Prof G Markets: First Citizens Acquires SVB, Hindenburg Shorts Block, and Nike vs. Hermès

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1:28Welcome to Prop G Markets. Today, we're discussing First Citizen's acquisition of SVB, Hindenburg's short on block, and Lululemon's latest earnings. Here with the news is Prop G media analyst and future porn star, Ed Elson. I have a better number for you. My number is 46. That's where the Prop G pod ranks in all podcasts globally as of this week. that means we're one ahead of Megyn Kelly and 16 ahead of Logan Paul. Pretty good. What do you think, Scott? I'm obsessed with the affirmation of others. I'm addicted to it. That's my addiction. And I think it's important that people understand their addiction.

2:08I'm being semi-serious. As much as I joke about alcohol and THC, I don't think I'm addicted to either of those substances. I am addicted to the affirmation of strangers. But what it clearly is, is it's new downloads or new registrations, because I think it's more based on momentum than actual downloads. Don't give it away. Yeah, because of the Bill Maher thing, we got a ton of new interest, new downloads, so it'll spike. But unfortunately, I think it'll come back down. But still. But by the way, something else interesting. We're ranked 46 in the world, 65 in the US. So it's the internationals who are sort of carrying us.

2:42We're global. We over-index in South Africa and Brazil. By the way, I think your door's ringing. To Edibles Delivery. My house is literally a, basically an Amazon distribution center. And that is, there is so much shit that comes in and out of this house. It's just, Amazon should just literally turn this place into a warehouse. We'll keep 10 % of everything they stock. But anyways, talk to me about today's news. Let's start with our weekly review of Market Vitals.

3:17The S &P 500 gained, the dollar fell, Bitcoin briefly hit$29 ,000, and the yield on 10-year treasuries was relatively stable. Shifting to the headlines. AMC's stock soared 21 % after a report from The Intersect said Amazon is considering purchasing the theater chain. Alibaba shares popped 14 % after it announced plans to split its$220 billion conglomerate into six distinct business units through separate IPOs. Elon Musk, along with a thousand other tech leaders and researchers, signed a letter calling for a six-month moratorium on any further training of advanced AI models. They said that AI poses, quote, profound risks to society and humanity.

4:02Federal prosecutors charged FTX founder Sam Beckman-Fried with foreign bribery. SBF allegedly paid Chinese officials$40 million to unfreeze accounts linked to his other company, Alameda Research. He now has 13 criminal counts pending against him. And finally, the Commodity Futures Trading Commission is suing Binance and its CEO, Changpeng Zhao, for, quote, willful evasion of regulations, calling its exchange illegal and its compliance program a sham. Scott, what are your thoughts here? amc i i think this was a leak from amc i just don't buy and you know famous last words i don't see why amazon would buy this company or i can see the the kind of the industrial logic that they'd want to go vertical give amazon give their internal production studio a front-end distribution in theaters but it's just such a shitty business and decline i've never seen them invest in a business that's in structural decline, which is movie theaters.

5:05So I wonder if somebody at AMC leaked this story. As in made it up? Yeah. I wouldn't be surprised if maybe, who knows, maybe Amazon looked at it at some point, but I just don't buy it. We'll see. Alibaba, this is a great idea. This is actually kind of the most interesting business story of the week. Splitting into six companies is trying to unlock the company from the conglomerate tax. And what you mean by that? CEOs like to acquire different assets or launch, in this case, launch different companies taking advantage of the brand and their customer base. And oftentimes what they end up with is these corporate Frankensteins where there's really very little synergy.

5:44And the market hates conglomerates because what the market wants is a CEO and a company that are singularly focused such that they can understand the company, understand its metrics, and hold that CEO accountable. and the ceo likes to acquire stuff because their compensation goes up because the bigger the company the bigger the range that their benefits or their compensation consultants will tell them the ceo should be paid for and they always love the idea of a hit acquisition that makes the world much easier than actually building something but two-thirds of acquisitions don't work out because people typically overpay but you end up with these multi-headed hydras that kind of make no sense and then the ultimate activist player the go-to on activist investments is they come in and they break up companies because the way the market communicates its displeasure with conglomerates is it takes the shitty business in the conglomerate and it assigns that multiple to the entire company.

