What I was NOT allowed to say about SpaceX

Have you ever had a moment where your whole world-view was turned upside down…

Where everything you thought about how the world works – or better said – how you believe the world should work was proven wrong?

Well, that was me about two weeks ago.

I had written this sales letter around SpaceX’s IPO which basically read as an exposé.

Because based on what I saw in my research, there was truly no other way I could tell this story. However, once I presented it to my client, I got this assortment of responses:

I can’t begin to tell you how disillusioned I felt at this moment.

I thought the industry I was in – alternative financial media – was meant to deliver the kind of stories no one else would dare to touch.

Some of my favorite stories in this space was how some writers and analysts were warning people of the 2008 housing bubble… told people to buy bitcoin in 2015…

And even recommended Nvidia in 2018 as The #1 Tech Stock in the World!

But nonetheless, it seems like I’m not in that business anymore.

SO! This means I’ll just tell you what I found instead.

So, what did I find that was so damning?

In short, after digging into every little thing I could about SpaceX’s IPO, all I could conclude was that SpaceX’s IPO will go down in history as:

The BIGGEST manufactured wealth transfer in history…

A setup where a handful of insiders cash out twenty years of pent-up gains at the top…

And your retirement account is the one footing the bill.

How’s that possible?

Well, the story all starts on March 30th – two days before SpaceX filed confidentially with the SEC – when the Nasdaq quietly rewrote its own “index inclusion” rulebook.

You see, most people don't realize this, but getting listed onto a major index is a huge deal. Because the moment a stock joins an index like the Nasdaq 100, every passive fund tracking that index — including the ones inside your 401(k) — is forced to buy it.

Automatically. No matter the price.

And normally, that wouldn’t be a problem because there was “a gate” standing between a brand-new stock and billions in automatic buying called “the seasoning period."

Think of it as a vetting process at that gate. Before a newly listed stock could pass through it, the company had to prove itself by trading on the public market for months…

Long enough for analysts to dig through the filings, for the hype to cool off, and for the market to settle on the stock's TRUE fair price based on it’s own merits.

In short, that gate is the one thing that made sure passive investors across America bought in newly listed stocks at a fair price… after the hype had burned off.

And not just by one index but by a whole string of them.

First, Vanguard's CRSP indexes – the ones behind the funds sitting in millions of 401(k)s – loosened their rules, opening the door for a thin-float giant like SpaceX to get swept into their indexes within days of listing.

Then the Russell index family relaxed its rules too, fast-tracking big new listings that used to have to wait months for the next review, down to just 5 trading days.

And then came the big one, the Nasdaq exchange.

Because on March 30th, the Nasdaq cut its seasoning period from a full three months – and in some cases up to a year – down to just fifteen trading days.

Fifteen days…

To figure out the fair market price of the single biggest IPO in human history…

Before SpaceX gets swept into almost all of the major indexes.

Yeah, that sounds like a disaster in the making.

And look, I didn't just want to assume this ends badly. So I went digging into what actually happened to previous mega-IPO’s that hit the market.

The results aren't pretty.

Starting with the structure SpaceX is using: a tiny public float, under 5% of shares…

A finance professor named Jay Ritter — basically the guy on IPO data — went back to 1980 and found 11 big companies that went public with a float that thin.

Ten of the eleven underperformed the market within three years — on average, by roughly 50%.

And it's not just the low-float ones. Across 30 major tech IPOs, the average stock fell about 55% from its peak within the first year.

And if you want the cleanest warning of all? Look at the last time the Nasdaq pulled this exact move… shortening its window to rush Facebook into the index.

Thanks to all the index inclusion hype, the insiders made out like bandits. Peter Thiel alone turned a $500,000 investment into $640 million… a 127,900% gain.

Meanwhile? The everyday investors who got sucked into the hype watched the stock crash 50% in just four months. Insiders got the fortune. Retail got the bill.

Point is, when you rush a hyped-up stock into the indexes before the market can price it, regular people are the ones who get hurt.

"But what about the lock-up period?" you might ask…

Normally? Yes.

After a company goes public, insiders are locked up for 180 days. They cannot sell. It's the one thing that keeps their interests lined up with yours for the first six months.

But for SpaceX, the banks leading the underwriting process are doing away with the lock up period and replacing it outright with what I called “an exit rolling plan.”

Instead of one solid 180-day insider selling tsunami, the banks sliced it into a series of release valves – staged windows that let insiders start cashing out way, way sooner.

Here's the actual schedule, pulled straight from their own S-1 filing:

Look at that staircase.

The solid six-month wall got quietly turned into a set of doors… that swing open one after another… starting almost the moment the stock goes public.

Now, in fairness, I'll give credit where it's due. Elon himself stays fully locked up. He's not touching any of these early exits.

But everybody else? The early funds, the venture backers, the insiders sitting on a decade-plus of gains? They get to stroll out those staged doors…

While retail is forced to pile in.

And make no mistake, these aren't small gains they're itching to lock in.

We're talking about some of the largest paper fortunes in the history of investing.

Just look at who's been waiting at those doors:

So put yourself in their shoes for one honest second.

If you'd been sitting on a 62,000% gain for the better part of two decades — locked up, untouchable, just paper on a screen — and someone finally cracked the door open…

How fast would you run for it?

Exactly.

Now multiply that instinct by every fund on that list.

That's the wave of selling headed for the market.

Well, now you can see exactly why my client did not want me to publish this version of the SpaceX story.

Strip away the rockets and the hype, and here's what you're actually looking at:

Oh yeah, I forgot about that part.

As GMO's Ben Inker – Jeremy Grantham's right hand – reports:

"With each 1% increase in market cap through IPOs, it eventually leads to
approximately a 7.5% decrease in stock market price."

And now, with SpaceX set to be worth 3% of the entire US stock market…

You can do the math on that one.

Point is, as I see it, the SpaceX IPO is not a wealth creation event.

Instead, it’s the BIGGEST manufactured wealth transfer of our lifetime.

Now, here’s the disclaimer for all of this which I did include in my original piece.

Maybe, SpaceX turns out to be an incredible business over the next twenty years.

And honestly? It probably is a great company.

But "great company" and "great thing to buy in week one… at a forced-up price, while insiders line up to sell into you" are two completely different things.

And that’s why, I cannot recommend anyone to buy SpaceX on opening day in good faith. In six months time, I probably will take a flier on the company.

But till then, this company is a stay away for now.

It’s going to get choppy.

Till next time.

From Your IPO Explorer,

Manuel

PS: Oh — and that big research project I mentioned a couple issues back? The one where I'm tracking every IPO going back decades to figure out what actually makes a newly listed stock worth buying? I’m still building it out. Stay tuned.