How the Crypto-FTX-Fraud Could be Masking Epic Capital Misallocation
Accounting Tools states that cash flow to stockholders is the amount of money a firm pays its equity owners. They explain that “Investors routinely compare the cash flow to stockholders to the total amount of cash flow generated by a business…” In other words: how much of the company’s free cash flow are investors getting?
Pretty simple, right? This piece suggests otherwise.
Understanding the conversion of income statement profits to operating cash flow and the uses of cash for capital spending is a basic jumping-off point for securities analysis. Suffice it to say, one could suggest the work done on this front has deteriorated sharply since the bubble took flight in 2017.
With markets down -18% this year, investors are feverish to buy the leaders of the last bull-market mania. Many seem convinced that we are just a Fed pivot away from another low-quality rally. We think current investor preference could be even more costly than the fallout from the collapsing promotional bubble stocks of 2020.
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Could Crime in Crypto be Distracting Investors from Bigger Issues?
Crypto, FTX, and Bankman Fried are clogging the news. Reports suggest $8bn was swindled, and the fraud is being compared to Enron. We feel bad for those who were conned and are not here to minimize their losses.
Yet this was not an Enron. Many crypto folks didn’t want regulation. That was often a big part of the pitch. First they fought the Trump Administration’s attempt to regulate the industry. Then the crypto-crowd lobbied the Biden Administration to take a “light-touch regulatory approach” while advocating for “…the development and implementation of a U.S. central bank-issued digital currency (“CBDC”).”
Careful what you wish for.
Not sure why there’s so much surprise about FTX or other crypto frauds. We were told that tokens were not securities or even money. Many of the rules crypto fans didn’t want were put in place after the 1929 crash. Crypto advocates, please read our end note before ripping our heads off.**
Unpopular view: why should regulators get involved? People threw their money into an unregulated private exchange with offshore operations to buy unregulated tokens. These things had no operating activities, no cash flow from assets, no property plants or equipment, and generated aggregate total cash flows of zero.
Tokens remember? Not securities. Why are taxpayers funding investigations into this mess?
In our view, regulators and actual investors have much bigger items to contemplate.
As the FTX saga unfolds, there are a swath of stocks that investors appear to have an almost Pavlovian desire to buy because they are “down.” A lower price for a low-quality asset with poor growth prospects and negative cash flows does not a good investment, make. We proved this with our rips on Snapchat and Carvana Investor Relations. Both were “lower” when we wrote them up and promptly plunged even lower.
We fear the next shoe may be dropping in equity markets, and it is a much bigger issue than FTX, in our opinion.
How to Calculate Net Capital Spending
While investor attention is focused on the FTX fiasco, are the true “generals” of the Ponzi cycle in the early phases of collapse? These “Ponzi generals” did nothing wrong. They are all GAAP compliant. But that does not mean their past capital allocation policies may not be wreckage waiting in the wings.
Look at Salesforce below.
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December 30, 2022 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
December 30, 2022
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin