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by Joseph Hargett | April 26, 2022
Honestly, it reminds me of an old Lamb Chop song:
Great! Thanks, Mr. Great Stuff. Now that song’s going to be in my head all day!
Welcome to the club. For the past month, we’ve covered nearly every aspect of the Twitter/Musk saga. From Elon’s initial 9.2% stake in Twitter to his ultimate acquisition of the microblogging social media giant.
Yes. We know. We all know. So why are you still talking about it?
Well, I haven’t covered everything just yet. And there are some tidbits leaking out about Elon Musk’s Twitter financing deal that’s scaring the living bejesus out of Tesla investors. I mean, did any of you wonder why TSLA stock was down more than 9% today?
Well, I’m about to tell you.
In big corporate buyouts like these, the acquiring party typically secures funding for the buyout by utilizing the target company’s assets as collateral.
But not Elon Musk. No sir. Musk is reportedly using his own assets as collateral for about two-thirds of Twitter’s $46.5 billion financing package.
Now, this wasn’t all Musk’s ego getting in the way. I’m sure he would have been happier not financing this deal himself.
However, according to infamous “sources familiar with the matter,” several banks didn’t see enough cash flow at Twitter to justify the loan. So Musk is all by his lonesome on this one.
Meanwhile, the remaining $12.5 billion will be secured by a margin loan against Musk’s TSLA stock holdings. This is where it gets interesting … and potentially painful for Tesla investors.
Per a regulatory filing, if TSLA stock drops 40%, this $12.5 billion margin loan comes due immediately.
Tesla dropping 40%? You must be joking. Not gonna happen.
Not gonna happen, you say? Look at TSLA’s high on January 4 and then at its low on February 24. That’s more than a 40% drop. It can happen. It has happened. And with the potential for a continued market drawdown and recession/stagflation … the chances of TSLA stock dropping 40% from the date of the deal is a lot greater than you think they are.
Heck, if the deal was signed yesterday … we’re a quarter of the way there already.
So what happens if TSLA stock drops 40% and Musk needs to make good on that $12.5 billion loan? Why, he’ll have to sell TSLA stock to cover the loan immediately … all $12.5 billion of it. And you thought a 40% plunge was bad … hooo boy.
But let’s say TSLA stock holds up, and the company weathers whatever economic and stock market woes lie on the horizon. It could happen. What then?
Well, Musk is still on the hook for about $1 billion annually for that $12.5 billion margin loan. Unfortunately for Elon … Twitter’s annual net income has only topped $1 billion twice since it went public.
This is exactly why so many banks passed on the “privilege” of loaning Elon Musk $12.5 billion to buy Twitter.
Now, if you believe in the “genius” of Elon Musk, you probably believe that he’ll turn things around immediately and everything will be just fine.
He’s the Elon Musk, after all. He could make the job cuts and asset sales necessary to hit that net income target, sure.
But if it doesn’t happen right away, or if too many people ditch Twitter because of Musk or his changes to the platform … well, you can see where this is going. Musk will likely have to sell TSLA stock to make payments on his Twitter loan … which could put that 40% decline back in play.
I mean, we all blew off Tesla’s warning about this exact occurrence earlier this year in its Q4 filing:
Now do you understand why TSLA stock was down more than 9% today after the Twitter deal was finalized?
This is gonna get ugly, Great Ones.
I’m not telling you to sell Tesla right now. But I am telling you that if you’re a TSLA stockholder, you need to pay very close attention to Twitter and any of Elon Musk’s financial filings. And with Twitter going private, that’s going to make this even more nerve-wracking.
Twitter Isn’t The Only Thing Elon’s Buying…
Musk’s Twitter takeover may be getting all the headline attention right now, but he recently made another investment that isn’t on many people’s radar…
And it could soon disrupt the $100 trillion global financial industry.
Cathie Wood sees this investment soaring 7,200% in the next decade. And former hedge fund manager Ian King says: “This could be the greatest investment opportunity in history.”
