The most-asked question in my inbox over the past two weeks is… well, to be honest, it’s “Where’s the new monthly letter?”
I’ll channel Rousseau to answer that one: “Patience is bitter, but its fruit is sweet.”
The second-most-asked question in my inbox in June asks about the quantitative specifics of the read-across for buybacks from the phase shift that finds mega-tech capex outstripping cash flows.
That’s a narrower version of the bigger question which asks if, between slower buyback growth, blockbuster IPOs and mega-tech secondaries, net equity supply might be positive going forward, putting an end to decades of float shrink.
After getting the question (the second one) again on Friday morning, I retrieved my Ouija board from the attic, and after finally convincing Captain Howdy to shut up, I was able to reach Rousseau. Unfortunately, he didn’t have much to offer on the big-tech buyback question. Thankfully, Nomura’s Charlie McElligott has the answer.
The two charts above, from McElligott’s last missive before what, if past is precedent, will be a lengthy summer vacation (he calls it a “brain de-frag”), show you hyper-scaler authorizations going to zero, and net “demand” going negative.
The market, Charlie wrote, is coming around to the reality of the supply risk, and specifically to the fact that this isn’t just a debt issuance story anymore. There’s an equity supply narrative too.
For nearly two decades, “corporate buyback flows paired with de minimis issuance acted both as a latent bid under the market and a general equities-wide vol suppressor, as buybacks tend to get most active into drawdowns,” McElligott said, describing the “generational regime shift.”
“In this evolved ‘AI Trade 2.0,’ that virtuous tailwind risk[s] becoming a vicious headwind on the ‘supply > demand’ inflection shock for US equities,” he went on, reminding investors that in the past, Mag7 buybacks were “20-30% of the total.”
Earlier this week, commenting indirectly on the same supply > demand inflection, Allianz CIO Ludovic Subran told the FT Global Insurance Summit that SpaceX’s back-to-back raises (the $86 billion IPO and the $25 billion inaugural bond sale) are evidence that the market’s moving “from a stretched boom into bubble territory.”
Silence fell on the group. Someone gasped in shock and dismay and hands flew to cheeks. The camera moved in tight on the astronaut’s face and we heard: “You’re gonna die up there.”
(And you thought I couldn’t thread the Captain Howdy needle.)
You can’t fill a capital structure with debt with no consequences. Reasonable balance will be required.
I saw CNBC brought back our old friend Jeremy Grantham to get his commentary on the market and described him as a “famed investor known for calling bear markets.”
Unfortunately, the terms “humdinger” and “real McCoy” were not mentioned.
Alluding back to what you previously mentioned, shareholders in essence are paying for the build out.
If no one appreciates the amount of editorial dexterity on display here vis à vis answering the, “Ok, I’m contacting Rousseau through a Ouija board, and any Ouija board mention invariably conjures Captain Howdy, now how do I get to a punchline that ties Linda Blair to a market top?” question with “Oh! I got it! SpaceX = astronaut scene,” I’m going to be really disappointed in you folks.
I know a lot of you get it by now, but just to be clear: At this point, a decade into this site’s existence, the macro-market commentary’s almost secondary. It’s the breadcrumbs, the Easter eggs, the hidden references, the double entendres, the callbacks to old jokes, the stories, the cultural references and so on. That’s why you’re here. Even if you don’t realize it.
I am ashamed to admit it, but I had to look up “Captain Howdy.” In my defense, I was raised Catholic and did not see The Exorcist for many years. (My first exposure to the plot was actually the old SNL skit starring Richard Prior.) Still, I managed to find this clip:
My advice to anyone who hasn’t seen that film is don’t. Is it possible you’re that 1 in a 1,000 people who’s immune to it? Sure. Are parts of it past the ~middle sorta corny by today’s standards? Sure, kinda. Is it worth the risk? No. Almost surely not. The first half of that film and particularly that scene (if you’ve seen it, you know the scene I mean), will never, ever leave you alone.
Much of that movie was filmed at Georgetown, so it’s a university tradition to show the movie every Halloween. That was where I saw it for the first time, and I could not for the life of me believe that a Catholic University was okay with that particular tradition.
The sound track really helped the film.
Kant wait to taste the sweet fruit.
