Equities in Secaucus: TXSE, PSUS, GME

I'm Maria Konnikova.

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What's interesting about this is that this is political. This is a politicized stock exchange. Even if they're trying not to be the introduction of Texas, I feel like it makes it political.

I think the people starting this exchange are at least hinting that some of those rules are either too onerous and expensive or they're too woke and left-wing, and so they will offer a different set of rules in Texas.

It's kind of done in concert with the SEC. So there's only so far that the Texas Stock Exchange can differ.

I was waiting for you.

You're not getting that many perks from switching from one to the other, and it's like an administrative hassle and it's confusing. So why would you switch, right? Most companies think about listings only really when they're going public. And when you're going public, it is such a high-pressure situation. It is so important to get it right.

And if you list on some untested exchange and you're the first company listing on that exchange, there's that small potential for catastrophe, and you really, really, really don't want that when you're going public. So if you are going to compete for listings, you do have to start probably with already public companies, and you want companies that are interested in doing weird stuff and not afraid of the weird stigma of being the only company listed on a weird new exchange with lower listing standards. And that all does.

The worst thing that happens is it takes a little extra time to open you for trading. But yes, also I agree that even if there were a risk of catastrophe, Elon Musk would say, great, sign me up. So I think it's a good idea. Yeah. Not to step on your territory, but I would think that the other listings that they would want to compete for are for ETFs, right?

Because I assume that if you're an ETF issuer, you have a lot of ETFs, it's a little bit less higher stakes each time to pick a listing exchange. And I assume they're angling for.

But I mean, there are hundreds of ETFs that launch and list every single year. And I mean, those ETFs, they pay an initial listing fee and then they pay annual listing fees. So, I mean, that continues to hum along. It was just so fascinating to see that press release, that that, specifically, is an area that they want to target. Because right now it's NYSE, it's NASDAQ, it's also CBO.

And CBO, for example, has been speaking- CBO is BATS Exchange. It's not a major.

I mean, it's done much better than some of the recent IPOs from this year. So, you have to imagine the ETF business, the ETP business, for these exchanges, it's a nice cushion from.

And one thing that sort of happens is that if you are a big broker or a big electronic market maker, you're sort of obligated to connect to every exchange because you have obligations to get your clients the best execution. And so, you have to know whatever exchange is doing. So, even if you sort of say, I don't think the Texas Stock Exchange is ever going to have, almost ever going to have the best price on any stock, you can't be sure of that. So, you have to like connect and check their prices before you trade somewhere else. And so, you're paying them for like connections and for data fees.

And so, anyone who's like a certified official national stock exchange can get some revenue from just like charging for data. So, it's this interestingly regulatorily protected business model that when you start an exchange and you go out and pitch investors, you have to like tell a story about how, you know, we're going to be the anti-woke exchange. But like to some extent, once you have the exchange, it doesn't matter what you do. You can just collect the data fees. Sounds pretty good.

Unless you actually intend to like displace NYSE and NASDAQ as like one of the major listing venues, which I think is much,

I do want to say one other thing about the Texas Stock Exchange. Two other things. One is the phrase equities and dollars, which of course comes from liar's poker, where it is used as an insult, because the worst trainees in the Solomon training program were sent to trade.

Just read it. The people were so keen to come up with that joke on their own that they were like emailing me that joke after I already read it. I didn't come up with it on my own either, but someone else told me equities and dollars like a great Wall Street insult, which is now like the actual business model of the Texas Stock Exchange. Maybe it will soon be a compliment, perhaps. I think Dallas has sort of self-consciously reclaimed its stature as a financial center and been like, no, no, it's not equities and dollars anymore.

Now it's good. But the other thing I want to say about this exchange is that I wrote that, you know, it's all electronic, right? No one really stands on the floor of stock exchange except like TV reporters now. But, you know, I wrote that their computer for trading stocks would be in Texas. And they actually told me, no, they will have a data center in somewhere in Dallas, but they will also have a data center in Secaucus.

As they should. As they should, because all U.S. stock exchanges sort of have to be in northern New Jersey. because it is all this interlinked web of trading venues where, like everyone, trades on every venue and you sometimes have to do arbitrage trades where, like a stock is trading at one price on BATS and another price on NASDAQ. And so you want to do the trade between them.

