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Ever Grande

When I shut down my Bloomberg and exited the Mayfair office of my hedge fund for the final time a few years ago, one of the last prices I saw flickering on my screen was the bond price of a Chinese real estate developer called Evergrande. The price was part of my ‘canary’ screen. Evergrande is the biggest player in the biggest industry sector in one of the biggest economies in the world. It is also very highly leveraged. So when its bond price falls, it’s useful to take note. 

This week, its bond price fell. 

It’s not the first time it’s happened, which is why it may not have made it to the front pages of the newspapers. But that doesn’t make it any less significant. Its balance sheet is bigger now, at $356 billion, and it is the largest issuer of dollar-denominated Chinese junk bonds. The fall in Evergrande’s bonds was sparked by news that one of the Chinese banks had frozen some of its deposits. Piling on the woe came news that it had been asked to suspend new home sales in the city of Shaoyang due to a lack of funds in its accounts and that potential buyers were being refused mortgages by some Hong Kong banks. One line of its bonds fell to 49 cents on the dollar. 

China is a country full of paradoxes and one of them sits at the heart of the residential real estate market where Evergrande operates. Lest you forget, China is a communist state, and all land is owned by the state. In order to solve a funding problem, early reformers came up with a fudge. Zhao Ziyang, a former premier, describes in his memoir how he was introduced to the idea of selling land to raise funds:

It was perhaps 1985 or 1986 when I talked to Huo Yingdong [a Hong Kong tycoon better known as Henry Fok] and mentioned that we didn’t have funds for urban development. He asked me, “If you have land, how can you not have money?”

I thought this was a strange comment. Having land was one issue; a lack of funds was another. What did the two have to do with one another? He said, “If municipalities have land, they should get permission to lease some of it, bring in some income, and let other people develop the land.”

Indeed, I had noticed how in Hong Kong buildings and streets were constructed quickly. A place could be quickly transformed. But for us it was very difficult.

In 1988, the government changed the constitution to allow rights to use land – not to own, to use – to be bought and sold under long term leases. Residential use typically comes with a seventy year lease; commercial use with fifty years. No-one really expects land to revert to the government after that time, but the fudge serves a purpose. In the seven years between 2009 and 2015, the Chinese government collected 22 trillion yuan from selling land. By privatising this state asset, the government has been able to fund massive infrastructure investment on a scale that the taxpayer wouldn’t have been able to bear. 

The constitutional change paved the way for a commercial market to take root around residential property. But the real turning point came later, in 1998. At the time, most city dwellers lived in housing provided by their state employer. The problem was that state employers lacked the motivation and resources to build housing on sufficient scale. In 1998, the government introduced urban housing reforms that removed the obligation of employers to provide housing. People were encouraged to buy their homes from their employers, who sold them at heavily discounted prices. A massive transfer of wealth took place between the state and its people. That transfer of wealth seeded the growth in the residential housing market as homeowners reinvested their gains back in the market by buying bigger and better homes. 

(Ironically, having not been interested in investing in housing themselves prior to 1998, many state enterprises got heavily involved in real estate ten years later as the returns exceeded what they could get in their core business. In 2010, the central government mandated state companies to divest their property arms and return their attention to their core businesses.)

My interest with Chinese property developers began in the mid 2000s, soon after I had started at my hedge fund. Several developers had come to the market and I would visit them on trips to China. Plastic shoe covers on my feet so as not to spoil the newly laid floors, I would tour the sweeping developments springing up around cities like Beijing, Shanghai and Guangzhou. 

The investment thesis was simple: China was urbanising fast and that drove an insatiable demand for residential real estate. Developers could buy land from local government and turn it into aspirational accommodation at 25% margins. Back in my hotel room I would fire up my laptop and plug in values for the inventory of land and unsold homes sitting on developers’ balance sheets to gauge what their stock was worth. 

It didn’t take long for the market to get frothy. Demand for housing came not just for its utility but also for its investment features. Interest rates were kept exceptionally low and easy money boosted investment demand for housing. Since 2002, housing prices in China’s tier 1 cities, like the ones I visited, have risen more than six-fold (which compares with an 80% overall national increase in US housing prices between 2000 and 2005). With the market this frothy, analysts began plugging into their laptops the value of land developers hadn’t even acquired yet, but might. 

It was into that environment that Evergrande was listed, at the end of 2009. It was the biggest residential real estate developer of them all. At the end of the year, it had a total land reserve of 55 million square metres, giving it years of runway compared with the 5.6 million square metres of gross floor area (GFA) it sold that year. The company’s strategy was built around scale, affordability, turnover and brand. It adopted a standardised approach to its operating procedures. One of the bankers on the deal called Evergrande the McDonald’s of the Chinese residential property market. Its stock was 46 times oversubscribed in the retail tranche and it popped 34% on its first day of trading. 

Successful listing of the Group set the milestone in the corporate brand building. From the beginning of 2009, the Group quickly leveraged the gradual heating up of the property market, and immediately adjusted the business strategy, obtaining excellent results of RMB30.3 billion in contracted sales. Besides, the Group captured the best opportunity of the capital market and was successfully listed on the Main Board of the Stock Exchange on 5 November 2009. The Evergrande brand became a household name in China, the recognition and reputation of the brand reached an unprecedented level. [2010 Annual Report]

The IPO also helped Evergrande clean up its balance sheet. In the years prior to IPO it had operated with very high levels of debt relative to equity. Following its IPO, it sat on a net cash position.

That wasn’t to last. The company immediately geared up and started to expand in a literal land grab. The year after IPO, it grew its land bank by 75%, investing in a pipeline of developments across 62 cities, up from 25 the previous year. It took scale to a new level, building mini-cities rather than just apartment blocks that could accommodate as many as 65,000 people on a single site. The company raised cash from pre-sales, signing up prospective buyers years before completion. And it also raised debt: net gearing (net debt as a percentage of shareholders’ equity) rose to 52% in the year after IPO.

A couple of years later the company attracted the attention of short sellers at Citron Research, the team that would later give up short selling in the aftermath of the GameStop affair. They highlighted the risks creeping into Evergrande’s balance sheet. The company had grown its assets five times faster than peers in the past five years and was burning cash. Citron’s report made a number of other accusations about the company and its chairman, and Andrew Left, Citron’s founder, was eventually fined for market manipulation on the basis his report had been somewhere between negligent and reckless. But he was right about one thing: Evergrande was burning cash. 

In the ten years leading up to 2020, Evergrande has overseen RMB230 billion in cash outflows from operations. Its net debt currently stands at RMB536 billion, reflecting a 153% net gearing ratio. Excluding the revaluation of investment properties, that ratio is over 170%. Add in large accounts payable obligations (RMB829 billion) and the company’s liabilities are even larger. Much of this debt has been channeled into land acquisitions; the company now owns 231 million square metres of land across 234 cities (equivalent to four Manhattans). Over the past few years the company has been funding at rates of 8-11% via dollar-denominated bonds, but even these bonds were trading at higher yields before the recent bond price collapse.  

Over the years, the government has intervened numerous times to influence the residential real estate market in China. Using tax, mortgage rates, mortgage quotas, controls on secondary market listing prices and other tools, it has attempted to steer the residential property market between boom and bust. More recently it imposed some ‘red lines’ on property developers that require them to control their debt levels. Evergrande remains firmly in the ‘red group’. 1

Some people liken Evergrande to a giant pyramid scheme. There are periods in the cycle where real estate isn’t a cash flow business, it’s an asset appreciation business. As long as debt can be serviced, that can work, but problems emerge when it can’t. To address this, Evergrande has pursued two strategies.

First, it diversified into other businesses. It’s had a football team since 2010 which has gained success under coaches Marcello Lippi and Luiz Felipe Scolari. It operates theme parks, is involved in grain, dairy and mineral water businesses and has a cultural entertainment division. Its electric vehicle business is now worth $26 billion (down from $93 billion in April).

Second, Evergrande has made itself too big to fail – literally ever grande. Real estate investment is a very important driver of the overall Chinese economy. It has grown from a 5% share of GDP in 1995 to over 13% in 2019, of which over 70% is residential. Incorporating industries downstream and upstream of real estate, the sector makes up 29% of Chinese GDP (comparable internationally only to pre-crisis Spain and Ireland). 

Banks are particularly co-joined. Real estate loans make up around 28% of their loans and 40% of new loans. As a robust source of collateral, banks have an incentive to extend more loans to firms with land holdings. Incentives are similarly skewed in local government, where construction activity represents measurable economic output against which officials are assessed. Zhao’s economic realisation still drives local government budgets today. 

Because it’s too big to fail, Evergrande’s demise may be less a product of its financial position and more its political position. Recently, China’s financial regulator instructed banks to conduct a stress test around an Evergrande failure so the endgame could be getting close. How they choose to allocate losses will determine whether Evergrande bonds bleed out of the canary screen and onto the main screen. 2

Thanks to Byrne Hobart for pushing Evergrande up my agenda and for flagging Ken Rogoff’s recent paper with Yuanchen Yang on the Chinese real estate market.

