A whiff of Eike Batista... The fragility of the Twitter financing... Musk might get a margin call... The hubris of Bill Hwang... The lies that people tell... Levered visionaries, hucksters, and Elon Musk...
 Let's take perhaps our last look at Elon Musk's bid to acquire Twitter...
I (Dan Ferris) wrote about it twice last week. I thought Twitter (TWTR) would ultimately be acquired... and it moved closer. Musk's offer was finally accepted. Last week, I suggested that Musk may give a boost to freedom of speech on Twitter, but I also said the platform's often combative dynamic may limit the business's profitability indefinitely. This week, I'm getting a dark feeling about the financial aspects of the acquisition... In short, I fear that Elon Musk may have entered Eike Batista territory. You may remember Batista as the Brazilian ex-billionaire and former chairman of EBX, a conglomerate focused on natural resources. All the subsidiaries' names ended in X, too... OGX, CCX, MPX, OSX, and a couple others. The self-made tycoon built his fortune from 1980 to 2012, and viewed the letter X as a symbol of the multiplication of wealth... until it all fell apart when metals prices tanked starting in 2011. He was briefly Brazil's richest man, worth $34.5 billion in 2012. By July 2013, Bloomberg reported his net worth at around $200 million. For now, I'm focusing on just three details of the Batista saga... First, when Batista's net worth plunged in 2012, Bloomberg said he had "at least $2 billion in personal liabilities"... In other words, he borrowed against the value of the only thing he owned: his companies. When the companies' value dropped, the markets took his net worth apart like a chicken wing at a tailgate party. Second, Batista's net worth peaked right as the Abu Dhabi sovereign wealth fund Mubadala Investment converted an equity investment in Batista's companies into debt in 2012. Suddenly EBX had an additional $2 billion in debt ‒ as metals prices were about to plunge. Batista's fortune continued to evaporate after his oil-and-gas company, OGX, badly missed production targets... 15,000 barrels per day versus a 730,000 barrels-per-day ultimate target. So he was set up for a powerful mix of leverage and falling prices. By 2015, Batista's net worth was negative. He is currently serving a 30-year prison term for paying $16.5 million in bribes to the governor of Rio de Janeiro, Brazil. Third, Batista's empire grew rapidly and peaked before and during the financial crisis. It survived and thrived until 2012, only because it was natural resources focused... and those markets weathered the storm better than the housing and financial sectors at the center of the bubble. Interest rates were higher than now, but still considered low. Money was easy. Due diligence was cursory... Musk's net worth hasn't plummeted (yet?)... But the other two items in the Batista blowup – newly acquired debt by himself and the company, plus easy financing – are part of the Musk/Twitter story. Once Musk's acquisition of the social media company is finalized, Twitter will have roughly $18 billion in debt... Musk will have an additional $12.5 billion in personal debt, from borrowing against his Tesla (TSLA) shares. Musk will get a margin call if the balance of that loan ever rises to 35% or more of the value of the Tesla shares pledged as collateral. The initial loan-to-value ("LTV") is 20%. Musk has also committed to as much as $21 billion in equity financing, which may involve another personal loan. Musk's 168.2 million Tesla shares are worth around $150 billion today. We don't yet know how many shares he'll have to pledge as collateral, but the initial 20% LTV suggests it'll be at least $62.5 billion worth (12.5 = 20% of 62.5), more than 40% of Musk's holdings, at recent prices. Awkwardly for Musk, Tesla's share price has fallen more than 13% this week. That should make the bankers nervous enough to insist on more than 40% of Musk's shares as collateral... But, as I understand the situation, none of these metrics are etched in stone until the transaction is further along. And as it did for Batista, the financing has come rather easily for Musk. As the Financial Times reported... It took just days for banks across Wall Street to cobble together a $25.5bn financing package for Elon Musk's bid for Twitter, an exercise that would normally take weeks. The speed stumped Twitter's advisers: how could banks' buttoned-up risk management committees get comfortable with the deal so quickly? As one person involved in the debt