6:35So the disposition of assets when you're paying a conglomerate tax is accretive to shareholders. And an analyst did the work here at Alibaba. And then, and this is the important part in the second part of the story, got the blessing of the CCP. And it strikes me that the CCP is on a bit of a charm tour right now. And that is Jack Ma showed up and seemed friendly and didn't have any visible scars. They didn't have, you know, jumper cables attached to his nipples saying, say nice things about communism. That was a little graphic. Anyways, but basically it seems like Xi has figured out, okay, Chinese internet economy has just been smacked upside the head.

7:16And they've said, we've got to show some growth here. We've got to show some, we've got to let our thoroughbreds run. And I think you're going to see more of this. I think you're going to see even some photo ops with American internet companies and their great partnerships. But basically, I think the frost is thawing in the Chinese internet sector. and the Communist Party there is about to become a wind at their back as opposed to a wind in their face. This whole AI thing, this letter, I take anything Tristan Harris says seriously. However, I wonder if Elon Musk, if he had wrested control of open AI, which he tried to do, and my understanding is was kicked out.

7:52I wonder if he was in control of it, if he'd be advocating for a slowdown. And I'm all down with the notion of a slowdown. I understand the threat that this thing as technology that could get out ahead of us, and it will obviously have some potential or could be potentially weaponized. The problem I have is unless China, Brazil, North Korea, Iran, and Russia are going to sign the same go slow pact around AI, I think it could backfire on us. And that is, we knew that developing the hydrogen bomb would probably be a bad idea for the world. But if we stopped unilaterally the development of hydrogen bombs or splitting the atom, we knew would be really bad for us.

8:31So my feeling is we should absolutely go full steam ahead, but we need regulatory bodies. And then ideally some international cooperation to say, okay, this shit's scary. We should all agree to certain protocols. And then the last story on SBF, if there's any way to put someone in prison for like 11 lifetimes, they're going to try it with this guy. It just seems like his sentencing hearing is going to go for 10 weeks. God, God, I just get the sense he is definitely going to pay for the sins of all of crypto. And then Binance, what's to stop Binance from meeting the same fate as FTX? What do you think happens here?

9:09Well, there's no indication of fraud or a Ponzi scheme, though you never know with these crypto companies. What they're accusing them of is that they're letting U.S. customers trade crypto derivatives without registering with the CFTC. Binance is not registered in the U.S. They're registered in the Cayman Islands. and basically what they've been doing is they've been trying to sort of under the table tell us customers how to become a user with binance and it's not necessarily the retail customers that the cftc is worried about it's their big high frequency trading firms that are binance's quote vip customers and basically what binance did is they said you can't be a client unless you set up a VPN, which will shield your IP address and will allow you to be a user on our platform.

9:59So all of this is just a problem of you haven't registered in our nation. And that's a problem. As you mentioned, there's this comparison between Binance and FTX. I think back to last summer, when there was the first big crypto winter wave, and you had Coinbase's revenue was down 60%. Celsius, that big crypto lender, they failed. So did BlockFi, so did Voyager. Everything was collapsing. And then amid the collapse, there was this one winner that was, for whatever reason, it was crushing it. And that was FTX. And FTX bailed out BlockFi, they bailed out Voyager, they were hosting conferences and hiring Tony Blair and Bill Clinton to come and speak about the future of crypto.

10:42And the question that we were asking was, what on earth is FTX doing right that everyone else is failing at? And was it maybe they're just really good traders or they have a nice regulatory environment in the Bahamas? And we said this, they're probably just doing something really shady and illegal. And we should have said it earlier, and we should have said it more publicly, but we didn't have any evidence. And so the first thing when FTX finally did collapse, the first thing I said is, Binance is next. Because the thesis here is very simple. If your business is predicated on existing outside of the law, and generally that means existing outside of the US, which has probably the strongest regulatory environment in the world, if that's the first pillar of your business, and second, your sector is in structural decline, there's just no way that you can win this game.

11:28You're bound to fail. So I think, you know, 12 months from now, Binance is probably not a company anymore. Wow. There you go. I like it. We'll be right back after the break with a look at First Citizen's acquisition of Silicon Valley Bank.

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14:12We're back with Prof G Markets. It's official. Silicon Valley Bank has finally found a buyer, First Citizens Bank. First Citizens is based in North Carolina, and it calls itself the nation's largest family-controlled bank. It'll get SVB's$72 billion loan portfolio at a roughly 20 % discount. It'll take over all of SVB's remaining$56 billion in deposits, and it'll also get a$35 billion line of credit from the FDIC to cover potential future losses. However, the FDIC will retain the long-term treasuries that sparked SVB's decline. Shares in First Citizens surged more than 50 % after the news. So, Scott, the first time we discussed SVB, you predicted that a bank would come in and take it over and the depositors would be safe.

