5/21 MHR Short Report - Weekly Macro & MSTR/Bitcoin Strategy Update

This weeks report focuses on the prior weeks important macro data, along with an update and take on Microstrategy (MSTR) from Market Monk.

Contributors: @DonMiami3 (Don Johnson), @MarketMonkPicks (Market Monk, PhD)

 I had the opportunity to visit Houston, TX over the weekend and didn’t see much of anything pointing towards a consumer recession yet on the experience/travel side of things. Busy hotels (jam-packed), busy events (concerts and baseball games both full and nearly full as well). The rate hikes clearly haven’t had much of a damper at all on this sort of spending from the middle & upper-class consumers and spenders that continue to party like it’s 1999. Keep in mind - many of these trips are pre-booked and likely have been pre-paid for or put on credit cards - so the forward-looking consumer spending from here is going to be more important to focus on. 

Turning toward the macro data - consumer confidence seems to be dropping sharply again - potentially leading the market. You can see how closely consumer confidence tracked the stock market at-large last year. 

Piper Sandler’s latest market forecast - volatile until claims rise sharply & unemployment rate increases - which results in a hard landing for the economy/market at large. This is a great chart below that outlines the potential market direction while we continue to see a more resilient labour market. 

If mortgage rates top 6.75+% again - we should see some slowdown again in an already slow time for the national mortgage market. Although I do not expect large home price declines until employment weakens and inventory is brought online through things like a dramatically worsening picture for both the shorter/longer-term rental markets. It’s also important to keep watching what yields (and the inverted curves do) because they can give us a decent indication of the next steps for the Fed which seems to be leaning towards a June pause and a promise of ‘higher for longer’. The big question remains: how long will higher for longer last? Maybe not that long if a credit crisis arrives. Below - take a look at the Empire State Mfg survey - which sharply declined after a brief bounce in the Spring in manufacturing activity. The senior loan officer survey as well has pointed to a significant tightening in the US credit markets which will result in a slowdown for the economy with a lag. Let’s keep this one brief - so last point- keep an eye on what the Biden admin decides to do with student loans and repayments restarting going into June. Have a great rest of your weekend and enjoy the contribution from Market Monk below. 

DJ

Update on $MSTR and The Bitcoin Strategy
MicroStrategy® Incorporated (Nasdaq: MSTR) investor relations state they are “the largest independent publicly-traded business intelligence company, with the leading enterprise analytics platform.” However, the company is better known for its sizable Bitcoin position, which currently sits at approximately $3.77 Billion at current prices (Deshkovich). When tracking the stock price, it is ultimately the price of Bitcoin that steers the ship. Despite a major new product release, a favorable recent earnings report, and their $BTC position at close to breakeven, there is likely trouble ahead for the stock.

Microstragegy is a software analytics firm, a point understandably lost on many traders, and perhaps some of their investors who see it as a Bitcoin stock. They recently debuted a new software platform called Microstrategy One, “a modern, open cloud-native BI platform that can serve all the analytics needs of large enterprises. MicroStrategy One is highlighted by a modern product suite, including dossier, library, workstation and Hyperintelligence” (Microstrategy). Q1 Earnings show increased revenue from product licenses and subscriptions:  $36.2 million, a 23.4% increase over Q1 2022. However, the overall picture in their earnings report shows sizable debt (over $2.2 Billion), and while they maintain assets in excess of this, $MSTR’s market cap is $3.77B, meaning outstanding debt equates to 59% of their market cap (Deshkovich). Their revenues have declined every year but one since 2014 and they became unprofitable in 2020. Is their core business as a Business Analytics Firm likely to push them to return to growth and profitability? Their revenue hinges on getting Microstrategy One, a suite 8 years in the making, into the market. $MSTR is also currently developing SaaS tools for businesses based on Bitcoin’s lightning network. The investment required to do so can hinder any cost-cutting measures and delay profitability and cash flow generation. This is a familiar story in SaaS stock but unlike many of their peers, their fate is primarily tied to Bitcoin prices. $MSTR’s well-known “Bitcoin Strategy” entails using its balance sheet to purchase Bitcoin as a reserve asset. Former CEO and current executive chairman Michael Saylor argues that Bitcoin protects against inflation and currency devaluation.

For better or worse, Michael Saylor, as one of Bitcoin’s most ardent and visible promoters, has ensured that the fate of $MSTR stock is tied to the future of Bitcoin. He spoke recently at Bitcoin 2023 in Miami. His comments from last year’ conference have not aged particularly well: “Take the money you want to give to your grandchildren, convert it to Bitcoin, put it in cold storage, and wait.” In his estimation, the only mistake a person could make is to sell. (“Michael Saylor”). $BTC was over $40K when he made these comments and despite a recent rally now sits just under $27K, a major drawdown for the grandkiddos’ inheritance in a year. Saylor was more measured in his comments to CNBC this year, emphasizing that the crypto landscape is changing. Buy and HODL was replaced by, “The entire world is confused about what happens next, so continual education, communication, and interpretation of all the activities in the finance markets, and especially the crypto markets in every country in the world is what keeps me up at night.” Nevertheless, one of Bitcoin’s biggest hype men stays on message in front of the eclectic Bitcoin conference crowd: “The reason that Bitcoin is so sound, literally sound, is because it is thermodynamically sound” (The Bitcoin Conference). That is a pithy sound byte to be sure, but with some major headwinds likely ahead for Binance and Tether and pressures for unfavorable crypto legislation, $MSTR’s Bitcoin Strategy leaves them especially vulnerable to these challenges.

$MSTR has outsized exposure to Bitcoin. They own approximately .62% of all the Bitcoin that will ever exist. The recent Bitcoin rally facilitated remarkable gains in stock from 132 lows in December to a peak in April over 345, which coincided with Bitcoin’s move over $30K. However, this momentum cuts both directions. The recent pullback in $BTC coincided with nearly a 20% pullback in the stock. With fewer than 11 million floating shares (by comparison $COIN has nearly 160 million shares), this stock likely will continue to see wild swings in price at the whim of the Bitcoin market. Such volatility is an opportunity for traders but magnifies the risk for investors. Not to diminish their core product, which does seem innovative and promising but the bull case for $MSTR is Bitcoin. The bear case is Bitcoin.

Works Cited
The BitCoin Conference. “Michael Saylor: ‘The Reason That #bitcoin Is so Sound.” Twitter, 19 May 2023, twitter.com/TheBitcoinConf/status/1659644171915763731?s=20. 

Deshkovich, Vlad. “Microstrategy: Slow Decline with a Bitcoin Twist (NASDAQ:MSTR).” Seeking Alpha, 19 May 2023, seekingalpha.com/article/4606066-microstrategy-slow-decline-bitcoin-twist. 

“Michael Saylor Gives Crypto Outlook from Bitcoin 2023, and XRP Jumps 10% for Week: CNBC Crypto World.” CNBC, 19 May 2023, www.cnbc.com/video/2023/05/19/michael-saylor-crypto-outlook-bitcoin-2023-xrp-jumps-cnbc-crypto-world.html. 

“Microstrategy Announces First Quarter 2023 Financial Results.” MicroStrategy, www.microstrategy.com/en/investor-relations/press/microstrategy-announces-first-quarter-2023-financial-results_05-01-2023. Accessed 21 May 2023. 

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