WRFH/Radio Free Hillsdale 101.7 FM - Wall Street Weekly: Investigations, IPOs, and Accusations

Episode Date: March 25, 2024

Join Patrick and George as they discuss Reddit's first day of trading, investigate Apple's monopoly problem, and evaluate the newest accusations against Boeing. 

Welcome to Wall Street Weekly, a show where your hosts, George and Patrick, cut through the financial jargon to keep you educated and informed about the markets that affect our lives. Enjoy the show. This is the highly informing, overperforming radio show on Radio Free Hillsdale 101.7 FM, where we normally start with a little bit of chitter-chatter, but we've got such a loaded episode today that we want to get right to it. So Patrick, can you tell the audience what we might be talking about today? That's right.

So today we're going to be talking about some interesting news. with Boeing. Then we're going to move on to trust busting, looking at a historical study of what that has looked like in the past and an interesting brand new development. Always like to see the breaking news, which I'll also be bringing with Reddit's IPO happening today, as well as if we get the time, some new companies that are going to be forming in the next few weeks. All exciting stuff. As a quick reminder, though, this show is for entertainment purposes only. As always, talk with trusted financial Council before making any investment decisions. Patrick, you have, I would say, the most intriguing story of the week that I think has actually been overlooked by a lot of media outlets, so why don't

you bring it to us? We've talked some about Boeing's recent issues after the door flew off one of their 737 max planes and how Boeing has had quality control issues in recent years. So one former employee, his name is John Barnett, had worked at Boeing for decades as a quality control engineer and manager. And he openly critiqued Boeing's safety standards in the last few years, and he became more well-known after Boeing started to experience some of these mishaps. And he claimed that the recent Boeing 737 door accident, it wasn't a 737 max problem, or rather a Boeing problem. And he noted that Boeing started removing inspection operations in 2012, which probably could have caught these issues like loose or missing bolts on doors, for example. So essentially he was saying that he wasn't

to hear the news. I don't think he was. And this was his job for decades. He was a quality control engineer. And so he's in a way an expert in his field. And so he would know, you know, what stuff is supposed to look like. And so as we mentioned in our previous episode on the Boeing incident, the company's stock took a dive and Boeing was public enemy number one in the business world, at least for a little while. And now for a recent development, John Barnett, the whistleblower who vocally critiqued Boeing's quality control, was found dead two Saturdays ago, apparently due to,

to a self-inflicted gunshot wound. And he was in the middle of offering evidence in a defamation suit against Boeing. He was claiming that the company hurt his reputation after his attacks on Boeing. So this is definitely some suspicious information. We always want to disclaim that, like, we don't really know what's going on,

but there are some weird circumstances surrounding his death. Right. I mean, yeah, we're kind of just here for the story, but at the same time, this would have pretty serious financial and investing implications if your company that you were invested in was found guilty of, I won't say it.

But it gets even more suspicious. And so a woman who talked to Barnett days before his death claimed that he told her, if anything happens to me, it's not suicide. Of course, this is all speculation, and we assume more details are going to come out over time, but it's still an interesting story, and so we'll see how this affects Boeing stock price. Now we're going to move on to trust busting, George? Or do you want to get to your story? Let's talk about Reddit's IPO.

we've talked about the demise of Boeing. Let's talk about the start of something new, or that's what some people think is in Reddit's initial public offering, which was up 48% today in its New York Stock Exchange debut. So I'm just going to give a slight backstory, try to cover this story as well as I can. Reddit hasn't really been a profitable company for the last 20 years, and a lot of people on the platform have claimed that that's why they've enjoyed the experience,

because without aggressively having advertisers on the platform, it's more of a free marketplace of ideas. I know a lot of people would argue with that, but that's at least Reddit's claim. Private investors recently, though, decided that by taking the company public they'd be able to better monetize the platform in an effort not to totally isolate the loyal Redditors

who had been with the company for so long, they allowed them to buy 8% of the stock in the underwriting process or the IP. PO process, which we talked about in a previous episode. We did. And if you'll remember from that, that's something that's generally reserved for investment banks and other big multi-billion dollar financial institutions is the ability to get those shares at a cheaper price.

