Prof G Markets: The Most Profitable Year in Banking History, Elon’s Tesla Stake, and Firing People

0:28Time to check on the skies. Rinse takes your laundry and hand delivers it to your door, expertly cleaned and folded, so you could take the time once spent folding and sorting and waiting to finally pursue a whole new version of you. Like tea time you. Mmm. Or this tea time you. Or even this tea time you. So did you hear about Dave? Or even tea time, tea time, tea time you. Mmm. So update on Dave. It's up to you. We'll take the laundry. Rinse. It's time to be great. This week's number, 99. That's the percentage of the American population that lives in a county with at least one Mexican restaurant.

1:07True story, I like to masturbate fully naked. If you don't like it, go to another Chipotle.

1:24Welcome to Prof G Markets. Today, we're discussing Elon's Tesla stake, bank earnings, and a firing on TikTok. True story, Ed. I have a lifetime. I used to talk about Chipotle a lot, which I absolutely love. And they sent me a lifetime Chipotle. I can walk into any Chipotle with this card, which I've since lost, and order a meal and it's free. My kids, it's like literally my kids are totally blown away and think my job and career has merit now. So you got super rich and they decided to give you more stuff for free. That's awesome. do i think it's important that wealthy people get free stuff i just think it makes sense yeah by the way just on the on the your opening joke and i got two comments last week one was for my friend's mom who was like that last week's joke was totally inappropriate then the other this other dude came up to me at the gym he's like oh are you at else i'm like yeah i'm like oh yeah i love the podcast i was i was listening to it this morning um i'm trying to get my girl into it my girlfriend into it um but we listened to the first first five seconds and scott started talking about how his wife fucks him in the ass with his with her massive cock so she doesn't really like it apparently girls don't really like the um the anal what about women ed what about women yeah yeah anyways get to the news you you you you anyways what are we discussing let's start with our weekly review of Market Vitals.

2:57The dollar rose, Bitcoin dropped, and the yield on 10-year treasuries climbed. Shifting to the headlines. A federal judge blocked JetBlue's $3.8 billion deal to buy Spirit Airlines, saying a merger would restrict competition and lead to higher fares. Spirit's stock cut in half after the decision on Tuesday. Uber is shutting down alcohol delivery app Drizzly after acquiring it for$1.1 billion three years ago. Uber intends to prioritize the core Uber Eats strategy, helping customers get anything from groceries to alcohol on one single app. US Bitcoin ETFs pulled in$871 million in the first three days of trading.

3:34Investors turned to BlackRock and Fidelity for new crypto products as the higher fee Grayscale Fund saw outflows of more than$1.1 billion. For the first time ever, Apple surpassed Samsung as the world's largest smartphone manufacturer by units shipped. Apple now holds a 20.1 % market share over Samsung's 19.4%. In terms of revenue, Apple dominates with a near 50 % share of the entire market. And finally, chip design software maker Synopsys plans to acquire Ansys in a$35 billion deal. That would be the biggest acquisition in the tech sector since chipmaker Broadcom took over VMware last November.

4:14After the news, Synopsys shares were up 3.8 % and Ansys shares were down 4.8%. Where do you want to start? Spirit and JetBlue, definitely the Biden administration is much more kind of antitrust-friendly or merger-unfriendly, if you will. The thing that struck me about this was the Spirit Airlines on announcement that the deal wasn't going through. It dropped, it got cut in half. now that it's been blocked, JetBlue owes Spirit$470 million breakup fees. So it's weird. It got cut in half, despite the fact it's getting almost a half a billion dollars. A year ago, when it was a bidding war, I don't know if you remember, it was a bidding war between Frontier and JetBlue.

4:54The Spirit CEO was very vocal, saying to the shareholders, don't vote for JetBlue. It's unlawful, and it won't be approved, because JetBlue's too big. And he was trying to drum up support for the Frontier acquisition, because, yes, it was a smaller offer, but it was more likely to go through. It didn't get enough support from the shareholders, so the Frontier deal falls through. And then as soon as that happens, Spirit's CEO turns around and he says, we've reached an agreement with JetBlue, we're really excited about it. And then he spends the next year explaining why the deal is lawful and why it would promote competition.

