The company had a market cap of $140 billion. How has the stock done over the past 12 months, relative to the S&P 500?Full post, including comments
I hope that each of you did his/her/zir/their reading assignment from a month ago, i.e., The Lost Bank: The Story of Washington Mutual – The Biggest Bank Failure in American History.
Now that I have finished the book myself and have given folks a chance to avoid spoilers, a brief post about the end of the book.
It turns out that it wasn’t clear that WaMu had actually failed. Even when it was seized by the FDIC, wiping out shareholders and bondholders, and then sold for almost nothing to politically connected and savvy JPMorgan Chase, the bank may well have had sufficient liquidity under Federal rules. A quiet bank run, in which billions of dollars left WaMu daily, was precipitated by the following factors: (1) leaks from Washington, D.C., (2) the FDIC insurance limit of $100,000 per depositor (almost enough to buy a car today!), (3) consumer ignorance regarding the practicalities of FDIC insurance, (4) consumer reluctance to become embroiled in a process of getting money from the FDIC. If not for the leaks about the regulators’ concerns, the bank run probably wouldn’t have happened and the regulators wouldn’t have been able to seize WaMu’s assets.
We may never know the answer to whether the bank actually met the relevant criteria for being shut down. Kirsten Grind, the Wall Street Journal reporter who wrote the book, gives various estimates for the bank’s liquidity on the day of shutdown but is unable to say which one is correct.
Why is it that 5 banks enjoy roughly half of U.S. commercial bank assets?
Partly this is due to the reasons discussed in the previous post regarding this book. But it is also due to the fact that the government treated some of the biggest New York banks differently than WaMu, only slightly smaller. The NY banks, donors to Senator Charles Schumer, had similar liquidity issues to what WaMu suffered. But they were deemed “systemic risks” a.k.a. “too big to fail” and, therefore, were showered with government money (taxed, borrowed, or printed) that was denied to WaMu. A handful of political appointees and government workers at the Fed, the US Treasury, the FDIC, and the OTS had a tremendous amount of discretion regarding which banks would get bigger and which would be seized.
So in addition to the topics mentioned in my previous post, the book serves as a good example of the importance of lobbying and political donations!
- “A Champion of Wall Street Reaps Benefits” (NYT, 12/13/2008): Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business. Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital. Calling himself “an almost obsessive defender of New York jobs,” Mr. Schumer has often talked of the need to avoid excessive regulation of an industry that is increasingly threatened by global competition.
- Is LGBTQIA the most popular social justice cause because it does not require giving money? (includes photos of Seattle from August 2019, including one in which the truth of the Rainbow Flag religion is proven mathematically)
SNOW is down nearly 30 percent while the S&P 500, thanks to Joe Biden’s careful stewardship of the U.S. economy, is down 10 percent (but actually that 10 percent over 1.5 years is more like 25 percent once inflation is factored in, a stunning loss of wealth for Americans).
In April 2021, SNOW was valued at roughly 30 percent of the value of Oracle (ORCL), the backbone of business data processing. What is the company’s market cap today, as a percentage of Oracle’s market cap? SNOW is worth $54 billion. Oracle is worth $165 billion. So I think the philip.greenspun.com fact checking department must rate my April 2021 claim as #False. SNOW turned out to be a loser for an investor, but not because 30 percent of Oracle’s valuation was absurd.
- How did SNOW do versus the S&P 500? (April 1, 2022): “Despite SNOW having gone down a bit, I continue to be mystified by its market cap. … Why is a money-losing company, albeit one with growing revenue, worth $70+ billion?”
From May 9, 2022, S&P 500 down at least 6 percent since Joe Biden took office:
Who wants to get bragging rights by calling the bottom on this market slide? I’m going to say that the correct value is 3,200 (pre-coronapanic value) plus 0 percent growth for 2020 when Americans cowered in place and 8 percent growth for 2021. Then add 20 percent for the inflation rate that is experienced by people with enough money to buy stock. So today’s correct nominal value is 4,096. Markets tend to overshoot, though, so let’s take 5 percent off that for the bottom: 3,891.
