Where Did The $40 Billion Go?
There have been some spectacular failures in the wild and wacky world of tech startups (check Uber and Lyft) but nothing can top the implosion of WeWork and its arrogant CEO Adam Neuman. Mr. Neuman had been at the helm of two other startups that went broke but for some reason people loved to lend him money. One of his biggest supporters was SoftBank Group Corp. and its CEO Masayoshi Son who lent the startup billions.
The company got its start around 2010 and had a very simple business model. Get someone to lend you money, take that money and buy all the real estate that you can afford and then lease the space out. If the plan is successful you make the spread between the capital you have borrowed and the amount that the leases bring in. There is really no limit as to the size of your spread as long as you have the cash to pull the deal off. In fact, Mr. Neuman often bragged that he would become the world’s first Trillionaire!
Last Spring as he was preparing their IPO, Mr. Neuman invited the leadership of various exchanges to one of his homes in the Hamptons to negotiate the terms and conditions of the listing. He is very much into a “sustainable earth” movement and one of his demands was that the exchange bar the use of plastic and that they remove meat from the menu of their cafeteria. The NYSE told him that no individual was going to tell them what people should eat, the NASDAQ caved, and they got the deal.
Softbank had not only loaned WeWork billions but had also loaned Mr. Neuman hundreds of millions. They had the company valued at around $47 billion in market capitalization. They were prepared to bring that number to the market. That is when the farce started. Mr. Neuman tried to “squeeze” the market and wanted a higher valuation number. As the accountants tried to make that number work they found out that their were billions missing. Mr. Neuman had totally overstated the value of the land that was being used as collateral for the loans, the IPO was “delayed” while details were being worked out.
The IPO never got done. As the accountants sorted thru the mess the valuation kept going lower until it is now valued around $8 billion. At these valuations it wasn’t a guarantee that the company would have sufficient cash flow to stay in business. Mr. Neuman had a loan due to Softbank of $500 million which he could not pay. The issue was finally resolved when Mr. Neuman was fired as CEO, SoftBank made him a new loan and the company agreed to pay him close to a billion over 5 years as his termination package. Where the drama will end no one knows for sure but one thing is clear Mr. Neuman is very good at spending other peoples money and he is coming out of this deal smelling like a rose!
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week we will answer those questions with a short paragraph covering a variety of trading subjects.
Question;
Someone told me I can write credit put spreads to hedge my portfolio is that right?
Answer: As the option markets have evolved over the past 25-years the use of weekly options has gained acceptance. This allows many investors the chance to use weekly credit put spreads in combination with longer based serial puts to create a synthetic short position in the market that has very little or no time decay. This wasn’t possible even five years ago, but it is now a strategy that I teach to students that want to learn advanced trading and protect their individual stocks or portfolio from downside risk.
The Wise Guy Report: The View From The Floor
Each week I talk about what I think the Wise Guys (floor traders) are up to with the Big Three commodity contracts: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). I also track the Market Edge (www.marketedge.com) ‘Market Posture’ which has a twenty-six year record of forecasting the intermediate-term direction of the stock market as measure by the DJIA with around 70% accuracy.
T-Notes
T -Notes slept the whole week with very little price action and volatility. The market is waiting for something, but I am not sure what that is. If we keep getting in tighter ranges and low volatility I think that a breakout will come to the downside. I am looking for one final rally that will allow me to get short near yearly highs. With this week’s price action, I will be patient and remain in observation mode.
Crude Oil
Crude Oil is still confusing me. The wholesale price is close to yearly lows, but the retail price continues to rise. Personally, I think we are now at yearly wholesale lows and I think it is a good time to leave the sidelines and get back in the fray. I am looking for a day when we test the lows and I will get long. I think the risk reward at this level is very favorable. We shall see.
Gold
There has been no real price action in Gold for months. This week Gold had a very small trading range on low volatility. Until we can make a new high or I can take profit on a break, I will continue to hold my short position. This trade is frustrating to say the least but that is the nature of this game. You need to be able to know when to hold ‘em and when to fold ‘em!
The Big Three Commodities Contracts
Contract Opinion Open Date Open Price Friday’s Close Gain/Loss YTD
T-Notes Flat 128.60 $8707
Oil Flat $56.17 $9481
Gold Short 08/07/19 $1513.00 $1501.00 $3553
The Market Edge Market Posture
Market Timing Models Current Reading Prior Week Connotation
Cyclical Trend Index (CTI): 6 8 Positive
Momentum Index: 11 9 Positive
Sentiment Index: -3 1 Negative
Strength Index – DJIA (DIA): 75.0 66.7 Positive
Strength Index – NASDAQ 100 (QQQ): 73.0 68.6 Positive
Strength Index – S&P 100 (OEX): 79.0 69.4 Positive
The Market Edge ‘Market Posture’, which has been Bullish since the week ending 09/13/2019 (DJIA 27219.52) remains Bullish at this time.
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Mr. Seifert