Luckin Fudicrous
Last week I gave you a stock thesis built around the investment idea that the market was underestimating future volatility from central banks increasing the interest rates to curb inflation.
This past week, chatter about the Federal Reserve tightening its monetary policy has gripped Wallstreet with the more speculative asset classes being strangled the most.
Cryptos take a hit
The plummet in Bitcoin’s price is a prime example of this:
To the leftist left of the graph, you can see a sharp drop in the price around the same time people started believing the Fed’s threats were more imminent than expected.
Interestingly, I was in a zoom meeting/event hosted by my university with Craig Wright (a bit of a legend or a meme, depends on whether you believe he invented bitcoin or not) and he said that bitcoin’s price will drop when the federal reserve increases interest rates.
Further, when reading around the subject I came across this in the FT:
“Higher yields on low-risk assets like US government bonds make the potential returns that can be earned through speculative investments like cryptocurrencies look less appealing, analysts say.”
This makes sense when talking about stocks. But, it seems that most of the media or *analysts say* that the drop in cryptocurrencies is due to hikes in interest rates making risk free assets more appealing… I’m just sitting here thinking, really? This is dumb. This makes no sense.
First of all, this quote I got from the FT said by the *analyst* implies that investors speculators buy cryptos for yields, ie cashflows. But cryptos don’t produce cash and never will. So this, like, makes no god damn sense.
And second of all, if bitcoin’s price is in part dictated by risk-free assets, specifically as the risk-free rate increases, it increases the opportunity cost of owning risky assets, therefore causing a defection towards safer assets as it’s less economically attractive - it implies that crypto investors speculator care about risk. Like, seriously? So, when the investor speculator buys an asset that will never generate cash, who’s price is solely determined by how much another investor speculator will pay for it, this guy cares about risk? Nah.
Regardless, it’s a great exercise to illustrate that causation isn’t correlation.
So what could it be?
Obviously fear is playing a huge part in this. If you bought this asset as a gamble and saw the global stock market taking a hit due to the Fed tightening its monetary policy, you might think it’s time to take profits and sell up. Perhaps institutional investors, like Dalio’s fund, are thinking along similar lines - the lovely brief period of dirt-cheap capital is coming to an end, time to take profits, buckle down the hatches and go back to good old fundamentals.
Luckin Fudicrous looks to resurge
You may have heard of them. Luckin Coffee.
The company to rival Starbucks’s dominance in China… until it was found to fabricate over $300m in revenues. But, is it looking to displace Starbucks again? Quite possibly.
When you think of the big frauds we’ve seen over the pandemic, the ones that pop into your mind are probably Wirecard and Luckin. Wirecard is very much dead and buried, but why not Luckin?
Well, in Lucky Luckin’s case they were inflating revenues so that, I guess, to make their equity look more attractive. Whilst this is far from great, the company still generated real revenue from real coffee shops serving real coffee… ye you get the idea - there is still an actual business possessing tangible assets with a fundamental value, which an equity investor could pay for if presented with the right price.
Looking at Wirecard on the other hand, most of the value is tied up in intangible assets like its branding, which has been dragged through acres of crap. Hence why the stock is zero.
Interestingly Luckin is still traded in the US on the OTC market, valued at about $2.5bn and plans to relist on the main market. Since it’s already listed and traded in the US, it shouldn’t be too much of a hassle when compared to a Chinese company trying to float on the NYSE for the first time.
The idea is that the situation presents a potential lucrative recovery play for investors, the company still posts earning reports, has ushered in new management, published 106% YoY revenue growth (ok, take it with a sniff of coffee), and is restructuring its debt. The company has paid a significant portion of its fine to the SEC after it was found that $864m had been raised from its investors during the time it was falsifying its revenues. It’s doing all the right things I guess.
Some argue that the company is an attractive asset as it is doing well in the consumer market, most of the allegations are around financial and operational governance, not so much about the quality of their product which is the value proposition to consumers. Thus, investors could argue that the value proposition is solid, everything else after a bit of ‘TLC’ and capital (lots of it) should aggregate to a rather tidy coffee business.
Perhaps people are on to something? Fool me once?… Or it could just be another Argentian-bonds situation where funds lined up to buy Argentina’s Century bonds after the country defaulted and promised to reform - didn’t work out great for the investors.
That’s all this week.