There you go. This reader gets it. Kitsch Register entries and the HR Monthlies will lead into one another. That was the new challenge I set up for myself. It was all getting too easy for me on a daily basis, so I added a layer of complexity.
I named my dog Pazuzu…
Don’t mess with Captain Howdy.
Again, it all depends on the return on the capital. As a shareholder, I WANT mgmt to find projects that return in excess of the cost of that capital. Cash flow might go negative on higher capex (in the short run) but that capex should/hopefully will result in more growth and returns in excess of that cost of capital over many future years.. Not every mgmt gets it correct but some of these names have pretty smart teams. They kinda know what they are doing. Debt is cheap, balance sheets are mostly very solid for several of the mega caps, the earnings yield of the stock they are selling is 3-5% (they should be able to get a return greater than that). If these capital raises are for “maintenance” Houston has a problem but if it is for growth we could see many years of stronger growth. Don’t we want our mgmt teams to do what is right? Many will make mistakes, some will not. Our job is to find the ones that will “do the right thing”. Invest capital in excess of said cost of capital. Only on Wall Street do we celebrate higher prices and worry(panic?) over lower prices. Always looking over our shoulder, doubting our beliefs, looking for what other think, what others will do. In the professional world where perf is evaluated on a daily basis and career risk etc I understand it to some degree (though I think it underserves the investors in the funds) but for individuals I think it is a true competitive advantage to play the “time arbitrage” hand many of us have. There are some pretty good businesses, pretty good mgmts out there where there stocks are now “cheaper” than they were (but are they cheap or fair valued or still overvalued?) shouldn’t we be more excited rather than more cautious? Just because a stock is “on sale” doesn’t make it a buy but maybe it does deserve a bit more analysis……………………………………….. As a GARP guy I prefer investment in the business by “smart” mgmts that I believe (hope?) see excess returns rather than buybacks of stocks with a 3-5% earnings yield……………………………………. But I am “OldSkool”.
I’d humbly suggest that you are a minority of shareholders. In our brave new world of investing, we want immediate short-term returns, except when we pile into theme stocks promising real profitability in a rolling three-year horizon. (As in that date keeps getting pushed forward.)
Over the past 15 years executive suites at companies which could afford it listened to their new breed of investors and prioritized share buybacks over capex. “Happily,” that also boosted the value of their personal share-based compensation. When interest rates were close to zero that made total sense for both shareholders and the stewards of our capital. Now that is getting tougher.
But that is only one reason for my disagreement with your belief that the management at the hyperscalers are focused on the value of long-term capex.
The other is that executives are people. As such, they can be swept up in a mania just as much as the rest of us, prodded along by Wall Street “analysts”. If you were investing in 2007-2008 you witnessed this in person. In retrospect Citibank CEO Chuck Prince has been ridiculed for his quote that “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing”. As did almost 100% of financial sector CEOs, including in the whole property sector. The late Alan Greenspan had believed Ayn Rand’s belief that business leaders would always prudently manage shareholder funds. To his credit, post the GFC, he admitted that he had been dead wrong about that. What has changed since then?
I’m getting too verbose here, but that was the same dynamic that led to US and EC banks funding round after round of lending to obviously bankrupt Latin American borrowers in the last 25 years of 1900s. Back in the 1980s, we had a B–school case on the first great wave of sovereign loan defaults. After parsing national trade and financial accounts for the various borrowers, the esteemed (seriously) professor asked us: “after analyzing all of this would any of you made these loans?”
Mr Little Snarky was the only one out of 80 who raised his hand. The incredulous prof asked me why. I’d already worked in NYC so I had enough exposure to the real world to answer “I’d lend the money because my boss and his boss would have called me into a room and asked me why I was not making these loans. If I tried to explain they were 100% likely to default, they’d answer “Well all I know is that Chase, Chemical and Mannie Hanny are making tons on those loans. If you cannot stomach doing the same, I’m sure we can find someone here who would be more open-minded about it.” To his credit he pondered my answer for a moment and replied, “you have a valid point there.” And history showed I was right.
Phew! I’ve seen too many real-life examples to believe that most CEOs are motivated by anything more than personal greed. Afterall, they’ll be off on a yacht when those long-term capex bets possibly start to bear fruit.