Not even the near-constant threat of a new Prime shipping overlord was enough to keep the pep out of United Parcel Services’ (NYSE: UPS) step this quarter.
The company reported earnings of $3.05 per share on $24.4 billion in sales — well ahead of Wall Street’s $2.89 per-share projection. UPS also maintained its 2022 full-year guidance of $102 billion in sales despite cost headwinds hammering the company.
Following this Street-beating revenue and earnings, investors should have felt some relief for their freight-carrying comrade, whose stock has slowly sunk since the beginning of April.
But that’s not the world we live in, Great Ones.
Instead, investors continued to stress caution ahead of falling freight rates — something that’s good for consumers, but generally bad for the companies that handle everything those consumers ship.
Now, I’m not saying shipping prices aren’t something to keep an eye on. Should they fall too far, this could negatively impact UPS’ profit margins later in the year.
But we also need to consider that freight rates are falling from exorbitantly high levels due to COVID-19-induced supply chain constraints. So, if anything, costs are slowly returning to “normal” as these supply chain snarls untangle themselves.
Having said that, I think UPS’ 3% dip is a bit premature … but the proof, as they say, will be in this year’s parcel prices.
Remember the other week — I know, it feels like forever ago — when Nektar Therapeutics (Nasdaq: NKTR) all but tied its own noose after halting all clinical trials of its key cancer treatment, bempegaldesleukin?
Funny, I just built an Ikea cabinet with the same name…
Well, turns out it’s pretty tough to run a biopharmaceutical company when your lead asset’s sinking like a lead balloon.
Following bempeg’s abysmal failure, Nektar announced it’s nixing 70% of its workforce to stop the bleeding (shares are down 67% this year). Because apparently nothing screams “confidence” to shareholders like laying off nearly three-quarters of your company.
Nektar now says this restructuring will help to ensure it has enough cash on hand to develop other drugs that will be the “most impactful” to its future.
Thing is, bempeg was at the top of that list a mere **checks notes** eight days ago. And I’ll make bets it looked just as promising as the other drugs in Nektar’s pipeline.
Analysts agreed, saying the restructuring was a good start to help the sinking company, but not enough to inspire any further positivity on Nektar’s stock. I’m sure all the people who just got laid off would likely agree with that sentiment.
New “Bio-Chip” Could Be Bigger Than The Internet
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What do you do if you’re a failed mall retailer with no prospects or plans to entice people into your stores? Why, you try to buy the second-emptiest storefront in your friendly neighborhood shopping plaza, of course!
Well, JCPenney’s corporate parents Simon Property Group and Brookfield Asset Management placed the bid … ‘cause we all remember what happened the last time JCPenney tried to prove it was a “real adult” capable of handling important business decisions.
I held JCP stock until the very last penny, thank you very much.
You sound a lot like Kohl’s, which has been staving off relentless activist investor sales soliloquys and heated bidding wars amongst peers who “don’t understand Kohl’s core business.” (Their words, not mine.)
Technically, JCPenney probably understands Kohl’s’ strip-mall calamities better than anyone — which could prove useful during negotiations. I mean, it did pretty much write the book on failed business ventures.
But if JCPenney’s past failures are the main selling point for a future Kohl’s sale … for KSS investors’ sake, I hope this deal is DOA.
It’s Tuesday, Great Ones! Which means today’s the day to talk about *checks notes* recession indicators!
Aight, Imma head out now.
Hold it, don’t even think of scrolling on by.
Everyone’s dishing out their own recession indicator these days, which could be a recession indicator in itself. When it comes to predicting economic downturns, y’all know the classics … economists’ greatest hits.
Every time the yield curve has inverted, we got a recession. Every time gas prices spiked 50%, we got a recession. Heck, we even mulled over the fabled history of the Super Bowl Indicator with Mike Carr at our virtual tailgate back in February.
But modern problems recessions need modern indicators … right? What about all those lesser-known indicators analysts like to pull out of their rumps?
