• We titled this week’s Market Alert: “SpaceX, Facebook, and Why Discipline Beats Hype.”
• The biggest story this week wasn’t SpaceX. It was inflation. The CPI came in at 4.2% year over year, the first time inflation has been above 4% in three years. The market had been expecting lower interest rates and cheaper money, so when inflation came in hot, investors recalibrated and we saw a significant selloff.
• But if you peel back the onion, the story looks different. Core inflation, which excludes food and energy, came in at 2.9%, and the monthly number was actually below expectations. A big part of the headline inflation number is being driven by energy prices and what’s happening in Iran.
• That’s why Iran continues to be a major market story. Energy prices have moved higher because of the conflict, and that has been one of the primary catalysts behind the recent market weakness.
• Now let’s talk about SpaceX. This is the biggest IPO in history, and many clients have asked if it will be part of our portfolios. The answer is yes, eventually. SpaceX is not eligible for the S&P 500 yet because it has not been public for 12 months and it is not currently profitable. Most likely, it will find its way into our large-cap holdings later this year.
• Before getting too excited, it’s worth looking at Facebook’s IPO. At the time, it was the biggest IPO in history. The stock jumped 11% on its first day, then went on to lose 50% of its value and took 14 months just to get back to even.
• Today, Morningstar estimates SpaceX may be worth roughly $780 billion, while it is coming public at a valuation of approximately $1.8 trillion. That doesn’t mean it can’t be successful, but it does mean investors should be careful about getting caught up in the hype.
• In fact, the delay before SpaceX becomes part of our portfolios may work in our favor. If the stock follows a path similar to Facebook, we may have an opportunity to own it later at a much more attractive price.
• The bottom line is that inflation remains the most important story right now. SpaceX is grabbing the headlines, but inflation is what drives profits, interest rates, and ultimately stock prices over time.
• Most importantly, we continue to follow our Invest and Protect process. If markets move higher, we participate. If markets face a major decline, we have a disciplined process designed to help protect your retirement from catastrophic losses. Growth is important, but protecting your retirement is even more important.

Transcript:

Hello everyone, and welcome back to our Weekly Market Alert video for today, which is June 11. Now, I know you’re getting this on the 12th, but we’re recording this on Thursday the 11th, and I’m glad you’re with us.

I hope this video finds you healthy, wealthy, and wise.

We have a ton to talk about: SpaceX, inflation, the scary headline that came out, the market going down a lot lately and what’s driving that, Iran, and a whole bunch more. We’ve got a lot to talk about this week, and I’m excited to talk about it with you.

Before we get going, I want to share something with you. If you feel like I’m not my normal ebullient self, it’s because I’m actually heartbroken right now.

As you may know, if you’ve been watching our Weekly Market Alerts, my wife got a kitten. The kitten’s name is Toby because he has six toes. Apparently, you pay extra for that. I thought that was funny. I’d like a six-toed cat. Okay, that’s extra.

Anyway, she got Toby, and Toby and I hit it off. I’m not a cat guy. I actually don’t like cats. But Toby and I hit it off, and I fell head over heels in love with him. I’ve never fallen that fast for a pet. He’s great. He’s my little buddy. He followed me everywhere. We played together. He was just wonderful.

Then my wife decided that Toby needed a little brother, so she went and got another kitten. The other kitten’s name is Ziggy. The reason he’s Ziggy is because he has a blue eye and a brown eye. If you remember David Bowie and his character Ziggy, David Bowie had a blue eye and a brown eye, so therefore his name is Ziggy. So now we have Toby and Ziggy.

Well, when Ziggy was introduced to the household, Toby suddenly was not my buddy anymore. He wants nothing to do with me. I walk into the room and he leaves. I try to pet him and he stays out of reach. He broke my heart.

I can’t believe it. I need therapy. I’m depressed. I told my wife that I finally understood why people love cats because of Toby. And now I’m reminded why I don’t like cats. They toy with you. They play with your heart.

Dogs don’t do that. Dogs love you regardless. Cats toy with you. They take your heart, crush it, and toss it in the trash.

Anyway, I’m told Toby will come around. He’s just adjusting to a new member of the family and going through all of that. But let me tell you, my poor heart can’t take it. I’m depressed.

Anyway, we titled this week’s video:

“SpaceX, Facebook, and Why Discipline Beats Hype.”

I’m going to get to the SpaceX IPO because a lot of you are saying you want to invest in SpaceX. We’ll talk about that in a minute.

But the bigger story, in our view, is inflation. The CPI came in at 4.2% year over year. That’s really high because the Fed wants inflation at 2%. Inflation moving above 4% is significant, and it’s the first time in three years that it’s happened.

All of that made the market say, “Oh my gosh, inflation is going up.” As we said last week, the market now has to recalibrate. The market had been looking at lower interest rates, cheaper money, and higher profits. It built all of that into stock prices.

