Elon’s Twitter Buyout Offer… The Market Top (Or At The Least A Sign Of What Was To Come)

Written by the William Allan team · Published 2022-07-01T12:00:00.000Z

On April 4, 2022, the S&P 500 price index closed at 4,582.64, about 4.5% below its January 3 closing high. These are price-index levels and exclude dividends. At the time, this somewhat benign drop could have been viewed as 1) A short-term blip, and we would soon be heading higher in no time, or 2) The beginning of a stock market correction as higher inflation reared its ugly head, forcing the Fed’s hand to raise rates. Either direction was plausible.

Another newsworthy event took place on this date. An SEC filing disclosed that Elon Musk owned approximately 9.2% of Twitter, foreshadowing what was to come… a buyout offer for the company! In our view, the offer that followed was aggressive. I would venture to say this was the jump-the-shark moment for the “easy money” stock market of the past two years (or, shall I say, the past decade-plus). Did Mr. Musk call the proverbial top of the market with his outrageous buyout offer?

From the April 4 close to June 16, the S&P 500 price index declined approximately 20%, excluding dividends. The historical daily index series provides those closing levels. Bull markets can end when expectations for earnings, interest rates, or risk change. Whether stocks were overvalued beforehand is a separate valuation judgment. While we kiddingly say The Techno-King called the top, his action was a microcosm of the investment environment's building issue(s) just a few months back. Specifically, two issues that are tied together.

Our first concern was the price Musk proposed to pay. We viewed it as aggressive, rather than evidence of a professional consensus on Twitter’s value. Our second concern was financing risk. The proposed transaction combined Musk’s equity commitment with outside financing, as described in his April 2022 SEC filing. That capital was not free, and financing availability and terms mattered to the transaction.

To us, the bid illustrated how readily available capital can encourage ambitious deals. That is an interpretation of the episode, not proof that this offer caused or marked the market’s peak.

Elon is just one billionaire pursuing one company with an uncertain commercial outlook. Time will tell how this one shakes out. But, extrapolate this story to hundreds, thousands, even millions of investors, companies, etc. Easy money has gotten many folks involved in areas they do not belong… can you say “crypto” or “home flipping.” Everything is great until it's not!

Fast forward to today, and the Fed has removed the easy money punch bowl. While high inflation is not the norm, higher interest rates are par for the course. The Fed kept rates abnormally low for way too long, but we all had to know that rates would have to rise at some point. Even with the short-term pain we have and will endure, we welcome a more normal environment with higher rates. Based on Mr. Musk’s recent about-face on Twitter, I’m not sure he welcomes this brave new world (or old & normal) of actual interest rates. Unfortunately, I’m sure he’s not alone.

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This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.