5:27So it's like a complete 180 from what he was originally saying. And I think the way he's handled this illustrates the truth of this situation, which is the deal was never going to go through. And the fact that JetBlue's CEO thought that it might demonstrates, in my view, probably some incompetency because now they have to pay this$400 million fee to Spirit shareholders. They also have to pay a$70 million fee to Spirit, the company. And they look really stupid now. And then, surprise, surprise, the JetBlue CEO is now stepping down. Yeah, I mean, I hate the airline industry for the most part, the bailouts, you know the five ceos the biggest airlines of the four ceos collectively paid themselves like 150 million dollars the year before covid and then went hat in hand such a joke then went hat in hand to the government during covid saying we're all in this together they're just so full of shit it's just a very difficult business it's labor intensive it's capital intensive it's subject to all sorts of exogenous impacts so it's weather or i mean it just or consumer trends or a pandemic.

6:33Warren Buffett famously said, if he had a time machine, you'd want to go back and kill the Wright brothers. The airline industry has just been terrible, terrible for investors. Drizzly, this one was weird to me because I couldn't discern whether this is a billion-dollar acquisition that didn't work and they're just calling it a day or if they're just getting rid of the brand. It's been rolled up to the larger food offering. Do you have any sense for what's going on here? Basically, I mean, the story Uber is telling that this has kind of been the plan and that their long-term plan is that they just want to consolidate all delivery into one app and that app is going to be Uber Eats.

7:11And then they've also made statements about why it's actually not a big deal, which honestly, I believe, for example, they're like alcohol sales doubled on Uber Eats last year. Also, So the majority of Drizzly users already have Uber accounts. Also, they still keep all the back-end tech, like they have this proprietary ID technology that lets retailers identify and verify the age of their customers. And that's something that Drizzly designed and then Uber scooped up when they acquired them. This feels to me like another example of the corporate communications department not doing a very good job.

7:46And that is, this came off as a foul ball. It came off as Uber was calling uncle on a terrible billion-dollar investment, but it might have been just brand architecture move. And then Apple selling more smartphones than Samsung. Most people would credit Apple with a lot of sort of seminal or iconic business strategy moves. But I think the one that doesn't get enough attention was in 2001, Steve Jobs decided to take money out of pre-purchase broadcast advertising. And they opened their first store in Tyson's Corner. at the, you know, when, if you think about it, you go back and what's so visionary about this, is this was a time when Amazon was coming online and the general consensus was that stores were just going to go away and we're going to no longer play a role that we were all going to be ordering everything online.

8:33And what I think Jobs recognized was that branding and brand is the core asset of Apple. They get above market margins. Just real quick, I was on the board of Gateway Computer. I don't know if you know that, Ed. But at that time, we sold more computers. We sold three times as many computers as Apple, but our margins, get this, our gross margins were like 6%, and Apple's margins were 30%. People pay so much for that self-expressive benefit brand Apple. So the brand really is key. And there's kind of three components to branding, pre-purchase advertising, loosely speaking, purchase distribution, and then post-purchase loyalty programs, warranty, et cetera.

9:08And what Jobs recognized was that the sword of pre-purchase branding, specifically television advertising or print, that sword was getting duller and duller. So 40 years ago, an ad on the Academy Awards cost a fifth as much but reached five times as many people or offered 25 times their ROI. Or put another way, the ROI has gone down 96 % over the last four decades. And he recognized this and said, well, people still have to buy shit. So if you really examine the channel and hardware, the distribution channel was really desperate. If you ever wanted to fix a computer or buy a computer, you went into like Egghead Software or CompUSA or Circuit City.

9:50And then they opened these temples to the brand. And I think it has been the difference between Apple becoming the strongest brand in the world and Samsung losing share and just not offering the same or not being able to offer the same type of margins in their product. And I consulted to the CMOs of both Nike and Samsung, and my message 15 years ago was the same to both. They need to get greater control of their distribution in order to maintain the type of brand equity and margins they become used to. One listened, the other did not. Samsung actually opened a store. You wouldn't even call it a store because they weren't selling anything in the meatpacking district.