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More Net InterestGreensill: Simply not Fintechery

The UK Parliamentary Treasury Select Committee released its report, Lessons from Greensill Capital this week. Our original write-up on Greensill was flagged at the hearings; the Committee now presents its own conclusions. In them, the Committee picks up on the red flag we raised about Greensill using an ‘appointed representative’ regime to meet regulatory requirements. Rather than seek direct authority, Greensill hid under the umbrella of a regulated firm called Mirabella Advisers. The Committee recommends that the Financial Conduct Authority and Treasury should consider reforms to the appointed representatives regime, with a view to limiting its scope and reducing opportunities for abuse of the system like this one.

The Committee also dismisses Lex Greensill’s attempt to deflect blame to the insurance industry. At his hearing, he said, “one of the real lessons from the failure of my firm and the impact it has had on the 1,200 employees that we had, is that a heavy reliance on trade credit insurance is dangerous. I urge you and the Committee to consider the manner in which that is regulated, because it is fundamentally [procyclical] in its behaviour.” The Committee is blunt in its response: “We do not think the failure of Greensill leads to any particularly strong evidence about procyclicality in the regulation of insurance markets.”

One other thing that stands out from the report is the cover that some companies receive from their association with the buzz around fintech. The Committee writes,

Mr Cameron may have been hoping to tap into an ongoing interest of the Government in supporting fintech. In 2014, George Osborne, then Chancellor of the Exchequer, stated at the launch of a new trade body for fintech that “I’m here today because I want the UK the lead the world in developing Fin Tech.” Lord Macpherson told us that “Every Government likes to be associated with success stories, such as the dotcom boom. Fintech is definitely the flavour of the month.”

Greensill paraded as a fintech company, but it wasn’t one. As Lord Macpherson told the Committee: “this simply was not fintechery.” Greensill is not alone here; many companies enjoy privileges they may not otherwise attain, through their characterization as fintechs. 

Circle

The noise around stablecoins is heating up now that they have over $100 billion of market cap and policymakers are taking note. We touched on the big ones here. Aside from continued questions over Tether’s balance sheet (see note 2 below), Circle has released disclosures ahead of its SPAC merger.

Circle management projects that the volume of USDC (its stablecoin) in circulation will grow from $35 billion in 2021 to $194 billion in 2023. It anticipates generating interest income on these balances of $40 million in 2021, rising to $196 million in 2023 (or $21 million to $88 million net of income shares and transaction costs). A rise in interest rates will boost these projections as Circle would be able to extract a higher yield on cash. A 100 basis point rise in interest rates across the yield curve would be worth an extra $470 million to Circle in 2022 and $1,110 million in 2023 before income sharing and transaction costs.

The company hints that it may seek out a bank license. It states that substantial investment in the business is required for a number of reasons, one of which is “regulatory capital required for appropriate license, operational and business model expansion.” Its interest rate sensitivity would make it one of the most asset sensitive banks in the sector.

Equity Research

As a former equity research analyst, a current newsletter writer and an intermittent consumer of investment research, the investment research industry is one I take a deep interest in. It was the subject of a Net Interest piece last year: The Cautionary Tale of Equity Research.

Earlier this month, Integrity Research completed a survey of asset managers to measure spend in the industry. They estimate that asset managers will spend $13.66 billion on investment research this year, down 4.5% on last year and almost 20% down from the peak ($19.98 billion) in 2015. 

Most of the spend gets channeled to the big sell-side firms, although independent research providers are expected to pick up $2.1 billion (a lower decline). The biggest chunk of this independent piece is primary research, which is projected to grow.

Classic sell-side maintenance research has been in decline for many years, but the budgets are still there for investors to reward value-added research. Last week, Byrne Hobart discussed newsletters that can move markets. The ones he highlights turnover a fraction of the $13.66 billion institutions spend on research. Either they are underpriced, or the price of investment research has further to fall.

Finally

It’s hot in London! So I may take some time off over August. But if you have any ideas, opportunities, proposals, observations, or anything else you want to talk about, do get in touch by replying to the email or via Twitter or LinkedIn.

1

Targets are: net debt/equity ratio below 100% by 30 June 2021 (company was at 153% at end 2020); cash/short-term debt above 1x by 31 December 2021 (company was at 0.47x at end 2020) and liability/asset ratio below 70% by 31 December 2022 (company was at 83% at end 2020).

2

@TheLastBearSta1 has an interesting theory that Tether (which we discussed here) may have invested customer funds in Evergrande commercial paper. Tether owns just under $30 billion of commercial paper, yet trading desks in Europe and New York have not had dealings with it. Evergrande, meanwhile, is one of the biggest issuers of commercial paper, with $32 billion outstanding at the end of 2020 (although consolidated number could be higher). 

Pop quiz: What do Norway, Nestlé, and NASCAR have in common?

Or what about Leonardo DiCaprio, President Biden… and JetBlue?

They’re all among the companies, celebrities, cities, and countries that have made commitments to curb their contributions to climate change.

Or eliminate them entirely.

And they’re all using the exact same tactic to do so.

It’s one you’ve probably never heard of…

In fact, it’s a commodity so new that it doesn’t even have an official market yet.

There are no quotes or tickers on Yahoo! Finance, Financial Post or Google Finance …Pricing is almost impossible to find.

But it’s on the verge of erupting onto the world stage.

In a few years, even your Uber driver—will know everything about it.

I’m Talking About Carbon Credits

From here on out, the carbon credit news cycle will accelerate.

And it’s going to happen at a breakneck pace.

The tidal wave of government and corporate money that will create this change will put NASA and every other government body to shame.

It’s going to create enormous, long-lasting change in how investing works.

• This is the type of opportunity that—like clockwork—comes along once in a generation.

You are getting a front-row seat to one of the most incredible emerging opportunities you will ever see.

Once you’re up to speed on how the largest entities in the world plan on fighting global warming…

You’ll be set to profit from them in a big way.

So, let’s get you up to speed on the basics.

I guarantee you will be smarter than any of your friends and colleagues by the end of this missive.

How are Carbon Credits Created?

Carbon credits are generated through emission reduction or direct emission removal.

For example: carbon credits can be earned for a renewable power plant that is used to displace coal fired electricity generation.

• For each tonne of CO2 which is displaced, a credit is earned.

Carbon credits can also be generated through removal of greenhouse gases.

This is known as carbon sequestration.

Carbon removal comes from projects such as forest restoration and avoided deforestation. These are grouped as “nature-based solutions”.

Or credits are created through physical removal of carbon from the atmosphere through technology known as:

• Carbon Capture & Store or
• Bioenergy combined with Carbon Capture Store (known as “negative emission technologies”)

Carbon offset projects which sequester carbon (such as reforestation or avoided deforestation) are a function of opportunity cost.

This means the alternative use for the land is what partially drives the value of the offset.

Land which could be used for agriculture or livestock is therefore a function of crop and livestock prices.

The Trove Intelligence Global Carbon Credit Supply Model indicates that prices in the voluntary market will need to rise by an order of several magnitudes…

To continue to incentivize carbon project developers.

Book a Flight

If you try to look at pricing of flights on google or any online portal, under the price of the flight you will now see the amount of carbon emissions that your one seat is responsible for.

This is done for two reasons…

First, to start making customers aware of the amount of carbon emissions they are responsible for their flight.

Second, it’s to condition customers such that when there is a cost now to negate those emissions, the customers know the reason for the cost.

Carbon Credits are an Emerging International Marketplace

The beauty about the carbon market is that it is global.

Greenhouse gases migrate and emissions from one nation end up in the skies of another.

It requires global acceptance and adoption to solving the problem.

• In the Voluntary Carbon credit Market (VCM), a credit produced in 1 country can be applied against emissions of a company located in another part of the world.

For example, the Bonobo Peace Forest in the Democratic Republic of Congo is one of the largest reforestation projects in the world.

Credits earned from this project can be applied against emissions of a company domiciled in Europe or North America.

This creates an incredible opportunity for an international marketplace for credits.

Below is a table which shows the total value of transactions by offset type in the Voluntary market for the past 4 years.

• Total transaction volume in 2020 is estimated to be over 3 times the volume it was in 2017…

And this is exactly what makes it such an exciting place to invest…

All of this is building up a pressure chamber of demand in the VCM that has not yet reached a tipping point.

When it does, there’s a lot of upside to be had.

Because It’s the perfect setup for a long squeeze in the VCM:

1. Rising emissions from a growing population.
2. Tightening government mandates on carbon emissions.
3. Increasing consumer demand for environmental responsible.
4. More transparency in emissions reporting.
5. Corporate buy-in at every level, even from non-emitting companies.

All together, this is going to result in a desperate scramble for high-quality carbon offsets, of which there are few.

If you thought the rise in the price of lumber was crazy in early 2021…

Just wait until you see the VCM market in five years.

Voluntary Carbon Market Pricing

The bad news is that since VCM is such an undeveloped market, pricing information is hard to obtain.

In fact, the term “voluntary carbon market” is somewhat inaccurate. The market itself purely ad hoc.

This is such a new commodity that there is no real, actively traded market.

