← Brew Markets
Loading summary
Transcript23 lines
- [00:02]
A
SpaceX buys EchoStar Spectrum, why telephony stocks are down, and just how. There's so much more to this deal than meets the eye. There's no such thing as a crystal ball. So what does the probability of a Fed rate cut really mean? And Robinhood will join the s and P500. What this means for the markets for Monday, September 8, it's blue markets Daily and I'm Ann Barry. More market details to come. But first, no one likes to be left outside the club. Coinbase got past the velvet rope in May. Tesla has been partying with the elite since 2020. But despite surging growth, fellow tech player Robinhood had not made the cut until now. And that is in joining the Team USA of the equity markets. That's what I call it, the S P500. Now, in our August 28 episode, we broke down how companies are selected by S P Global, an independent financial information company, to join the prestigious group. So check out that episode for more details on all the benefits to a public company of being included. And there are several. Which typically drives up the stock price of a company once its entry to The S P500 is confirmed. Just as Robin Hood stock is up about 15 today on the news, it joins the club on September 22nd. So why does this matter so much? And why does it matter right now? Well, to answer that, here's a quick recap of what it takes to be included in the S P500. And that's aside from being listed on an approved exchange like the New York Stock Exchange or the nasdaq, and being a US Company, it must be profitable, not just quarterly, but cumulatively over the last four quarters over a period of time. It needs a market cap of at least 23 ish billion dollars. That sort of moves. But that's where it is roughly right now. And there needs to be a specific amount of liquid liquidity in the stock, meaning a big proportion of the value of the company must be publicly available to trade. Now, even if the company checks all these boxes, the selection committee over at the S P Global team has discretion over who to include. And until now, it's used that discretion to exclude Applovin and Robinhood. Both have long checked all the technical boxes, but neither were welcomed until this month. Now, one reason for that exclusion may have been an attempt to get sector balance. So the S P team does try to get broad representation of the US economy in the S P500, but it's hard to do that with so much market cap concentrated in tech these days. Another possible reason for Robinhood not making the S P500 before could be volatility. Rather like applovin. These have been high beta stocks and there's been regulatory risk around them. And that's where Robinhood in particular has seen a bit of instability. So here's why I think joining The S&P 500 now matters. It's a sign that Robinhood is accepted as a durable business. So to be clear, this does not mean that its share price is going to stay where it is. It doesn't even mean that the share price is going to go up. It could well go down. But it is a sign, in my opinion, that the volatility of the world in which Robinhood operates is being perceived to stabilize because many aspects of its business model are now seeing acceptance by regulators, by institutions, by major corporations. Now here's one sign that its CEO Vlad highlighted highlights in his latest earnings call, and that's with respect to crypto, in which trades drove a 99 increase in Robinhood's deposit value versus last year. Let's take a listen to what he had to say.
- [03:36]
B
You guys know the Genius act just passed. We've launched staking in the US with over 750 million staked in just the first month. So pretty, pretty incredible progress for staking in the US bitstamp exchange by Robinhood. That acquisition closed. So we now have a growing institutional business and we think that's going to be a big one over time.
- [03:58]
A
So in crypto, it's US regulation risk declining. And the S and P is sort of tacitly acknowledging this by the inclusion of Robert Hood. Another policy change matters in another key area too, and that's retirement funds. Now, if we pull up the chart for Robinhood, we can see here we got this from the earnings release from the most recent quarter that the amount of assets that are being deposited with Robinhood, or for retirement specifically, well, that number has doubled over the past year. And to go back to the point about the environment, the White House is moving to expand the range of products that retirement funds can invest in. Something that's driving old school financial players like Goldman Sachs and T. Rowe Price to partner up for wealthier savers. And Robinhood's just doing this for everyday investors. And it's this last point that perhaps lands the most, which is just how important and meaningful this is in acknowledging the importance of, of everyday investors. If there's one thing that Robinhood has done since it went public in 2021, it's become the symbol of the Rise of Retail Investors and Traders The S&P 500 membership is saying you're not a renegade anymore. Robin Hood. Welcome to the establishment. Retail investors now part of the mainstream too. Brew Markets Daily is sponsored by Public, the investing platform for those who take it seriously. Now, before the show today, our producer John mentioned a feature he recently found on Public that's right, I've been getting.
- [05:22]
C
Portfolio insights from Alpha Public's AI powered research assistant. Then I discovered that Alpha can do recaps of earnings calls and that's where I love getting the inside peek into a business as soon as they share its updates.
- [05:32]
A
Well, Public gives you smarter context in which to use a wide range of asset classes, offering the tools you need to build and manage your wealth, whether it's for stocks, options, bonds or crypto. So fund your account in minutes or less. Get started at public.com brewmarkets that's public.com.
- [05:47]
C
BrewMarkets paid for by Public Investing Full Disclosures and Podcast Description Today we heard.