14:58That appears to have all happened. Did it go down in the way that you expected? I thought it was going to be a big bank that would want entree into the venture world. This was two regional banks making one bigger regional bank. The learning here is that of all the asset classes or all of the parts of the life cycle, there's seed, venture, growth, public, public growth, mature, value, and then distressed. I have found on a risk-adjusted basis, the best place to invest is distressed. And it comes down to one thing, that you really need to be careful not to trust your instincts. And occasionally, when your instincts are really strong, you want to pause, try and put your emotion, your instincts aside, and think the other way.

15:46Develop a thesis that zags while everyone else is zigging. Because humans will do almost anything to avoid pain. And when we come off the weekend where shareholders lost all of their money in SVP, you think, that must have hurt. I don't want to have that. I don't want to endure that kind of pain. And so the entire sector starts getting pummeled. And you immediately think, wow, I hate this sector. This whole sector is in trouble. It's probably my instincts are to short the sector or to sell my banking stocks. And that might be right. But at a minimum, you want to slow down and go, okay, instincts are rooted or cemented in us or implanted in our DNA over millions of years.

16:29And the way they get implanted is that they are the common emotion across the majority of the species. And that is you are scared of fire and so is the majority of your species. When everyone's running, when your first instinct is, I need to run from all bank stocks, you need to recognize that that instinct is probably prevalent across the majority of investors right now. Now, what does that mean? It means everyone's a seller. And when everyone's a seller, it means that decent companies that'll survive this mess get unfairly punished. They're the babies that get thrown out with the bathwater. First Citizens is an example of that.

17:08And that is, this is a company that is basically built on the backs of failed banks. They've done this 11 times. They go to a failed bank and they say to the FDIC, they say, dad, will you pay for this? Will you put me in business and you absorb all of the downside because you're dad and you have more money than me, but I'll give you some of the upside. They've done this 11 times. And as evidenced by the terms here, basically, they're saying here, you take the shitty, dangerous, explosive assets that have long-term maturities on them. I'll take the other assets. And basically, you'll backstop me, finance the acquisition, and all I have to do is give you a portion of the upside.

17:46It's just a great deal. And First Citizens has not only made great money over time, banks generally aren't that volatile. Upon the close of this deal, First Citizens' shares went up 50%. There will be some regional banks here, some niche regional banks that have a great business, that have not experienced a run, that have not experienced large outflows, but their stock is off 30, 40, 50%. That's where the opportunity is. Your instincts and your emotions are your enemies around investing. We were talking about First Republic last week, and First Republic stock rose around 11 % after the government said it would help any more struggling banks.

18:28It would provide further assistance. I mean, it's still way down compared to the beginning of the year, but it feels like maybe the contagion is subsiding. That's what it feels like. I don't think depositors are that scared. Even with all the catastrophizing on CNBC, I think they say, well, if they bailed out those douchebags in the valley, they're going to bail out us in Kansas if something goes wrong at First Kansas. How do you think history is going to remember this? I don't think this is going to be much of a, I think this will be a trivia question. A certain amount of leverage, a certain amount of bank failure that's ring-fenced, again, sign of a healthy economy.

19:04I don't think, I think we look back on this more as just the color around it. There'll be a Netflix documentary, maybe an original scripted program starring Jared Leto or I don't know, Anne Hathaway or somebody. We'll see. Who would be good? Who would play Greg Becker? You'd be good. It's a bold guy. You should do it. I like it. I like it. everything's fine don't panic don't panic because he's sweating and popping xanax and selling yeah and selling on the other hand hold on a second it's my broker sell bitch sell i could i could absolutely be that guy i'm going hawaii and he peaced out the hawaii that guy has like i would argue he doesn't have great judgment anyways i don't think this is what i'd call a historic financial event.

19:54I think it's a trivia question in a year. Yeah. And just the final, I just want to end on this final point, which is, so this transaction will cost the FDIC$20 billion. All of that will be covered by the fees that the FDIC charged the banks. In other words, taxpayers haven't paid a penny on this. And it feels like no one's actually lost money. So I guess the conclusion would be this turned out completely fine. But famous last words, we'll see what happens to the rest of the banking sector. It's just an important point. The FDIC is a separate off-balance sheet insurance entity that charges fees to banks to cover bank runs like this.

