £790m in 2005 and sold 10% of the company when it was listed on the NYSE in 2012. The Glazers bought the club in a classic leveraged buyout (LBO) that has been criticised by fans sore at a five-year trophyless run for loading debt onto the club (£275 million at the time, but now almost double that) while the owners pulled out cash in dividends and chose not to renovate or redevelop the storied Old Trafford stadium. But that's the nature of LBOs!

The family is reportedly looking for a valuation of between £6 billion (US$7.2 billion) and £8 billion, making it the most expensive sporting institution ever, and far higher than the £2.5 billion paid in May (plus a £1.8 billion investment commitment) for Chelsea by a consortium fronted by Los Angeles Dodgers part-owner Todd Boehly. It would come to a very high 50 times this year’s expected earnings before interest, tax, depreciation and amortization (which, you may be horrified to hear, market types call "eebitdah".) Fans may be happy to add losing the Glazers to the trophies they've been losing, but any new buyer may need to be even more aggressive in wringing out returns from the company and may well take on even more debt to do so. (Unless funded by abundant natural gas reserves, of course.)

It's obviously a huge gain for the family over the purchase price 17 years ago, even excluding the fees and dividends since then. The shares rose 26% on the news, and even after the gain, the club had a market value of US$3.1 billion, perhaps reflecting that the "strategic alternatives" they are considering may not directly benefit all shareholders. (The Fenway Sports Group, which is looking to sell unlisted Liverpool Football Club, will be watching closely.)

🎓 Leveraged Buyouts (LBOs) - Mini-explainer

• In a leveraged buyout, LBO, buyers form a new company to take over a target company, with bankers adding a lot of debt in the form of high-yield ("junk") bonds.

• The target company’s assets are used as collateral for the bonds issued to take it over, with the target’s cash and cash flow used to pay the interest.

• This is because, after the buyout, the target becomes a subsidiary of the new company (or the two merge into one company) and all the target company's assets and borrowings are replaced by the new company's assets and borrowings.