But they were offering that to people who had been loyal, who had interacted a lot with the platform. Quick crash course on underwriting. Basically, an institutional firm will pledge to buy all of the shares that the company is selling, and then they'll go ahead and trade those off to other secondary investors like you and me and be able to turn a profit, whereas the way that Reddit did this was probably less cost effective because you have to sell it to a bunch of different people. But they claim it was a way to not disenfranchise the people who had enjoyed the platform

and a lot of moderators on the site. In fact, I think all of the moderators are unpaid. So what's keeping them on there? Moderators are kept on because it's like a feeling of authority or a power belonging that you're able to contribute to the spread of ideas. I suppose so. That's interesting. It's understandable, though, why people were mad when news came out that CEO Steve Huffman will supposedly get paid $193 million in compensation as a result of the IPO.

And I know what you're thinking. That's a lot of money. And no matter how you slice it compared to what the moderators are getting $0. That is a lot of money. However, it is important to note that these figures are slightly overstated because $193 million can only be achieved if the stock goes up by a certain amount. It's not just like he's getting a pile of cash. A lot of it's stock incentives that have a lockup period of five years, meaning he won't be able to sell them right away.

Most of it is determined on the performance with Reddit, in which case everyone will be doing better if he's doing better. A common argument with this Reddit IPO is that the platform is dying, and management contends that Reddit will be able to harness AI and better monetize their user base. And even if it is a dying platform, it's the 20th most visited website in the world and has 70 million plus active users each and every day. It's a far cry from the 3.2 billion daily users of meta platforms, which consists of Facebook, a big contribution from WhatsApp, Messenger, and Instagram. Investing, we always talk about what you pay versus what you get. And meta is also worth 161 times what Reddit is being priced in the open market.

So you can't really compare the two because they're just two. to I think fundamentally very different companies. And maybe that's part of the reason that there was so much volatility today in the opening pricing. Do you think that people see Reddit as a long-term challenger for Meta? I really don't think they're comparables. And if you've ever seen Reddit's interface, I think it's a totally different social media platform or media platform than Meta. A lot of it is like being able to ask questions anonymously or being able to form communities with people that you can just talk to. So you would say that their success is not inversely related, you know, the better meta does doesn't necessarily mean that Reddit's going to do worse.

I don't think so. I think the big challenge with Reddit is people resisting monetization. I think that's why a lot of people have chosen to go with the platform because they feel like they can say what they want, they can express their beliefs. Now, I will say there has been a lot of censorship specifically since the COVID-19 pandemic, which has made many who consider themselves to be right-leaning to. to leave the platform. However, I think it is a platform that's going to be resistant to monetization. Even if the Redditors are disappointed that their CEO is getting paid so much, today was a very good day for them. They were able to buy the stock. If they were given the opportunity in the IPO, they were able to buy those shares for $34, trading open today around $53. So even if they would have sold as soon as the market went live, they would have made a return of, I believe it was 58%.

That's pretty good. Yeah. So I think that this is something to watch in the coming weeks because the narrative can and likely will change, dependent on how well the stock price does. Additionally, Reddit had the power to move GameStop to the short squeeze. I think in the upward direction or the downward direction, there's a lot that could happen when you have a community of people who want to be a part of something bigger. And we saw GameStop go up. I think it was 1,600% in like three days. So I guess anything is possible.

It'd be interesting to see if Reddit can mobilize Reddit users to bump up the Reddit stock price like it did for GameStop. There's the concern it could go the other way too because a lot of Redditors are mad about Reddit going public because content will have to be censored even more to get advertisers on the platform. And as a result, many on Wall Street bets are actually calling people to short the stock to bet against the stock price in an effort to drive the price down. So yeah, just like some really weird stuff. going on, as you should expect when you have a lot of Gen Z and millennials on a platform all conspiring together. Maybe that's too cynical of a way to put it. If anything crazy does go down, which isn't out of the question, we'll be sure to keep you educated and informed on Wall Street Weekly on Radio Free Hillsdale 101.7 FM. As I send it back over to Patrick where he's going to talk

about the history of trust busting and then some recent news that popped up on his feed yesterday. That's right. First off, what is? Trust busting. Trust busting is basically government manipulation that eliminates monopolies and corporate trusts. For reference, a monopoly is a company is when a company has all of the market share, basically forcing out all the competitors, and then all of the customers in the industry come to them. A corporate trust is a clear a name that different organizations hold their assets under, and so that offers the members of the trust a larger share of the market, but it can also hurt the economy as a side effect. So why does the government want to break up monopolies and trusts?

And the main thing is to keep prices low. So free and unlimited competition does two things. First, it creates more products from different companies. And then two, it drives down prices. And so those are both good for the consumer and the economy. So a government will often get involved with monopolies and corporate trusts when they do things like intentionally maintaining low levels of goods in production, refusing to provide supplies to potential competitors and a bunch of other things that retain that monopoly, that 100% market share.

And so taking a look at the origins of trust busting, historians believe that competition law, which is kind of the more formal term for trust busting, started around Roman times. But we today are most familiar with trust busting because of the post-industrial revolution era. And if we look back at our history books, we'll remember that the Industrial Revolution was the major time when the U.S. best, well, really the world, was switching from farms to factories, agriculture to industry. And this was also around the time of the beginning of the corporation. It may surprise you to learn that, uh, not you, George, but maybe a lot of the listeners to learn that a corporation is not actually that new of a thing considering the whole history of the world. It was the first state to pass a limited liability in corporation statute was New York in 1811.

And as a reminder, limited liability means that, if people lose money because of your business, they can't take torches to your house and claim all your assets. Right. It has no personal effect on you if your business goes down. Because of this industrial revolution and the rise of the corporation, we began to see corporations like the U.S. Steel Corporation, Standard Oil, and a bunch of others, they became huge billion dollar companies. And they were able to do this by going to small markets, lowering oil or steel prices below profitability, they would lose money in certain sectors. And then once the local business went out a business, they could just jack up the prices. Right. Some may call it genius business strategy.

Others call it manipulation of the markets. The Sherman Antitrust Act, though, also known as the No Fun Act, called it illegal. Right. So the Sherman Antitrust Act was passed in 1890, and among other things, it prohibited trusts. And it also outlawed a corporation's ability to restrain or monopolize interstate or international trade, which we also don't often think about with monopolies and trusts. But it's understandable that a government would want to have control over its own trade and not let the corporations overstep their bounds there. And so standard oil, a company started by John D. Rockefeller, it was at the point in 1880 where it was refining 90 to 95 percent of the U.S. is oil, and then standard oil company combined with affiliated companies in the industry to create

the standard oil trust, and that was run by nine trustees. And so those trustees were each issued 20 trust certificates for every share of the stock. And they also determined the dividends and elected the directors and officers of the different companies in the trust. And since those nine trustees controlled all of the companies, the trust was technically a monopoly. So it would be like if I got all my friends together. And because there was a lot of us, it didn't look like a dick, But we were all just calling the shots from together. Together. Okay.

And another way that these work, if you've got two competitors in a market, they can agree to basically stay in their own lands. Because their ultimate goal is to raise prices, right? Because if there's no other competitors, you can raise prices out the wazoo and then customers still have to pay for them if they're valuable goods and services. And so sometimes they will agree to stay in their own lanes. And then that will allow them to raise prices. without worry of competitor interference. So Standard Oil was ultimately attacked by, I believe, Teddy Roosevelt under the Sherman Antitrust Act.

That trust was considered busted. And now we get to modern day. And this was a story that popped out just really a few hours ago. But the DOJ, the Department of Justice, is suing Apple for restricting its smartphone operating system in a way that drives up costs for consumers and prevents developers from successfully releasing products on other smartphone systems. And the suit claims that Apple prevents the successful deployment of what the DOJ calls super apps that would make it easier for customers to switch between smartphone platforms. They claim that Apple blocks the development of cloud streaming apps, those that would

allow for high-quality video gameplay without having to pay for extra hardware, and that it inhibits the development of cross-platform messaging apps. So that customers have to keep buying iPhones. I think Europe has already gone after Apple for these very same things where the App Store was getting attacked because basically if you own an Apple phone, you can only download App Store apps. And then they were getting huge profit margins on whatever sales were made, even if it was in-game sales from those apps. Okay. Yeah. Personally, I think Apple's ability to charge higher and higher prices on their smartphones, it does look suspicious. and it could be a symptom of a monopoly,

but I don't think that they have a very good argument against Apple for making it more expensive to switch to a competitor's product. These are called switching costs in business, and that's a common strategy that companies will use to create what are called barriers to entry into the market, and those are just designed to prevent new players from entering the game. And so for me, it kind of seems like the DOJ is kind of mad at Apple because their strategy of creating these switching costs