And that’s great news.

Because it means very few people are actually investing in the market right now.

This isn’t even hitting a blip compared to Gold or Bitcoin on Google Trends…

• As an investor, you know that the time to make your bets is when NO ONE else is looking at a sector.

To start shedding light on what carbon offsets could be worth, let’s start by looking at the price floor.

Carbon offsets produced through means such as reforestation have an opportunity cost.

Breakneck Price Acceleration

Based on this, the Trove Intelligence Global Carbon Credit Supply Model indicates that prices in the Voluntary Carbon Market (VCM) will need to rise to continue to incentivize carbon project developers.

Furthermore, how credits are produced gives them different base values.

The table below shows the variation in global carbon credit pricing across different types of carbon offsets in the voluntary market for 2017–2019.

In 2021, prices in the voluntary market have been hot.

Prices have regularly been quoted above $7.50 per tonne and as high as $15 per tonne for high-quality credits.

Catalysts & Opportunities in the Carbon Markets

They key catalysts for the carbon market are…

1. Government-led initiatives to promote the carbon marketplace.

These include establishing a global carbon price floor, heavily enforcing the achievement of NDCs, and regulating investment in carbon removal technology.

All of these are heavily bullish for carbon offset prices.

2. Corporate-led net neutral and net zero pledges.

Expect to see corporations race to become net zero so that they can remain competitive in the marketplace.

And then watch for additional demand from erasing historical emissions.

3. Demand-driven development of reporting and exchanges.

As outlined, this will include Scopes 1, 2, and 3 emissions. In the near future, it will also require highly liquid, transparent exchanges for both the compliance and VCM.

This has always been the trajectory of any new commodity.

Only this time, you know about it before it has achieved anything close to equilibrium.

The Carbon Market is an Incredible Asymmetric Bet

There’s so little downside—climate change isn’t going anywhere—and incredible upside.

Early adopters, project generators, and holders of carbon credits and offsets can earn substantial returns over the coming years.

Very few people know about this brand-new commodity sector… yet.

But everyone understands it immediately once exposed.

And everyone who understands… will invest, because it makes sense and its cheap to do so now.

Of course, you can stay on the sidelines if you want. But before you make that decision, recall one of Warren Buffett’s most famous quotes.

It goes like this:

“Someone’s sitting in the shade today because
someone planted a tree a long time ago.”

Those trees are (literally) being planted today—all across the world.

And I’m here to help you make a profit from it.

To find the companies best positioned to make money from the hundred-trillion-dollar war, you’ll want to become a member of Katusa’s Resource Opportunities.

In my monthly newsletter, I’ll be publishing the best carbon investments that come across my desk.

If you want to be among the first—and only—to know, sign up today.

Regards,

Marin Katusa

The post The Adoption Rate of this Obscure Commodity Will be the Fastest of All Commodities appeared first on Katusa Research.

Welcome to another issue of Net Interest, my newsletter on financial sector themes. If you’re reading this but haven’t yet signed up, join 21,000 others and get Net Interest delivered to your inbox every Friday by subscribing here 👇

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Revolution in the Air

As a finance newsletter, we touch on fintech here a lot. We’ve looked in detail at a host of new entrants into financial services – Wise, Tinkoff, Paytm, Robinhood – all of them attempting to disrupt the traditional way of doing finance. This week, we turn our attention to one I’m particularly close to: Revolut.

I first came across Revolut in 2016 when an early investor showed me around its app and the backend dashboard he had access to. I used to travel a lot and the opportunity to access cheap foreign exchange via a payment card was very appealing. I signed up as a customer and – as the app informs me today – went on to spend £6,438 on my travels through the remainder of the year. 

I knew that if I found the app useful, others would too; I was keen to invest. A short while later the company was out raising its series A and I got the opportunity to participate. 

This week, Revolut became the UK’s most valuable private tech company of all time. It announced a series E fundraising, valuing it at $33 billion. That puts it roughly on a par with NatWest Group, the bank where I had my first account as a kid. 

The massive growth of Revolut is clearly very exciting for me as an investor. But it also raises questions. Last year, NatWest did £11 billion of revenue; Revolut did £261 million. NatWest is on track to make £2.5 billion of profit; Revolut may or may not make a profit. Revolut has a few more customers than NatWest – 16 million versus 12.5 million – but what are those customers worth?

It’s time to sharpen my pencil and update my analysis of Revolut.

Personal Money Cloud

Revolut was founded at the end of 2013 by CEO, Nikolay Storonsky and his co-founder Vlad Yatsenko. Like the founders at Transferwise, discussed here a few weeks ago, the pair were fed up with the charges banks levied on foreign currency transfers. While Transferwise initially focused on making it cheaper to send money back home, Revolut focused on making it cheaper to spend money abroad. Storonsky recalls how he suffered around $2,000 of hidden foreign exchange transaction fees on a trip to the US from his home in the UK.

However you cut it, both markets are large. Revolut estimates that combined, the markets are worth £190 billion in the UK and Europe and ten times that globally. In the world before Covid, people used to travel abroad a lot and they spent money when they went. Revolut estimated that in its initial target market of the UK, more than three quarters of the population went away in the twelve months prior to launch, spending an average £220 per trip. The company’s proposition was that it could save these people from having to pay bank fees on their holiday spend. 

The focus on spend meant that Revolut needed to launch with a payment card. In July 2015, it came to market with a prepaid Mastercard issued by Paysafe. The card allowed customers to hold funds in GBP, Euro and USD, and to spend online and in-store with a globally accepted multi-currency MasterCard linked to their Revolut account. A virtual card was available for online purchases as soon as the account was set up and a physical card was dispatched shortly afterwards. Customer funds would be ring-fenced in accounts at Barclays. 

At that stage, Revolut was just an app – the infrastructure was provided by others like Paysafe, Mastercard and Barclays. But as an app, it offered an effortless and well-designed solution to multiple consumer pain points: transferring money across currencies, spending money abroad and tracking transactions. 

The revenue model was to exploit the spend side of the business to capture a share of the merchant interchange fees earned when customers use their cards. Initially, the company offered currency exchange and money transfers up to £500 for free. Later, it extended the terms of free currency exchange. However, the economics didn’t really add up. In Europe, debit interchange fees are capped at around 0.20% of the value of the transaction – not enough to cover the cost of free foreign exchange. So Revolut was on the hunt for new revenue streams. 

The original model had the hunt fulfilled by subscription fees. Revolut’s seed pitch deck projected £5.7 million of revenue three years after launch, of which over £5 million would come from subscriptions – enough for it to make a profit. It estimated that around 30% of customers would pay around £165 a year in subscriptions. Sure enough, it did launch a subscription product right about then. However, by this time, the strategy had shifted; the important thing wasn’t to hunt for revenue streams, it was to hunt for more customers. 

Global Money App

In its seed deck, Revolut projected 140,000 customers three years out. It got there in nine months. Through viral referral campaigns, Revolut was able to pick up customers very quickly. Media helped: the company featured in the press and on TV. It also moved into new markets early, with 10% of its customers coming from France very soon after it launched there.

Today, the company is in 35 countries and has 16 million customers. It’s a big number, but many of its accounts are likely to be dormant. Third party data (Apptopia) suggests that in June, the app had 3.4 million monthly users and 1.3 million daily users globally.

Revolut’s biggest market remains the UK (19% of monthly average users) where in 2020 it booked 88% of its revenue. Other big markets include Ireland (12% of monthly average users) where 1 in 2 adults is a customer; Romania (10% of monthly average users); and France (7.5%).

Revolut launched in the US in March 2020, and had seen 200,000 customers sign up by year end; total downloads are now running at more than twice that, but monthly average users lag at around 135,000 as of June. Its target market in the US is the 40-45 million people who aren’t originally from the US, who may have greater demand for a multi-currency account and are more likely to want to send money abroad. 

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The rapid growth in customer numbers has led to some growing pains at Revolut. Customers complain about funds getting frozen and accounts being closed as anti-money laundering systems pick up too many false positives while customer service is insufficiently resourced to pick up the pieces. In the first nine months of 2020, Resolver, an online complaints service, received almost 4,000 complaints about Revolut, after getting nearly 2,500 for the whole year before.

In addition, in 2019, Wired painted a picture of a toxic work culture where staff turnover was rife. That issue was tackled with a governance overhaul that led to the arrival of several new non-executive directors. The customer issue still rankles with many. 

Nevertheless, with customers come revenues, albeit still of the capped interchange variety and not sufficient to support the business. By the time of the series A round in 2016, the 2017 revenue projection had been upgraded from £5.7 million to £10.0 million. The actual outturn was £12.8 million. But yet again, profits were pushed out. The series A deck pushed breakeven back a year to 2018; three years on, the company has yet to report a profit over a sustained twelve month period. 

It claims to be getting close, though. In 4Q2020, Revolut reported an adjusted operating loss of £6 million, underpinned by profits in November and December. Subscriptions provide a ballast. In the UK, the company offers three tiers of subscription: plus (£30 per year), premium (£72 per year) and metal (£120 per year). They offer varying limits on no-fee ATM withdrawals, no fee currency exchange (the lower tier is limited to £1,000 per month), and the number of free international payments. Last year, subscriptions contributed £75 million to total revenue, with 14% of new customers taking a paid subscription. 