To do that, you have to move data, and it takes longer to move data over long distances than it does over short distances. And this business is so like competitive and so focused on speed that people locate their computers in the data center with the exchange computers. And the idea of sending your data all the way to Dallas would be weird. It would be so far away. It would take so long for your data to get there.

So, of course, the Texas Stock Exchange will actually have computers in Secaucus next to.

Yeah,

Apollo, investing in tomorrow, today. Learn more at Apollo.com slash private investment grade.

I'm Maria Konnikova. And I'm Nate Silver.

It runs like $18 billion, not all of it, most of which is in Pershing Square Holdings. U.S. investors, they kind of can buy Pershing Square Holdings, but not really. It's, like, bad for taxes, and they can't market it. So, it's mostly European investors.

But Bill Ackman is in New York, and the fund mostly invests in U.

S. companies. And so, he wants to open a closed-end fund in the U.S. that would do the same investing, it would buy U.S. companies, but it would be much more convenient for U.S.

investors, and he could market it to U.

S. investors. But then, last week, the Journal reported that he's also planning an IPO of the management company of Pershing Square. So, the management company itself would go public, probably, like, at the end of next year or something. And in the lead-up to that, he sold a stake, he sold, like, 10% of the management company to some private investors for a billion dollars.

So, valuing the management company at $10 billion, which is really quite rich for a hedge fund firm that manages $18 billion, to value the management company at $10 billion is pretty rich. But then, also, Bloomberg reported that he's planning to raise $25 billion for the U.S. closed-end fund, which helps explain the valuation of the management company. He's like, oh, he's going to run, like, a lot more money. But on the other hand, that's a sort of ambitious target to raise.

So, that's kind of where the news is. Yeah. I mean, starting with.

5 billion valuation, that's something close to 60% of its assets. And according to the Wall Street Journal, they reported that Ackman told investors to compare Pershing Square to Brookfield Asset Management, Blue Owl, etc. But then you take a look at how they're valued, and this is something that Aaron Brown pointed out in Bloomberg opinion, that typically, they have market capitalizations that are, like, 15% to 18% of their assets. So, I mean, comparing them to that peer group, it's still quite rich. But I guess if you are planning to quadruple assets or something, it makes a little bit more sense.

Yeah. I mean, like, my dumb math.

So, 60% is really big, right? Like, if you're charging 6% of assets per year, then you can get that kind of valuation. But then, you know, if you're charging 6%, like, who would pay you 6% of assets to run their money? But yeah, I mean, I think that the idea is that you're comparing them to these other asset managers, but you're baking in a lot of growth in the very near future, which is ambitious, right? Blue Owl and Brookfield also want to grow assets under management, but, like, Pershing Square is going to double assets under management in, like, six months.

Okay, maybe. I do think the other thing that's, like, a little bit fascinating about Pershing Square's business model and, like, why they think they can get a premium valuation. is, it's so simple, right? Like, they have one investing team, they buy, like, 12 stocks, they hold them for the long term, they're all, like, liquid public US stocks, so, like, there's plenty of capacity. And so, like, Blue Owl, you're paying a lot for a lot of people, like, go out on the road and, like, find companies and try to make direct loans to them, manage the credit risk, and, like, the loans are constantly, like, maturing, you have to find new loans.

Your money is in funds that have a limited life, and so you have to, like, go, raise new funds and all this stuff. And Bill Agnew is, like, I just have, like, this, one permanent fund or two permanent funds now, and I buy 12 stocks and, like, that's it. That's the whole business.

S. stocks plus hedging for bad situations, which is, like, you know, it's just a hedge fund product.

You definitely are. I mean, it's interesting.

Like, if you're buying a management company that makes a lot of money on incentive fees, you value those at kind of a low multiple because you can't be sure they're going to be consistent from year to year. Pershing Square is, like, going to make all its money on, like, 2% management fees, so it's very consistent revenue on very locked up money. So, on the one hand, it's, like, a very safe bet, right? But the other thing you're buying is, like, Bill Ackman as a person, right? And you're buying, like, his ability to go raise $25 billion, which, again, is, like, really ambitious, right?

