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The day before the SNAP IPO, I penned "Goldman Sachs & Morgan Stanley Pull Off the Heist of the Decade, Bends Over Those Who Don't Read BoomBustBlog". Despite being rather dramatic, I was dead serious. Fastword 48hours after the IPO, and I was able to pen "On Just the 2nd Full Day of Trading, Arithmetic Reality Hits SNAP Stock". Who could've known? Now, four days after the IPO, guess what?

 

 

One of my (many) gripes with the SNAP IPO (and to be honest, many others brought this point up as well) was the sale of common stock with absolutely no voting rights, to wit:

  •  Cue in Goldman Sachs and Morgan Stanley. They have pulled off the heist of the decade, essentially selling 200 million digital tokens (they're calling them stocks) with no voting rights at a trailing P/S multiple of 60x and forward multiple of 20x for a startup losing half a billion per year, with said losses increasing over $200M Y-o-Y. This is almost the ultimate in reward free risk.
  • ... basically take the risk of a venture capital investor, get the protective covenants of... Oh yeah, there are none, and the reward of... who knows, it's a startup! Oh yeah, you get the returns of venture capitalists as well, right? Wrong! You don't have control or voting powers in the company at all.
  • ... Moral to the story, be wary of Mark Cuban and anonymous hedge fund investors backing of "alternative facts" explanations of slowing growth at the top of the business cycle when non-voting shares are sold at what has to be a world record valuation for a start-up company that loses half billion dollars per year, with said losses increasing by roughly $200M per year.

Well, Reuters reports activistist investors are attempting to block SNAP from inclusion in major indexes, to wit:

A group representing large institutional investors has approached index providers S&P Dow Jones Indices and MSCI Inc, looking to bar Snap Inc (SNAP.N) and any other company that sells investors non-voting shares from their stock benchmarks.

Both index providers have said they are reviewing Snap's inclusion. Were Snap to be added to indexes such as the S&P 500 Index or the MSCI USA Index, managers of stock index portfolios would have to buy its shares, and other investors whose performance is tracked against such indexes would likely follow suit.

Some money managers worry about buying Snap’s Class A shares because they have no voting rights, meaning those shareholders will have no voice on matters like company strategy or executive pay.

    "They're tapping public markets but giving public shareholders no say," said Amy Borrus, deputy director of the Council of Institutional Investors, which represents pension funds and other large asset owners, in an interview.

In reaching out to both index providers, she said, "What we would like to see at the least is for the indexes to exclude new no-vote companies."

David Blitzer, managing director of S&P Dow Jones Indices and chair of a committee overseeing its indexes, said they would not add a new stock like Snap for six to 12 months after its IPO in any case, and will use that time to study Snap's structure.

While the index provider does not have a hard requirement about a company's voting structure, the committee needs to think through how much influence investors should have, Blitzer said in an interview on Monday.

MSCI (ex-Morgan Stanley) was (or shall I say is, they seemed to be alight with it until someone raised a stink - wonder why???) a bit less sanguine on the matter:

MSCI (MSCI.N) said on March 2 that Snap would qualify for indexes including the MSCI USA Index, but said on March 3 that after additional analysis Snap did not meet all requirements. Snap's inclusion into the MSCI USA Index will be re-assessed in May, MSCI said in a statement on its website.

MSCI is seeking feedback from investors about whether companies without voting rights should be included in indexes, according to the March 3 statement. A spokesman did not immediately provide further details.

Since no one else will say it, I will. SNAP's lack of earings visibility, slowing growth and void of common shareholder voting rights (at least those shares sold in the IPO) were all easily availalbe. You guys allowed Morgan Stanley and Goldman Sachs to make sheeple of you once again. Now, is not the time to complain. The stock was ridiculously overpriced anway, and may fall further still. Index inclusion requirements vary. For the S&P 500 a stock typically needs a market capitalization of around $5.5 billion and to have been profitable over the past four quarters.

I don't see Snap being profitable four quarters in a row without sacrificing growth, and possible not ieven then.