- [05:53]
A
Of another big deal in the telecom world as SpaceX, that's Elon Musk's satellite and rocket company, agreed to buy wireless spectrum licenses from EchoStar. Now this sounds a bit dense and technical, but stay with us because yes, it's a big story about telecoms and what this could mean for the sector, but there are so many interesting nuggets in here, including the deal itself and what it may mean for Public shareholders to be able to get more access to Elon. We're going to come back to that. But first of all, let's talk about why this could be transformational for telecom as mob in messaging that's currently routed through cell phone towers could eventually be trafficked through space.
- [06:29]
C
All right, so quick definition. Spectrum refers to the invisible airwaves that power wireless communication. So basically how mobile data is transmitted and it's a limited resource regulated by the fcc. And gold sold off a government auction, Freudian slipped.
- [06:43]
A
It's gold. It literally is gold out there. It's limited and it's highly, highly desirable. Now SpaceX has had its eyes specifically on the spectrum that EchoStar has owned because it has resented the fact that it has seemed to squatting on the spectrum so not really using it. So much so that SpaceX sent a letter to the FCC in April. We dug around and we found it fuel so you don't have to find it. And SpaceX said in there that echostar spectrum is quote ripe for sharing among next generation satellite systems. So that's the key. SpaceX really pushed on the idea that Americans deserve to have providers who use their spectrum to make sure that they, the consumer had better services. Particularly by the way, in rural areas where there's been a history of those communities being underserved when it comes to broadband services. Right.
- [07:31]
C
That's part of the regulation, is that they want to make sure that these underserved communities can get service and hooked up and be part of the next generation of tech. And SpaceX has been doing this by putting already 600 satellites in orbit that are going to connect to this mobile network and they're calling them cell towers in space.
- [07:48]
A
Yeah, I love that this storytelling images like that. Well, the FCC did respond to this and as a result we saw last month Echo Star sold a chunk of its spectrum to AT&T for $24 billion. And just to recap what happened then, because John and I talked about it, check out that episode. Echo Stars shares absolutely rocketed because the $24 billion in cash it's going to get from AT&T is roughly about the same amount of debt as EchoStar has on its balance sheet. So this is, you know, a boon for shareholders. You put on that top of that today's announcement that SpaceX will buy extra spectrum from EchoStar for around $17 billion. And that's why we're seeing such a massive response in EchoStar shares today. But what caught my eye, John, because this doesn't happen very often. That's why I said, stick with me. SpaceX is paying for the spectrum in a combination of cash and stock, which means Echo shareholders will, number one, see cash coming into the company, but number two will now have a stake in the equity, which is private of SpaceX. And so one of the things we've talked about in the past is how much has Tesla's stock basically become a proxy for public investors wanting to get a piece of Elon because all of his other companies are private. Is this perhaps one not investment advice where we see people trying to buy EchoStar stock for the exposure to SpaceX that ultimately sits underneath it, even in a very small way?
- [09:12]
C
Right. And just to point out that EchoStar got $9 billion more from these sales than they spent for the spectrum. So this was a windfall for the, for the shareholders.
- [09:23]
A
Absolutely huge. So look, the windfall to Echo style shareholders, though their gain does appear to be coming at a bit of a loss to shareholders elsewhere in the space we have seen today, John, Verizon shares down, T Mobile shares down. AT&T shares down. Talk to us about what's going on there.
- [09:40]
C
Well, this is a different type of technology those companies have been building. Cell phone towers that we're familiar with have limited range to mobile customers. But this new product is going to be satellite mobile connectivity which in theory once it's built out and it's not at this point, there can be some text messages sent or light data, it can't do voice. But now with the spectrum they will be able to build this out is the idea is that SpaceX will be able to essentially in theory have an always on mobile hotspot around the world.
- [10:14]
A
Just to repeat on this one, T Mobile shares down 5%. They have the most potentially to lose here. Just to sort of do a quick recap, T Mobile had signed a deal with SpaceX previously which allowed T Mobile to provide connectivity to about half a million Americans again in rural areas. And the idea is that the T Mobile customer in those locations could then get satellite access to sort of plug the gap. With SpaceX now buying Spectrum, there's a chance that it can go do for itself itself what it has been doing in partnership with T Mobile. Verizon down over 2% AT&T down over 3.7%. Again, market's not quite sure yet the magnitude of the threat that this could present, but certainly doesn't like what it's seeing. Let's take a quick break. When we come back, the market has had a Fed rate cut set this month at a 100% probability. But what does that really mean? John, we have a question from the audience.
- [11:10]
C
That's right, Jack in San Diego wrote in and I keep hearing that the probability of a Fed rate cut this month is 100%. Where does that probability come from?
