Transcription
Wow, this morning starts with two reports. One suggests that MicroStrategy is a Ponzi scheme; this is straight from Wall Street. The other suggests that our recession window isn't over; it's actually just begun.
Both of these reports come right after an interview with the CEO of TWC on Bloomberg. In this interview, she discussed something that made her the most concerned. She listened to a panelist at Davos, the World Economic Forum that's going on, and the panelist said that the business cycle is over. There can't be a downturn anymore because of all the investments in super cycles like artificial intelligence.
She said this extreme optimism made the hairs on the back of her neck stand up. Anyway, kind of an interesting way to start the morning, especially when Delta Airlines just missed on its forecast revenue, leading the stock down about 9% in the pre-market. Not that this one matters so much, but when you look at the American stock market, it also comes the same morning that Puma falls to its lowest level in the European stock market since 2017.
Its margin expectations came in lower than expected, and its net income came in about half as much as expected. That stock had just had its worst intraday fall since 2021, falling over about 21%. But we're going to focus mostly on the U.S. market here and what's going on, especially since today is starting like it potentially may be a little bit of a red day.
Probably just a give back after some of the euphoria we saw yesterday. I mean, consider it for a moment: yesterday, ARM was up 15.9%. Today, you're giving back about 4%. It's interesting that Coinbase is still below $300, and Nvidia is giving up about 1.5% as well. But again, it was up 4% and 1.5% yesterday, so you're having a little bit of that give back day.
American Airlines initially dropped 9%, but it's only down 5.6% now, so who knows? Maybe the euphoria and excitement can keep going. I mean, after all, Robinhood just shot up above $50; it is down 1.56 in the pre-market, though.
So what are some of these warnings that we just ended up getting from some of these institutions, and why are we getting these? Well, I'm going to show you, and we're going to go through them together here.
First, let's start with what Greenlight Capital just said. Greenlight Capital rips Bitcoin, well, specifically MicroStrategy. They suggest that we're in the "fart coin" part of the cycle and that MicroStrategy is just a Ponzi scheme. They say it's a way to extract premium from the market to buy Bitcoin at lower values.
They also question how Trump coin can end up making Donald Trump more money, potentially as much as $32 billion. Although, obviously, they don't have the liquidity nor the ability to un... well, there are some lockup restrictions holding apparently insider coins from being able to be dumped. But some people say there are plenty of wallet addresses that have not indicated any purchases yet are selling.
So some people suggest there are faux lockups and that people got certain fart coins that they're able to sell on the inside. Anyway, I want to show you the actual PDF here.
Take a look here: Donald Trump was inaugurated yesterday. While 2020 before was dominated by election uncertainty, with the election now behind us, it actually feels like we're faced with more uncertainty than ever. We know who the president is, but it's any guess as to what he'll do.
We carefully followed the campaign, but we don't seem to remember any discussion about territorial expansion. Trump is now interested in taking over Greenland, Canada, and the Panama Canal. This could be Manifest Destiny part two, the new American colonialism, with Trump negotiating all of it basically here.
Then they talk about how we're at the fart coin stage of the cycle, where you have essentially meme coins that can trade 24/7. Yet, other than trading and speculation, they serve no obvious purpose and fill no obvious need. They say that lest you think it's likely to go to zero, it could be the pets.com of the cycle.
Fart coin is only the latest meme coin. Then they sort of talk about Doge. They also talk about how if fart coin were a stock, it would rank about 180 in the S&P 500. This is where they get into starting to talk about MicroStrategy, where they say they own a small software business.
Because they sell for a premium right now, it's worth noting MicroStrategy sells for about two times as much as Bitcoin they hold. They hold about $42 billion in Bitcoin. Let's just take a quick check here: if they hold about $42 billion in Bitcoin, yeah, they're at about a $93 billion market cap.
So just divide the two; they're trading for about 2.2 times their value in Bitcoin. Now, people say it's okay to sell for a multiple of book if you actually have an underlying business. You know, that's how real estate trades, for example.
