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💦 IPO dilution

June 01, 2021 Sign up

It’s Tuesday, so here we are in your inbox improving your financial life yet again. Here are the money topics for today: 

  • IPO dilution. Is it becoming too easy to go public?
  • What does the 10-year Treasury have to do with me?
  • Can you really make coffee for 20 cents? And the catch.


IPO dilution. Is it becoming too easy to go public?


Did you get that email from Robinhood too? Users of the most popular retail trading app seem to be finally getting access to IPOs before they’re listed on the markets. That would’ve been useful like a month ago when Coinbase went public... but we digress.

A growing number of retail traders being introduced into the markets within the last year has also coincided with a lot of businesses being taken public. With the popularity of SPACs on the rise and the SEC's direct listing option, companies are being presented with more flexible routes to public funding.

We’re starting to see lower barriers to entry for public markets, and for some analysts, this is begging the question: is it too easy to go public?

We need some perspective and data on this

  • The US hit its peak for most publicly traded companies all the way back in 1996 when there were about 8,000 companies trading. 
  • Logically assuming that the number of public companies would slowly increase over time, you’d be surprised to find out there are far fewer now than before: about 6,000 between the NYSE and the NASDAQ. 
  • Despite this long-term decline, the number of IPOs in 2020 more than doubled from 232 the year prior to 480. That represents the highest number since 2020 when 397 companies went public.
  • And in 2021? 485 companies already went public, putting us on pace for an annualized total of about… 1,200. SPACs have taken up a sizable 70% of these public offerings so far this year.

So let’s establish this: we’re not exactly overrun with stocks on the exchanges historically speaking, but over the last year and a half, the number of IPOs has skyrocketed relative to the last two decades, and this is where the concern is stemming from.

The real debate may be around IPO criteria

As the data bears out for us, we don’t exactly just have a massive glut of companies listed on the markets. If anything, restrictions have gotten tighter and regulatory agencies stricter over time. The real topic here may be that some investors disagree with some of the less conventional ways of going public that have facilitated this recent boom.

Although SPACs have been around since the 90s, they’ve really picked up steam over the last couple of years. Investors and analysts are increasingly becoming skeptical about the management teams behind some of these prototypical shell companies given their structure, and expressing concern over consistently poor returns for everyday investors who are usually caught holding the bag.

On top of this, some are wary of what’s called a direct listing in which outstanding shares are sold without underwriters. Such listings allow existing shares to be sold directly to the public instead of issuing new ones. Because of this, direct listings now give retail investors access to finally participate in public offerings. 

Recall that in a traditional IPO, new shares are created and underwritten. Underwriters are intermediaries, typically investment banks, that facilitate the listing, distribution and pricing of newly issued shares for a chunky fee.

So at the end of the day...

By removing certain barriers to the traditional IPO process thereby allowing lesser-qualified businesses to become publicly traded, we would expect to see more volatility in newly minted public companies. 

Retail investors like us have no control over what companies go public or why they qualify to do so. So, what do you do? Use our best judgment if we plan to partake in the party. Learn, research, and invest wisely.


What does the 10-year treasury have to do with me?


Financial analysts who attempt to decrypt why exactly this irrational machine we call the stock market is doing what it does have cited every potential reason in the book over the last 5 months to explain the market’s erratic behavior. Perhaps the most perplexing of those reasons to newer investors? The 10-year Treasury.

So let’s break it down 

  • What is it? It’s a bond that’s backed by the full faith and credit of the US government, guaranteeing regular interest payments plus repayment of the borrowed money in 10 year’s time. They’re usually bought by institutional investors or investment banks, who then sell them on the secondary market to individual investors or fund managers who allocate them to a range of financial products and accounts. The US government issues other similar securities but with differing maturity dates and yields.
  • What about yield? It’s the current rate bonds would pay investors if they bought them today. And the yield directly influences other interest rates, such as for mortgages. A rule of thumb to remember: a bond’s yield and price are inversely related. When demand is high and Treasury prices rise, yields fall, and vice versa.
  • Treasuries and the economy. The 10-year Treasury yield has become somewhat like the economic barometer. Usually, if the 10-year yield falls, mortgage rates fall, which could strengthen the housing market and therefore the economy. If the future becomes uncertain and investors get worried about the economy, they look for safe-haven investments, which causes Treasury prices to rise and rates to decline.
  • But there’s more. The 10-year Treasury yield also influences a company’s borrowing rate: the higher it is, the more expensive it is for a company, potentially reducing their options to grow. When yields fall, it’s easier for companies to borrow and expand—serving as a boost for equities.
  • And your investments? Rising yields usually mean that investors are looking for investments with higher returns but it could also stoke fears that could pull capital away from the market—just as we’ve been seeing these days.

So what do you do with this? Add the 10-year Treasury to your watchlist and give it a glance every now and then while keeping up with the headlines, and you’ll be more in the know and smarter than most other investors just for knowing what’s causing your tech stocks to drop or the rate on that mortgage you were eyeing to rise.


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20 cent coffee. What's the catch?

The idea of being able to make an iced coffee that costs 20 cents was popularized by finance Youtuber, Graham Stephan, a couple of years ago, and it has since become somewhat of a meme within frugal living communities. 

Is it really doable, though? Yes, arbitrarily so, and depending on just how much coffee you define as a cup. Nevertheless, if you’re not a coffee connoisseur and despise the idea of using a fancy Nespresso machine, you should be totally fine with this inexpensive coffee that actually breaks down to about 14 cents per cup.

Oh and, you can actually make this even cheaper by substituting the creamer with almond milk, or we suppose leaving it as is.

☕ Here’s the recipe and breakdown:

  • Pete’s Coffee: $8.70 for 66 cups
  • Kroger Filters: 5 cents for each pot
  • Coffee-mate Creamer: 25 cents for 66 cups

Total: $9/66 cups of coffee = 14 cents per cup of coffee

What's the catch? Well, by drinking 20 cent coffee you'd be saving money you would have otherwise spent. And if you compound the money you will have saved over 50 years at a 7% annual rate of return, you'll be a millionaire. 

A bit of a stretch? Maybe, but you get the gist. 


Today's Movers & Shakers

  • AMC (+20%) after the firm sold $230 million worth shares to Mudrick Capital. It will use the cash to buy theatre assets and leases, and reduce debt. Gamestop (+5%) and Blackberry (+11%) as Wall Street Bets strikes
  • Cinemark (+2%) as movie theatre chains gain favor among investors as we return to normal
  • Cloudera (25%) is being acquired by PE firms, KKR and Clayton Dubilier & Rice
  • Boeing (+2%) after Cowen upgraded them to outperform

This commentary is as of 9:11 am EDT.


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