The biggest revenue upside is from new products. Revolut has been a machine at rolling out new products. In 2020 alone, it launched 15 new products and innovations for retail customers. These include interest-bearing savings vaults, open banking, gold and silver trading, junior accounts, cash gifting, rewards, bill sharing, subscription management tools, salary advance and new crypto tokens.

According to the CEO, shipping products fast is important:

“It’s our secret weapon, right, it’s how we compete with other companies. Because ultimately all… businesses, what they do, they give products to people and then the faster you can ship products, the faster you can iterate on products, so the more chances that you will win. As a result, [in the] last 5-6 years, we just perfected the speed – and we pay so much attention to speed and quality of the product – because ultimately, product wins.”

In its rush to deliver product, the company is not embarrassed to mimic others. Its salary advance product is based on a product offered by companies such as Salary Finance, Wagestream and Level Financial Technology [disclosure: I am an investor in Level]. It is in the process of rolling out social trading similar to what is offered by eToro (discussed here). In the future, it has ambitions to pull together its retail ecosystem with its business ecosystem (500,000 customers) to allow businesses and consumers to transact without intermediaries. Sounds a bit like Square. 

a.image2.image-link.image2-825-1456 { padding-bottom: 56.66208791208791%; padding-bottom: min(56.66208791208791%, 825px); width: 100%; height: 0; } a.image2.image-link.image2-825-1456 img { max-width: 1456px; max-height: 825px; } Source: White Sight via Aika’s [very good] Newsletter

The machine-like product rollout was just as well because the decline in travel during the pandemic was devastating for Revolut’s legacy business. International payment volumes declined by two-thirds compared with pre-Covid levels, leading to a 12% decline in overall revenues between the first and second quarters. Fortunately, stock and later crypto trading picked up the slack. For the full year, card and interchange revenues were up 28% to £95 million, but fees from foreign exchange and wealth were up 150% to £80 million.

Revenue per customer reached around £36 on an annualised basis in the first quarter of this year, up from around £21 for the full year 2020. Similar to Robinhood, which we discussed last week, the numbers are small. In US Dollar terms, the first quarter revenue run rate is equivalent to $50 per customer. This compares with around $90 per customer at US challenger bank Chime (2020) and $137 at Robinhood (1Q21). At incumbent banks, the numbers are larger. NatWest generates around $420 of revenue per customer and in the US, Bank of America and Chase generate over $500 per customer. 

The difference is of course that challengers can in principle scale at low cost. Revolut is still growing its customer base rapidly through referral, although it’s unclear what the return on a customer acquisition is when the referral incentive is £50 (even if the new customer does have to make three transactions to qualify). In 2020, the gross margin of the business improved from 29% in the first quarter to 61% in the fourth. Underneath gross profit, there’s £226 million of administrative expenses; right now that expense base is growing more quickly than revenues as the company invests in expansion, but at some point that will slow. Indeed, the company already employs more compliance personnel per head than major UK banks, so it may not need to invest as much there. Based on LinkedIn data, 16% of its headcount is employed in compliance compared with 8-9% at larger UK banks. 

Global Financial Superapp

Like other consumer fintech companies, Revolut has converged on the super app strategy. “One app for all things money,” is the lede on the company website. “We are building the world’s first truly global financial superapp.” Unlike others, though, it doesn’t have a core profitable business. Chime has unregulated debit interchange – it doesn’t suffer the cap that Revolut does in Europe. Robinhood has payment for order flow. Tinkoff in Russia has credit card lending. 

Revolut has two things going for it: it wants to be global and, unlike some of the others, it wants to be a bank. 

“Our vision is we want to build a global bank… sooner or later, someone will do it, and we want it to be us.” [Source]

Revolut is entering new markets at a rate of 5-10 a year. It typically spends up to two years on the ground before launch and invests between $10 million and $20 million in the process. Revolut reckons it can outgrow local competitors in the majority of countries it enters once it turns on its marketing campaigns.

It’s a tough challenge, though. There’s no real precedent for a global consumer bank. Citi and HSBC both tried, but retrenched from their global ambitions in waves. HSBC recently gave away its French business, but years earlier had given up on its slogan ‘the world’s local bank’. Citi is close to selling its retail banking operations in South Korea as part of its strategy to exit consumer banking in 13 markets across Asia and Europe.

At a recent investor event, the CEO of Tinkoff took a sideswipe at Revolut: “Our model that we’re thinking about at the moment is not a light model, where you skim off a few hundred thousand customers in 20 different markets. That’s not what we’re thinking about.”

Revolut also wants to be a bank. Right now it is regulated as an e-money issuer in the UK, although it has a banking license in Lithuania. It sits on £4.5 billion of customer funds (£310 per customer) which it needs to hold in cash at accounts at authorised financial institutions as a safeguarding mechanism. A banking license would bring three benefits. It would allow Revolut to invest customer funds more broadly, for example by offering loans. It would also provide customers with deposit insurance on their funds (although it’s not clear how much of an obstacle this is to gathering funds; Wise sits on customer funds averaging £2,300 per account without insurance). Finally, a banking license would give Revolut access to central bank facilities. As chairman Martin Gilbert said recently:

“​​The banking license would be pretty advantageous for us … at the moment, one of the big disadvantages we have is we might have £3bn or £4bn on overnight every night on negative interest rates, so you can see the drag on earnings that that has, because we have to safeguard clients money obviously because we’re not a bank.” 

In the US, SoFi is seeking a banking license and has indicated that it could add $200 million to $300 million per year to its baseline EBITDA projections over the next few years. Its business model focuses much more on the lending side than Revolut’s but it reflects the appeal of a banking license.

The downside is of course the cost. Revolut currently has to operate with only £63 million of capital. A banking license would ramp that capital requirement, which is one of the reasons it has just raised $800 million in its series E.  

There’s another downside, which is valuation. In the same interview, chairman Martin Gilbert said, “We don’t want to be perceived as a bank because banks are rated at a far lower rating than a fintech business, so we really do need to keep that advantage of being seen as fast moving and fee based rather than interest based business.”

That’s not something Revolut has to worry about for a while. It just raised capital at a valuation of 74x last twelve months’ revenue; that compares with NatWest at 2.3x. The question now is whether it can extract sufficient profitability from its customers to grow into that valuation.

Wise came to the market in the UK last week with an unbundled approach to financial services – isolate a product and provide it cheaper than the competition, with no cross-subsidisation. Revolut’s bundled model is different. Its newest shareholders, Softbank and Tiger Global, know that the revenues are out there; they are betting that by spraying products across markets, Revolut can capture some of them.

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More Net InterestBuy Now Pay Later

The Buy Now Pay Later market is hotting up with Apple entering the market in partnership with Goldman Sachs. (I have said before that the most formidable competitor in fintech could be Apple + Goldman Sachs.) Increasingly it looks like Buy Now Pay Later could be a feature rather than a business of its own. 

John Street Capital @JohnStCapital$AAPL & $GS are launching a BNPL service known as "Apple Pay Later" enabling Apple Pay users to pay across 4 payments every two weeks or across several months. $V & $GPN annc a similar product in Canada today. This + $PYPL & eventually $SQ make BNPL a feature & not a company

July 13th 2021

36 Retweets224 Likes

A good representation of this is in India, where MobiKwik recently filed to go public. The company started out as a mobile wallet in 2009. It now has 101.37 million registered users. In May 2019, it launched a Buy Now Pay Later product (MobiKwik Zip) that enables users to activate a Rs500 to Rs30,000 credit limit in their wallet which they can draw down, interest-free, in 15-day cycles. At the end of the cycle, the user is required to pay what’s due within five days, failing which late fees are applied (the user also pays a one-time activation fee). 

As at the end of March, MobiKwik had pre-approved 22.25 million users for the product, out of which 741,000 had activated. MobiKwik retains some of the risk (5-15%) but passes most of it on to financial institutions. Its advantage is that merchants are already signed up, via its wallet, and it has good data on its consumers via their purchase history. 

In the year to March 2021, the Buy Now Pay Later product contributed 21% to total revenue. A part of the investment case behind the IPO is that this will grow; it’s likely a feature other wallet providers will replicate. 

Loan Growth

A major issue overhanging US banks since the beginning of the pandemic has been the absence of loan growth. JPMorgan’s consumer and business loans were down 3% year-on-year in the second quarter as customer cash balances remain elevated leading to higher prepayments in mortgage and lower card outstandings. But the company is optimistic loan growth will resume. On his earnings call, the CFO said, “we are quite optimistic that the current spend trends will convert into resumption of loan growth through the end of this year and into next.” Bank of America provided a useful chart that backs up the assertion. It shows daily loan balances, with the trough having passed in March. Lending companies will be hopeful of a strong rebound in loan growth in the second half. 

a.image2.image-link.image2-308-500 { padding-bottom: 61.6%; padding-bottom: min(61.6%, 308px); width: 100%; height: 0; } a.image2.image-link.image2-308-500 img { max-width: 500px; max-height: 308px; } Source: Bank of AmericaAIG/Blackstone

Back in 1998, AIG took a 7% stake in Blackstone. Ten years later, AIG was in financial trouble and had to be bailed out by the US Government. Blackstone’s price was severely affected by the crisis, so the stake couldn’t be used to raise cash, but a few years later AIG was able to exit for a considerable gain.