Now all of a sudden, that’s gone. In fact, the price of money may be going up. Interest rates may go up. If that happens, profits go down.

So there’s a recalibration taking place, and we’ve seen a significant selloff in the market. The interesting thing, though, and I don’t think most people see this if you peel back the onion, is core inflation.

If you take food and energy out, which apparently none of us need, by the way, core inflation only rose 2.9% over the last year. The monthly number actually came in below expectations. So if you really look at what inflation did, it almost did the opposite of what the headline suggested.

Energy is part of the headline number, and of course that’s oil. We have everything going on in Iran, and that’s a major reason why. If you take energy out of the equation, inflation is not that bad. So maybe the market calms down about that.

The market certainly didn’t like the headline. We’ve seen multiple down days this week and last week. The market had gone to all-time highs, and now it’s pulling back. Again, the catalyst for much of that is Iran and what’s happening over there.

Right now, we’re bombing them, they’re bombing back, and somehow we’re calling it a ceasefire. I’m a little confused about what a ceasefire means when people are still shooting at each other, but that’s apparently where we are. So let’s talk about SpaceX. This is the biggest IPO in history.

SpaceX is going public tonight after the market closes, and tomorrow investors will be able to buy the stock on the Nasdaq. There are some rules around when a company can become part of an index. For the S&P 500, there are two important rules.

First, the company must have been public for at least 12 months. Second, it must be profitable. Right now, SpaceX is not profitable, and nobody expects it to be profitable anytime soon. It may take quite a while before that happens.

So, SpaceX is not going to be joining the S&P 500 anytime soon. However, the Nasdaq has more relaxed rules, so SpaceX can be included there much sooner. Yes, you can buy SpaceX.

The question many of you have asked is: “When will SpaceX become part of our portfolio?” Since we use large-cap ETFs, SpaceX will most likely become part of our holdings sometime around September or October.

So yes, we will eventually own SpaceX. You don’t necessarily need to run out and buy it yourself. And honestly, the delay before it enters our portfolios may actually be a good thing.

Let me explain by comparing it to Facebook.

When Facebook came public, it debuted at $38 per share. At the time, people thought its valuation of $104 billion was incredible. Today, that looks tiny.

SpaceX is coming public at a valuation of approximately $1.8 trillion. That’s roughly 17 times larger than Facebook’s IPO valuation. Facebook raised $16 billion. SpaceX is expected to raise about $75 billion.

Facebook was profitable when it went public. SpaceX is not. SpaceX still has to build out infrastructure, satellites, and continue expanding its business before it reaches profitability. When analysts looked at Facebook’s IPO, many said it was remarkably expensive.

Today, Morningstar is saying something very similar about SpaceX. Morningstar estimates that SpaceX may be worth around $780 billion, not $1.8 trillion. In other words, based on their analysis, SpaceX could be significantly overvalued.

What happened to Facebook? On day one, Facebook opened at $42 after pricing at $38. It gained about 11%. Then it reversed.

Over the next several months, it lost approximately 50% of its value. It didn’t get back to breakeven until July 2013. It took 14 months. This was a company that was already making money.

The hype around Facebook was enormous. That’s why we need to be careful and not let the hype overtake us. The delay before SpaceX becomes part of our portfolio may actually work in our favor. If it behaves anything like Facebook did, it could surge initially as everyone piles in.

Everyone who owns a Nasdaq index fund will automatically own SpaceX because the index will have to buy it. If the stock then drops significantly, those investors could be stuck with a large position that declines sharply. That’s why we want to be careful. If SpaceX drops substantially before we own it, that may actually create a better opportunity for us later. Time will tell.

But we don’t want to get overly excited. I know we’re getting a lot of calls from people saying, “I want to buy SpaceX.” Calm down. It’s okay. Take a nap and get over it.

So where do we go from here? Inflation is probably the biggest story this week.

SpaceX is the headline story. But inflation is what drives profits and, ultimately, stock prices over time. If you peel back the energy component, and hopefully that’s not a permanent issue, inflation may not be nearly as concerning as the headline suggests. The market may have overreacted. We’ll see.

Most importantly, we have our Invest and Protect process. If the market decides it’s going down 50% for whatever reason, we have a process designed to help protect you from catastrophic losses to the extent that we can. That’s our Weekly Market Alert for this week.

One thing I hope is that you enjoy these updates. If you do, please share them with your friends. They may enjoy them too. And who knows, they may even decide to become clients, which would certainly be good for them and good for us. You’d be helping us out in the process, and we’d appreciate it. Again, thank you for watching.

I hope this video found you healthy, wealthy, and wise. I hope all you Squippers out there are squippering your tails off and enjoying your second childhood without parental supervision. And for all you clients, we’re going to get you there if it’s the last thing we do. Thanks for watching, and we’ll talk soon.

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