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By just the 2nd full day of trading, math and reality hits SNAP stock. Last week, I posted Goldman Sachs & Morgan Stanley Pull Off the Heist of the Decade, Bends Over Those Who Don't Read BoomBustBlog and if that wasn't a textbook example of a guaranteed short, a clear sign of a bubble and the most demonstrable example of the Street taking advantage of clients, then I don't know what is.

Here's livecase video on the topic that I did on Twitter and Facebook last week.

 

The US stock markets, and the banking sector in particular, have been on a tear since Trump's election. Here's a factual look to determine if all of the capital appreciated hoopla is really worth it.Trump Obama and the markets.png

When I state that Trump has been relatively inefficient in his communication and pursuit of policy, tend to get political and partisan comments in return. Let’s look at Trump’s accomplishments from an empirical perspective, and leave partisan politics to the wayside. In this fashion, we can more accurately gauge the probability of the Trump administration timely accomplishing the tax and stimulus proposals that have (allegedly) driven up (primarily band and financial services) stocks so far, so fast. If it becomes apparent that Trump will not be able to follow through timely, or an existential shock to the system occurs, not only will those rapid gains be rolled back, but a sharper correction or worse is in store.

At the very least, expect to see a changing rate environment.

Keep in mind that both presidents came into office with majority control of the full legislature which makes things easier to get done (relatively).

Obama Trump
Legislation “Lite”– For Trump, lighter legislation was mostly reversals of the Obama Administration  
Obama won approval of a congressional budget resolution that put Congress on record as dedicated to dealing with major health care reform legislation in 2009 Block a coal-waste targeting Stream Protection Rule
  Requirement for oil companies to disclose payments to foreign governments
  A bill awaits the President’s signature and would repeal a rule that bars individuals deemed mentally incompetent to manage their own Social Security payments from purchasing firearms.
Major Legislation requiring material fiscal commitment & bipartisan support
President Obama’s most significant legislative accomplishment in the first month was the signing of the American Recovery and Reinvestment Act. This was close to a trillion dollars stimulus package aimed at arresting and reversing the economic crisis of the Great Recession. It can be argued that this was less a result of Obama’s political statesmanship and more the result of a bipartisan desire to combat the effects of the market crash and economic malaise. While this is likely true, Trump has also ran on the campaign rhetoric that America was invery poor economic shape. While prudent speculators should take this as mere campaign rhetoric, frequent and extreme off-the-cuff comments such as this detracts from general credibility and invokes uncertainty. Infrastructure overhaul appears (from mediareports) to be encountering partisan politics, being pushed to 2018 to pressure vulnerable Democrats_
The Children's Health Insurance Reauthorization Act was another early accomplishment scored by Obama that expanded a federally funded medical insurance program to cover roughly four million additional children and pregnant mothers. ACA (Obamacare) repeal and replace has not shown any material progress – from a public facing perspective, at least. It is likely that this is too massive and complex a piece of legislation to repeal and replace without considerable collateral damage, thus chance are it will be “fixed” instead. While this is, by far, the more logical and practical move – it will result in a distinct failure to follow through on one of the primary Trump campaign promises.
Obama signed the Lilly Ledbetter Fair Pay Act, thus extending the statute of limitations for presenting equal-pay lawsuits – primarily for women. Plans to materially and dramatically reform the tax code have yet to emerge. There is not a clear consensus on border taxes.
Executive Orders: From Trump’s perspective, pretty much a follow through of what Obama and Bush have implemented
Obama implemented a new set of ethics guidelines designed to significantly curtail the influence of lobbyists on the executive branch. This apparently broke with actions from the Bush Administration. Trump issued and executive memo whose “ethics pledge” and “lobbying ban” was essentially drafter from Obama’sorders signed in his early days.
Obama supported the UN declaration on sexual orientation and gender identity Trump reinstated the Mexico City Policy, blocking federal funds from NGOs that provide access to abortion abroad and nationally. This is not unique policy and is apparently standard operating procedure in the GOP as every republican president in recent history has done so after taking over from a Democrat – including Reagan and both Presidents’ Bush.
Followed through on Bush's Iraq withdrawal of U.S. troops (King: S)econd 100 days will be bigger test for Obama, CNN, John King) Trump implemented Federal hiring freezes similar to that of Presidents Reagan and Carter – bipartisan.
lifting the 7½-year ban on federal funding for embryonic stem cell research.[8] Trump’s most notorious executiveorder briefly halted travel from seven Muslim-majority countries. His acting DOJ head (hold over from Obama admin) advised against the order, and when she refused to defend it in court, he fired her. This ended up as a fiasco, as no less than three federal judges stayed the order and hundreds of thousands if not millions protested around the country. Even companies associated with the order (ie. Uber) lost business. Trump is expected to release a new, revamped order this week.
President Obama’s early executive actions sought to mitigate what his administration saw as the overreaches of the Bush anti-terror strategy. One the use of torture in interrogation, insisting that “in all circumstances [prisoners] be treated humanely and shall not be subjected to violence.” Another order called for the closure of the Guantanamo Bay detention facility within a year, an interesting case study in the limitations of a president to achieve policy outcomes by decree. In a departure from what some might have expected, President Obama also ramped up the troop commitment in Afghanistan by 17,000 soldiers in the early days of his presidency. President Obama also repealed the previously mentioned Mexico City Policy. Trump’s orders to limit migration across the southern border, if followed, could be massive in fiscal scale and policy impact. Estimates of the of a U.S.-Mexico border wall now exceed $20 billion, and additional measures detailed in recent DHS memos (1, 2), including a major increase in immigration enforcement personnel, may cost billions more. While there is a great deal of executive discretion that contributes to the scope and speed of deportation efforts, the text of DHS memos broadly expands the “prioritized deportation” categories to include individuals found guilty of non-violent crimes and misdemeanors.
Obama ordered the closure of the Guantanamo Bay detention camp Trump has signed additional EOs, although several of them have not yet had a material effect, ie. Moving HSBCs from under the purview of the Dept. of Ed. to directly under the supervision of the White House.
President Obama lifted some travel and money restrictions to the island.[7]  
Obama signed an order requiring the Army Field Manual to be used as guide for terror interrogations, banning torture and other illegal coercive techniques, such as waterboarding.[109]  
Obama signed two Presidential Memoranda concerning energy independence, ordering the Department of Transportation to establish higher fuel efficiency standards before 2011 models are released and allowing states to raise their emissions standards above the national standard.[111]  