This week, the two announced a reverse transaction. Blackstone will take a 10% stake in AIG’s life-insurance and retirement-services unit ahead of its IPO. Blackstone will also manage $50 billion of AIG assets, rising to $100 billion over six years. The move is the latest in the convergence of insurance and private equity as insurance companies seek to improve investment returns in their portfolios. It’s a theme we discussed in Other People’s Money – the latest application of a model Warren Buffett developed back in 1967.

The “BDE” of billionaires is next level.

Jeff Bezos made an announcement that he’s going to space via Blue Origin.

Whether he didn’t want to be outdone or wanted to steal all the spotlight (clever), Richard Branson announced he was doing the same via Virgin Galactic.

Only earlier.

But the billionaire race to space is just a sideshow to the real race to space.

Bezos and Amazon might control a significant portion of e-commerce and even tech infrastructure (through Amazon Web Servers). However…

• There is an even bigger play here: Control over the internet itself.

And it all begins right before the Dot Com boom…

The Battle for Global Signals

In November 1998, a new company called Iridium launched a brand-new satellite communications service.

And just ten months later, the company filed for Chapter 11 bankruptcy.

They’d failed to take into account one pretty simple fact: it requires billions of dollars to launch satellites into space.

Twenty years later, Elon Musk is barging into the exact same space.

Only he’s doing it Musk-style, using his now-typical (and ultra-successful) gameplan.

First, he’s turned the really expensive thing into a commodity, just like he did with electric cars and rocket ships.

His company, Starlink, is on the verge of creating satellites on an assembly line.

Second, he’s his own customer.

SpaceX needs a continually full calendar of payloads to take to space, and Starlink always needs to get satellites up to build out its network. It’s a win-win.

Third, he’s leveraging the U.S. government (okay, your taxpayer dollars) to fund the entire thing.

Starlink has been picking up lucrative FCC contracts to provide satellite-based internet to areas all across the United States.

And fourth, the company is making a ton of money before it has even fully launched, and using that to fund future growth.

• Starlink already has $500 million worth of subscribers and reservations.

Even the founder of Iridium knows the eventual outcome:

“I wish Mr. Musk well,” he said. “I expect him to succeed.”

Iridium was just building a satellite phone service, but Starlink is taking that a few major leaps further.

Starlink wants to be the internet service provider for the world…

And when it’s fully built out, it will upend the world order in much the same way the internet did in the late ‘90s and early ‘00s.

The Starlink concept is really simple. With a small, pizza-box-sized satellite dish, a user can access the internet from anywhere in the world.

Anywhere.

A barge in the Suez Canal… The top of Mt. Everest…

The Sahara Desert…

The service is currently being tested in a few countries. In true Musk fashion, they’re calling it the “Better Than Nothing Beta Test.”

Already, it’s pretty great. Testers are getting better than 100 Mbps speeds. And by the end of the year, that’s expected to reach 300 Mbps.

(For context, the average U.S. internet speed is <200 Mbps.)

And it’s just going to keep getting better…

• Starlink’s original stated goal was 1 Gbps internet—four times the fastest country in the world, Singapore.

And they’ve promised the FCC they will provide the internet with zero contracts, early cancellation fees, and no data caps.

All for the whopping price of $99. But that’s expected to come down.

As Musk tweeted:

• “Starlink is a staggeringly difficult technical & economic endeavor. However, if we don’t fail, the cost to end-users will improve every year.”

Once Starlink is fully operational, a majority of internet users won’t even consider anything else.

Which begs the question…

When and how will all of this unfold?

As of early 2019, less than 5,000 satellites total had ever been launched.

Starlink projects that 12,000 satellites will be necessary to provide reliable global internet coverage at ultra-fast speeds.

Seems impossible, right?

The first small batch of Starlink satellites was sent into space via SpaceX in May 2019.

Right now, there are now nearly 1,500 Starlink satellites in orbit.

Courtesy of https://satellitemap.space/

More importantly, the frequency of launches is accelerating—from six months between the first two is now down to just nine days between launches. Expect that to become hourly.

Yes, hourly.

Further, Musk is preparing a new Starship, which will be able to haul four times as many satellites per trip.

In other words…

• Starlink is going to get bigger than expected, much faster than expected, all paid for by U.S. customers through the FCC.

It gets better. The satellites will be de-orbited after three or four years.

So just like Teslas, SpaceX will be able to upgrade them on a rolling basis.

In an early 2021 presentation, Starlink revealed they plan to reach speeds of 10 Gbps—in part by using lasers to communicate between satellites.

This isn’t about faster Netflix and porn speeds.

• This is going to revolutionize where, when, and how business is done.

And it’s going to have massive ramifications for global politics and the world order.

OK, I’m going to channel President Reagan for this next title:

“Mr. Musk, Tear Down This Firewall”

Once the satellites are in space—remember, more than twice as many have ever been launched—there will not be room for a second internet service provider.

China and Russia fear this in a big way.

The Space Race was in my book, The Rise of America, if you want to know more.

But if Musk is successful: The game will be over.

And the second-order effects of a single, global internet service provider will be unlike anything you’ve seen before.

For example, right now, Jeff Bezos (Amazon), Mark Zuckerberg (Facebook), Sundar Pichai (Google), and Tim Cook (Apple) wield incredible power.

As you’ve seen, a flip of the Twitter or Facebook PNG switch can instantly mute someone from the world stage.

• Elon Musk is positioning himself to be the person with power over the people who have power.

Once he controls the world’s internet, he can dictate what is and is not transmitted worldwide.

You can bet that major world powers and governments are watching this closely.

And you’re probably aware of the so-called “Great Firewall of China,” which the government uses to determine what users can access.

Russia, India, Iran, Syria, and Vietnam also have or are implementing similar programs.

With Starlink, users will be able to circumvent that filter. It’s a little difficult to block all of the space.

I’m even willing to speculate that Starlink will open-source the patents for the receiver dishes, just like Tesla did. Same guy in control.

But all of that is nothing compared to the real competition unfolding.

Because the world’s biggest country and the world’s biggest entrepreneur both have the same grand ambition:

• Get to Mars. First.

SpaceX knows the entire space launch industry is only worth about $5 billion in revenue a year.

Global internet access? That’s a $1 trillion+ market…

Or the size of China’s entire GDP in 1999.

With that kind of revenue, SpaceX—and Elon—have a shot at winning this thing.

Over the course of the next year, we’re going to watch a no-holds-barred fight, with Earth as the arena.

Like the founder of Iridium, my money’s on Elon.

And to all those who bash Elon, I ask—what have you done to make society better?

Until next time, stay safe.

Regards,

Marin

The post Starlink and the REAL Space Race appeared first on Katusa Research.

Hi all.

I built some hexagonal shelves for my daughter and was looking for suggestions on the best way to hang them. They're all one piece and in the picture shown, they're upside down.

Shelf.jpg

Thanks! Attached Images

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Tool? I think so, I have some profile molding in my kitchen that I need to sand which my palm sander can't get to. I am thinking about these sanding sponges so that I can get into those cracks and round overs and maybe press hard so that they can fit profile. Well these sponges are little over 3.00 a piece but if they work then its worth it. Any suggest on what sponges and where to buy vs HD or Lowes? Attached Images

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I was at Menards a couple of days ago and looked at their track saw. It was $199. The track came in 4 pieces and got to 110 inches long. Although I have my doubts about that brands accuracy, I can see how it can be used for many different applications.

The other things I have considered is: I have always had a work shop. Not necessarily big, but I never had to share it with a car, where I had to move machines around just to use them. I can see where the track saw can easily come into play in that kind of situation. Although it requires some sort of support, but then every thing requires some sort of support.

I did read all the posts and I tried to keep an open mind. Braking down sheet goods, getting a straight line rip, and getting two edges on a large surface square to each other, was the hardest task for me. It took a lot of thought and trial and error to get where I am now.

Having the table with the pins and holes addresses the problem of perpendicularity, if the holes are accurately located and that would need to be purchased. Now after 50 years of woodworking, I now have the room for a Excalibur sliding table and a Delta contractor saw to address the problem. But one would be amassed as to how useful two table saws are. I could write about and point my finger at how expensive the table with the holes is but I would also have 4 fingers pointing back at me.

I am going to repost a picture of me just having completed cutting sheet goods and if you click twice and blow up the picture you will find the white piece of plastic the saw is mounted on and rides in a track. If one is cutting along the 8 foot line my track can flex out away from me depending on where I am in relation to the cut. The track saw, with the wider track addresses that problem. The real eye opener is I have and use a 20 year old version of a track saw.