financing explained, the due diligence "was easy. There was none. Not in the classic sense." This shows how finance in the surreal, postmodernist sense has replaced finance in the classic sense... If Tesla's market valuation falls from its current spaced-out levels to those that don't require viewing them through a kaleidoscope while tripping on LSD to make them look normal... Elon Musk will get a margin call... He'll have three days to add cash to his account, sell Tesla shares, or pay off the $12.5 billion. Those three options are spelled out explicitly in the U.S. Securities and Exchange Commission ("SEC") filings... Though only one specifies selling Tesla shares, I doubt he could do either of the other two options without also selling Tesla shares. Forced sales can cause share prices to drop uncontrollably. The day Elon gets the margin call, Tesla will likely tank hard, adding a heaping helping of Batista mojo to Elon Musk's life. If I wanted to call the top of the Tesla one-stock bubble that I've mentioned in more than one previous Digest – and you know I don't do predictions – I'd do it the day the TWTR transaction closes. That day will seal Elon Musk's fate... From that day forward, Elon Musk will constantly be at greater risk of a large drawdown in net worth due to the leveraging of his Tesla shares as part of the Twitter deal's financing. It's a complex financial situation and complexity in finance invites large, quick losses. It's not hard to imagine Tesla's share price falling, causing Musk to get a margin call, requiring him to sell billions worth of stock very quickly, triggering panic selling of TSLA. For now, the Twitter/Tesla/Musk saga is a wait-and-see proposition. But given how important the Tesla share price is to the transaction closing, I've shifted from confidence that Elon (or somebody) would successfully acquire Twitter to waiting for the other shoe to drop. Musk's Batista moment calls to mind another infamous victim of hubris and massive leverage... And he has returned to the headlines this week... Bill Hwang of Archegos Capital Management. I wrote about Hwang and Archegos twice last year, here and here. Hwang's hedge fund used massive leverage and a popular Wall Street tool called total return swaps to take large positions in stocks like ViacomCBS and Discovery Communications (now Warner Bros. Discovery)... The fund reached gross exposures of as much as $165 billion with just $36 billion of invested capital. Hwang is back in the news because the SEC charged him and three former Archegos employees with several counts of racketeering, wire fraud, and securities fraud... In a 40-page complaint, the SEC said Archegos grew rapidly from March 2020 (the COVID-19 bottom) until its collapse in March 2021. By September 2021, the complaint said, Archegos was worried enough about maintaining its rapid growth that it began to manipulate the stock market... By dominating the market for its Top 10 Holdings, as well as by "setting the tone" (i.e., engaging in large premarket trading), bidding up prices by entering incrementally higher limit orders throughout the trading day, and "marking the close" (i.e., engaging in large trading in the last 30 minutes of the trading day) and by other non-economic trading, all with the goal of artificially inflating the share prices of its Top 10 Holdings. Archegos avoided SEC reporting requirements for large positions by using total return swaps instead of just buying the stocks outright. It was able to buy large percentages of the equity in various companies. The SEC provided six examples... - GSX Techedu – more than 70% of outstanding shares of the Chinese firm's American depositary receipt ("ADR")
- Discovery Class A – more than 60% of outstanding shares
- IQIYI – more than 50% of outstanding shares
- ViacomCBS – more than 50% of outstanding shares
- Tencent Music Entertainment (TME) – more than 45% of outstanding shares
- Discovery Class C – more than 30% of outstanding shares
