Tuesday, October 25, 2022

An update on the world's best, safest inflation hedge; Time to buy Chinese stocks?; Empire Real Wealth; Is Musk buying Twitter the second-worst deal ever?; Elon Musk Is No Steve Jobs; HBO documentary on Linsanity

By Whitney Tilson

1) In my June 17 e-mail, I called U.S. Treasury Series I Saving Bonds ("I bonds") "the world's best, safest inflation hedge" and explained exactly why.

In short, any American can invest $10,000 per year in the world's safest investment – U.S. government bonds – and earn interest equal to whatever the inflation rate is. With inflation near a 40-year high, I bond holders today (and for the next six months) are earning a staggering 9.62% annual interest! (Please read my June e-mail for various caveats and details.)

One of my daily e-mail readers, Ben P., sent a link to this article, which explains a) how you can lock in 9.62% for the next six months (and 6.48% for the following half year) if you buy the I bonds by tomorrow (the rates reset every year on May 1 and November 1, and purchases need up to five days to clear)... and b) how you can make multiple purchases of $10,000 of I bonds if you gift them to others such as your spouse or children: Want to stash I Bonds in a 'gift box'? Do it by Wednesday. Excerpt:

Throughout this year, I have read with – at first, disbelief, and later, fascination – as devotees of U.S. Series I Savings Bonds discovered and successfully exploited a TreasuryDirect "gift box strategy" to accumulate I Bonds beyond the $10,000 per person yearly purchase limit.

Although the strategy is legit and perfectly legal, I haven't written about it and I don't intend to use it. But a lot of people have asked me about it. If you intend to use this strategy, I'd advise completing the process on TreasuryDirect by Wednesday, Oct. 26, if you are aiming to lock in the current 9.62% interest rate for a full six months, and then 6.48% for the next six months.

Here's a TreasuryDirect video about it: Purchasing a Gift Bond 2021.

2) In yesterday's e-mail, I highlighted the collapse of Chinese stocks, blasted regulators for being asleep at the switch as American investors were bilked out of tens of billions of dollars by Chinese companies listed on U.S. exchanges, and called for the U.S. to ban all of them.

But I don't expect this to happen... So in light of the carnage in the sector, yesterday I took off my crusader hat, put on my investor hat, and sent this e-mail to my eight colleagues on the Empire team:

Alibaba (BABA) fell 12.5% today to an all-time (eight-year) low. From its October 2020 peak of $317, it's down 80% to $63.

Is it time to rethink our long-standing aversion to Chinese stocks? The hatred of this sector is a good contra-indicator in my book...

I have to chuckle at the responses I got – nobody was even the slightest bit interested in bottom fishing here!

Enrique Abeyta wrote:

We had this same discussion almost six months ago to the day (BABA is down 28% since then). Here's what I wrote at the time:

The opposition here is not moral – it is a logical acknowledgement that we can wake up tomorrow and the Chinese government will delist every one of these names. In fact, I personally think that is what they eventually should do...

I think we have a bunch of great ideas so why do we want to engage in a bottom-fishing exercise? It has a binary risk that we will never have any real visibility on.

My view today is the same. I'm even afraid to trade them in Empire Elite Trader!

Herb Greenberg added:

Alibaba was the first example I wrote about in a special report to subscribers of my new Empire Real Wealth newsletter entitled, "Five Pitfall Stocks to Avoid at All Cost" (subscribers can click the link to read the entire report):

This is a company that I strongly believe misrepresented itself when it went public in the U.S., raising $25 billion as the largest-ever initial public offering ("IPO") at the time.

At the time, I was very public about it on CNBC, along with my former business partner, a forensic accountant, in red-flagging multiple concerns about the company's financials. The U.S. Securities and Exchange Commission ("SEC") launched an investigation into accounting irregularities, which continues to this day... six years later.

However, none of that mattered to investors because Alibaba was seen as a proxy for the explosive growth in China.

And it was... until it wasn't.

The story is in Alibaba's revenue growth, which has shown signs of sputtering, in large part because of China's economy itself... the result of COVID lockdowns, which in theory should have helped Alibaba.