So with all that the people on this forum posted about the track saw, I took a different mind set when I looked at the track saw. The quality of the saw I looked at other than deciding I wouldn't buy that brand, didn't inter into the evaluation of it's uses. I now believe is a useful addition to the tool list.

Although I do not believe it will replace the table saw, as some have predicted, the pendulum always swings the other way, I do believe it has a place in the shop. I do not plan on buying one because I do not wish to relearn a different way of doing things. The fast, reliable, repeatable results I get are hard to argue with. And so thanks to the ones on this forum for taking to time to post, I have come 180 degrees from thinking track saws are just an expense fad to actually believing the have a place in the shop.

And here I have been using its' predecessor for twenty years. And so thank you again.

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I bought this PM 66 that had been sitting for about 8 years in a garage. When I got it home I found a silver capacitor 97f9632 25 uf + 8 - 6%. It would not start the saw, it just hummed. I'm looking for capacitor size and whether it takes a start and run capacitor. There are three wires coming from the motor with one going through the centrifugal switch. The saw dates to 1987 (sn 876672038) and it took a bit to free it all up. I replaced the 3 belts as well. While changing the belts I found the motor pulley about 1/2-3/4" off the arbor pulley and had to adjust it lo align the bels. I guess someone had been tinkering with it. I was hoping someone has been down this rabbit hole and may have the info handy. Thanks, Bill (.-.)

Is anyone out there by chance using one of these DROs on their Supermax? I’m trying to install mine and can’t seem to figure out if and how I can install it with the supplied brackets. Hoping I don’t need to drill into the sander or fab up a custom bracket to make it work. The only examples I’m seeing online are for the wixey which has a bracket setup specific for this machine which mine does not. (.-.)

My daughter has twisted my arm to build a kitchen cabinet component that will have a pull out trash/recycycle drawer, a wine rack and a microwave section. She wants all painted expect the wine portion. This has me scratching my head on the design and cutting of the wine section as I assume she will want the diamond shaped wine rack. Anyone with esperience in this type of build? I am in the scratch head portion and will have to build this in a couple of months. (.-.)

Amana sells an after-market 8mm DF500 Domino bit for $28 compared to Festool $48. Anyone have experience with the Amana bits? Are they on par with Festool OEM bits? (.-.)

One of my first workshop projects is to pay for electrical upgrades in the garage shop. Currently, I have 1 20-amp circuit. I have zero 220 machines, but that may change in the future.

1. What do I actually need, electrical-wise, in the shop? I'm thinking two more 110 circuits and 1 220, but that's just spitballing.

2. What will it cost to add these to new construction? There is space in the outdoor panel, and the indoor panel. Both are located on the other side of garage walls.

3. What does it cost to add a mini-split AC? I live in San Antonio, and it's warm here 6 months out of the year. (.-.)

I'm tossing the idea of getting a small 10" bandsaw.

I had a 14" saw that I bought used. I took the table off to transport it home & 5 years later, when I sold it, the table was still not put back on the saw.

I had pretty much no real reason to use a bandsaw - so - I sold it.

I do have some things coming up I'd like to make - but - nothing that requires anything more than a 9" or 10" saw.

From what I've been able to see so far - there's a ton of 9" saws & they are nearly all just toys.

The 10" Rikon, Jet and Wen saws - seem to be decent machines that are built for doing actual work.

I would normally just get the Rikon and forget about the Wen and Jet - - but - - I just picked up a Wen drill press & I'm pretty impressed with the quality of it - for the money I paid for it. (.-.)

Need a little clarity. I don’t do cabinet hardware stuff enough to know the right answer to this. There are some photos below to go along with all the words.

I’m building a large vinyl record storage cabinet that is going to have 12 drawer boxes on 15” Blum Tandem Blumotion slides. Looking at the specs for the drawer slides (+ the interior dimensions I need for record storage) helped me size the drawer and therefore the cabinet opening side to side. The slide paperwork said to add 1 15/16” overall to the inside dimensions of my drawer box for the outside dimensions of the slides and where they mount on the horizontal plane inside the cabinet. I took that to mean that was also where my vertical divider/partition would be as well as I was under the impression that the slides have screws they hold them both down the the horizontal part of the cabinet as well as screwed into the sides/vertical divider part.

In a mock-up yesterday trying to sort things out, I slide the rear mount bracket on the back of the slide and see that it projects out beyond the outer edges/dimensions of the slide about 3/8” on each side. Did I get the wrong rear bracket? Do I need to use them?

The issue is that the cabinet size and all the divider locations are already sized based on me adding 1 15/16” to the interior drawer box dimensions as per the slide instructions and I don’t have the extra 3/4” (3/8” on each outer side of each slide) in the current cabinet size. The cabinet parts are not cut to final size yet (or assembled) but I don’t have the extra length to add 3/4” to each drawer bay.

If I need them installed, do I need to make a little notch in the rear lower corner of each vertical divider to allow them to have the correct placement? Even then, one may collide with or touch the adjacent one, but that may not be a problem as long as they are just touching and not overlapping.

All material in this part of the cabinet and drawer boxes is 3/4” hardwood veneer plywood.

Attached the rear brackets I have and now I see the spec sheet on it calling out 15/32” of space that is takes up beyond the outer edge of the slide...

Am I missing something or just thinking about this wrong?

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The day has arrived! My SC 2C shipped from Georgia a day early and came into the shipping docks I'm allowed to utilize on Tuesday. DH and I were out of town vacationing while all this was happening. Today we'll go pick it up on the trailer and move it into my shop. :) I'm apprehensive about removing it from the skid, but I usually expect things to be much harder than they turn out to be, so hopefully this will hold true. I'll post pics. (.-.)

Hi Folks,
I have a powermatic taiwanese 15 inch planer which I have had for over 10 years and it's been fine. Today I was planing some 8 to 10 inch wide hard maple boards and it seems like the crank goes up making the cut less and so not much progress is being made. I had just put in sharp blades and ran about 30 bf of maple through it before today. Is maple that hard that it fights the blades and pushes the platform down? I have never had this problem with other woods and can obviously try some different species. I did notice that the rods that go through by the four posts and the nut on the crank had worked themselves loose, so I tightened them, but it still acts up.
Any advice?
thanks,
Stevo (.-.)

This is used to turn the blade angle adjustment on my Rigid table Saw. I can’t use the stock handle since I added a router extension. Where can I buy a shorter version or how would I fabricate one? Attached Images

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Welcome to another issue of Net Interest, where I distill 25 years of experience investing in the financial sector into a weekly email. If you’re reading this but haven’t yet signed up, join over 20,000 others and get Net Interest delivered to your inbox each Friday by subscribing here:

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What is Robinhood?

Last June, I wrote a piece in Net Interest called The Stock Market as Entertainment. It explored the explosion in retail trading activity happening at the time and suggested that one cause for renewed interest in the stock market was the cancellation of sport:

… a pivot from sports is a compelling explanation. The demographic of Robinhood’s customer base is similar to that of a sports bettor. Men aged 25-34 are the segment most likely to bet on sports on a regular basis. According to Deloitte 43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that’s the same group that has flocked to Robinhood. The median age of a Robinhood customer has drifted up from 27 in 2017 to 31 now, and 80% of them are men.1

Indeed, Robinhood’s interface makes the transition between sports betting and trading seamless. The app has been compared to a mobile game (“Charles Schwab, meet Candy Crush,” according to an NBC News report) which users check ten times a day or more.

Robinhood customers also appear to be attracted to stocks for the same reasons they are attracted to sports events. In its S-1 prospectus DraftKings, a sports betting company, says that it delivers “betting experiences designed for the ‘skin-in-the-game’ sports fan – the fan who seeks a deeper connection to the sporting events that he or she already loves.” A look inside Robinhood portfolios reveals the sorts of companies that customers no doubt have deep connections to.2

One year on, it is clear that this explanation doesn’t suffice. Sport came back, but retail trading continued with enhanced vigour. Indeed, activity accelerated earlier this year, as Robinhood data attests.

a.image2.image-link.image2-338-594 { padding-bottom: 56.9023569023569%; padding-bottom: min(56.9023569023569%, 338px); width: 100%; height: 0; } a.image2.image-link.image2-338-594 img { max-width: 594px; max-height: 338px; } Source: Robinhood S-1

An alternative explanation is one promoted by Balaji Srinivasan: “Everyone is an investor now.” He argues that everyone being an investor is the natural endgame of the financialization of the economy, just as the shift from farming to manufacturing was the endgame of its industrialisation. “If in the 20th century, the 99% are labor and the 1% are capital, the flip happens this century where the 99% are capital and the 1% are labor.”

balajis.com @balajisFarming was the 1800s. Manufacturing was the 1900s. Counterintuitively, could investing become the most common "job" of the 2000s? Reason: crypto and fintech are turning everyone into an investor, just like the internet turned everyone into publishers. How far does that go?

September 22nd 2020

388 Retweets1,769 Likes

The idea is reflected in large white-on-green font towards the front of Robinhood’s S-1: “We are all investors.” Data from the Federal Reserve Survey of Consumer Finances shows US household direct ownership of stocks rising from the trough of 2013 and Robinhood reckons that will continue: “We believe democratizing finance for all is a one-way door, and these forces of change are more likely to accelerate than reverse.”