But when people look at MicroStrategy, they're like, "Wait a minute, but literally you guys aren't doing anything. You're buying Bitcoin and then you are plopping it into your balance sheet, and that's it." You raise money by Bitcoin, raise money by Bitcoin.
People who like MicroStrategy, of course, see this and say, "No, no, no, their software business is fantastic." And you know, this is where other people come back and say, "Okay, then why does the software business not make money?"
You can see that right here. This is the last quarterly report for MicroStrategy. Now, in fairness, they are including digital asset impairment losses here to save some money on taxes when Bitcoin goes down or, you know, the value of whatever they have goes down.
You could actually ignore this portion, though. So what you should do is take this gross profit of $81 million; this is from their actual product licenses and subscriptions. Then subtract from that 881, take the 35 out for sales and marketing, take 33 out for research and development, take 33 out for G&A, and you've got a business that lost $20 million in that quarter.
Now, obviously, they made substantially more in their Bitcoin investment, which is why people come back and argue, "Hey, like they're making a lot of people money." So are you all just bitter because you underperformed or something? Maybe.
But anyway, they say that the idea of MicroStrategy is to raise money from new investors at a premium and use the proceeds to buy more Bitcoin. Since the Bitcoin that MicroStrategy buys costs less than the Bitcoin implied value of MicroStrategy stock, the new investment is dilutive to new investors but accretive to existing investors.
In other words, the more the company can basically sell Bitcoin to other people in the market at $200,000 a coin, the existing investors win. But all the new investors get burned because the new investors are paying $200,000 for Bitcoin that's worth $100,000 and a money-losing software business.
The old investors are like, "Hell yeah, they got somebody to pay $200,000," you know, to 2x basically the value of Bitcoin. So this is where he goes on to say that as Bitcoin itself yields nothing, the Bitcoin yield that MicroStrategy talks about or Michael Saylor promotes is really just a yield of the Ponzi finance's effectiveness.
Basically, the more people buy in, the more effective the Ponzi is. This is at least what Greenlight Capital is saying. And again, you know, maybe they're just bitter.
They go on to talk about how leveraged ETFs have to reset daily, and something like a MicroStrategy multiplier, you know, a 1.5 or 2x multiplier on MicroStrategy is something that's likely to go to zero at some point in the future.
Now, they also then argue that the overall valuation of the market has been high, and as a result of that, they argue that because valuations, like even Apple, with no revenue growth but a PE multiple expanding from 22 to 37x, is unacceptable to them.
They argue that they have underperformed the market because they didn't want to be a part of this. So some of this could be part of their problem, right? It's possible that because they're underperforming, they're frustrated and they're sort of lashing out.
They say here, "Look, Apple's gone from 22 times to 37 times, and maybe it'll even go to 40 a year from now." It might, but we don't see why it should be appealing to invest in at this valuation.
So here's just sort of an example where Greenlight Capital is making it clear that, "Hey, look, we think valuations are nuts. Here's what we think is going on in the market."
We were outperforming the market until August. This actually happened to a lot of people. A lot of people got spooked by the market in August because of unemployment trends. I'm not very happy about the unemployment or job trends either, and then underperformed.
So they outperformed the first eight months of the year and then underperformed the last four months of the year. Well, the last four months of the year are usually the most important for our performance.
But anyway, that's Greenlight Capital's take. But it's really interesting because it comes at the same time as Piper Sandler says that the ongoing job market continues to slow and that the recession is actually just now beginning to become a reality rather than not a reality.
Now, this is really interesting. They say the ongoing slowdown in job growth, marked by falling job openings and slower payroll gains, signals a weakening labor market. The market anticipates at most two rate cuts this year, but a rapidly shifting economic landscape in 2025 could change these expectations.
They say a soft landing remains possible, but a somewhat turbulent environment in 2025 should lower the Fed funds rate to 2.75. So they actually see potentially... I mean, that would be closer to five or six cuts as opposed to what the market is currently implying, which would only be, you know, one to two cuts.
So they say there's little reason why the downtrend in the labor market is basically not going to continue. In fact, we just had unemployment claims that came in a little higher than expected, spooking markets just a smidge.