Again, like, every other investment firm, would love to double their assets next year, but, like, Bill Ackman is selling his ability to double his assets to investors, right? And I agree it's a lot of key man risk. It's, like, there's, like, kind of a meme stock vibe to it. where, like, you're buying this guy who is, like, a financial celebrity, who's on Twitter, who's on television, his personal life is in the news. You know, like, a guy who has a lot of retail appeal and who's, like, very explicitly marketing that as part of the business proposition.

So, yeah, like, that's what people are investing in is, like, his ability to, like, monetize that celebrity to raise a lot of money. But, yeah, like, what if he gets bored? His number two is not the same celebrity. You're not getting, like, a super institutional asset manager. You're getting, like, kind of one guy.

But the discount, it's trading at a 25% discount. And I have to say, I don't super understand why. I mean, if you look at some of these muni, CEFs and other ones, I sort of get it. With performance like this, I don't quite understand why it's trading at such.

Like, you have a fairly small portfolio of fairly long-term holdings and fairly liquid stocks. If you look at that portfolio, you could replicate it. You just buy the 12 stocks. You would get the discount buying those 12 stocks. But you also wouldn't pay Pershing Square any fees for owning the 12 stocks, right?

You just own the 12 stocks directly. So the fees eat into the value of the fund and explain part of the discount. The other thing that I think sort of explains the discount is just investor segmentation. Like I said, it is hard to buy Pershing Square holdings if you're a U.S. retail investor.

It's got some weird tax attributes and they can't market it. And it's just like, you know, you can like find it on your workers, but it's not a thing that a lot of U.S. investors buy. And it's otherwise like very U.S. centric, right?

It's like a guy who's a celebrity in the U.

S. who tweets in the U.S. and who invests in U.S. companies. So like, who's going to buy Pershing Square holdings in Europe?

It's like open to European investors, but it's otherwise targeted very much to the U.

S. So I think that's part of it is like, it's just not the most attractive product. And clearly Pershing Square's hope is that when they do, you know, kind of the same product, Pershing Square U.S. is not that different from Pershing Square holdings. But when they do that product in the U.S.

and like, market it very heavily to U.

S. investors, they will get a lot of U.S. investors and it will not trade at a discount. If you ask them, I think they will hope that it will trade at a premium, because people will be so excited to have Bill Ackman manage their money that they'll pay more than the net asset value for the fund. But we'll see.

one is going to charge, and it's just a 2 percent management fee. So it's clear for the first year. Yeah. So it's.

Like they don't ascribe a lot of value to those performance fees because they fluctuate. So if you're thinking about taking your management company public, you're less excited about the performance fees and you're more willing to just sort of do it for a flat 2 percent, because that's what investors will pay for. So if you think about the actual.

S. closed fund could become a reality pretty soon, like in the next couple of months or so. Let me ask you as a connoisseur.

. It's a lot of money. It's a lot of money, but I mean, Bloomberg Intelligence had a report out this week and didn't downplay that number at all. I mean, you think about the size of some of the most retail-friendly ETFs, and I think $25 billion could be possible. I mean, think about Cathie Wood, for example.

She doesn't manage that much money now, but I mean, she got in the $40 billion range. Also, for all the shade that we just threw on the European closed end fund, it has $15.3 billion in Europe. So I guess $25 billion in the U.S., putting it through that lens, looks very realistic. Yeah, I mean, I think that's right. I.

Apollo, investing in tomorrow, today. Learn more at Apollo.com slash private investment grade.

I'm Maria Konnikova. And I'm Nate Silver.

So I want to do a weird transition here. Yeah, do it. At some point. in the last few months, people started sending me Instagram ads for Bill Ackman's investing masterclass or his investing newsletter or something where you'd sign up, and it's like, I'm Bill Ackman. I picked all these great stocks, and I can teach you how to pick all these great stocks.

People kept sending me these being like, look at what Bill Ackman is saying. These are obviously fake. These are completely obviously fake. His eyes were hazel. Yeah.

No, no. They were real pictures of Bill Ackman taken from the internet and used to market a fake Bill Ackman newsletter product. I didn't click on them, so I don't know what the product is. I don't know what the scam is exactly, but someone is like, I'm going to pretend that Bill Ackman is starting an investing newsletter. I'm going to get people to send me their credit card to sign up for this newsletter, and they bought Instagram ads saying it.

