Feb 6, 2020

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness: Casper, the original mattress-in-a-box direct-to-consumer retail disruptor. It went public yesterday at $12 a share and opened this morning at $15. That's well below the $23.12 per share that Series B investors paid as long ago as June 2015. Go deeper.

It's been a big week here at Axios. We've not only relaunched a ground-up redesign of the axios.com website, we're also testing out our first-ever mobile app.

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In this week's newsletter: Tesla volatility, the rise of borders, FICO scores, rental brokers, coronavirus, and more. All in 1,642 words — a 6-minute read.

1 big thing: The vindication of Elon Musk

Photo illustration: Sarah Grillo/Axios. Photo: Jörg Carstensen/picture alliance via Getty Images

"As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone."
— Elon Musk, "Taking Tesla Private" blog post, August 2018

Tesla stock has been in Ludicrous Mode for the past few days. Given its bonkers gyrations, it's now easy to see why CEO Elon Musk might feel that he was right all along in wanting to take the company private back in 2018.

How it works: Tesla's rising share price this year has been good for Musk's pay package and his wealth, but it has also turned the stock into an arena for short-term, high-stakes gamblers.

  • In the first three days of this week, $157 billion of Tesla stock changed hands. For gamblers, it was more popular than Bitcoin, which saw $96 billion of volume in those three days. Tesla even approached the $198 billion of volume in SPY, the benchmark S&P 500 ETF that's the most popular playground for day traders.
  • Compare Apple, with its awesome $1.4 trillion valuation: It had $107 billion in volume over three days, much less than Tesla, which is worth roughly a tenth as much.

The stock market is failing at its primary role of price discovery, the determination of how much securities and companies are worth. There's no rational reason — and certainly no news — explaining why Tesla's value should have fluctuated by more than $20 billion per day.

  • This wasn't a short squeeze like the famous VW run-up in October 2008, when the German carmaker briefly became the most valuable company in the world. In that case, the quantity of shares available to buy was much lower than the amount that short sellers had sold. But in this case, even if all the Tesla shorts were forced to cover their positions at the same time, that would account for less than one day's trading volume.
  • Other possible explanations like delta-hedging call-option volume (don't ask) similarly can't come close to explaining the magnitude of the price swings and high volume that Tesla stock is seeing.

Be smart: A stock that can melt up for no particular reason can just as easily melt down.

When the share price is as volatile as this, valuation feels more like a sugar high than the true wisdom of the crowds, and a buy-and-hold strategy feels like utter foolishness. Hedge fund manager Cliff Asness has argued that the price opacity of private markets has significant positive value. If that's the case then Tesla in particular should probably be private.

Flashback: Musk said in 2018 that he wanted to take Tesla private at $420 per share, which corresponded to a valuation of $76 billion. At the time, that was a significant premium to the open market price.

  • The bull case for Tesla is predicated on the company raising another $10 billion in equity capital, plus possibly much more than that in debt. Public investors don't like that kind of dilution, but a private investor willing to buy the company for $76 billion in 2018 would probably be happy to put another $10 billion in right now.

The bottom line: If Tesla is going to be a vehicle for speculators, it should be one in which they sit behind the wheel, rather than one they buy on the Nasdaq.

Bonus: Tesla's eye-popping acceleration
Expand chart
Chart: Axios Visuals

By the numbers: Tesla's market cap rose by $11 billion on Thursday, $23 billion on Monday, and $19 billion on Tuesday, before falling by $27 billion on Wednesday.

  • As recently as June, the entire company was worth just $31 billion.
2. Nations withdraw

Illustration: Sarah Grillo/Axios

It's not just goods and services that cross international borders every day — it's people, too. But now the world is retreating into national shells, and the U.S. is leading the way in discouraging international travel.

Driving the news: In recent days, the U.S. has...

  • Imposed travel restrictions on citizens of Eritrea, Kyrgyzstan, Myanmar, Nigeria, Sudan and Tanzania — who between them have a population of more than 360 million.
  • Barred even U.S. citizens from enrolling in the Global Entry program that facilitates international travel, if they live in the state of New York.

Of note: This was roughly the same week that the U.K. left the EU, with seismic implications for the future of labor mobility both into and out of Great Britain.

How it works: If you've ever spent much time in a place with invisible international borders, you'll know how magical it feels. I had a great vacation in Alsace last summer, and often didn't even know whether I was in France or Germany. In places like Alsace, or the island of Ireland, hard borders mean war and bloodshed, while their absence means peace and prosperity.

How it fails: International trade is already suffering from the coronavirus, including the travel and tourism sector. In the present climate, it's harder than ever for companies and countries to reverse course and start rebuilding severed international links.

The big picture: Coronavirus may only be a short-term problem. Over the long term, however, the outlook is similarly bleak, thanks to the geopolitical consequences of global warming.