When it comes to predicting the possibility of post-pandemic pandemonium, Brian Sozzi over at Morning Brief posits three whole reasons why recession fears are overblown! By golly, by gosh, let’s get ahold of his indicators.
Brian Sozzi’s first data point that proves we’re not headed toward a recession? His local mall was busy last weekend. Sozzi’s reasoning is that if people can fill up on $5 gas to go overpay for more stuff at the mall, then the average consumer is just fiiiiine!
The Morning Brief writer also went to Starbucks and — get this — he had to wait in line for 19 minutes! Nineteen minutes. All because so many other humans wanted their over-roasted coffee. I thought this was America?
If you needed more proof as to why recession fears are overblown, Sozzi points to American Express (NYSE: AXP) having a good quarter.
Since the king of credit, American Express, is making bank off increased network volumes and increased spending … clearly, we’re in an age of great economic security, where everyone is balling and absolutely no one is irresponsible with their credit card(s).
One thing people are willing to drop mega cash on right now? Travel, whether for business or pleasure. This lines up with the increased air traffic reported by the airlines. And as y’all know, absolutely no one ever in the history of the world has made bad financial decisions when going on vacation…
Umm. Does anyone want to tell him?
It gets better: The last and final reason why Brian Sozzi says we’re not headed for a recession? Because people are still buying premium toilet paper. Yeah. You read that right.
According to Sozzi, literally no one has been buying the cheap toilet paper brands to save money … ass if buying toilet paper was something that people had much of a choice in anyway.
Real budgeters switched to bidets in 2020 anyway.
Yeah … I’m gonna move right on past that. See, I think you Great Ones can see through the sarcasm and figure out the problem with, well, all of Brian Sozzi’s recession reasoning here.
Ah, Brian, you fell for the two classic blunders when gauging the American consumer!
First, never underestimate the average American’s desire — or compulsion — to overspend.
Imagine walking into a mall and assuming that everyone there is able to afford what they’re buying. Just because you can’t see someone’s credit card balance blinking above their head doesn’t mean they’re being fiscally responsible.
Second, while we’re talking about foolish assumptions, just because you see some folks paying for coffee at Starbucks or buying premium toilet paper doesn’t mean everyone is. And it sure doesn’t mean everyone can even buy that stuff to begin with.
That’s the thing about recessions. Just because you see some people not struggling doesn’t mean everyone’s all hunky-dory.
We’re not going too deep down the wealth disparity rabbit hole today (too late), but when you read brainless nonsense like “Olive Garden was busy today, thus the economy is fine” … you need to pump your brakes real quick and to even admire the sheer glimmer on that blind spot.
Heck, maybe articles like that should be your recession indicator…
On the other (more realistic) hand, I want to give the Morning Brief some credit, seeing as Brian Sozzi posted a separate recession-related piece that’s thankfully less bewildering.
Behold: The Fluffy Puppy Indicator. Tracking non-food pet purchases, the Fluffy Puppy Indicator is down 1.9% this month as grooming, accessories and pet beds all got more expensive.
It works like so: When the going is good? You might buy your furry friends (not those kind) some special treats, a new collar, unnecessary outfits or even a lil’ teepee tent.
But when cash is slim at the end of the month? Welp … goodbye wet food, hello, bulk food bags. Judging by Chewy’s (NYSE: CHWY) recent earnings, I’m gonna presume more than a few dogs had their teepee budgets cut down to “just food” over the past year.
And as long as we’re throwing out personal anecdotal evidence all willy-nilly now … the Fluffy Puppy Indicator tracks with my experience much more closely than, say, Brian Sozzi’s Toilet Paper Predictor.
What do you think, Great Ones? Are any of these indicators actually useful in predicting recessions? Do you have your own indicator? Let me know in the inbox what signs tell you a recession is (or isn’t) coming ‘round the bend.
Once you’ve shared your thoughts, here’s where else you can find us across the interwebs:
Until next time, stay Great!
Editor, Great Stuff