- [11:19]
A
Thank you, Jack. It's a great question because we hear a lot of commentators popping up on tv, for example, saying what they think will happen with interest rates. But the fact is no one has a crystal ball. The market in contrast, shows how it expects rates to move by putting money on the line. They put their money where their mouth or their belief is. Now how this happens drives the probabilities that you keep hearing about. So here's how it works. Traders at banks and hedge funds and other asset managers buy and sell futures contracts that are tied to the Federal Reserve's benchmark interest rate. This is called the Fed Funds futures. Now each contract represents the trader's expectations of what the Fed's rate will be at some specific point in time. Now, not all traders have the same expectation and it's worth touching for a second on what they base their different Opinions on. Now, to start with, these traders will have their own individual views of where inflation, economic growth and employment levels will go. And the reason they have that opinion, the reason they educate themselves on this, is they know that the Fed will watch those to then determine how and where to set rates. The other thing that traders look at is the Fed's dot plot. So let me explain what that is. Each quarter Federal Reserve officials state what they personally think is the appropriate Fed funds rate over time. And just like all other human interactions, like every other committee we've seen, there are differences in an opinion. So what the Fed does is it plots those different opinions in a chart. That's literally the dot plot you hear a lot about too. And it's a good data point to see what the spread of those opinions are. Now imagine the Fed's current rate is five and a quarter percent. If futures traders are paying prices, that suggests the rate will still be five and a quarter percent next month. The implied probability of no change is clearly very high. But if the flow of traders money, and there's a lot of it, drives prices that point toward a 5% rate next month, then that's signaling that investors believe a quarter point cut is coming. That, by the way, is what you've been hearing about with respect to this 100% probability. After Jay Powell's speech, that's the Federal Chair, Federal Reserve Chair in Jackson Hole a couple of weeks ago, the market listened to what he had to say and thought the probability of a rate cut in September of about a quarter of a point was super high. Now here's the part on how likely the rate cut is, the quantification of this and how this happens. Well, the market for trading futures is massive with billions of contracts each year. And a major hub for this trading is the Chicago Mercantile Exchange or the CME. And in 2013, it set up a tool called the Fed Watch Tool to analyze the range of futures prices in the market at a point in time and convert that range into probabilities. Now those percentages are, are not predictions in the scientific sense. They're a snapshot of the range of beliefs of investors who are putting money at risk right now. So if new inflation data comes out tomorrow or a Fed official gives a speech that sounds more cautious or more optimistic, probabilities can swing dramatically, sometimes within minutes. And here is why this is actually very newsworthy today. We've seen with new inflation data come out that the risk, the, the probability that the Fed Watch Tool is suggesting right now a Fed rate cut has gone to about 88% with quot a remote chance of an even bigger cut of 50 basis points. That's coming out of the money moves that traders have made just today. It's already different from Friday now when you see headlines about 100% chance of a rate cut. It's not a guarantee because like anything else, the Fed Watch tool isn't perfect, but it is useful as it's the market's best guessed expressed in dollars about how the Fed might move and how as a result we as consumers might be impacted from the mortgage rates that we pay to the interest that we receive on our savings.
- [15:03]
C
That's right. And if you have a question for Ann, be it dot plot related or not, send an email or voice memo to brewmarketshoworningbrew.com well, it's 4:00pm on the east Coast.
- [15:14]
A
The markets have closed. We don't have a ticker tape. Let's throw it over to our human ticker. John, what went on in the markets today?
- [15:21]
C
Well, the Nasdaq was up nearly half a percent today and it hit an intraday all time high. The S&P 500 and the Dow were both up about 2.10 of a percent. Shares of Etsy were up over 7% after the online marketplace announced leadership changes intended to drive innovation and improve customer experience. And shares in Sphere Entertainment were up nearly 10% today after the company announced that the Eagles have added more shows to their Las Vegas residency, now totaling 48 shows running through January.
- [15:48]
A
That's it. I love the Eagles and I had total FOMO because I didn't see them last go around. I did see you two though, and I really enjoyed it. Well, look, final thought, because guess what, we're back to school. It's September, summer's behind us and guess what's kicking up IPO activity now. One I just wanted to shine a light on very quickly before we go. Klarna, the Buy now, pay later player that comes from Europe, is set to IPO this week seeking a 14 billion dollar valuation. Couple of big questions and here's why I'm watching it. The way in which this performs out of the gate will be a very strong sign for what investors are looking for from tech companies these days. Two issues here. Number one, Clan has been known as a one trick pony. There's lots of BNPL players out there now. Can it move into banking? What something it's claiming to do? Has it been successful enough? The market will vote when this IPO happens. And the second thing we've talked a lot about how in recent IPOs the market has shifted its focus from just growth to profitability. Klarna has not been generating a ton of profit historically, so the market's reaction to whether its outlook for profit now is strong enough. Also going to be an indicator for where appetite is right now for different kinds of of tech stories. That's it folks, for today's blue markets.
- [17:01]
C
Daily Brew Markets Daily is hosted by Anne Barry and produced by John Gratto, Tarek Abdelatif and Emily Milian. Our technical directors, Uchenawa and the President of Morning Brew Inc. Is Devin Emery.
- [17:10]
A
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. We will see you back here tomorrow, same time, same place.