Today the S&P 500 closed at 3,932, down 4.3 percent after the government released inflation numbers.
Let’s look at the chart:
Not a huge change compared to May 9, 2022, at least in nominal dollars, but the index is down in real terms given the inflation that continues to eat away at savings.
My prediction that the stock market would bottom out at 3,891 was wrong. 3,667 on June 16 was the local minimum. But some of the folks who commented were off by even more, e.g., with a prediction of 2,700 (but on the third hand, I didn’t specify a time interval so it is possible that we will yet reach 2,700).Full post, including comments
“Rising Home Prices Are Mostly from Rising Rents” (Kevin Erdmann) was sent to me by a retired bond fund manager. He starts by noting that the Case-Shiller real estate index, when adjusted for CPI (“real”), shows dramatic apparently irrational price swings. We go in and out of housing bubbles based on sentiment.
The problem with that theory is that rent inflation has definitely risen faster than general inflation for the past 40 years or so. So, instead of adjusting for inflation based on a reasonable theory that has stopped reflecting reality, why not adjust home prices with rent inflation instead of general inflation? When you do, it turns out that prices have become more volatile, but the deceptively compelling long-term flat pattern that suddenly jumps to a higher range isn’t so clear any more. Persistently high rent inflation is driving the rise in the “real” Case-Shiller index.
When the adjust-by-rent system is applied to individual cities, the purchase price of housing looks even flatter. Here the author generates smooth curves fit to data points from 50 metro areas. 2007 does look like irrational exuberance, but primarily in the higher-cost cities (even in 2007, in cities where rent was low, the buy/rent ratio was about the same as in 1991, 2012, 2015, and 2018).
Thanks to the miracle of population growth and the inability of Americans to come up with a cheaper way of building housing…
In Figure 8, we can see that prices are now rising in every city like they were in Los Angeles before. Low rates of building, with constrained lending, means that residents with low incomes are suffering from our policy choices now everywhere.
[Blaming “policy choices” is where I part company with this author, who talks about “systematic, persistent lack of housing production” as though that could be changed with the wave of a central planner’s wand. As I noted in City rebuilding costs from the Halifax explosion, even when land is free and there are no zoning restrictions, the basic cost of building an apartment now exceeds what a couple with two median incomes can afford (maybe the answer is that Americans need to live in throuples?). A simpler explanation is that we’re simply not wealthy enough, on average, to afford the things that we believe we deserve, including high quality housing for 333+ million people. We’re a medium-skill country, trending toward low-skill via our immigration system, demanding all of the stuff that properly belongs to a high-skill country.]
I’m not sure what we should take away from this as investors. The residential real estate market isn’t as irrational as previously portrayed. House prices, like apartment building prices, track rents. But how do we make money unless we have a crystal ball to forecast future rents? The friend who forwarded this to me said that historically real estate provides lower returns than investing in the stock market (but maybe this isn’t true if you consider leverage and the ability to stick lenders with the downside risk while keeping the upside benefit) and real estate ownership carries idiosyncratic risks, such as litigation risk (the owners of a hotel were hit for $26 million because a jury found that a clerk employed by the owners allowed a pervert to check in next to a sports journalist and film her naked (and that she suffered $55 million in damages from this, more than if she had been killed)).
As taxpayers one take-away is that we’re going to be paying the rent for a high percentage of our brothers, sisters, and binary-resisters who either don’t want to work or whose skills don’t yield a sufficient income for housing that we consider suitable for a resident of the U.S.
Speaking of real estate investing, you can’t go wrong by doing the opposite of whatever I suggest. My theory was that Cambridge, Maskachusetts real estate would go up in value once the Followers of Science abandoned their fears, masks, school closures, lockdowns, and vaccine papers checks. When everyone was back at his/her/zir/their desk in the office towers of Kendall Square or the academic buildings of Harvard Square, real estate in Cambridge would catch up to real estate in South Florida. The brilliant minds of the AI software within Zillow disagree, forecasting a down round for Harvard Square:
From February 2022, when we were dumb enough to sign a contract to buy a house:
The market will go up 23%.