I always thought these were super obvious fakes. I think I actually thought they were served to me on Instagram, and then people send them to me, but they're fake. This week, I have gotten several people sending me Instagram ads for Keith Gill, starting an investing masterclass or newsletter or what have you. I'm also fairly confident. those are fake.

The reason I'm confident those are fake is that anyone, almost anyone, not literally anyone, but almost anyone who's selling you an investing class or a stock picking newsletter, you should ask the question, if they're so good at picking stocks, why aren't they just making a lot of money picking stocks? Why do they need my $49.95 for this investing newsletter? Bill Ackman is like a billionaire running a hedge fund. He doesn't need your $49.95.. That's why you know the Bill Ackman investing ads are fake.

Keith Gill has made $300 million trading GameStop stock. He does not need your money. He is not starting an investing newsletter. He is, however, going on YouTube to do a live stream to talk about GameStop at noon on Friday, June 7th, which is unfortunately after we record this podcast and before we release this podcast. By the time you hear this, Keith Gill will have said something newsworthy that we haven't talked.

. By the way, that was a transition. Now we're talking about Keith Gill.

. I threaded that needle quite well. I was a little nervous.

So, I don't know. Keith.

. Oh, should we introduce... Yeah, we've talked about him before, but he's the guy who started the GameStop frenzy in January 2021.. He was a guy who got along GameStop and liked the stock. He would do these four-hour YouTube videos about why he thought GameStop was an undervalued business.

Then, when GameStop had a huge rally in January 2021, he was the sort of patron saint of that and got a lot of media attention. Then, last month, he tweeted some weird stuff. He tweeted a cartoon and then he tweeted some video clips. GameStop stock came just roaring back, a huge rally. Then, he posted on Reddit his E-Trade account.

Back in 2021, he would periodically post his GameStop positions and how much money he had made and how he was holding them. He posted that last week. It was hundreds of millions of dollars of GameStop stock and options. At one point, Bloomberg calculated that he had a portfolio worth $300 million of GameStop. So, he's back.

He's back. Now, as you say, he's going to do a video thing where we'll see him. Unless AI has advanced tremendously, we will know if Keith Gillett is actually behind this account, which I think we already do. I think there were a lot of rumors when he came back. Because he was just tweeting inscrutable stuff, there were rumors that someone had bought or hacked his account, that someone else was doing this, and it wasn't really him.

This was all some sort of weird fake out. I think that now we know that's not true, because there is a Wall Street Journal story about E-Trade getting increasingly nervous about his trading because they worry that it's market manipulation. If E-Trade is worried about his trading, they do KYC. They know who's trading it, right? If they know what his portfolio looks like and he's posting that portfolio, then that means this is all real.

This is actually his Twitter,

It's reasonable that people would make conspiracy theories out of that. Didn't anyone at E-Trade watch Dumb Money? Well, I mean, to be clear, that's the debate.

What does it hurt you? You don't want to skate too close to the regulatory line if you're a big broker-dealer. But with Keith Gill, if you kick him off, it's going to be a real firestorm. So far, they haven't. By the way, the controversy about him being a market manipulator, I find it's a little strange.

Yeah. Well, I was just going to say,

If market manipulation law doesn't handle this, then what's it for? What is it for? To me, market manipulation is like, if you move a stock by doing something deceptive. And the thing about Keith Gill is that he's definitely moving stocks. He's definitely, when he tweets, the price of GameStop stock goes up, and it's definitely not for any fundamental reason.

It's definitely his fans and his followers are buying the stock because he's tweeting about it. But none of them are deceived, right? None of them are being lied to. There's no deception going on. So I don't think it's manipulation.

I think it's just this mysterious new thing. It's like coordination, right? Like people are having fun with their friends. There's like the social element to like all buying GameStop together. And when Keith Gill tweets, that's the thing that makes everyone like go buy GameStop together.

