☀️☕️ Cava & Green Shoes!
📊 Also: No Spiral; ECB hikes; China rallies; Bad is Good in China; Loose Japan; Solid Toyota 🎓 Green Shoe up your IPO
Happy Friday!
📝 Focus
Cava & Green Shoes!
📊 In the Markets
No Spiral
ECB hikes; China rallies; Bad is Good in China; Loose Japan; Solid Toyota
📖 MoneyFitt Explains
🎓️ Green Shoe up your IPO
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📝 Focus
Pop the Cava!
US IPOs are back! And they're wearing greenshoes🎓! Cava, the self-described category-defining fast-casual restaurant chain in "Mediterranean cultural cuisine", closed 99% up from its $22 initial public offering price on its first day of trading, having raised $318 million. Thanks to strong demand leading up to the IPO, the price was set 10% above the pre-IPO "guidance" range of $19-20, which was already up from the original $16-18 that its bankers started off with. Remember that in an IPO, the new shares that are being issued have already been sold to investors, and the first day of trading is just the first time everyone else might have a chance to buy (and the first time that shareholders can sell their shares in the market.)
Forget the Champagne and Prosecco, Pop the Cava!
- Image credit: Wedding Crashers (2005) / New Line via Tenor
.....▷ The doubling puts CAVA at a market value (total number of shares X latest share price) of $4.7bn. Not only did Cava price above the revised guidance range, but it also exercised its greenshoe option🎓 to give its bankers a 30-day option to sell about another 2 million shares, which could (and probably will) increase the amount raised by the company. Not bad for an unprofitable company (though investors are more focused on their plans for 1,000 outlets by 2032 from 263 now.)
.....▷ For restaurant-watchers, the question is if it is closer to Chipotle, the $56bn Mexican food chain with good growth and margins or to fast-growing and cash-burning (but profitable) salad-based Sweetgreen, the last restaurant to go public back in late 2021. Sweetgreen's IPO price was $28 per share, also above the guidance range, and after peaking at $53 per share, it closed at $40 on its first day of trading, a 43% pop. On Thursday, it closed at about $10, a full 80% off that first-day high, which it never saw again. Healthy salad-based diet vs a healthy Mediterranean diet? (What's unhealthy is to assume the first day of trading will continue forever...)
.....▷ For IPO watchers, the IPO market has been slow compared to previous years, so CAVA was particularly closely watched for signs of life. Post-pandemic economic uncertainty, a banking crisis and the rate-hiking tightening cycle put the brakes on many companies going public. But of course, the markets have still hit the technical "bull market" range despite all that, so the prices of the IPOs could be higher (since they take into consideration the valuations of comparable companies which are already trading.) Upcoming IPOs this year may include payments company Stripe (which we use), work management platform Airtable (which we also use), and space exploration company SpaceX (which we don't.)
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📊 In the Markets
No Spiral: After a "meh" response at the close of Wednesday when the US central bank, The Federal Reserve, announced the widely expected pause, even if a hawkish pause (and with Fed Chief Jay Powell telling everyone not to call it a skip!) markets were off to the races again on Thursday. Despite the hawkish spin and strong hints of two more 0.25% hikes this year, markets focused on signs of economic weakness in the hopes those hikes won't happen. Bad news is good again. Ignoring still strong retail sales, traders enjoyed hearing about more normal people losing their jobs than expected.
The labour market I think has surprised many, if not all analysts over the last couple of years with its extraordinary resilience, really. And it’s just remarkable. And that’s really, if you think about it, that’s what’s driving it. It’s job creation, it’s wages moving up, it’s supporting spending, which in turn is supporting hiring, and it’s really the engine that is driving the economy.
Federal Reserve Chairman Jay Powell
.....▷ Though messages were mixed (confused, some say) Jay Powell did hint that rather than being a necessarily bad thing from an inflation risk perspective, labour market strength in the US may prove to be a valuable support for the economy as he continues with his campaign against inflation. Even back at the last meeting in May (when the Fed last hiked), he said, “I do not think that wages are the principal driver of inflation”. This surprises some critics who think he's trying to drive up unemployment as the tool to smash down inflation, but that can't be the case given the Fed's dual mandate (see below)... unemployment may be collateral damage from a slowing economy, but it won't be the tool (which is slowing the economy!)
The Fed's Dual Mandate - a mini-explainer
- Unlike most independent central banks around the world, the Fed has a "dual mandate", meaning that not only does it have to keep inflation under control through all means necessary (target is 2%, not zero), it also has to seek "maximum sustainable employment"... not meaning zero unemployment, but a level that is neither a boom nor a bust rate of (un)employment.