10:29And it just felt stale. There was no life to it. It felt like a museum. No one went. You went once and that was it. And the Apple stores are just, they're just incredible. So the downstream or the verticalization of Apple, the huge investment, kind of swimming upstream or being a contrarian, zigging when everyone was zagging, It ended up being, in my view, one of the kind of the pillars of it becoming the most valuable company in the world. The craziest part is that the iPhone is still seen and priced as this luxury product. And as you talk about and teach about, like the number one rule of luxury is limited supply.

11:07Like that's what allows Hermes to price a bag at 10 ,000 because you walk in and you're not allowed to, you're not able to get a bag. this almost defies economics because this that's not the case with the iphone it's now the most popular smartphone in the world and yet it's still priced at a thousand dollars per phone it's still the most expensive it's still this aspirational brand well just as the idea of a virgin giving birth to the son of god kind of defies the natural order or suspends all rational belief what apple has pulled off is kind of suspends the natural order in the world of marketing.

11:44It just, it defies gravity and it's pulled off what, as far as I know, no other brand has pulled off before. And then let's talk about Synopsys to acquire Ansys. A lot of sys in here. So Synopsys, I didn't know this, is the largest maker of software used in chip design. The stocks that have really outperformed over the last decade, maybe more than that last 20 years, kind of have one thing in common, at least the majority of them, and that is they're an asset light model. And to a certain extent, you don't want to own apartments. You want to build a layer of software on top of them so people can rent them out.

12:20You don't want to own a car. You want to create a level or a thick layer of innovation or software on top of it such that you can rent them out to other people. And obviously that's Uber. But these asset light models have really dominated. The most valuable company, I would argue, in AI right now, Nvidia, they design and then they rent out other people's manufacturing. And this is interesting. I don't know much about it. Do you know anything about this deal? Well, biggest in the tech sector ever, if it goes through. To me, the big reminder is like, boring is sexy. Because, you know, full transparency, I had never heard of Ansys before this.

12:59And maybe I'm just dumb, but I also read business news for a living. I think both of those things are true. I think those things can exist at the same time, Ed. Great. Doing your job. Well, hold on. I was saying something, which is boring and sexy. So here's what I do know about Ansys now. They make engineering simulation software. Basically, they'll go to an airplane maker and they'll say, instead of physically testing your airplane, we'll just simulate a bunch of real world scenarios that you don't have to spend all this time and money building and crashing planes. and that's literally all they do.

13:35And so I guess the lesson for me here is like, if you can build a product that no one else is building, whether that's because your product is super complex and you need to hire a bunch of crazy smart engineers and get them out of like academic institutions, which is what Ansys has done, or maybe just because other people don't really care about the problem that you're solving because people don't know about it. But if you can do something that is extremely niche that no one else is building, you're going to make a shit ton of money. And it doesn't matter if you're a household name or not. It's being sold for$35 billion, which is almost double what Adobe was going to pay for Figma.

14:11And based on the stock movements, the market believes this is going to go through. We'll be right back after the break with a look at Elon's Tesla stake. Thank you.

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16:00We're back with ProfG Markets. Elon Musk wants more Tesla stock. In a series of posts on X, Musk wrote that he wants 25 % vote to control over the company. Otherwise, he'd take his AI and robotics ambitions elsewhere. Musk sold about$40 billion of his shares in 2022 to finance his purchase of Twitter. Still, he remains Tesla's largest shareholder with a 13 % stake. Scott, Elon is basically pressuring the board to double his stock. Have you ever seen anything like this before? Yeah, this happens all the time, but in a much different format and much less aggressively. I have been on the board of several companies where the CEO stamps his or her feet over their compensation and threatens to leave.

16:41I even had one CEO kind of threaten that he would walk down the street with his team and start another company. And we came close to actually firing that guy. Oftentimes, there's a bit of jockeying around compensation between the board and some implied or implicit threats, especially in private companies. It's really unusual in public companies. And what's so unusual about this is that if you take a step back and really think about what's going on here, Elon Musk is the wealthiest man in the world. How did he become the wealthiest man in the world? Mostly through his stake in Tesla. So the company that made him the wealthiest man in the world, he is saying to the board, if you don't pay me an additional$70 billion, which would be the value of the options they would need to award him to go to 25, I am going to take all of my ideas and start deploying them in a different entity that competes with Tesla, but I expect to still be around at Tesla.