Presidential Approval Rating

65% <40% - It should be noted that this is the lowest approval rating of any early term president since the ratings have been tabulated.
Trump Obama and the markets.png
Cabinet Appointees & Personnel
By the end of January 2009, nine out of fifteen of President Obama’s cabinet appointments had been approved by the Senate.

By the end of January 2017, only three out of fifteen of President Trump’s cabinet appointments had been approved. Trump also had the resignation of National Security Advisor Gen. Michael Flynn and the recusal of his newly minted head of the DOJ for matters related to the Russian interference probes & inquiry.

Trump has also fired his head of the DOJ, and is currently facing a direct rebuke by his head of the FBI over allegations that the Obama administration wiretapped Trumps private residence.

   
     

In Conclusion

Maintaining an apolitical stance and without opining on actual policy itself – just measuring the effective implementation of policy - It is quite clear from an empirical perspective that Obama has accomplished significantly more in the short period of time following the inauguration than Donald Trump has. To be fair, a portion of this can be explained away by the contextual atmosphere of the times. There was a material political “willingness” to deal with the fallout of the Great Recession. By the same token, those Fiscal Stimulus measures that passed were done so without any GOP support at all. The stimulus package passed in the House of Representatives on January 28 without a single Republican vote. The Republicans developed opposition without developing consensus on an alternative plan.[126]

Another, more unassailable, conclusion is that the priorities of this administration (or at least the energies expended) are more focused on immigration policy than economic, tax, trade and education policy. Now, the constitutional separation of powers prevents the POTUS from acting unilaterally, but nearly all immigration-related policy pledges are in the process of enactment, while there is not material progress shown on fiscal stimulus, tax or economic policy. This should raise a red flag to all of those who feel that the recent stock market runup has any sort of fundamental “legs”.