It is strange. It is a way of moving stock prices that has nothing to do with the fundamental value of the cash flows. But market manipulation law is about using deceptive devices and there's no deception going on here. It's weird if you're like a fundamental investor who wants to buy GameStop at a reasonable price or wants to be able to short GameStop if it gets too high and are worried about being blown up. You know, it's like bad for market efficiency.

But the stock market rules are not about market efficiency. They're about honesty. And, like usually, those things kind of work together. And so if you're not lying about a stock, the stock will probably come to the correct price. But Keith Gill has discovered this mysterious new thing where, like you, can not lie about a stock, but still make the price not be correct.

So I don't know. I don't think it's market manipulation, but I understand why people get mad about it. Yeah. I also, from that same article, I want to quote another complaint. So Jay Clayton, who used to be the chairman of the SEC, the journal says that he suggested in an interview that Gill should publicly answer questions about his trading.

Such questions include, is he working with anyone else? How did Gill, an individual investor, finance his purchases of GameStop shares? Has he hedged any of his bets on GameStop? And what are his ultimate intentions? And it's like, yeah, I understand why you'd want to hear all that.

But he actually doesn't have any obligation to do that. There are actual disclosure rules about who has to disclose what about a stock. And he hasn't triggered any of those disclosure rules. He's not an institutional investor. He's not above 5% of the stock.

He's like getting there. You know, he's just like a guy buying stock. There's no rule that says he has to answer your questions about his intentions. It's like driving people crazy because it is not covered by the rules. And everyone has this intuition that there's something wrong about it, but it's technically.

I'm curious to see how many more headlines like this we get, because after he posted on Reddit, that screenshot that showed his stake, Bloomberg News reported that Andrew Left, the founder of Citron Research, placed a new short bet against GameStop, immediately just went back and shorted it. I have to imagine he's having a pretty lousy end to his week. Yeah. I mean, I'll tell you,

And when he tweeted his profits, everyone's like, oh, he's excited, he's back. And if this YouTube video does even better than the tweets, then like, yeah, Andrew Left is going to get blown up. Although I think he's sad that he's scaling back his short bets on GameStop. He's got a lot of time. But like, yeah, like, you know, if Keith Gill continues to have this wild power to move the stock every time he does some stuff, he'll keep doing more stuff and the stock will keep going up and the short sellers will lose a lot of money.

But I think there has to be some sort of bet on fatigue here where it's like, well, you know, like, eventually people will stop doing this. I don't.

And here we are in the year of our Lord, 2024.

. To your point. Yeah, go on. No, you go on. No, I won't.

Is it? What is he saying? What does it mean? And then he revealed his position, which is enormous. And people were very excited about that.

And that. and now he's going to go on YouTube. And like he was originally, like more than anything else, like a YouTube guy, like he would do these long, in-depth discussions of GameStop. And so he'd come back in other formats. And now he's finally rolling out.

If he were, you know, designing this to maximize his impact, he's done a nice job of tripping it out. And also, like it's maximizes impact, but also like kind of maximizing pain for short sellers. Because if, like Keith, Guild tweets and the stock gaps up and you're a short seller, you're like, ah, this can't last. And you short it. And then, like the next day, he does like another thing.

He's done a nice job of making life hard for short sellers. I don't know. You want to take a step back to appreciate like. he made almost $300 million, basically trading one stock. You know, it's not Nvidia.

The company hasn't done anything in the last three years, but in the last like three years, he went from kind of like zero, from like regular kind of middle-class person amount of money in the stock to $300 million on one stock, through some combination of being really media savvy and being really like stock market savvy and kind of being legally savvy. And it's just amazing. No wonder he has a fan base. Our friend, Mary Child said to me that he's the first self-made person in the history of the world. And like, that's kind of true.

Like he's really kind of gone from nothing to like immense wealth through a very odd and particular set of skills. And like, no wonder people are interested in seeing what his trading is.

I mean, like the last GameStop rally, a lot of people lost a lot of money. A lot of people made a lot of money, including Keith Gill. If you piled into GameStop stock at the top and then lost a lot of money, like maybe it's not completely irrational for you to blame Keith Gill for that. Maybe, like in some people's eyes, he is a villain, but like, I don't know, man, he's made a lot of money on his own cleverness, I think.

And that was the Money Stuff Podcast. I'm Matt Levine.

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