I mean, unemployment claims are a relatively lagging factor. We really need months of that sort of data to really understand what's going on. Generally, the labor market is just such a lagging indicator of recession. Nobody really pays attention to it until it's too late, which makes sense; I get it.
But anyway, they talk about how the establishment survey suggests we're growing, but the household survey is still suggesting the downtrend is continuing, and this is a problem. This is something to watch for.
Again, this is total employees right here, where the household has basically leveled off. This is potentially due to multiple job holders. When you have multiple jobs, you are more likely to show up on the establishment survey twice, and this could be what explains this sort of wedge between the two here.
Anyway, during the... or when you also see drops in temporary labor workers, you tend to be preceding recessions. You can sort of see those drops in temporary employees and how we've had that drop in temp employees over here.
They also say that policymakers now expect two rate cuts in the coming year, while markets only expect a 50% chance of that second rate cut. So basically, only one and a half rate cuts being priced in right now.
Their argument is that over the past 40 years, recessions have typically followed 2 to 12 months after the yield curve un-inverts. With the curve just turning positive, the recession risk has opened—well, has not closed; rather, it has just opened.
Historically, the timing depends on various factors, including the broader economic environment, monetary adjustments, and external stock shocks. The likelihood of a 2025 recession is further supported by recent trends in the unemployment rate.
Historically, recessions are preceded by a gradual rise in the unemployment rate, forming a U-shaped pattern before the downturn. This contrasts with a soft landing, where the unemployment rate remains stable or actually declines, reflecting continued economic strength.
As a result, they actually think investing in bonds right now is a good strategy. Now, I have been talking about bonds since August, actually since about July, which obviously has been premature. It's been very premature.
Let's just say it's been wrong; it's been premature. And I'm not looking for a confirmation bias here. I just think it's interesting. This is what institutions are talking about this morning.
I think we have to take both of these with a grain of salt, though. Greenlight Capital is probably just sort of in their letter to shareholders trying to explain why they underperformed the S&P 500.
So I think they're sort of lashing out at some of the euphoria that's going on. Let's be real; valuations are high. But there is truly this movement by people that think, "Oh, there's never going to be a recession again."
Everybody's got an app on their phone, and they could all buy the dip on stocks. That stuff like that makes me nervous. I actually think it's lunatic—how should I say? Lunatics would say that there will never be a recession again.
I am highly concerned, and I don't know when it's going to happen, but I worry that the next recession is going to be one of the worst ever. The barriers to get a job again are going to be so hard.
It's not that I actually think that overvaluations correcting have to correct so miserably, although there will be substantial valuation corrections. It's just that when the recession takes hold and people lose their jobs, I really worry that when people go back to work, it's going to be really hard to find that work again.
And that's what makes me the most nervous. So that's why I've been really just trying to combine my fear of what artificial intelligence means. It's good in the long term; I agree with Elon Musk that it probably means some form of universal basic income.
I love that idea, and I'm very optimistic about that. I'm just sort of very nervous about the path between now and then. And while I'm hopeful, I also want to be careful.
I mean, look at Space Mobile, for example. You know, they've run, they've run, they've run. They peaked out in September; they're down 47% from then. They're down 14% in the pre-market because they issued convertibles.
As soon as companies start missing earnings and then they issue debt and they talk about cutting costs and they start laying off, the cycle begins. And the cycle usually begins very rapidly.
I think, you know, for the last six months, the markets have been like straight up. People have sort of been lulled into this feeling that, "Oh, things can never go down." I mean, things can go down way more than I think people think.
And it's going to be way more than a buy the dip again. I hope that doesn't happen. But again, Greenlight—who knows? Maybe they're bearish because they missed.
But Piper just sort of reminds you that there are still underlying trends that have weakness, and to be careful. Anyway, that's what I got for you today on the Morning Report.
Thank you so much for watching. Feel free to subscribe if you like this sort of content. I'll keep bringing you different perspectives every single day. Thanks so much for being here. See you in the next one. Goodbye, good luck.
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Congratulations, man! You've done so much. People love you; people look up to you. Kevin P.A., the financial analyst and YouTuber, meet Kevin. Always great to get your take.