A Tavern on the Green

If there’s a synthesis between the two explanations, it lies in the conflation of gambling and investing. The two activities fall on the same spectrum and converge in the fuzzy area of financial speculation that sits between them. A few years ago, a group of researchers published a paper in the Journal of Behavioral Addictions looking at the relationship between gambling, investing, and speculation. Here’s how they frame the similarities and differences:

a.image2.image-link.image2-578-1456 { padding-bottom: 39.6978021978022%; padding-bottom: min(39.6978021978022%, 578px); width: 100%; height: 0; } a.image2.image-link.image2-578-1456 img { max-width: 1456px; max-height: 578px; } Conceptual similarities and differences between gambling, speculation and investment.

Ask any bystander of the industry what the fundamental difference between gambling and investing is and the response might be the role of skill versus luck in the outcome. But that wouldn’t be right. Many gamblers (for example Matthew Benham or Tony Bloom) show profound skill, and the role of luck in investing is well known. Rather, the key difference is that investing typically involves the creation or purchase of an asset with the expectation of long-term capital appreciation, which does not occur with gambling. In addition, in investing, the asset is never explicitly staked, whereas this always occurs with gambling – the best definition of gambling is staking money on an event having an uncertain outcome in the hope of winning additional money.3

Speculation captures the crossover of the two activities. Like investing, it takes place in a financial markets environment but it tends to be shorter term, higher risk and focused on generating gains from price movement with less regard for the fundamental value assets. 

There’s a class of financial instruments that lend themselves very well to speculation and they are financial options. Their fixed expiration dates make them more short term than owning their underlying assets, the leverage they carry heightens their risk and the premium you pay upfront is equivalent to a gambling stake. 

Which brings us back to Robinhood.

While Robinhood employs the investor narrative in its marketing efforts and claims “evidence that most of our customers are primarily buy-and-hold investors,” it makes the largest slice of its revenue from options. In 1Q21, it made $198 million of revenue from options, compared with $133 million from straight equities. Perhaps its options customers are subsidising its equity customers, allowing them to buy-and-hold at cheaper rates than otherwise would be the case. But given how much money Robinhood makes from options, its incentives are less around promoting stock ownership and more around promoting options trading. In 1Q21, it made $2.9 revenue per options trade, which compares with $0.4 on an equities trade (and $1.0 on a crypto transaction). Customers had only 2% of their funds invested in options, yet options contributed 14% to total trades and 47% to transaction revenues.4

a.image2.image-link.image2-388-596 { padding-bottom: 65.1006711409396%; padding-bottom: min(65.1006711409396%, 388px); width: 100%; height: 0; } a.image2.image-link.image2-388-596 img { max-width: 596px; max-height: 388px; } Source: Robinhood S-1

This set-up brings Robinhood closer to the contracts-for-difference (CFD) model popular in Europe. We discussed the model here in Net Interest back in March when we compared ETrade to eToro, just after eToro announced its intention to go public. CFDs are derivative instruments that allow traders to bet on the direction of an asset, either up or down. Unlike stocks, they don’t grant economic rights to the underlying asset. In some markets they bear tax advantages (for example in the UK, traders don’t have to pay stamp duty which they would be liable for on a stock purchase). As derivative instruments, they also embed leverage. 

CFDs are a lot closer to gambling than to investing (hence the different tax treatment). Customers can lose all their money. eToro’s general risk disclosure states: “CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider.” At Plus500, a competitor, the number is 72% – regulators insist on the disclosure.

So CFD platforms are in a constant hustle to acquire new customers to replace the churn. In 1Q21, Plus500 lost 16.2% of its customers over the quarter. They make up for it with high ARPU (average revenue per customer). In Plus500’s case, revenue was $838 per customer in the first quarter ($3,351 annualised).5

What about Robinhood?

Riding Through The Glen

Compared with Plus500, Robinhood’s churn rate is a lot lower. It is a more diversified business, and although it makes the biggest slice of its revenues from options, we don’t know what proportion of customers trade them. In 1Q21, it lost 4.8% of its customers, which is not as high as the CFD platforms but it is higher than Charles Schwab, where churn was 3.0% in the same period. Its ARPU is also a lot lower than Plus500’s, at $34 in the quarter ($137 annualised).

In really simple terms, those churn and ARPU numbers mean that Robinhood can expect to extract around $714 of revenue per customer over their lifetime, which compares with Plus500 at $5,200. Fortunately for Robinhood, its customer acquisition costs are commensurately low, at $15 in 1Q21, and all the free publicity Robinhood got in the first quarter actually pushed them down (from $20 in 2020).6

The analysis really is very simple though, because it assumes customers who stick around generate the same revenue contribution year-in, year-out. Robinhood expects that revenues from those customers may actually increase, and presents some impressive looking cohort charts to prove it. It’s true that as their assets appreciate, these customers will trade in bigger size, leading to higher revenues for Robinhood. The company estimates that as of the end of March 2021, its customers had seen appreciation of their assets of approximately $25 billion. Assuming this doesn’t include churned customers and only those currently active, it implies a 45% return on $56 billion of invested funds (given customers are currently sitting on $81 billion worth of assets). 

a.image2.image-link.image2-340-599 { padding-bottom: 56.761268781302164%; padding-bottom: min(56.761268781302164%, 340px); width: 100%; height: 0; } a.image2.image-link.image2-340-599 img { max-width: 599px; max-height: 340px; } Source: Robinhood S-1

The problem with this approach is that markets don’t always go up. As Robinhood’s UK risk warning declares, “Past performance is not a useful guide to future returns, which are not guaranteed. Your investments may go down in value.” And more importantly for Robinhood, transaction turnover may not always go up whatever markets do. In fact, Robinhood is IPOing off an extremely high turnover base. In 1Q21, its customers did an average of 30 trades each or 122 on an annualised basis, up from 84 last year and 54 the year before. That’s not as many as eToro, but it’s roughly twice the rate at Schwab. 

Sustaining that level of turnover will be quite a feat, which is why cohort economics make more sense for a steady subscription based business than they do for a cyclical transaction based one. 

a.image2.image-link.image2-639-1247 { padding-bottom: 51.242983159583%; padding-bottom: min(51.242983159583%, 639px); width: 100%; height: 0; } a.image2.image-link.image2-639-1247 img { max-width: 1247px; max-height: 639px; } Source: Robinhood S-1 and company reports

To frame just how unusual this current period is, take a look at the chart below which shows the average number of trades per quarter executed by customers of Charles Schwab going back twenty years. 

a.image2.image-link.image2-388-596 { padding-bottom: 65.1006711409396%; padding-bottom: min(65.1006711409396%, 388px); width: 100%; height: 0; } a.image2.image-link.image2-388-596 img { max-width: 596px; max-height: 388px; } Source: company reports

And with Schwab data, we can even zoom right in to the present day by looking at weekly trends. Brokerage activity peaked around the time of the Gamestop episode at the end of January and has been on the decline since. 

a.image2.image-link.image2-388-596 { padding-bottom: 65.1006711409396%; padding-bottom: min(65.1006711409396%, 388px); width: 100%; height: 0; } a.image2.image-link.image2-388-596 img { max-width: 596px; max-height: 388px; } Source: company reports

Finally, it’s worth looking back twenty years to see what happened after the last frenzy in retail trading activity in 2000. The chart below shows ETrade’s average daily trading volumes during the period (this one is not shown per customer, it’s across the entire ETrade customer base). After the peak in 1Q00, activity rates halved over the next eight quarters. It took a while to realise it, of course. On a conference call in March 2001, Charles Schwab, the man, talking about the performance of Charles Schwab, the company, admitted, “We’ve come through a highly speculative technology bubble. Maybe I should have been more emphatic about understanding that this was a temporary phenomenon.”

a.image2.image-link.image2-388-596 { padding-bottom: 65.1006711409396%; padding-bottom: min(65.1006711409396%, 388px); width: 100%; height: 0; } a.image2.image-link.image2-388-596 img { max-width: 596px; max-height: 388px; }

Perhaps we are all investors now – or speculators at any rate, doing 120 trades a year and checking our app ten days a day – but let’s not forget, “it’s a bull market, you know.” Robinhood customers are sitting on $25 billion of gains ($1,400 per account) and that ‘house money’ may sustain activity for some time. But when it’s gone, trading may lose its allure and Robinhood’s growth will have peaked.

Thanks to @FIGfluencer for great insights with this.

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More Net InterestBuy Now Pay Later

The Buy Now Pay Later (BNPL) market is getting increasingly competitive. As well as the pure play participants like Affirm, Klarna and Afterpay, there’s competition from PayPal (Pay in 4, which doesn’t charge merchants incremental fees) and legacy banks. Competition is particularly intense in lower ticket categories, where the credit decisioning process is simpler.