Even if the POTUS were to switch course and start implementing said policy immediately, the time to actual enactment will be several (if not many) fiscal quarters away, leaving extremely high and unsupported valuation multiples in it’s wake.

Time will further elucidate what this administration’s true policy goals are, but for now it definitely does not seem to be those that support either the campaign rhetoric nor the stock market run-up.

Reasons for Trump’s relative underperformance?

·       Trump still does not have a full cabinet, likely due to his selecting very divisive cabinet nominees, inciting unnecessary agita and debate. In addition, many nominees apparently didn’t have proper paperwork in place (relative to Obama’s nominees who had papers in order), at least according to the opposing party.

·       Trump has, in my opinion, unnecessarily and to his detriment, started a “war” with the press and even his own intelligence staff and officials. By challenging a machine with significant and aggressive investigative abilities, a large captive audience, and (at least now) an inherent incentive to “catch” the administration in wrongdoing, Trump has (at best) created a very significant distraction that saps the administration’s time, attention and resources - and at worse, forms the machinations of his potential downfall/impeachment. At the end of the day, there was very little reward to be received in declaring a “war” on the press and intelligence agencies (his own, who work directly for him) considering the risks taken.

·       Trump is Inexperienced at crafting and implementing policy (literally had zero experience upon inauguration) and it shows

·       Either Trump is easily distracted by the media, or he gives the impression of such.

This is has been an attempt to gauge, from a factual and non-partisan perspective, the probability of Trump actually pushing through the policy that has presumably driven share prices so high, so quickly. The short answer from what we’ve seen so far… Nahhh!

 

See also:

  1. Is Time to Short America? Macro Risks + Unpredictable Administration / Geopolitical Uncertainty = ?
  2. Is It Time to Short America?, Part 2: Crony Capitalism Leads to Socioeconomic Stratification - the Rich Get Richer!

President Obama implemented the Fiduciary Rule, which was supposed to go in effect next month. In short, it says financial advisors and salesmen had to put the interests of their clients ahead of thier own interests. In other words, it outlawed blatantly ripping off your clients. Trump came in and halted this, basically ensuring that it will still be legal to put your bonus pool's interest ahead of you client's interest. Cue in Goldman Sachs and Morgan Stanley. They have pulled off the heist of the decade, essentially selling 200 million digital tokens (they're calling them stocks) with no voting rights at a trailing P/S multiple of 60x and forward multiple of 20x for a startup losing half a billion per year, with said losses increasing over $200M Y-o-Y. This is almost the ultimate in reward free risk

you basically take the risk of a venture capital investor, get the protective covenants of... Oh yeah, there are none, and the reward of... who knows, it's a startup! Oh yeah, you get the returns of venture capitalists as well, right? Wrong! You don't have control or voting powers in the company at all.

At 200 million shares, Snap raised $3.4 billion and was valued at nearly $24 billion as of its pricing. CNBC reported investors were expectinga pricing of $17 to $18 per share, above the $14 to $16 per share range originally given by the company. 

The IPO is 12 times oversubscribed. Let me repeat this, 12x oversubscribed. That's how bad... Im sorry, good, Wall Street is at convincing people to want to through their money into the vast unknown. 12 buyers for every share for sale!. ed. Some managers told CNBC they got as little as 2 percent of what they were asking for.

Goldman has done this before (but they've outdone themselves with this Snap thingy), referenceFacebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman's Pricing. I was absolutely right then, and math (or common damn sense) dictates I'm right now. The difference is... Facebook was making money, at the fop of its sector and growing like a weed, but still half the valuation of Snap! To be precise, FB generated 7x the revenue of Snap at its IPO and was easily profitable, and had no close competitors - and was still drastically overpriced at IPO. Snap is literally for suckers and sheep. Good luck, fellas! You're gonna need it, particularly as we're at the top of the business cycle (as compared to being at the bottom at Facebook's overpriced IPO.