seems to be working very well to the point that they've pushed out all the other competitors. I guess it's unfortunate for Apple that they've done so well with these switching costs. It might get them in trouble, but yeah, I don't know if the DOJ has the most solid case on this. Well, I'll say two things. I think the first thing is that this case

is much less convincing to me than when Apple was found to it. have been reducing battery lives of their old phones when a new phone was about to get released. I forgot about that. Now, they still do that via updates. So if you have an old iPhone and you try to update it to the newest operating system, it'll drain your battery because the newest operating system isn't designed for old phones. That's not a problem.

The problem was when they were actually changing the software so that it would like purposely drain old phones batteries at a ridiculous. number. But the second point I'll make is don't underestimate the Department of Justice. I think that in a lot of cases, and this might be a little controversial, they have an outcome in mind when they start the case, and then I think sometimes they work backwards. I think that if they have an outcome in mind, they're going to be able to find the evidence. They'll be able to find the evidence because the judges, no matter how impartial we would like to think that they are, ultimately, They're government officials.

Their government officials, so is the DOJ. So definitely unfortunate for Apple. It did look like it affected their stock price slightly. About 4%, which considering Apple is not a tiny thing, I guess. And also you have to consider that the U.S. is probably a minority of their sales compared to the rest of the world. I would imagine that the U.S. is one of the larger. But compared to the rest of the world in aggregate, I would think it's smaller than that. Okay, probably.

Either way, that is a significant move, like you said, for a multi-trillion dollar company. And we could see this playing out for the next several years. The DOJ and several states are currently suing Google for supposedly having a monopoly in the digital advertising arena. And that was started in 2020. And so that's been going on for four years now. And they still haven't settled the case. So this could play out for the next several years. wouldn't anticipate seeing any upcoming news anytime soon.

The DOJ is not known for being the fastest of agencies. And as we finish up, I realize we don't have time for our last story today. We're going to do a little quiz show to preview next episode as we talk about spin-offs. Welcome to Answers with Ackla, the part of the show where we try to find answers to questions via Patrick Scott to your host, George Ackla. Patrick, I'm sorry for that. I just couldn't find anything that rhymed with a letter of my name. Like, G, doesn't really work. So answers with Ackler is what it's going to be.

First question, what is the name of the company that was formerly named Kellogg's? The name of the company that was formerly called Kellogg's? Yep. What? Kellogg's is still around? Nope. No? Is this a recent development?

I don't know. Shame on you for asking the question to the least smart person in the room. No, you got to answer. answer. You got to answer. I'm going to say a small change like Kellogg's company. No. That is incorrect. So as a result of a spin-off, the new name of Kellogg's is actually Kellanova. You are right, though. They will be using Kellogg's on all their branding for their cereal and everything, which is under the brand name WK Kellogg. We'll talk much more about that next episode. But yeah, there is no company anymore just called Kellogg's, interestingly enough.

Is that going to show up on the cereal boxes, Kellanova? I don't think we'll be seen that because that company is actually WK Kellogg. The cereal brand and the snacks brands are two different brands now. Oh, okay. Question number two, Mr. O for one. How many public companies will the company formerly known as General Electric have by the end of this April? How many companies will have under it? Not under it.

How many companies will have General Electric split up into? Three. That is correct. Oh, let's go. I was afraid it was about to be O for two. I really wasn't confident. in my answer. Nope, they have three companies that will end up being

their healthcare division, their aerospace division, and then also their power division. I love it when General Electric comes out with my health solutions. They're actually a big healthcare company that we'll talk about next week. And finally, why would

a company want to split into multiple companies? To find that answer, you'll have to join us next week on Wall Street Weekly as we talk about spin-offs and whatever Patrick wants. to talk about. I don't know. Maybe I'll give my answer next week. Maybe you'll give me a week to think about it. A week to research. Yeah. Exactly. Well, thank you so much for joining us. You are our audience. We had probably a little too much fun on this show, but that's all right. You've got to be a loose

every once in a while. If you've missed this episode or any of our past fun episodes, you can find those on Twitter, also known as X at Wall Street Pod. Thank you for joining us on Wall Street Weekly on Radio Free Hillsdale 101.7 FM. Thank you.