In April, when we were dumb enough to close on a house:
The market has gone up a little and will go up 18.3 percent more.
In June, Zillow is busy celebrating Pride Month (from 2020: “They’re bold, bright and one-of-a-kind — they’re the homes we love, Pride-month style. We may not be celebrating together in person, but we’ll never stop celebrating what’s beautiful.”), but the company’s robot still has time to say that the forecast is 14.6 percent:
August 5, 2022, the “typical home value” is up by a staggering amount and the forecast is 7.8 percent more:
August 14, 2022, the “typical home value” is still up (yet houses have seemingly been slow to sell for a few months now and there have been many price cuts) and, with the Inflation Reduction Act nearly signed by the vigorous Vanquisher of Corn Pop, the inflation forecast is down to 5.3 percent:
These forecasts aren’t mutually inconsistent. If we take the starting “typical home value” and inflate it by the forecast 23.1 percent increase we get $647,098 for the expected typical home value in February 2023. If, indeed, the current value is already $627,655, the forecast 5.3 percent inflation rate (to August 2023) will make that happen.
Do we believes these precise forecasts? If so, should Joe Biden ask Zillow to come in and take over the Fed?
Separately, speaking of house price inflation, it occurs to me that the capital gains tax applied to homeowners does not make any sense. Suppose that Dana Dentist, a gender-neutral driller of teeth, purchased a 4BR house for $500,000 fifteen years ago. Dana falls in love with someone he/she/ze/they met at a Pride March in another city. Dana sells his/her/zir/their house for $1.5 million (in 2022 mini-dollars) and buys an identical size/quality house in the new sweetheart’s city, which just so happens to cost $1.5 million. Dana is no better off. He/she/ze/they has exactly the same size and quality of house. Yet the IRS now hits him/her/zir/them for capital gains and Obamacare investment income tax on $750,000 (the first $250,000 of gain on a primary residence is exempt). There may be state capital gains taxes to pay as well if Dana did not live in Texas, Florida, or a similar state.
Note that this wouldn’t happen to a commercial property owner. If he/she/ze/they sold House 1, which had been rented out, and bought House 2 in order to rent it out, the sale/purchase would be done in a 1031 exchange and there would be no tax on the fictitious capital gain until, perhaps, House 2 was sold and not replaced.
What’s the downside of the Feds and states taxing fictitious capital gains? By making moving more expensive, the policy discourages people from moving for better career opportunities and, thus, reduces the overall growth rate of the U.S. economy (not as much as our family law system does, but at least to some extent).Full post, including comments
From November: What edge does Rivian have in the truck or EV market? (market cap: $127 billion)
From January: How is Rivian still worth $78 billion?
The market cap today is $18 billion, an 85 percent loss for those who bought the stock at the time of my November post (or a massive profit for those who went short!).
Though this truck has many parlor tricks—a big frunk that can swallow 400 pounds, an optional tongue-weight scale, and BlueCruise hands-free driving—none are as impressive as how quick it builds speed from a standstill, thanks to 775 pound-feet of instant torque. Mat the accelerator and the front tires spin. Actually, the fronts will spin if you floor the accelerator at any speed below 50 mph or so. The effect is amplified as you load the truck closer to its 2235-pound max payload capacity.
It even drives and feels a lot like an F-150. A 50/50 weight balance contributes to very good road manners. … A low center of gravity keeps the truck relatively flat through corners, too.
The base vinyl-lined Pro model starts at $41,769 and comes with the 98.0-kWh battery that’s good for an EPA range of 230 miles, while the upgraded extended-range battery brings 131.0 kilowatts-hours of storage and 320 miles of range. … On the not-so-good front, the Lightning can tow up to 10,000 pounds when spec’d with the Max Trailer Tow package, but it can’t do so for very long between charges. We pulled an 8300-pound boat and trailer at about 65 mph, and the on-board trip computer indicated we were getting less than one mile per kilowatt-hour. This puts the highway range with a trailer of decent size and mass somewhere around 100 miles.
