Weekly TLDR - 401 Problems but the Stock Market Ain’t One
In this week’s TLDR, we talk about the massive stock market stimulus that is the “Secure Act 2.0” that just passed the House, EV battery costs and Tesla gross margins, Apple getting into the enterpris
The TLDR
In this week’s TLDR, we talk about the massive stock market stimulus that is the “Secure Act 2.0” that just passed the House, EV battery costs and Tesla gross margins, Apple getting into the enterprise market, and the UK government embracing crypto in a major way.
Chart of the Week
Goldman Sach’s onshore stock basket is vastly outperforming its offshore counterpart. These two stock baskets are determined by the % of business and supply chain companies within the US or abroad (i.e. the onshore basket has companies with supply chains mostly in the US and vice versa for the offshore basket). Much has been said about the death of globalization but a tense geopolitical conflict, continued supply chain disruptions, and a looming geopolitical conflict with China has many countries looking to “in source” and reduce their dependencies. The entire EU is doing that with its energy sector and the US is looking to do so with its semiconductor manufacturing capabilities. Our take is that this “in sourcing” is the start of a major trend. You don’t want to be left as the only country dependent on someone else and be in a position of weakness. For stocks, we envision somewhat siloed markets centered around North America + Europe, China, SE Asia, India, and South America. Companies based in one of the siloed markets will find it harder and harder to expand to another market as “in sourcing” turns into protectionism.
Stock Market TLDR
401K Retirement Bill Is a Sneaky Backdoor Stock Market Stimulus
The US house just passed the “Secure Act 2.0” act in a rare show of bipartisanship. The act will require all employers with 10 or more employees to automatically enroll its employees into a 401(k) plan at a base rate of 3% of salary. The retirement rate will increase 1% annually until workers are saving 10% of their pay into the 401(k). Given the bipartisan support in the house, the act will likely pass the Senate in April as well unless something changes.
This matters because there were roughly 8.9 Trillion dollars in wages paid out to workers in the US in 2020. 3% of that means an inflow of roughly $267 billion in funds per year to 401(k) plans before considering any employer matches. These funds are likely going into target date funds or index funds and will gradually increase every year. This means a gradually increasing inflow of passive money that will likely be primarily allocated in US large and mid cap stocks. Large inflows of passive money has a stabilizing effect on the market, and a stable market also means “risk on” for some of the high growth stocks beaten up in the past 6-9 months.
Elon Takes a 9.2% Stake in Twitter
Elon Musk becomes the largest shareholder in Twitter and it may not end there. Elon has shown interest in the operations of the platform with recent polls around free speech as well as an “Edit” button. It feels like board seat representation from someone in Elon’s camp is a given. It's hard to predict exactly what will happen but having Elon’s name attached to your company has been a boon in the past and Twitter’s stock is already up 25%+ on Elon’s announcement.
Exploding Battery Costs Slow EV Adoption, TSLA Gross Margin Risk?
Remember when we showed you a ridiculous graph on the price of Nickel? Well, apparently Nickel represents 12% of the costs of EV batteries and Lithium is 9%. Both of those metals have risen 21% and 13% respectively and are putting the squeeze on the EV battery supply chain as well as unit costs. This could mean lower gross margins for major EV manufacturers like Tesla that consume a vast amount of both metals.
China Mulling $1570 Daily Limit for Live-Streaming Hosts
While making $1570 per day seems like a lot already (~$573K annually), the super-star influencers in China (and the US) make considerably more than that. In the short-term, I expect influencers to find off-platform ways to make up the deficit. The issue will be on the live streaming platforms like YY and HUYA who will now be out monetizing whale activity. The old ratio still holds true that 5% of paying users generate 95% of revenue so limited whale user activity is going to be a huge hit for those platforms.
Apple Targeting Corporate IT Market
Apple is launching a new subscription based device management software aimed at IT managers called Business Essentials. This will make it easier for smaller corporations to adopt and manage Apple devices in a corporate environment. Think installing applications, managing security patching, setting passcode policies etc. There is even an AppleCare integration for repairs. The big Trojan horse is around being able to manage iPhones as well as Macs. With workers used to bringing their own smartphones into corporate environments, Apple has a backdoor in getting corporate adoption of Business Essentials and eventually Macs. Mac products have always lagged in corporate adoption outside of creative and software development environments so growing traction in enterprise could provide a boost to that lucrative but slow growth segment.