Hwang joked pridefully of his power over stock prices... From the SEC complaint... In June 2020, when asked in a text message by an Archegos analyst whether ViacomCBS's stock price improvement that day was "a sign of strength," Hwang responded, "No. It is a sign of me buying," followed by a "tears of joy" or laughing emoji. The impact is plainly visible in charts the SEC included in the complaint. We only need to publish one, because they all look exactly like this one of Discovery shares, from September 2020 through March 2021... Huge undisclosed positions were made riskier through the use of leverage, which ranged from 5 to 1 to as high as 10 to 1, according to the SEC. Hwang told various lies to keep the financing flowing. He told banks he could quickly exit positions, and that he was holding large positions in megacap, highly liquid names like Apple (AAPL) and Alphabet (GOOGL). In early 2021, bankers on the other side of Archegos' total return swaps wanted to know how much of its net asset value ("NAV") was in its top two holdings... Hwang said 35%, but the real figure was more than 50%. We'll be here forever if we start listing all the lies Hwang and his subordinates allegedly told counterparties... I got to 50 before I stopped counting paragraphs in the complaint under the heading of "Misrepresentations." It all started unraveling after the market close on March 22, 2021... Archegos' largest holding, ViacomCBS, announced a $3 billion share offering, and the stock price fell 10% the next day. The result was a 48% drop in Archegos' capital, to just $16.9 billion... The firm got a margin call the following day, March 24... Archegos allegedly lied to its counterparties about its dire financial condition to try to get them to help it bolster its capital. Market losses continued and by March 25, Archegos' capital had shrunk to $9.2 billion. The jig was up... Archegos was done. And now Hwang, 57, could spend the rest of his life in prison. The multiple counts he's charged with carry maximum sentences of several decades. His attorney says Hwang is "entirely innocent of any wrongdoing," and that the charges "are unprecedented and threaten all investors." Eike Batista bribed a politician to try to keep his empire afloat... Bill Hwang lied to his counterparties to try to do the same. I sincerely hope Elon Musk never finds himself in such a dire position that he'll see no way out but to commit fraud. Plenty of financial analysts say he has already done that to keep Tesla afloat... I don't know if that's true. Once I decide to stay away from a stock (as I did with Tesla early on), I don't continue digging into it. All I know is that financial history is littered with hubris-addled visionaries who used too much leverage and blew up spectacularly. Fraud has often accompanied such episodes: Enron... WorldCom... Tyco... Global Crossing... It's impossible to know if Elon Musk might be lying about any of his endeavors... But for now, I must leave him on the innocent end of storytelling visionaries. He comes off as a brilliant man at play in the world, trying earnestly to build things that he believes the world needs... Time will tell how far off that characterization might be. In the end, it's hard to know a liar from a true visionary... I interviewed author Bethany McLean a couple years ago on the Stansberry Investor Hour podcast. We spoke of another leveraged visionary who blew up and may have committed suicide as scandals came to light... Chesapeake Energy founder Aubrey McClendon. McClendon died on March 2, 2016, in a car accident that appears to have been a suicide. The day before, he'd been charged with rigging bids for oil and gas leases. McClendon was one of the most important figures in the development of America's shale gas resources. He levered both his personal fortune and his company. Both crashed in the 2008 crisis, triggering a margin loan that required him to sell more than 90% of his Chesapeake shares. McClendon's story represents how blurred the line is between visionary genius and huckster. The fact that they're frequently the same people often makes the line impossible to see until it's all over. Musk no doubt qualifies as both visionary genius and huckster. To what degree he's either of those things is a verdict only time can deliver... For now, with images of Batista, McClendon, and all those failed companies swimming in my head, I'll be watching the headlines for clues. One last character and I'll call it a week... I can't help mentioning Cathie Wood of Ark Investment Management (ARKK) in this cast of visionaries and hucksters... I first wrote about her on February 11, 2021, the day before Ark's flagship ARKK peaked at a closing price of $156.58. Today, the fund trades around $49 – a 69% drop – as the money-losing innovators it holds have seen their share prices absolutely destroyed, starting when the Nasdaq Composite Index peaked last November. Tesla is Ark's largest holding. It's held by four of the company's funds, and is the largest holding in three of them, including ARKK, where it currently accounts for 9.34% of the fund's