But the name should also be avoided because the bigger issue is the broader risks of owning any Chinese stock, especially given regulatory crackdowns by the Chinese communist party on publicly traded tech stocks...

There's also the risk that the U.S. might kick some Chinese stocks, including Alibaba, off U.S. stock exchanges over audit concerns. The two countries have recently reached an agreement to allow audits, but even SEC Chairman Gary Gensler, in a recent CNBC interview, used the word "if" regarding the audits. Of course, there's always a chance they delist themselves, as ride-sharing company DiDi Global recently did.

Then there's the war risk, which sounds boilerplate, but in this case, there is genuine concern about the effect on U.S.-listed Chinese stocks if China invades Taiwan. (Exhibit No. 1: Russian stocks after the country's invasion of Ukraine.)

Finally, don't lose sight of the fact that as with all Chinese companies that list in the U.S., investors aren't investing in the company... They're investing in a variable interest entity ("VIE"). It's a complicated legal structure that itself has been under scrutiny.

To show just how jittery Alibaba investors are: The stock lost $26 billion in value in May when rumors circulated that co-founder Jack Ma, absent from public view since 2020, had been arrested.

He hadn't been, but the stock's reaction – even after it had already lost two-thirds of its value from its highs – underscores why we think Alibaba should be avoided.

Herb added yesterday:

In my prior life doing research on stocks to short, my partner and I did a tremendous amount of work on Alibaba. The numbers when the company went public were false. Alibaba raised cash under false pretenses. The only reason we were laughed off the stage is that investors viewed the company as a play/proxy on China growth, or the perception of it – Potemkin or otherwise.

Plus, why would you invest in a country that wages a low-wage economic war on your country? It makes zero sense.

Finally, another member of the team wrote:

I do not think we should be buying Chinese stocks, at any price, for several reasons...

First, China is not a capitalist country. All companies are controlled by government entities. Therefore they are operating with different motives.

Secondly, the numbers are false. All of them. Yes, all of them... The accounting is not credible, as auditors are either corrupt or not used. And if you believe that "some" of the numbers are untrue, then you must believe all of them are untrue.

Third, the VIE structure does not actually confer true ownership, but rather is something more like a tracking stock. You don't actually own the asset.

Finally, the government could (and is likely to) pursue autarky policies, ending all cross-border capital flows.

I spent a lot of time in China coming to these conclusions and I believe them strongly. There is no price – none – that would interest me in buying Chinese stocks.

After hearing from my colleagues, I agree that investors should continue to avoid Chinese stocks!

3) On the other hand, the brutal market sell-off this year is creating wonderful opportunities...

However, it's critical to be ultra-selective with the highest-quality stocks – exactly the type that Herb is focusing on in his new Empire Real Wealth newsletter. Even better, his picks are trading at massive discounts, which gives his subscribers a chance to build long-term wealth in the years ahead.

Best of all, right now the first year of a subscription to Empire Real Wealth is only $49... and you get a 60-day, risk-free, money-back trial. Giving Empire Real Wealth a try is among the biggest no-brainers I've ever seen. Get the details here.

4) A few years ago, I created a new private e-mail list (joining the more than two dozen existing ones) for friends who share my fascination (obsession?) with all things related to Elon Musk and Tesla (TSLA)...

I decided to open it up to all of my readers, so more than 4,000 people now receive one or two e-mails per week. If you'd like to automatically be added to it, simply send a blank e-mail to: [email protected].

Here are two items from yesterday's e-mail:

a) I'm at the annual Stansberry conference in Boston, where my friend and one of my favorite thinkers and writers, Scott Galloway, was the opening speaker this morning. I agreed with nearly everything he said, in particular that on Friday Elon Musk is going to pay Twitter (TWTR) shareholders $54.20 per share ($44 billion) and own the company. Once he does, Galloway says it will instantly be the second-worst deal ever, after AOL-Time Warner.

