Dear Reader, Ahead of its much hyped IPO (Initial Public Offering), Uber was being touted in some circles as a US$120 billion business. Thankfully, common sense (and I use that term lightly) prevailed. In May 2019, Uber hit the market at a more ‘realistic’ value of…US$76.5 billion. What does that sort of money buy you? In Uber’s case, it appears to be a whole lot of red ink. This is part of Financial Times Alphaville’s coverage of Uber’s second quarter 2019 results (emphasis is mine)… ‘The quarterly net loss, which hit $5.2bn vs $878m a year ago and included $3.9bn in stock based compensation expenses related to the IPO, was spectacular in its own right. (On an adjusted basis the EBITDA loss came in at $656m, which marks an improvement on Q1.) ‘But the thing that really hit market sentiment was the slowdown in revenue growth at 14 per cent to $3.2bn. Analysts had been expecting a 20 per cent rate which would have taken the top line to $3.4bn. ‘This is important because Uber’s investment case is based on the thesis that the continuous net losses don’t matter because it’s still a growth company, and its pathway to profitability is through market domination and, of course, revenue growth.’ Uber tears up — in adjusted terms — US$656 million in a three-month period, but the real bummer is a modest slowdown in revenue growth. Talk about skewed priorities. But that tells you all you need to know about the ‘value’ proposition associated with these so-called unicorns. As long as it’s a ‘growth’ story, we’ll keep placing an over-over-over inflated price to these perpetual cash burners. The punters expressed their disappointment with Uber’s slowdown in revenue growth. Shares in the ride-sharer fell almost 25%. When it comes to value, I’m a little old school. Just to humour myself, I had a look at what the US 10-year government bond was yielding in May 2019. The rate was 2.4%. If you’d entrusted Uber’s value of US$76.5 billion to Uncle Sam, you’d be paid US$1.84 billion annually…without lifting a finger. But I digress, Uber is a growth story. Therefore, any comparison with something so boring and staid as a government bond is completely irrelevant…at least that’s the narrative during this period of complete and utter disconnect from reality. So how does Uber increase revenue growth? More people hailing an Uber? More people wanting lukewarm food to be delivered? That’s one way. But there’s a fair bit of competition out there. Lyft. DiDi. Ola. GoCatch. Taxify. Scoot. HOP. Deliveroo. Each of these is offering loss-leading deals to attract customers. Bump up prices? Not so easy with all that aforementioned competition. Another way is to take a greater cut from your ‘independent contractors’. It appears that’s already happening. An investigative report published by Jalopnik (an auto-based website) on 26 August 2019, found that… ‘Of all the [14,756] fares Jalopnik examined, Uber kept 35 percent of the revenue, while Lyft kept 38 percent. These numbers are roughly in line with a previous study by Lawrence Mishel at the Economic Policy Institute which concluded Uber’s take rate to be roughly one-third, or 33 percent.’ Uber refutes the findings…surprise, surprise. With consumers tightening their belts and looking for better and cheaper deals, that trend in slower revenue growth looks set to continue. If you’re an Uber shareholder who needs a dose of reality, or you have a passing interest in reading a common sense perspective on this ‘confidence trick’, then you should read Hubert Horan’s ‘Uber’s Path of Destruction’. The report is prefaced with… ‘…based on Horan's 40 years of experience in the management and regulation of transportation companies. Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants.’ For those who don’t have the time or inclination to read the 26-page report, here’s a couple of extracts… ‘An examination of Uber’s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate.’ And ‘Uber pursued a “growth at all costs” strategy financed by a staggering $20 billion in investor funding. This funding subsidized fares and service levels that could not be matched by incumbents who had to cover costs out of actual passenger fares.’ As a beneficiary of those subsidised rides, I’d like to personally thank the punters who’ve ponied up US$20 billion. But will they continue to be taken for mugs? While the fanciful growth story is still their reality, you bet they will. When Uber rattles the tin, those who are destined to learn that ‘a fool and their money are soon parted’ will pony up again. And if the hype around the upcoming WeWork IPO is anything to go by, there seems to be no shortage of fools looking to be separated from their hard-earned money. This ‘fluff’ is from the company’s IPO S-1 filing… ‘We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness. We have built a worldwide platform that supports growth, shared experiences and true success. We provide our members with flexible access to beautiful spaces, a culture of inclusivity and the energy of an inspired community, all connected by our extensive technology infrastructure. We believe our company has the power to elevate how people work, live and grow.’ Have you ever read anything so PC nauseating? Where’s the bucket? WeWork is a company that rents space long term and sublets it short term. Full stop. End of story. But WeWork is different…it’s a ‘growth’ story. And like all other stories in this land of fantasy, it’s written in large RED ink. As reported by CNBC on 17 August 2019: ‘WeWork’s revenue for the first half of 2019 may have been more than double that of a year earlier, but its losses are accelerating just as rapidly. The company indicated in its IPO filing that losses ballooned to more than $900 million in the first six months of the year, which follows full-year net losses of $1.9 billion in 2018.’ So how much do you reckon WeWork is worth? Me…I put it at $0. But you can’t really do an IPO for $0. In growth story land, there’s an odd relationship between losses and (dare I say) value. The greater the losses, the greater the value. Apparently, big losses means the company is building the foundations for growth. Personally, I think they are just digging a big hole into which investor funds will be buried. Anyway, back to the ‘growth’ story. WeWork’s IPO valuation is…US$47 billion. Is it worth it? You be the judge. ‘Regus is the leading global workspace provider. We have built an unparalleled network of office, co-working and meeting spaces for companies to use in every city in the world. It’s an infrastructure to support every business opportunity.’ Regus is part of IWG (International Workplace Group). An almost identical business model to WeWork…almost. Here’s a comparison between the two businesses… When I said ‘almost’, IWG is almost eight times the size of WeWork. There’s almost US$2 billion difference in profits between the two businesses. And, yet, WeWork is valued almost 13 times more than IWG. You just gotta love the brilliance of the bullshi**ers behind these growth stories. But continuing with the fool theme, you can’t fool all the people all the time. The sun will set on this period of insanity. Which is why Kathleen Smith, co-founder of Renaissance Capital, told CNBC on 28 June 2019… ‘Any private company that is not proceeding to go public in this market should have their head examined. The market is wide open, and it’s not always going to be.’ In other words, if you want to capitalise on people’s stupidity…do it now. I am truly at a loss to understand how people can be so gullible. But thankfully, unlike the investors who bought into this nonsense, my losses will be contained to my thoughts and words only. Regards, | Vern Gowdie, Editor, The Rum Rebellion |
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This Money Isn’t Smart or Dumb. It’s Raving Mad. By Bill Bonner Today, we are packing up, closing the shutters, putting away the lawn chairs and the croquet set. Everything needs to be stored away; otherwise, rain, wind, and sun will do their damage. The wood cracks; the metal rusts; the curtains fade… …It is nature’s way. And no matter what we do, nothing resists time. Dirty war In preparation for our departure, yesterday we got on our bicycles and rode around the countryside, saying goodbye to old friends. Our first stop was a visit with a retired colonel, a man who had spent his life in the military — including engagements in the war in Algeria and peacekeeping operations in the Congo. He is 80 years old and had cancer a couple of years ago; we didn’t expect to find him still alive. But he seems to be recovering and was cheerful and chatty. ‘The Algerian conflict was a dirty war. We could have won the war militarily. But it was ruining the integrity of the army, turning it into a ruthless and unruly police force. I asked myself if I should resign. But I stuck with it and did the best I could. I don’t regret it.’ Broken man After a cold beer and warm conversation, we got back on our bikes and pedalled along the country road. The next stop was to see a friend who used to work on our farm until he retired about 10 years ago. He is in remarkably robust shape. At 79, he works in his garden every day and chops his own firewood. But his oldest son was killed in a car crash last year — the second of his three children to die. Since then, he has seemed a bit like a broken man. ‘How are you, Francois?’ we asked. ‘Okay’, was the answer from his mouth. But his eyes told a different tale. He suffered. After a few minutes and a glass of cold, freshly squeezed apple juice, we mounted up again. A few miles farther on was the house of another retired couple. Both are in their late ‘70s. The woman is small, lively, energetic, and as friendly as ever. But her husband has multiple sclerosis. He no longer leaves the house, except to go to the hospital. Still, his mind is alert, and he is keenly interested in China. We took him a book from our library that we knew we would never read. It was written long ago in Chinese and now translated into French. ‘In Chinese, there is no clear separation between writing and the ideas it conveys’, he explained. ‘Both should be true, beautiful, and timeless. To the eye… and to the mind.’ ‘Uh… yes’, we replied. Rare truth But our beat is money. And in today’s money world, truth is rare; beauty can be found only in irony and mockery. Yesterday, for example, the US President came out with this: ‘Our Federal Reserve cannot “mentally” keep up with the competition — other countries. At the G-7 in France, all of the other Leaders were giddy about how low their Interest Costs have gone. Germany is actually “getting paid” to borrow money — ZERO INTEREST PLUS! No Clue Fed!’ The president is disturbed because the Fed is not debasing the US money supply fast enough. ‘Everybody else is doing it’, he seems to say. ‘Why aren’t we?’