assets. Whether she admits it publicly or not, one of the reasons Wood likely owns so much Tesla is the same reason Bill Hwang lied and said he owns large, liquid stocks with trillion-dollar market caps... Everybody with a stake in the outcome wants to know that if you have to sell, you'll be able to do it without crashing the stocks' prices. In Wood's case, Tesla is a near-trillion-dollar-market-cap stock that trades tens of millions of shares per day. That makes it easier for her to exit... With ARKK down nearly 70%, you can bet the firm is being hit with plenty of redemption requests. That would at least explain why Ark recently sold $162 million worth of Tesla just one week after the firm published a research piece predicting the stock would hit $4,600 per share by 2026. It makes you wonder what'll become of Wood and Ark if Elon Musk gets a margin call... He'll have to sell. Wood's funds' NAV will drop. Ark owns just 1.6 million Tesla shares, comprising less than two one-thousandths of the total outstanding. So we wouldn't normally be worried that Ark's selling would crush Tesla's share price. But Ark and Wood are famous... As investors watch Tesla's most famous hyper-bull selling shares instead of buying dips, they'll start to wonder if vision and crazy share-price projections are really an investment strategy. Such investors might conclude Tesla is finally too risky to hold. I'm trying hard not to find it telling that Wood's mentor ‒ who is also an investor in Ark ‒ is none other than Bill Hwang. The two have collaborated on research, according to Bloomberg. Both devout Christians, they have conducted Bible-study sessions with employees during the workday. Point is, as the megacap stocks continue caving in one after another, Tesla is virtually guaranteed to be among them eventually... Right this minute, we could be nearing the point of no return, and entering into a second wave of selling that could make the start of this year look tame. The megacap superstars of the last decade will start caving in... Folks will start realizing that not all dips are buying opportunities, and then we could have a real bear market on our hands. All the garbage stocks have been crushed (except Tesla, of course). The only thing left to sell is the megacap no-brainers that virtually nobody has believed could get crushed... which most think includes Tesla, of course. Facebook owner Meta Platforms (FB) fell 26% on February 3, 2022 ‒ its biggest one-day drop ever ‒ after forecasting weaker-than-expected revenue, which it blamed on a change in Apple's iOS operating system... The stock was down another 26% through Wednesday and rebounded yesterday. It's trading about 46% below its September 2021 peak. Netflix (NFLX) fell 35% on April 20 after reporting the loss of 200,000 subscribers. It's down 73% since peaking in November. After markets closed yesterday, Apple and Amazon (AMZN) both reported disappointing results... Apple was down 3.6% in after-hours trading, and Amazon fell 9.3%. Both have seen maximum drawdowns of just 17% since Apple announced its earnings on January 3 and Amazon did so on July 8. So they've held up well so far, but maybe this is where they both start to disappoint investors, as all "no brainer" stocks do eventually. Will Tesla be the next Meta and Netflix... falling 35% in a single day? You won't catch me trying to make that (or any other) prediction. But the stock could unravel fast, and you don't want to be in it when that happens. And I promise you. It'll definitely unravel one day. This could be it... the great unraveling... the honest-to-goodness moment when investors panic and hit the "sell" button...
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New 52-week highs (as of 4/28/22): Black Stone Minerals (BSM), Suncor Energy (SU), and Waste Management (WM). In today's mailbag, more discussion about inflation, including the latest data reported today... Do you have a comment or question? E-mail us at feedback@stansberryresearch.com. We'll share them next week. "The biggest fear about inflation today is not so much the increasing costs but knowing that the dolts in Washington will continue to mislead us about the level of inflation using altered figures. For now, I ignore the core inflation, i.e., CPI numbers, and watch more closely the Producer Price Index ("PPI"). The PPI [which measures producer prices and is up 11% year-over-year as of March] will eventually trickle down to consumers... "Perhaps a greater quandary is why gold is not responding to this inflation