The macro cycle is not the only thing that should concern those who fell for this deal. Snapchat's growth is slowing already!

                                                                 
     Global     North America (2)     Europe (3)     Rest of World  
Last Month
of Quarter(1)
   DAUs 
(in millions)
     YOY
Growth
    DAUs 
(in millions)
     YOY
Growth
    DAUs 
(in millions)
     YOY
Growth
    DAUs 
(in millions)
     YOY
Growth
 
Mar’14      50         415     27         259     16         1,065     7         856
June’14      59         173        31         116        19         265        10         319   
Sept’14      65         126        32         82        21         176        12         258   
Dec’14      74         92        36         56        24         118        15         214   
Mar’15      81         62        38         38        27         73        16         134   
June’15      89         51        41         33        29         52        20         103   
Sept’15      99         53        46         42        31         51        22         90   
Dec’15      110         48        50         39        35         45        26         77   
Mar’16      130         60        57         50        42         53        32         95   
June’16      148         66        63         55        48         65        37         92   
Sept’16      154         55        66         43        50         59        38         74   
Dec’16      161         46        69         39        53         51        39         53   

 

As reported by CNBC, this is the CEOs explanation for said slowdown:

""I think broadly speaking if you look at rest of world growth as a proxy for Android, you can start getting an understanding for the performance issues we face on Android in the last two quarters … [Snapchat] Memories worked very very poorly on low-end devices, largely because of the way we were caching images. The best way to get an actual feel for that is to buy a $100 Android on Amazon and play with the app. That will give you a more qualitative understanding of the issues we face on lower end devices. We've been investing a lot in fixing that and we actually changed the way we develop our products. So in the past our design teams used only iPhones … Now we transitioned half the design team to Android.""

Ok, but that doesn't really justify the slowdown. As a matter of fact, there are plenty of holes in that story. Here's a couple: 

  1. The ROW growth took a big hit, yes, but so did Europe and North America - where iPhone use is rampant.
  2. Not only is the iPhone insanely popular in Europe and N. America, but assuming the Android usage is the problem as the CEO suggests, it's definitely not performance related. The highest selling android phone in N. America is the Samsung Galaxy S and Note series. Both of these run complete circles around the iPhone in photography, storage and screen resolution - complete circles. If anything, strong high end Android adoption should be a boon to user growth on a photographic platform, not a bane. As a matter of fact, due to Samsung's debacle with the Note 7, Apple even gained share last quarter....

Wait, it gets deeper. Later on the CNBC story, others have corroborated what I see as a bogus excuse, to wit:

When contacted for this story, Mark Cuban elaborated on Spiegel's answer in a direct message: "Makes perfect sense. It's an image driven app that can overwhelm lower end devices. But that's fixable."

Another hedge fund investor, who attended the event and requested anonymity due to private nature of the meeting, agreed.

"It's a fair excuse because low end Android development is known and well covered problem given fragmentation and given those devices are less engineered for high quality video," the person said.

Moral to the story, be wary of Mark Cuban and anonymous hedge fund investors backing of "alternative facts" explanations of slowing growth at the top of the business cycle when non-voting shares are sold at what has to be a world record valuation for a start-up company that loses half billion dollars per year, with said losses increasing by roughly $200M per year.

If semi-annual or annual subscribers desire a valuation of SNAP to determine where to go long or short, let me know via tthe BoomBustBlog contact form. Click here to subscribe - we give discounts if you spread the word through social media.

 

In its press release on January 8, 2008, GGP released the following statement with respect to the financing of its debt liabilities due in 2008 and 2009 -

"The debt maturing in 2008 includes $1.816 billion of mortgage and other secured debt, $722 million of remaining bridge acquisition debt, and $83 million of notes. The Company estimates that property-level income, a measure used by lenders for financing purposes, will be approximately $365 million in the twelve months following the maturity date of the debt maturing in 2008. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $4.867 billion. Accordingly, the maturing 2008 mortgage debt of $1.816 billion represents approximately 37.3% of the financing value of the properties.

