May 19, 2022
Did you notice that stonks fell yesterday? It might have something to do with the pessimism I wrote about on Wednesday, or possibly the fact that Treasury Secretary Janet Yellen used the s-word, which means Axios is now publishing stagflation explainers.
- Situational awareness: Axios' "How It Happened" podcast has a new episode examining the fight for the Donbas in Ukraine, through the eyes of both a journalist and a soldier.
- In this week's newsletter, I'm back on the Twitter beat, but this time with a fabulous flowchart from the amazing Dani Alberti. Also, guns, art, even Rolexes. All in 1,181 words, a 4-minute read.
1 big thing: The Twitter vortex
The Twitter battle lines are drawn.
On one side: An edgelord billionaire with buyer's remorse. On the other: An avaricious board determined to enforce a deal worth roughly double the market value of the company.
- Caught in the middle: Twitter's employees, shareholders, and even users, paralyzed in a state of quantum superposition, awaiting a waveform collapse that probably won't arrive for months.
Why it matters: The Twitter meshugaas is a key test of the strength of the legal foundations underpinning the multitrillion-dollar legal and contractual edifice that is American capitalism.
- How it works: The signed merger agreement between Twitter and Elon Musk is about as watertight as such things get. Musk can say that the deal is "on hold" or that it "cannot move forward," but it's far from clear what that means.
- Twitter's board put out an unambiguous statement on Tuesday: "We intend to close the transaction and enforce the merger agreement." In other words: They have a binding agreement, signed by Musk, and they intend to hold him to it.
Between the lines: Musk seems to be trying to make a case — on Twitter, but not (yet) in the courts — that a possible bot miscount gives him the legal ability to tear up the deal.
- Decades of Delaware law and precedent say that he's wrong about that, but Musk seems to enjoy protracted legal fights, and corporate boards don't. So there's some incentive for the Twitter board to reduce the price of the deal, if doing so would help them get it done this year.
- The catch: Musk has already made multiple commitments with respect to Twitter, all of which he's broken. Given that the board would have no real assurance that Musk would close at a renegotiated lower price, they have no real reason to negotiate at all.
The bottom line: Lost in the chaos is any real hope that Twitter the product will meaningfully improve any time soon. The longer the turmoil continues, the more the intrinsic value of Twitter declines — regardless of its ultimate ownership.
2. What's next
When I first put this flow chart together over the weekend, my best guess was that it would go "yes" all the way and that Musk would end up buying Twitter at a small discount to his original $54.20 offer.
- Since then, Musk's literal 💩-posting (he fired off the poop emoji at Twitter's CEO) has vaporized the goodwill needed for the two sides to come to any new agreement.
- As a result, the chances of this ending up in the Delaware Court of Chancery have never been higher.
If it does end up in court, the judge will be well within her rights to grant Twitter "specific performance" — that is, to order Musk to buy the company, as he is contractually obliged to do.
- If he disobeys that order, no one has a clue what might happen.
The big question: Does even a Delaware court have any appetite to get into a massive fight with Elon Musk?
Go deeper: I went into detail this weekend about specific performance and the reason why Musk can't just walk away from the deal while paying a $1 billion termination fee.
3. The financialization of watches
Rolex watches have always been expensive — all those sponsorships don't come cheap. But over the past few years they've morphed from consumption good (buying one makes you that much poorer) to alternative asset class (buying one can, potentially, make you significantly richer).
Why it matters: Watches in general, and steel Rolex watches in particular, have now become an object of speculation. That in turn has helped to drive their price sharply upwards.
The big picture: Rolex watches have been all but impossible to buy on the primary market for years now.
- Annual supply of about 1 million watches per year now has to include a large allocation to China. That means authorized dealers don't receive enough supply, even to mollify their best customers — all of whom are trying to buy as many watches as they can, given that secondary-market prices are always significantly higher than retail prices.
- Rolex isn't in the business of maximizing profits, so it doesn't expand production to meet demand. Instead, it's wholly owned by the Hans Wilsdorf Foundation, a Swiss charitable trust. When it does introduce new models, it does so slowly and deliberately, and tries to lead rather than follow the taste of the public.
By the numbers: The secondary market in Rolex watches is highly liquid. The average Rolex now sells for about $15,000 — up from less than $5,000 in 2011.
- Prices have been softening in recent months, however — the first sustained down market since Rolex watches became an investment-grade asset class.
What they're saying: "A lot of buying was from people thinking prices can't go down," says WatchCharts.com founder Charles Tian. "Now we're seeing that first major sign that this type of growth is not sustainable."
4. The financialization of art
Art is a much tougher asset class to invest in than watches. Investment-grade art starts at about $500,000, and liquidity is much lower since artworks are unique. The round-trip costs involved in buying and then selling a work of art can easily exceed 30% of the value of the work, while the bid-offer spreads on a Rolex accompanied by all of its authenticity papers are much lower.
Between the lines: Art has a much longer history as an asset class than watches do, and so it's easier to see financial trends emerging.
How it works: The Mei Moses art index, which was bought by Sotheby's in 2016, gauges price appreciation by looking at repeat pairs of sales — situations where the same object is sold at auction more than once.
- The time between such sales is a good indication of how long collectors hold onto art. And that number has now reached an all-time low.
The big picture: Even old-school collectors regularly buy and sell as they hone their collections. Condé Nast patriarch Si Newhouse, for instance, owned the "Shot Sage Blue Marilyn" for about 10 years, from the early 1970s to the early 80s.
- Most collectors, however, hold onto most of their high-end art until they die, at which point it's often donated to a museum. Financial speculators, by contrast, buy in order to sell at a profit in the future.
The bottom line: The pictures that show up in the Mei Moses database are by their nature unusual: Most paintings are never sold at auction even once, let alone twice. But if the holding period for works at auction is declining, it seems reasonable to conclude that's also true for art in general.
5. Shot up
Not included in the headlines about how U.S. firearm production has soared in recent years: The fact that imports are skyrocketing too.
- By the numbers: On top of the 11 million firearms manufactured domestically in 2020, another 6.8 million were imported. That's a 71% jump from a year previously.
- Subtract out the 0.5 million firearms exported, and you get a grand total of 17.4 million weapons made to be sold in the U.S. — easily an all-time record.