I'm not sure I agree. Here's what I texted Scott afterward:

Yes, the moment the deal closes, it will be the second-worst deal ever, if you define it as: "What would the losses be if Musk decided he didn't want to own it and immediately put it up for sale?" In that case, I think he might be able to get $15 billion for it (to pick a number out of the air), which would be a $29 billion loss – wiping out nearly all of the $31 billion in equity that Musk and his friends are putting up to buy Twitter.

(Side note: This does NOT mean that the debtholders will be impaired. The fact that the banks are going to take big losses on the $13 billion in debt that they committed to raise simply reflects that interest rates have gone up a lot. This is the most over-equitized large deal ever – normally, the numbers would be flipped (20% to 25% equity, the rest debt) – so I do not think those buying the debt (at a discount) are crazy. Odds are very high that they'll get paid back 100 cents on the dollar.)

But it's important to keep in mind that Musk, of course, is not going to sell Twitter right after he buys it. He's going to savagely cut costs, try to turn it into WeChat by adding payments, etc., and there's a chance he might succeed. Twitter has been so mismanaged that I assume there's a lot of low-hanging fruit.

So, unlike AOL-Time Warner, we don't know at this time whether this is the second-worst deal ever. In fact, there's a chance it could be a big winner for Musk and his friends. I don't think this outcome is likely, but you have to admit that Musk has an extraordinary track record creating incredible value when the odds seemed stacked against him...

b) Musk fanboys (they're 99.9% men) are flaming Adam Lashinsky for this Washington Post op-ed: Elon Musk is no Steve Jobs. Excerpt:

The similarities between the two are many. Both craved access to the powerful. Musk has cozied up to former president Donald Trump; Jobs lent Bill Clinton a spare house on trips to Northern California. Both were workaholics who considered their vast wealth almost as an afterthought. Both showed uncommon virtuosity in promoting their products. Long before Musk made Twitter his bullhorn, Jobs demonstrated a self-taught mastery of granting interviews to carefully selected journalists as well as paying top dollar to advertise on the back pages of national magazines. There are other similarities: Jobs was in a serious relationship with folk singer Joan Baez in his twenties; Musk has two children with Claire Boucher, the musical artist known as Grimes.

That's where the resemblances end. Jobs was mercurial, but he also was the portrait of discipline. He reserved a day of the week for meetings at Pixar, devoting the balance for Apple. He created a company ethic of saying no: Jobs would lecture Apple executives that rejecting even good ideas was critical for focusing on the most important matters at hand. And whereas Musk's social life becomes odder the older he gets – despite his relationship with Grimes, the 51-year-old recently fathered twin children with an executive at one of his companies and then publicly joked about it – Jobs, who was 56 when he died, settled into middle-aged respectability, with four children and an accomplished partner.

Focus, discipline, and respectability hold no allure for Musk.

I come out in the middle – Lashinsky misses many striking similarities: Both were/are clearly on the autism spectrum, resulting in not being able to read people and often treating them very badly (e.g., Jobs refused to acknowledge paternity of a daughter); they were/are incredible visionaries, but also often thin-skinned, petty, and vengeful; they both had/have the ability to identify and hire type-A superstars and drive them to incredible achievements, but also burn them out; and they've both achieved extraordinary success in multiple, unrelated businesses, in part by living in a reality-distortion world, believing in impossible things, which is both a blessing (leading to unthinkable achievements), but also a curse.

5) If you have HBO, definitely watch this short documentary, 38 At The Garden, about Linsanity, which took place 10 years ago (here's the trailer). Until watching it, I didn't appreciate the impact it had on the Asian community... Summary:

38 At The Garden chronicles the extraordinary ascendance of point guard Jeremy Lin during his landmark 2012 season with the New York Knicks. Lin, an undrafted Harvard graduate, shocked fans, stunned his teammates and galvanized Asians around the world when he scored 38 points at Madison Square Garden against the Los Angeles Lakers, solidifying Lin's hot streak and the "Linsanity" craze.

A decade later, Lin's stature as a groundbreaking, cultural icon stands in stark relief to the recent hate crimes against the Asian American community. 38 At The Garden recognizes a pivotal moment in time for Lin and celebrates a phenomenon that was bigger than basketball for the world.

Best regards,


P.S. I welcome your feedback at [email protected].