20:34Now, you could argue that every depositor is going to have to indirectly pay for this because the insurance that the bank is going to be charged for FDIC insurance is probably going to go up. But I think they have $120 billion in that reserve fund or in that insurance fund. They're asking the big banks to put in more, and I think their logic is the big banks are going to be the ones that benefit most from this because there'll be a flight of capital or a leaking of capital from small and regional banks to the big guys. The big guys will push back and say, well, why are we paying for the sins of these little banks?

21:08But the FDIC, think about this. This was the most expensive bank failure, I think, in history. And it took out, what, 17, 18 percent of the insurance company's funds. And the reason why you have insurance is that when there's a disaster, the insurance company comes in and makes everyone whole.

21:33A few weeks ago, we covered an Adani Group expose that was published by the U.S. short seller Hindenburg Research. Well, last week, Hindenburg found itself a new target, Block. Specifically, Block's payments platform, CashApp. According to Hindenburg, Cash App is a fraudulent business. The report accused Cash App of faking its user numbers with duplicate accounts, taking advantage of people with, quote, predatory loans and fees, and it also alleged that Cash App is commonly used for illegal activity. As an example, it cited how hip-hop artists frequently rap about it in reference to drugs and murder.

22:09Block shares fell as much as 22 % after that report was released. So, Scott, let's take a look at what they're actually alleging, because frankly, I don't find it compelling. You know, Hindenburg, I really respected for a long time. I think that they've done some amazing work with Adani Group. They did amazing work on Nikola. But this to me is, in your words, a giant nothing burger. So one, they said that the user accounts are fake or they are duplicates. Their evidence for that is that some employees told them that. And I just don't really think that you can trust former employees who maybe were laid off.

22:45who have some reason to dislike Block as a company. Either way, that's one thing that they thought. Second, users are engaging in fraud. Lots of people engage in fraud. I don't really understand how that's Cash App's responsibility to prevent fraud. I think that's the law's responsibility. And then third, the thing that they hung their hat on is that rappers use Cash App in their lyrics. And that to me is the giant tell that this is actually not that big of a deal. and the thing that I was thinking about from a personal perspective, they said at the very top of the report, we've been investigating Block for two years, which I assume was their way of saying, we've done our research here.

23:26From my experience, when I've been writing research papers or doing research for you, and I have a theory, I have a thesis that I want to prove, and I spend too much time trying to prove that thesis, there's a certain point at which I will refuse to accept that my thesis wasn't true. And to me, that's what's probably happened here. They've invested too much in making sure that they can bring this company down. They've invested money. They've shorted the company. They've also invested two years of their time and effort and their resources. To me, this actually hurts the credibility of Hindenburg as a serious short-sighted investigative firm.

24:05Yeah, I think you're right. I think the temptation when you've been as successful as Hindenburg to keep doing what you do. My guess is they have absolutely no problem raising money, even for, you know, not even captive capital. But if they call anyone right now and say, we have another idea, we're not going to tell you the idea, but we need a billion dollars, they're going to raise that money overnight. So this feels like a bridge too far. This feels like, for lack of a better term, that they're reaching. And rappers talking about cash app, I not only don't see that as a negative, it's a positive.

24:36It means it's part of the zeitgeist. In addition, the fake account stuff, I thought that was a problem. And then as you read further down in the report, the Hindenburg report, they say, as of now, that loophole has been closed. So I agree with you. I feel like this was a bridge too far. I feel like this is Bill Ackman's Herbalife. It won't play out as painfully for Hindenburg as Herbalife did for Ackman. Take us through what happened with Ackman and Herbalife. Bill Ackman put on a big short position in Herbalife, which is sort of a pyramid sales household products and nutrition company where sort of like pyramid or multi, they call it multi-level selling.

25:17And I think Bill Ackman, I think it offended his sensibility. I think as a guy who flies around on a Gulfstream and probably has an amazing home in the Hamptons, he probably finds that type of selling is predatory and can't relate to it. And I'm sort of the same way. I would never, you know, I wouldn't want anyone I know involved in that type of multi-level marketing, whatever you call it. But he took a huge short position and he said things like the arrests are coming, which was probably irresponsible. I don't think anyone there had broken any laws. and because as activists do, they all hate each other because they all want to be the biggest swinging dick at the Iris Song Conference or have the biggest home in the Hamptons.