The debt maturing in 2009 includes $2.744 billion of mortgage and other secured debt and $600 million of notes. The Company estimates that property-level income will be approximately $415 million in the twelve months following the maturity date of the debt maturing in 2009. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $5.533 billion. Accordingly, the maturing 2009 mortgage debt of $2.744 billion represents approximately 49.6% of the financing value of the properties"

We analyzed GGP's financial position and its expected funds from operations (FFO) to check the company's ability to meet its debt obligations -

With GGP's optimistic assumptions of a cap rate of 7.5% and NOI of $365 mn and $415 mn for 2008 and 2009, respectively, (based on its historical growth rate of 5%) valuation for GGP's specific properties (on which debt is due for repayment in 2008 and 2009) comes to around $4.9 bn and $5.5 bn for 2008 and 2009, respectively. Based on LTV of 50% (which looks quite reasonable amid the current turbulence in the global credit markets) GGP should be able to raise $2.4 bn and $2.8 bn in 2008 and 2009, respectively. However, GGP's debt due for repayment in 2008 and 2009, respectively, is approximately $2.6 bn and $3.3 bn, translating into respective short-falls of about $188 mn and $577 mn (as shown below), even under the over-optimistic case presented by the company. Surprisingly, the company's financing requirement (as included in its press release) totally ignores the funding requirement for capital improvement and redevelopment programs required for sustained and long-term growth.


$ million GGP's Assumptions Reggie's Assumptions      
  2008 2009 2008 2009      
Property specific NOI $365 $415 $244 $369      
Cap Rate 7.50% 7.50% 7.50% 7.50% Overly optimistic
Cap Rate, but I'l give them this to prove a point
Value of Properties $4,867 $5,533 $4,589 $4,919
LTV 50% 50% 50% 50%      
Maximum re-fi available $2,433 $2,767 $2,294 $2,460      
Debt due at
maturity
$2,621 $3,344 $2,621 $3,344      
EMI on prior year financing     $861 $1,246      
Capital Improvements     $542 $195 GGP's press release
failed to allocate any funds for growth, development, and
expansion
 
New Developments     $1,040 $466  
Total Financing
Required
$2,621 $3,344 $5,063 $5,251      
Shortfall from
Re-financing
$188 $577 $2,769 $2,792 Even using the
extremely optimistic numbers of the press release, GGP falls short of the
mark!!!
         

However, we believe that GGP's assumption of NOI growth of 5% for
2008 and 2009 is unrealistic in view of the softness in the U.S
commercial real estate market, which has already started to experience
the ripple impacts of sub-prime crisis. The (now) highly probable US
recession, along with deteriorating macro-economic conditions, would
make operating environment extremely difficult for commercial real
estate companies like GGP.

Based on our research and detailed analysis of macro economic
factors like retail space demand, household and population growth,
consumer spending, etc we expect rentals to decline 1.0% and 0.9% in
2008 and 2009. If we assume a 1% and 0.9% decline in rentals for 2008
and 2009, and capitalization rate of 7.5% (same as that assumed by the
company), GGP's valuation for these properties comes to approximately
$4.5 bn and $4.9 bn in 2008 and 2009, respectively. This would enable
GGP to avail itself of a re-financing facility of $2.3 bn and $2.5 bn
(based on 50% LTV) against $2.6 bn and $3.3 bn due for maturity,
translating into a shortfall of $0.3 bn and $0.8 bn for 2008 and 2009.
This excludes the financing that GGP would require for capital
improvement and new developments programs. GGP's total funding
requirement, including re-financing, capital improvement and
development plans would be approximately $5.0 bn and $5.2 bn for 2008
and 2009, respectively, which would require additional financing of
$2.8 bn in 2008 and 2009.

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