Crypto TLDR
The UK Treasury is embracing crypto in a major way
Once the financial center of the world, the UK has been forced to share the stage with the US and Hong Kong/Singapore over the past century, yet the City of London is still a dominant force in international finance today. The UK’s vaunted status in international finance is why recent news of the Treasury setting out plans for stablecoins to be a recognized form of payment in the country and asking the Royal Mint to issue an NFT by summer is very bullish for crypto. Alongside these regulations, the Treasury will also introduce a “financial market infrastructure sandbox” to enable firms to experiment and innovate ways to further develop and accelerate the UK’s cryptoasset market. This comes at the head of a long string of positive news from major governments all over the world introducing favorable legislation for crypto. With the way governments are embracing crypto, I would say the future is very bright for the burgeoning asset class.
Crypto private equity is still going strong
With the recent turmoil in global markets, one would think crypto private equity would be majorly impacted as well. Although I’m sure overall investments have declined, headline fundraising rounds are still happening. One of the latest crypto startups to benefit from this is Fractal, a gaming-focused NFT platform founded by Twitch co-founder Justin Kan. The company raised $35 million in a seed round led by Paradigm and Multicoin Capital with participation from Andreessen Horowitz, Coinbase Ventures, and others. The valuation of Fractal from this round is unknown. A $35 million seed round is massive. To put this in perspective, back in 2013, people were astounded when infamous startup Klinkle raised a $25 million seed round, the largest in Silicon Valley history at the time. So far, five games have launched on Fractal. Fractal vets web3 games for quality, and has only accepted 5% of applications from game developers to use Fractal’s platform.
Crypto is going mainstreet finance, but there’s still hesitation
A new study conducted by Coalition Greenwich, a global provider of financial analysis, found that two-thirds of the 600 financial advisors the firm surveyed said that they have discussed crypto or digital assets with their clients in the past year. However, only 15% of them actually created a strategy or offered crypto products to their clients. 32% of the surveyed advisors said their firm’s policies wouldn’t allow it, 26% said crypto was not suitable for their clients, 15% said they expected to offer crypto products in the next year, and the rest said they lacked the tools to do so. A pain point for mainstreet investors to invest in crypto has been a lack of a spot Bitcoin (or Ethereum or any other crypto) ETF. The SEC has been hesitant to approve such an ETF, but if approved, could open the way for some of the hundred of billions of dollars flowing into passive funds each year to flow into crypto, which would be a huge boon for the industry.
DeFi disaster averted
Blockchain security firm OpenZeppelin recently uncovered a critical vulnerability in the Convex Protocol that could’ve potentially cost investors up to $15 billion. Although often lauded for its innovation, flexibility, and high yields, DeFi is also infamous for anonymous developers “rug pulling” their users and stealing all the deposits in a project. Convex’s developers are anonymous and with the scale at which the protocol was operating at, it’s fortunate that OpenZeppelin spotted the vulnerability early and the bug has since been patched. OpenZeppelin said it was reasonably sure that this was an unintentional vulnerability and the developers had no ill intentions.
Coinbase’s Ethereum staking yield is mysteriously low (author anecdote)
Staking ETH on Coinbase currently yields 3.675%. This is quite low as I’ve been running a few Ethereum 2.0 staking nodes directly and all of them have an 8% yield. Coinbase’s user agreement states that the company takes a 25% commission of the staking yield, yet assuming an 8% yield, a Coinbase user should be keeping 6% instead of 3.675%. I wonder how Coinbase calculates their staking yield and why it’s mysteriously and suspiciously low. I guess the moral of the story is to skip the middleman, and run your own Ethereum 2.0 staking nodes if you can.
Current ETH staking rewards are a little lower than 4.5%. Coinbase is still taking a cut, but it's not an absurd amount. The rewards gradually scaled down as more and more ETH is being staked. It pays to be early!