[A friend has a reservation for the F-150 Lightning and they won’t let him order the base model, so the $41.7k price is maybe just a theoretical one. The real price is at least $60k.]
So the Ford product is at least pretty good, is backed by a company from which people have been buying trucks for more than 100 years, and is much cheaper than what Rivian charges for a similar capability.
Ford even shows a great place to run out of battery power:
If this vehicle had dog mode, it would certainly be a better value than anything from Tesla!
Circling back to Rivian… after they run out of Silicon Valley enthusiasts, who is going to pay $100,000 for a non-Ford, non-GM, non-Toyota pickup truck? And what is the stock/company worth?
Rivian stock versus the S&P 500 starting on the date of my first post:Full post, including comments
Not a great time for us buy-and-hold index investors….
Since Joe Biden took office, the S&P 500 is down at least 6 percent in real terms (up 3.9 percent nominal, but up is the new down in a high-inflation environment).
Who wants to get bragging rights by calling the bottom on this market slide? I’m going to say that the correct value is 3,200 (pre-coronapanic value) plus 0 percent growth for 2020 when Americans cowered in place and 8 percent growth for 2021. Then add 20 percent for the inflation rate that is experienced by people with enough money to buy stock. So today’s correct nominal value is 4,096. Markets tend to overshoot, though, so let’s take 5 percent off that for the bottom: 3,891.Full post, including comments
Berkshire Hathaway has been holding roughly $140 billion during a period of raging inflation (source):
This is about 20 percent of the company’s market cap (about $700 billion). The standard explanation for this is that it gives Berkshire Hathaway the ability to pounce on great deals, but Elon Musk is managing to buy Twitter without having had to let inflation erode a substantial percentage of his portfolio for 2+ years. The company’s annualized operating earnings right now are about $22 billion (CNBC). Inflation has been 8.5 percent. So the company is losing $12 billion to inflation annually, more than half as much as its headline “earnings”.
Admittedly the S&P 500 is flat compared to a year ago as well, so if Warren Buffett had done the obvious thing of parking money in the S&P it wouldn’t have done significantly better. Gold didn’t rise smoothly as the dollar fell in purchasing power. Bitcoin is about 32 percent lower today in nominal dollars than it was a year ago. But isn’t there something better to do with all $140 billion rather than leave it for exposed to the depredations of the government’s money-printing operation?Full post, including comments
From 2013, Should we short Twitter?
Folks: It has come to my attention that Twitter has gone public at a valuation of $18 billion. The company has modest revenue (about $600 million per year) and no profit. Is it a short?
What is the explanation for how this service can make enough profit ($1 billion per year?) to justify an $18 billion valuation? It doesn’t seem like a natural advertising medium. Given the possibility of distributing information for free via Facebook or Google+, Twitter does not seem to offer a unique capability to users.
Generally I am a believer in the efficient-market hypothesis but I can’t understand this one.
What if one had shorted Twitter to buy the S&P 500? The following chart isn’t complete because the S&P 500 pays a dividend while Twitter did not. If we use Yahoo! Finance to create a custom chart starting on the date of my post,
The S&P has gone up 134 percent (and paid a dividend of 2 percent per year?) while Twitter is worth 20 percent more than on November 6, 2013. Note the lift in 2020 after the government made most non-screen-based activities illegal, but even that wasn’t enough to bring Twitter’s performance even with the S&P 500.
(I’m wondering if the market cap number I cited in my blog post was inaccurate. Elon Musk is paying $44 billion for the company and the stock price is only barely higher. Either the $18 billion number was wrong (maybe it was the initial pre-bounce IPO target price?) or Twitter has issued a ton more shares since November 2013 (acquisitions? to enrich executives and board members?).)Full post, including comments