It’s not a dip

Author

Devin O'Brien
June 20, 2022

Email agenda:

  1. Rate Hikes

  2. GDP = eh

  3. Crypto Hack to Pay Less Tax (takes 1 minute)

  4. What I’m hearing + startups to do list

  5. What I’m doing (or importantly not doing)

Money printer goes BRRRRRoken

The big news this week was the fed (central bank) is raising interest rates by 75 basis points (.75%), the largest increase since 1994

What this means: The Fed impacts short term rates by buying or selling US Treasuries

How the hell do they do this: Bond yields are inversely correlated to the price, so bond yields ^ = price goes down. So the fed is SELLING 2 year US treasuries, rates go up, price of bonds go down

Why:

  • Lower interest rates lead to more borrowing, spending, consumption, etc

  • As spending (demand) goes up, prices go up (inflation)

  • Interest rates were extremely low during COVID to help stimulate the economy. Now we have rapid inflation (bad), so by raising rates, the fed hopes to slow borrowing, spending, and bring down commodity prices

Impact:

  • Energy stocks and commodities like rising commodity prices (duh).

  • Think Exxon, or buying oil. These go up during inflation. As rates go up, there will be DISinflation, so these stocks tend to underperform

$XOM Chart below - see what inflation does for energy stocks?

GDP slowing + rate hikes = look out below

GDP or Gross Domestic Product is the measure of value added through the production of goods and services in a country aka is your economy accelerating or decelerating

Forecasts have GDP slowing in Q2 from Q1, with companies profits slowing, demand slowing, and we have higher interest rates

To sum this up…. This is NOT good for public equities

If you are a proctologist trying to pick the bottom, this isn’t it

Crypto bro’s come out of hiding to pay less tax

Best Meme:

Crypto is down 69% (lol) from its 52 wk high and approx 50% YTD

For all of you HODL’s here’s a hack you need to know about (if you read anything in this newsletter read this)

When you trade in the public markets, let’s say on Vanguard, there are rules called wash sale rules (wash sales)

This rule prevents you from selling things to generate losses and offset gains, and then immediately buying them back

BUT

There are no wash sales in crypto

So if you have capital gains, and are sitting on a bunch of crypto losses, you can sell and buy back and use those losses

It’s truly a no brainer

Example: You have $20,000 in capital gains from selling an asset (stock, crypto, real estate, business on microacquire, etc). You look in your coinbase and see (-$14,500) and you’re HODLing ETH. Sell the ETH, book the $14,500 loss, buy it back. Now you have the ETH at the same price, and you capital gains you have to pay tax on just went from $20,000 to $5,500 in 1 minute

What I am hearing - Private Markets M&A

The public markets have taken a beating, and this is slowly starting to carry over into the private markets

I spoke with a founder recently who sold their tech business to a PE backed company

They said that they are still looking at acquisitions, and multiples are trending down

FYI: Valuation multiples typically vary based on size, industry, growth, etc

SaaS Valuation Example:

SaaS has 5 customers on annual contracts

Each pay $1m upfront for the year

Your ARR (annual recurring revenue) is $5m

SaaS businesses because of their scalability and gross margins sell on ARR multiples (i.e., Revenue - Cost of Services typically is 65+%. Gross margins for a shirt are 50%

$5m ARR x 4 (industry, size specific multiple) = $20m valuation

If there is a $2mm ARR (annual recurring revenue) tech biz in the same industry as a $5m ARR tech biz.. All else equal the $5m ARR biz will command a higher multiple

Startups to-do list

  1. Analyze your burn rate (cash you’re losing per month)

  2. Forecast worst case scenarios for revenues and expenses

  3. Raise SAFE (Simple Agreement for Future Equity) notes if possible

    1. This allows you to get capital now for a valuation to be determined in the future at your next round

  4. Cut expenses where feasible

What I am doing / not doing

I think one of the worst parts about the finance / investing industry is honesty and transparency

I pay attention to a lot of data and pay for independent research so I was prepared for this turmoil

The S&P 500 is down 23% YTD and I am down 3.4%

I would bet 99% of people have a portfolio that is almost 1.00 correlated, meaning, when the market is down, all of your stuff is down

Not good

You need strikers and defenders. You need things that do well when other things don’t. When things you own go up and things you short sell or buy puts on go down, that’s called alpha or excess returns

Here’s what my portfolio looks like:

  1. Not buying almost any stocks

    1. Sold $XLU (Utilities Sector ETF) on 6/16

  2. Bonds look like s*** too, I am not buying them

  3. My biggest positions are $UUP (bullish US dollar) and $GLD (gold ETF)

  4. Put options on shitty retail brands

    1. Retail are seeing slowing sales, cost pressures, large inventories they can’t sell = slowing profits

  5. Put options on energy, oil, and natty gas

    1. These puts have not been my friend, but they don’t expire for awhile and I am betting on slowing inflation where these puts will launch

  6. Cold hard benjamins are 40% of my portfolio

  7. Buying Chinese equities ($KWEB is the ticker)

  8. Not buying crypto

    1. I will send out the bat signal when it’s time. It’s not (for me)

Sometimes you have to play defensive and protect your capital, and now is one of those times

I am fine with sitting in cash and not losing money and will wait and let you know when I start ripping it again. Remember, if you lose 10% of your capital you need to make 11.1% in gains just to get back to where you were…it’s simple math.

The best thing you can do is remove emotion from this game, as hard as it is. Don’t panic sell when things go down, don’t chase when things go up

On days I see the market up 2% and I don’t have much equity exposure, I don’t even blink. Oh well…

And on days when the market is down 4% and everyone is panicking, I’m not losing money (in fact, I’m likely generating Alpha and positive on the day).

I am still not buying cryptNO, bonds, or equities

If I did buy equities, it would be either utilities, or consumer staples stocks (McDonalds, Dunkin)

See ya next week!

- Dev the Dollar HODLer

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.