- Most economists believe inflation and unemployment work in opposing directions in an economy. "The Phillips curve" is the classic economics model suggesting a sharp inflation-unemployment trade-off.
Still hawkish
- Image credit: Tenor
ECB hikes, China rallies: In Europe, the Stoxx 600 was flat after the ECB repeated it expected inflation “to be too high for too long” and that it would not return to its 2 per cent target for another two years. It lifted its deposit rate as expected by 0.25%, and more hikes are expected. Earlier, stocks rallied in Asia after the People’s Bank of China cut its medium-term policy rate in the face of slowing economic growth (see below) with the Hang Seng China Enterprises Index, which tracks mainland Chinese companies listed in HK also off to the races, and up 2.2%.
Bull market off to the races again
- Image credit: Tenor
Bad is Good, China Edition: China's central bank, the PBOC, has made its first interest rate cut in 10 months, showing Beijing's deep concerns about the country's post-Covid recovery. The move comes as data continue to reveal a sluggish economy due to the slowdown in the dreadful property sector, weakened export demand and low business and consumer confidence. The government is expected to implement further measures such as infrastructure funding and tax breaks to support the economy.
.....▷ Despite the rate cut, many feel China's growth prospects remain poor, with retail sales and industrial production missing expectations. The unemployment rate for youth has reached a record high while the property sector continues to struggle. The government remains cautious about the economic recovery, expecting the second quarter to show faster growth but only thanks to a low base in 2022. And Chinese equities on the mainland, in HK and traded in the US responded bullishly to the bleak prospects and rate cut, while the renminbi (CNY) weakened against the dollar.
Loose Japan: The Bank of Japan (BOJ) will announce its policy decision later on Friday. Unlike other major central banks, the BOJ has been maintaining an ultra-loose monetary policy, which most expect to continue, though some measures, such as the market mechanism wrecking yield curve control scheme of his predecessor may be walked back. The ultra-dovish policy will continue until Japan's wage growth matches the supply-chain-caused price increases (so the real purchasing power of workers is no longer being eroded and may even increase.) The weak Yen, as a result of being so wildly out of step with other major economies' monetary cycles, has led to a surge of foreign investors (and tourists, too!)
.....▷ Japan's corporate landscape is undergoing a significant transformation (as discussed in last week's "Actively Japanese" MFM) which seems to be breathing life into the moribund economy. Canon and Toyota shareholders are demanding diversity and independence in their boards, Citizen Watch plans to buy back shares, and Uniqlo parent Fast Retailing has brought in huge wage hikes (see January MFM.) Improving company profits, labour market reforms, a post-pandemic economic rebound, rising inflation and increased wages have contributed to Japan's positive macro tailwinds, while the Tokyo Stock Exchange is pushing more companies to issue bigger dividends or buy back more shares (much like an activist investor would!)
Solid Toyota: Toyota plans to introduce an electric vehicle (EV) equipped with an all-solid-state battery by 2027, aiming to compete globally. These batteries offer fast charging in under 10 minutes and provide a range of 1,200 kilometres, surpassing conventional lithium-ion batteries. Toyota intends to boost its EV business, targeting sales of 1.5 million units by 2026 and 3.5 million units by 2030.
.....▷ As our MFM guest writer Woo FC noted at the start of the month, China's SAIC is planning mass production of its solid-state battery EV in 2025. Having led the way with the Nissan Leaf, Japanese carmakers have failed to keep up with US, European and Chinese rivals. Basically everyone.
A Tesla Model S takes 11-18 hours from empty on a 240-volt wall outlet at home. Even a Tesla Supercharger takes 25-30 minutes (EnergySage)
- Image credit: Tenor
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📖 MoneyFitt Explains
🎓️ The "Greenshoe" Option in IPOs
To keep an IPO from closing below its issue price, bankers used a price stabilisation mechanism called an overallotment option, or a "greenshoe." This is a permitted form of price manipulation to support the share in the event of weakness for a month following an IPO.
What happens with a Greenshoe Option is that bankers can sell 15% more shares in the IPO than planned. In other words, if the deal is hot, the banks effectively go "short" the stock at the IPO price by selling shares they don't have to investors. That sounds suicidal since the shares are, by definition, in high demand at the IPO price!
But in fact, if the shares do shoot up after the IPO, that's when the option can be exercised. The bank buys new shares from the company at the IPO price and squares its books at no loss. The company ends up selling more shares and receiving more cash at the IPO price.
On the other hand, if the shares trade down for any reason, the bank buys back the shares in the open market at a profit since they short-sold the shares at a higher price. (In this case, the company doesn't sell extra shares and won't receive any extra cash.)
The greenshoe option gets its name from the Green Shoe Company, which first used it in its 1960 IPO.