17:37I mean, there's about five different things in that that most boards would fire the CEO for. I've never heard of anything. We've never just seen anything like that. And for him to start shitposting the board publicly and putting, you know, negotiating in public, I've never seen that before. Usually it's private. it. And at some point, if this were a normal company with normal directors, basically directors usually are what I call referred to affectionately as FIPs, FIPs, formerly important people. And if some guy started threatening to take his ball and take it somewhere else, and we had already made this guy the richest person in the world, they might ask that person to leave, or they might just say, sorry, boss, we're not giving you more, you're already staked.

18:20And oftentimes, and I've been on boards with companies where the CEO wants more shares. And this happened to me. What my boards have said to me is, you own so much of the company, Scott, that you're kind of fully staked. We don't feel a need to give you more. You're good. But this board is different. The compensation committee of the board, although I don't know if this board even pays attention to its committees. I mean, the problem is there's so many conflicts. They all want to be this guy's buddy and have a chance to invest in his other ventures. So he kind of controls the board. He also has brothers on the board, which is ground zero for poor corporate governance.

18:54It strikes me that anyone that goes on this board really has, you know, there's only one requirement, and that is you do whatever the fuck he wants. And people on the other side would say, well, as long as he continues to create this sort of shareholder value, you know, he should kind of be able to push the board around. What do you think about that? I mean, he's 10x the value of the company in the last five years. I don't care how powerful you are. At some point, there have to be guardrails. There has to be somebody in your life that says no. Otherwise, it sort of goes to what are the keys to negotiating?

19:27And there's really only two things you have to remember. The first is to not be emotional. Don't make it win-lose. Don't get angry. Just realize they might have different objectives than you. That's fine. And second is to always show a credible willingness to walk away. I've never done a deal. I've never sold a company or bought a company where at some point one party didn't walk away. Because until someone does, they just keep bumping and making the terms worse. When I was doing my deal to sell L2 to Gartner, they kept popping up and asking for more and more stuff or reducing the price. And then finally I said, I'm out.

19:59I sent them a letter saying, we've asked for you to release this from the exclusive here. We're done. And then that's when they came back and gave us what we needed and said, we're going to close. At some point, somebody has to say no to this guy. Otherwise, I think it just gets worse. Well, I guess let's just go through the actual possible scenarios. So what Elon's actually asking for isn't necessarily 25 % of all the shares. He just wants 25 % of the voting power of the control of the company. and one of the things that he suggested that he would be down for is a dual class shareholder structure but then he also pointed out but i am also told it's impossible to do that after an ipo and then he went on a rant complaining about how it's stupid that that that it's not possible now i think what we should what's worth mentioning is what at least from a first glance view there's not total certainty over whether it's impossible to switch back to a dual-class structure.

21:00Because just when you look at history, Ford had an example where the shareholders voted on switching from dual-class to single-class. So there's a possibility, or we should at least take it with a grain of salt, his assertion that we cannot do this after the IPO. Then there's the other option, which is Tesla could, in theory, sell itself to a new co, which has a different shareholder structure. And then there's the possibility of, you know, they just say no. But I think the most likely scenario would be what they did in 2018, where they said, we'll give you all of this money or this stock, but you have to hit certain performance metrics.

21:39And we're going to make those performance metrics absurd. And what he did in the past five years is he met all of those. And so he earned his$60 billion. So I feel like, I mean, what would you do if you're the board in this situation out of the options that you could take? I think what you're suggesting is probably where they end up. And that is they give him some crazy over-the-top options award that has very aggressive hurdle rates and say, look, you can now be worth a half a trillion dollars and go buy the BBC and Russia Today if you want, but we're going to put big, big hurdles on it. I don't think a different class of stock is the way to go.

22:22But when you look at the margin compression here, when you look at how many people are coming for Tesla, whether it's Hyundai or that Chinese manufacturer, I forget who it is, I just think this guy is a few bad quarters away from all of a sudden this board finding its backbone.