  • A case can be made that the climate crisis caused Brexit. The British vote to leave the EU was in part a reaction to the sight of Germany accepting hundreds of thousands of refugees from the war in Syria. That war, in turn, was exacerbated, if not caused, by global warming.

The bottom line: When international travel and migration starts to decline, that's a bad sign for everybody except nationalists.

Go deeper: The global economic threat of the coronavirus

3. Don't worry about your FICO Score

Illustration: Aïda Amer/Axios

Your credit score changes quite a lot. The reasons why it changes can be hard to nail down, and doing the thing that's best for your long-term financial health can, annoyingly, often be bad for your credit score.

  • For instance: If you buy your first home and take out a mortgage with payments that are lower than you're currently paying in rent, that's likely to hurt your credit score. Or if you settle an overdue utility bill at less than 100 cents on the dollar, that could ding your score for longer than if you settle it at par.

Sometimes your score changes due to circumstances entirely out of your control, like when FICO changes its algorithm. That's what's happening now.

  • The broad-strokes consequence seems to be that people with scores above 680 are likely to see those scores rise, while people with scores below 600 are more likely to be downgraded.

No one knows what the effect on lending will be. Lenders won't necessarily use the new score, and even if they do use the new score they won't necessarily draw the line in the same place that they did with the old score.

Why it matters: Credit scores have risen by about 20 points, on average, over the past 10 years, and are now at an all-time high. Lenders want more differentiation among borrowers, and they want credit scores to reflect more long-term information, so that's what they're getting.

The bottom line: Individuals, in the words of the Serenity Prayer, should accept the things they cannot change. Whatever changes FICO makes are outside their control; the best thing they can do is just concentrate on their overall financial health rather than on one numerical indicator of creditworthiness.

4. How to fix a broken market

Illustration: Sarah Grillo/Axios

Renting an apartment in New York is ridiculously difficult and expensive, in no small part because of the dominance of a curious tribe of people known as "rental brokers." As the NYT explains, these creatures "have near absolute control over apartment listings, viewing appointments and leases."

Driving the news: In a widely applauded yet unexpected move, New York state regulators have decreed that renters can no longer be charged broker's fees.

How it works: Rental brokers charge astonishing sums for simply bringing together landlords and renters. The standard fee is 15% of the first year's rent, payable up front — that's $6,300 on an apartment costing $3,500 per month.

  • Brokers can charge that much because while they're hired by landlords, the landlords don't pay them, and are therefore price-insensitive. Meanwhile the renters, who have to make the payment, have no real choice but to pay whatever the broker charges.

What's next: If landlords want to continue to use brokers, they will have to pay them themselves. Brokers are warning that the broker's fee will then end up showing up in higher rent. But now landlords will have a clear financial incentive to use cheaper brokers. That should help drive prices down across the industry.

5. Coming up: Coronavirus researchers meet in Geneva

Illustration: Sarah Grillo/Axios

The World Health Organization says it will host a “major meeting” with researchers and health agencies from around the world on Tuesday to address the novel coronavirus outbreak, Axios' Courtenay Brown writes.

  • The goal: To set priorities and fast-track the development and evaluation of diagnostics, vaccines and treatments, plus ensure accessibility for vulnerable populations, the WHO said.

Why it matters: Thousands of people have been infected, and the death toll is rising. There is no proven treatment or vaccine.

  • Drug makers are already ramping up research. Gilead is testing one drug in Wuhan, the epicenter of the outbreak. China applied for a patent on the use of the drug.
  • What the WHO decides won’t stop individual countries or companies from going in their own directions, especially if they’ve started already, per Axios' Eileen Drage O'Reilly. But its recommendations will likely receive the lion's share of global funding.
6. Building of the week: U.S. Courthouse, Austin
Photo: Allan Baxter/Getty Images

The United States Courthouse in Austin, Texas — designed by Mack Scogin Merrill Elam Architects and completed in 2012 — is a striking complex cube constructed mostly from local limestone.

  • The elegant design fits 230,000 square feet of floor space onto a small urban lot. It manages to give judges and magistrates the light and ceiling heights their courtrooms need, while also being literally bombproof.

The courthouse is neither brutalist nor deconstructivist, yet it was singled out for opprobrium in a preliminary draft of a new federal order obtained by Architectural Record.

  • The order would mandate that “the classical architectural style shall be the preferred and default style” for federal buildings, and specifically says that the Austin courthouse has “little aesthetic appeal.” Buildings like the courthouse, mourns the order, are “influenced by Brutalism and Deconstructivism.”
  • The American Institute of Architects immediately condemned the idea, while architecture critic Paul Goldberger tweeted that "serious contemporary classicists should be appalled, not gratified, that the current administration is considering enshrining classicism as the official style."

Go deeper: Kriston Capps of CityLab asks whether the White House is trying to ban modern architecture.

Felix Salmon