. Of course, ‘we’ are. Our Fed is lending out fake money to member banks at a rate that is about even with consumer price inflation. This ‘free’ money does to the US financial system about what a hurricane does to a south Florida swimming pool; it becomes a greasy swamp with an alligator in it. But our guess is that other leaders were not ‘giddy’ about the storm, but puzzled. Why would investors take shelter in a 10-year Italian bond at less than a 1% yield? Raving mad There is the smart money. And there is the dumb money. But this money must be stark, raving mad. Italy’s economy has been in a slump for more than 10 years. Its native-born population is expected to be cut in half by the end of the century. It owes more than 130% of its GDP. And its government bumbles from one unstable coalition to another…barely able to govern at all. You’d have to be nuts to lend money to Italy… …unless you thought the fix was in. That is, buying Italian bonds — or German bonds, or French bonds…or US bonds, for that matter — makes sense only if you are front-running central banks, counting on them to do something even nuttier than you did, buying your overpriced bonds at even higher prices. Which is what Mr Trump wants the Fed to do — rig up the credit market even more than it is now. The Fed should print up more fake money, he believes, and lend it to his government at even cheaper interest rates. The idea is to get the economy running hot in time for the 2020 election. Free money Our guess is that this huge bubble in debt marks a major change in world economic power. Americans forsook their gods — honest money, smallish government, balanced budgets. Now, those gods forsake them. Fake money has destroyed real capital, created chaos in the markets, caused trillions in malinvestment, slowed down growth, and resulted in appalling inequality. It has also corrupted the government; the feds use it to avoid making hard — but necessary — decisions. Fake money finances their fake wars…rewards lobbyists, campaign donors, crony contractors…and has added more than $10 trillion in additional debt in the last 10 years. And with so much cheap credit available, not a single candidate even suggests balancing the budget or curtailing wasteful spending. Why make tough choices when you get free money? The fix is in Germany is actually ‘getting paid’ to borrow, Mr Trump reminds us. But people only get free money when the fix is in. And the fix won’t stay fixed forever. Today’s rigged-up bond bubble will be no exception. When will it pop? How? We would love to meet the person who knows the answers to those questions. In the meantime, we wait…we watch…and we try to connect the dots. And we wonder: What really matters? Our final stop yesterday was at the modest house of a woman whose husband had recently died after a long, losing battle with Alzheimer’s disease. We sat with her for a few minutes and reminisced. We discussed the weather, the small tomatoes in her garden, and what was going on at the local church. But she had her husband on her mind. ‘The last words he said were five years ago’, she explained, tears in her eyes. ‘He said ‘I love you’. Regards, | Bill Bonner, For The Rum Rebellion |
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Crashing RV Sales Forecast 2020 Recession By Harry Dent RV sales are crashing at a year-over-year rate of 20% below sales for the same period last year. 2017 was the peak thus far and 2018 sales were 4% lower. Hence, this year’s crash is making this look like a clear top. RVs are one of our mid-life-to-retirement sectors for boomers. Sales used to peak at age 63, but the most recent updates to the ‘Consumer Expenditure Survey’ shows them peaking a bit earlier, at age 59–60. That still makes it a strong growth industry into 2020–2021 for aging boomers. Hence, there’s no demographic reason for this industry to be waning yet. That makes this a potent recession indicator as it was for the last recession. This first chart shows the trends since 1990 before its Spending Wave started rising in 1997. The last peak came in late 2006 — several months after home prices peaked — and by two years later, in early 2008, we started the worst recession since 1981–82 and 1930–33. After the peak in late 2017/early 2018, we should be seeing a recession…and soon! The next chart hones in a bit finer through the percentage change. Growth crossed the zero line to negative in early 2006 before — about a two-year lead on the recession of early 2008. Now, it crossed again in early 2018 and is accelerating rapidly in 2019. That would portend a recession by early 2020. Also, recall my Dow Home Construction Index that first peaked in late 2005 when home sales peaked, a little over two years before the last recession. It peaked in mid-2017 this time around and portends a recession by early 2020 or mid-2020 at the latest. The bond markets continue to see falling yields. They are seeing this recession clearer than stocks — as almost always tends to be the case. Bonds are more risk averse and look more for bad news, stocks are more risk prone and focus more on good news. I had a quick look at Australian fixed income ETFs to confirm my theory and came across this chart: [ASX:BOND] is the SPDR S&P/ASX Australian Bond Fund and it aims to closely track the returns of the S&P/ASX Fixed Interest Index. So it’s basically a package of Australian bonds. And the money has been pouring in! Bonds up, markets down — that’s the message. No wonder the Donald is beating on Fed Chairman Powell to turn up the stimulus full blast again…and he says at the same time that the economy is doing well and as strong as ever. Better to look at the facts than listen to the hyperbole! Regards, | Harry Dent, For The Rum Rebellion |
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