snowball. More and more I feel like the Mad Magazine jester... What, me worry?" – Stansberry Alliance member Ralph B. Corey McLaughlin comment: Thanks for the note, Ralph. First off, keep the faith on gold. It's doing its job even without eye-popping gains. It's one of the few things that's risen in value this year... up 6%, including 1% today, which is pretty good with stocks and bonds both down double-digits in 2022. And great call on the PPI. It's a useful indicator for everyone who is tracking the inflation story to follow, and in March it hit its highest reading since the Bureau of Labor Statistics started publishing the measurement in 2010. Our Stansberry NewsWire editor C. Scott Garliss explained what PPI accounts for in a report about the record highs last month. As he wrote... PPI measures the input costs for manufacturers producing finished goods. When demand for those input materials increases and becomes scarce, prices go up, and the opposite is true when demand falls. When PPI is steadily rising, it can be an indicator of increasing costs for consumers. If a company has to pay more to build its products, it will typically pass those costs along to consumers to maintain profit margins. The data tells us the rate of increase for manufacturers' costs is going up. And despite difficult comparisons versus last year, the acceleration isn't letting up. Take a look at the chart below... As Scott wrote, this data supports the Federal Reserve's argument for continuing to raise interest rates – and borrowing costs throughout the economy – at its next policy meeting next week in an effort to "tame" inflation. For what it's worth, so does the latest Personal Consumption Expenditures ("PCE") reading – the Fed's preferred inflation gauge – which came out this morning. It measured March data and showed a 6.6% annual gain and a 1% gain since February, indicating inflation still hasn't peaked as of one month ago. Good investing, Dan Ferris
Eagle Point, Oregon
April 29, 2022
Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios | Stock | Buy Date | Return | Publication | Analyst | MSFT
Microsoft | 11/11/10 | 1,037.3% | Retirement Millionaire | Doc | ETH/USD
Ethereum | 02/21/20 | 969.8% | Stansberry Innovations Report | Wade | MSFT
Microsoft | 02/10/12 | 893.0% | Stansberry's Investment Advisory | Porter | ADP
Automatic Data | 10/09/08 | 806.9% | Extreme Value | Ferris | HSY
Hershey | 12/07/07 | 538.3% | Stansberry's Investment Advisory | Porter | BRK.B
Berkshire Hathaway | 04/01/09 | 487.4% | Retirement Millionaire | Doc | AFG
American Financial | 10/12/12 | 424.8% | Stansberry's Investment Advisory | Porter | BTC/USD
Bitcoin | 01/16/20 | 350.3% | Stansberry Innovations Report | Wade | BTC/USD
Bitcoin | 05/05/20 | 347.4% | DailyWealth Trader | Morris | ALS-T
Altius Minerals | 02/16/09 | 310.9% | Extreme Value | Ferris | Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals | | 2 | Retirement Millionaire | Doc | | 2 | Stansberry Innovations Report | Wade | | 3 | Stansberry's Investment Advisory | Porter | | 2 | Extreme Value | Ferris | | 1 | DailyWealth Trader | Morris |
Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio | Stock | Buy Date | Return | Publication | Analyst | ONE-USD
Harmony | 12/16/19 | 2,094.0% | Crypto Capital | Wade | ETH/USD
Ethereum | 12/07/18 | 2,044.7% | Crypto Capital | Wade | POLY/USD
Polymath | 05/19/20 | 1,152.6% | Crypto Capital | Wade | BTC/USD
Bitcoin | 11/27/18 | 961.9% | Crypto Capital | Wade | MATIC/USD
Polygon | 02/25/21 | 957.7% | Crypto Capital | Wade | Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio.
Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios | Investment | Symbol | Duration | Gain | Publication | Analyst | | Band Protocol crypto | | 0.32 years | 1,169% | Crypto Capital | Wade | | Terra crypto | | 0.41 years | 1,164% | Crypto Capital | Wade | | Inovio Pharma.^ | INO | 1.01 years | 1,139% | Venture Tech. | Lashmet | | Seabridge Gold^ | SA | 4.20 years | 995% | Sjug Conf. | Sjuggerud | | Frontier crypto | | 0.08 years | 978% | Crypto Capital | Wade | | Binance Coin crypto | | 1.78 years | 963% | Crypto Capital | Wade | | Nvidia^ | NVDA | 4.12 years | 777% | Venture Tech. | Lashmet | | Intellia Therapeutics | NTLA | 1.95 years | 775% | Amer. Moonshots | Root | | Rite Aid 8.5% bond | | 4.97 years | 773% | True Income | Williams | | PNC Warrants | PNC-WS | 6.16 years | 709% | True Wealth Sys. | Sjuggerud | ^ These gains occurred with a partial position in the respective stocks. | 
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