One response is to consolidate. The Australian Financial Review this week reported that Klarna (featured in Net Interest here) could be building up a stake in Australian company Zip Co which operates QuadPay, another player in the BNPL market. Given how much capital it has raised recently ($640 million at a $45 billion valuation) it makes some sense and explains why Klarna may have raised private capital so soon after a prior round, rather than going public. When it eventually does come to the market, it will be challenging enough to address regulatory risks; if it can show more stable competitive dynamics, it will be a much more compelling story. 

M&A

The quarter that ended last week turned out to be the strongest quarter for announced M&A ever. Deal volume of $1.56 trillion was announced, with $400 billion of that coming in June alone, pushing the quarter’s volumes 5% above the prior record. From a sectoral perspective, the strength was broad based, although technology, energy and healthcare saw particularly high volumes. A lot of the strength was domestic US rather than cross-border, and was centred among large cap companies rather than small or mid-sized ones. 

There’s a trend across many industries for the big to get bigger and M&A feeds that. There are many implications of that but for M&A advisory firms it’s a very profitable backdrop. 

Weather

We’ve covered some quite bizarre academic finance papers in More Net Interest over the months, all of them answering questions you never thought you had. For example, how earnings estimates can be influenced if analysts share the same first name as the CEO of a company they cover (spoiler: they’re more accurate, but don’t ask me about Salesforce.com). And how the accuracy of estimates correlates with how physically attractive the analyst is (spoiler: any benefit of an analyst being attractive diminished after Reg FD). 

A recent paper looks at the impact of weather. It examines how pre-announcement weather conditions near a company’s major institutional investors affect stock market reactions to its earnings announcements. The conclusion: that unpleasant weather leads to more delayed market responses to subsequent earnings news. Investors in California should learn to take advantage.

1

In its S-1, Robinhood provides an update of these demographics. The median age of customers is still 31, but “we continue to welcome an increasing proportion of women to our platform, having tripled the number of women on our platform at the end of 2020 as compared to 2019.” This would put the proportion of women in the customer base at around 23%. 

2

As of August 2020, Robinhood shut down the API that was used by Robintrack to collect data of stocks held in Robinhood portfolios.

3

Another notable difference lies in the variability of returns. Commercial gambling has a precise and mathematically determined negative return, whereas the magnitude and direction of monthly or quarterly changes in financial markets are much more variable and uncertain.

4

I’ve assumed 61 trading days in 1Q21 to calculate these numbers, which is right for options and equities, but crypto trades 24/7 in which case the revenue per transaction there is closer to $0.7. 

5

Plus500 disclosure puts ARPU at $753 for the quarter, but that is based on end of period accounts; I’ve used average accounts over the period.

6

The calculation here is ARPU divided by churn. It gives the perpetual value of a fixed revenue stream assuming a given level of churn. 

Well, it finally happened. I lost part of my right ring finger to the jointer. This could’ve been avoided, but I was rushing and not paying close enough attention to what I was doing and where my hands were while jointing the edge of a 5” wide board. The guard was also not retracting all the way and needed repair, which I knew about. “Just a couple of quick cuts,” I thought. Not looking for sympathy; nobody to blame but myself. Please learn from my mistake and take some time to review safety practices in your shop. Stay safe out there! (.-.)

The amount of capital that has and will continue to be deployed into the Carbonomics Sector is mind boggling.

It’s in the hundreds of billions and will reach the trillions.

But few of the corporations that have committed to reducing their carbon emissions have actual plans to reach their committed targets.

Billions of dollars and major company pivots are being deployed towards making net zero carbon emissions a reality.

In fact, I believe Nobel Peace Prizes will be handed out for the efforts.

Just recently…

• Shell, one of the biggest oil producers in the world, lost a Dutch court ruling and must now legally be responsible to cut their greenhouse emissions by 45% by 2030.

What does that mean?

Pay close attention to these next 3 lines…

It means that Shell needs to buy (and/or create) over 100 million carbon credits a year for the next decade.

Let’s put that in perspective…

In 2020, 223 million voluntary carbon market credits were issued

Read that again:

• To meet target emission cuts, Shell would need to buy 45% of ALL the voluntary carbon market credits issued last year. EVERY YEAR.

That’s just the ONE oil giant, Shell.

You can see immediately how the Shell ruling will have implications for climate cases around the world.

Is Shell just a one off?

Not even close.

24 hours after the Shell court ruling, Exxon’s board of directors had a massive shakeup.

Two board seats were won in a bitter proxy fight by an unknown climate fund called Engine No.1. Changes in climate action by the executives at Exxon are underway.

Then the shareholders of Chevron voted, and changes will happen there as well.

Dirty Oil and the Green Bond Bonanza

It’s only a matter of time before other oil companies and large resource miners follow suit.

But here’s my main point—it’s not a bad thing.

The old guard has resisted, yet they overlook the benefits that will come from this.

• For the first time, the oil and metal miners can tap into the low-cost source of capital available in the green bond market.

A major positive will be that their borrowing costs decrease.

Companies who lower their carbon footprint will attract new investors – who have avoided the extraction industries, that create a large carbon footprint relative to their share price…

And thus increase the demand for their shares.

By reducing their carbon footprint there are major benefits to both the cost of interest in the bond markets and the share price of the shares.

It’s a real win-win.

Whether you agree with this or not, there is an opportunity to make a lot of money from this movement.

We’re fine with others getting the credit, awards, and recognition.

Alligators only care about making money while doing positive things that better society.

So how much is at stake?

Here’s what got me very interested…

The amount of money flowing into the space is simply unstoppable…

According to Bloomberg Intelligence, ESG debt issuance recently surpassed $3 trillion this week.

It took 12 years to issue the first trillion dollars and 1 year for the second trillion.

In the past 6 months, a third trillion has been added.

• Already in 2021, more ESG debt has been issued than in the prior year.

Make no mistake, the ESG sector is scorching hot…

Even Russian companies such as PolyMetal are tapping into the Green Bond market.

They are doing this to reduce their cost of capital by committing to reduce their carbon footprint.

Are Carbon Credits a Tax?

There’s a major misconception and wrong belief that carbon credits are a tax or a tariff.

They’re not.

They’re an output commodity cost, and by reducing their footprint, corporations can make money.

How you ask?

By reducing their cost of capital and increasing their potential shareholder audience.

Debt raised with an ESG focus is cheaper on average than non ESG debt.

Don’t believe me? Ask the VP of Treasury of one of the world’s largest pipeline companies…

Max Chan, stated its recent sustainability linked debt came in 5 basis points lower than where regular debt would have priced.

Telus, one of Canada’s largest telecom providers, issued a sustainability linked note. And it came in 6 basis points lower than would be expected in the regular debt markets.

Scope Emissions: Going Green Is Good Business

Now let’s return to some further carbon reduction considerations.

There are more than 5,200 companies with $1 billion+ market caps that are publicly listed and trade on the North American and European stock exchanges.

Of those, 2,410 companies report their Scope 1 greenhouse gas emissions.

A little background:

• Scope 1 Emissions are the direct greenhouse gas emissions from company operations.
• Scope 2 Emissions are the indirect greenhouse gas emissions from energy purchased by the company.

Scope 1 and Scope 2 emissions are within the direct control of a company.

The criteria for identifying and reporting them is well established, transparent, and consistent across industries.

• Scope 3 emissions include the indirect emissions (not included in Scope 2) that occur in the value chain of the company (this includes both downstream and upstream emissions). These remain underreported.

There needs to be more legislation and international body governance on Scope 3 emissions as they include many “grey” areas open to interpretation and debate.

The chart above only includes Scope 1 carbon emissions, as there are no debates or discrepancies concerning these.

• The fact that only 46 percent of large-cap companies report their Scope 1 emissions will change.

Regulatory authorities such as the SEC are on the case.

And it’s only a matter of time before they mandate that all companies include a Scope 1 emissions report in their financial statements.

Scope 2 reporting will follow, and perhaps eventually Scope 3.

But reporting is one thing—action another.

Currently, out of those 5,230 companies with $1 billion+ valuations that are publicly listed in North America and Europe…

• Only 457 (8.7%) companies have publicly announced some kind of plan to reduce GHG emissions as of May 25, 2021.

A Carbon Credit Windfall

This does not mean that the companies have actually achieved any reductions…

Only that they are talking about trying to implement strategies (many of which they have not even started).

Again, this will change.

In the meantime, my major focus right now (aside from resources) is the hottest commodity sector right now.

I believe the Carbon Credit market is in its infancy…

And there is MUCH more information that I’m not sharing here in this alert to you.

I cannot tell you how many calls and contacts my team and I have fielded in this emerging sector.

Just as technology underpins almost every market from grocery stores to car manufacturers…

Carbon credits, emission reduction and green bonds will affect EVERY industry.

I’ve never seen a market quite like this in my career.

And if it sounds like I’m excited and talking my own book – that’s because I am.

After taking profits and free rides in many of our portfolio positions in my premium research service – Katusa’s Resource Opportunities…

I have a significant portion of my net worth allocated in the Carbon sector.

This is only the beginning.

And you don’t get too many asymmetric shots like this. So do yourself a favor and get up to speed ASAP.

Regards,

Marin Katusa

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