Invest: Subtle things caused by the interest hike

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Yesterday the chief executive officer of Uber Technologies Inc., Dara Khosrowshahi, sent out an email to employees telling them that Uber is going to try to make money from doing its businesses:

“We have to make sure our unit economics work before we go big,” the Uber boss wrote. “The least efficient marketing and incentive spend will be pulled back.” …

Uber will now focus on achieving profitability on a free cash flow basis rather than adjusted earnings before interest, taxes, depreciation, and amortization, Khosrowshahi said.

There are arguably two basic models of how to build a big business:

  1. Try to do something that makes money. Then try to do more of it.
  2. Try to do as much as possible of something that loses money. Then try to make it make money.

The second model was arguably the major business paradigm of the last decade; lots of people have talked about it under names like “the MoviePass economy” and “blitzscaling.” Perhaps no company was more associated with it than Uber. And now Uber is changing to the first model, “make sure our unit economics work before we go big.”

Uber drivers rank Seattle riders second worst in the U.S. — see how many  stars you're getting - GeekWire

In one sense, there is nothing surprising about a public-company CEO telling employees that (1) they should try to make money and (2) if they are doing things that lose money, they should do less of them rather than more. In another sense, this is the CEO of Uber. “It’s clear that the market is experiencing a seismic shift,” says Khosrowshahi, “and we need to react accordingly.”

Anyway stocks were down last week; the S&P 500 index has gone down each of the last five weeks, and things seem especially rough in the tech industry. In a world where money is cheap and plentiful, losing a lot of it for the foreseeable future in order to grab a share of huge faraway profits can be a reasonable strategy, or at least one that can attract investors. In a world of higher discount rates, making money now is distinctly preferable to losing it. A seismic shift.

Elsewhere, the meme stocks are over!

Year in a word: Meme stock | Financial Times

Nursing losses in 2022 that are worse than the rest of the market’s, amateur investors who jumped in when the lockdown began have now given back all of their once-prodigious gains, according to an estimate by Morgan Stanley. The calculation is based on trades placed by new entrants since the start of 2020 and uses exchange and public price-feed data to tally overall profits and losses. …

“A lot of these guys started trading right around Covid so their only investing experience was the wacked-out, Fed-fueled market,” said Matthew Tuttle, chief executive officer at Tuttle Capital Management LLC. “That all changed with the Fed pivot in November, but they didn’t realize that because they have never seen a market that wasn’t supported by the Fed,” he said. “The results have been horrific.” …

Famous names from the height of the frenzy are nursing serious losses. AMC Entertainment Inc. is down 78% since June 2021. It’s lost 49% this year. Peloton Interactive Inc. is off 90% from its record. From the start of 2020 to last November, a basket of retail  stock favored by retail trades that Goldman Sachs Group Inc. tracks more than doubled. This year, that basket has plunged 32%, more than twice the S&P 500’s decline. 

I don’t know, man, GameStop Corp. closed at $114.70 on Friday. It was down another 10% (!) as of noon today, but still. It started 2021 at $18.84, and we all lost our minds when it hit $76.79. If your only meme-stock trade was being early to the main meme-stock trade, you’re still doing okay. Meanwhile:

The surge in individual stock trading by Americans last year contributed to a record tax haul for the federal government this spring. …

Individual taxes from small business proceeds or the sale of stock and other assets are nearly triple the 2019 levels.

Tax preparers, in the annual season that closed last month, had reported a significant increase among their clients of people using services like Robinhood. Close watchers of Treasury data picked up on similar trends.

“A big chunk of it has come from short-term capital gains,” said Lou Crandall, chief economist at Wrightson ICAP LLC. “Meme stocks were very, very good to the IRS.”

The short-term capital loss rules are less generous, so if you made a million dollars trading last year and lost it all this year your tax situation will feel unfair.