22:47The banks kicked off fourth quarter earnings season, And JP Morgan once again reigned supreme. For 2023, the company had the most profitable year in banking history, with net income of about$50 billion. Meanwhile, Morgan Stanley's quarterly profit fell 32 % compared to a year earlier. And alongside Goldman Sachs, it reported its lowest annual profit in four years. Over at Citigroup, things appeared even worse. The company reported a net loss of$1.8 billion, down from a$2.5 billion profit the previous year. and it also announced 20 ,000 job cuts. Scott, mixed bag here. What do you make of these earnings?

23:23I mean, it's just amazing. Usually these banks kind of move in sympathy with each other. JP Morgan has registered profits, the likes of which we've never seen before in the banking industry. And I think it's better to be lucky than good, although they're both here. And that is as interest rates have spiked, if interest rates are 2%, percent, that means you're paying people 1 % for their deposits and you're loaning it out at two and a quarter. That's a spread of 125 bps. When all of a sudden you can get 8 % on a mortgage and you're paying people 5%, your spread is 300 bps. So for no real reason, your margins or your gross margins are up 150%.

24:08So a lot of that is just the incredible earnings power or incremental margin they're getting on their deposits. In addition, because JP Morgan is so big and so bulletproof and so well-connected, when I think it was First Republic was going out of business, they got to pick it up. Basically, they got to pick up, I think a quarter of a trillion dollars in deposits for free and then start earning their 200 bips. They picked up a massive amount of deposits just in time for the spread and the money they were making on those deposits to explode. So they have done incredible. Incredible. Their shares last year were up 27%, which is really impressive when you consider that the NASDAQ bank index was down 5%.

24:52And then Goldman looks like things are getting better there. I think M &A volume is picking up. They have a great wealth management business. Their asset management business is much more consistent, and the market likes that more. Their revenues increased 23 % year-on-year in their asset management group. you know they're executing and their profits increased 51 percent year on year blowing away analyst expectations citigroup or citi i would imagine that jane jane fraser is not long for this world a two billion dollar loss in the face of other folks doing really well and morgan stanley fell short of expectations but um they're still making money um this was i think this was probably a kitchen sink quarter, I would say, and that is sometimes the CEO takes all the charges, discloses all the bad shit, takes the write down because it's his first, I think it was his first quarter as the news, I don't know if it was his first quarter, but he's got, he's in a honeymoon period.

25:50So he wants, what he wants to do is kind of say, oh my God, I didn't realize how bad this was and blame the previous CEO and get it all out of the way. Ted Pick, you're talking, the new Morgan Stanley CEO. The new Morgan Stanley CEO. And set it up, you know, take all the bad charges, et cetera, and set it up for success. Yeah, I think the kitchen sink point, it was almost like a kitchen sink for every bank this quarter. Because, I mean, there was no consistency in the profits. JP Morgan's quarterly profit was down 15%. Morgan Stanley down 32%. And then Citigroup, yeah, has this$2 billion net loss, which is just crazy.

26:27But they all had these non-recurring charges, as you say, the kitchen sink. For example, the main one is that they all had to pay the FDIC fee because of the Silicon Valley bank collapse. And as we know, if you're a big bank or what they call a systemically important bank, that's more than$5 billion in deposits, then you have an obligation to cover the depositors if another bank goes down, which is what happened. So Citi paid$1.5 billion, JP Morgan paid$3 billion, and then you put all the banks together and they all paid to the FDIC just this quarter,$10 billion. In the case of Citi, there are also some really niche one-off charges.

27:09There's this$1.5 billion expense that Citi calls the Argentina-Russia transfer risk. And basically what it is, is for one, Argentina has devalued its currency by 50%. We discussed that on a previous episode. They're talking about getting rid of the central bank. They have this new populist leader in charge. And then over in Russia, they're fighting a war in Ukraine. and they're being led by a murderous autocrat, and the ruble is down around 30 % in the past year. So basically, Citibank's concern is that they have all these assets in these two countries, and they might not be able to get the money out when they need it.