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Nasdaq rewrites its index inclusion rules ahead of SpaceX IPO
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- Title
- SpaceX IPO Is Forcing Changes To Index And Underwriting Rules
- Authors
- Garth Friesen
- Word count
- 1093 words
One of the reasons I'm not a fan of passive investing. Passive investing only works under the assumption that there are enough active investors out there properly pricing in information and applying rational analysis to the market. If enough people are passively investing, then you'll lose a lot of rational price discovery. Some will say that this is naturally self-correcting, since active investors will always be able to profit off irrational valuations. But, if the market doesn't correct for longer than you can stay solvent or, in the less extreme case, stay within an acceptable band of performance, then your clients will take their wealth to another fund. Add in post-2008 moral hazard (or as Buffet has called it, the "too big to fail" paradigm), the growth of unsophisticated retail investing, and rational investors trading off expectations of irrationality within the market, it becomes harder to impossible to make sustained bets on truly fundamental rational analysis. And, once the canonical valuation models start to fail or underperform, the game theory starts to really favor trading off of momentum and sentiment over true fundamentals.
SpaceX's plan is to create an absurdly high valuation through a small portion of the market that's highly risk-loving, cynical, and/or irrational, then to stabilize that price through an accelerated entry into the Nasdaq-100.
On a related note, I found this excerpt a little funny:
"Too large to digest" = bullshit valuation.
Other indexes have different rules. Looks like the S&P 500 might have a rule change, though not as extreme:
Elon Musk's SpaceX Could Be Fast-Tracked Into S&P 500 After IPO Under Proposed Rule Changes
So if I understand this, it's basically going to screw passive investors into overpaying for the tesla holdings? The grift is getting pretty brazen.
Having the biggest stock indexes bend their rules to suit you is the biggest red flag.
What purpose does it serve outside of falsely legitimizing its valuation? It's not like stocks outside of those magically disappear.
It'd be like if Enron started lobbying to ban criminal prosecution of executives in 2000.
For the Nasdaq, the company that makes the list is the Nasdaq stock exchange and they benefit if SpaceX lists its stock on their exchange, so they’re doing it to get the business.
For the S&P 500, it’s not just about SpaceX. OpenAI and Anthropic are going to be very large and unprofitable when they go public too. The size of these IPO’s is unprecedented. The stated justification for the S&P 500 is that they want to include all the largest public companies:
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20260430-1483123/1483123_spdji-us-indices-megacaps-consult-20260430.pdf
Index investing isn’t about what companies are “legitimate.” It’s about having investments in all of them in case they go up.
I mean that’s in part because the space x ipo prospectus reads like if ayn rand wrote science fiction after a decorative MBA.
A huge part of the reason these are so large is because the valuation is just bullshit.
Tesla was added to the S&P 500 in 2020. This is about SpaceX.
Idk, if you “passively” invest in QQQ you’d probably want this, because you think spacex will moon. QQQ ain’t exactly VOO or VTO.
There is a strange logic at play, where large cap stocks that are highly overvalued in the medium term benefit both from greater access to borrowing at lower rates and from the "too big to fail" paradigm, which in turn translates to real long-term gain for the company. This isn't something I'd want to support.
What does that have to do with what Nasdaq decides with its own index?
Sure. That’s why you shouldn’t buy QQQ. They put it to vote, QQQ owners voted for it, kinda is what it is at that point. Just get VTI or another total market fund if you don’t want shenanigans.
Ideally, our major financial institutions should care about financial integrity and whether stocks are priced at their true economic value. I care about stocks being properly valued because otherwise it undermines the degree to which ordinary consumers can decide winners and losers in the economy through their consumption and also incentivizes government bailouts of some form or the other down the line when there's an impending correction. Of course, people can vote with their wallets and this discussion is to highlight what Nasdaq is doing.
Ideally they shouldn’t. That’s ideally the point of the market - none of the actors need to be good actors, they can be maximally selfish and yet the equilibrium is that the commodity is priced at its true economic value.
It really doesn’t. QQQ isn’t important enough for that. If SpaceX gets a bailout, it’s because it’s the only reason the US is competitive in the space industry. Before SpaceX our astronauts had to use Russian rockets to get to the ISS. With the war, if SpaceX didn’t exist there would be zero American astronauts in the ISS.
I wouldn’t catastrophize it either. QQQ is the tech hype beast ETF. It’s not like this is the corruption of a boring old index, that’s its identity. If you bought QQQ, you’re really a big believe in high growth tech companies, and you’re okay with its absurd fees.
If we assume the market is perfectly rational, then using the stock price and the yield curve (to determine the time value of money for present value calculations), we should be able to generate an implied projected profit. It's an empirical reality that if we apply this to a variety of "overvalued" stocks, we generate an implied profit that simply does not make any sense and/or that is inconsistent between stocks (ex. Tesla's stock value only being justified under the projection that it takes over the entire US car industry, and then some). Therefore, we must conclude the market is being irrational and that we will be exposed to the downside in some form or the other down the line.
Sure, I don’t think there’s anything saying that the market is perfectly accurate in the short term. That’s price discovery - it’s not an oracle, it’s a process that self adjusts.
Who’s “we”? Stocks go down and companies go under all the time. Who went down when WeWork blew up? Just SoftBank, mainly.
I wouldn’t have recommended anyone buy QQQ because it’s diversification is ass and has insane fees for a passive ETF. Adding this jank doesn’t really change anything. Hype beast ETF for hype beasts. I’d just let them do their thing.
What I worry most about is the government intervening to clean up these messes or to artificially juice the stock market as a whole, which they are very comfortable doing.
You don’t have to worry, if SpaceX fails it’s guaranteed the government would bail it out no matter what, so this doesn’t change anything.
Don’t buy QQQ, don’t buy SpaceX, don’t pay attention to either, ggez.
BIIIIG emphasis on ideally. I do generally believe that markets will find equilibrium. Like homeostasis in nature, sometimes that equilibrium comes from the economic equivalent of first the mass murder, and then starvation of, various actors (bunnies and foxes example or wolves and deer or whatever).
If the market is proven to be worthless, then economies will look elsewhere. Credibility and certainty are huge factors in markets and we're very much shifting away from that. Maybe it'll hold, maybe it'll correct, maybe it will CORRECT and lots of people will lose their future, and quite possibly even some of these "insulated" western companies and leaders will find out that nothing they do is so difficult to duplicate that it can't be done elsewhere.
First mover advantage and lots of historical inertia is a big deal. I'm generally of the opinion it takes a lot to change that.
You know what's a lot? Claiming a company most known for satellites and rockets has a 28.5 TRILLION TAM because 22.7t of that is AI...a product they arguably don't even have because it's xAI's (which yes is also Elon's), and more importantly, because it runs on rented GPUs from the largest competitor in the market, and then changing the rules to fast track it out.
Note, bringing this up from below not to spam the thread with replies and somewhat consolidate the convo:
Okay that I just outright don't agree with.
No matter what is doing an absurd amount of heavy lifting here and I think it's far from that certain with the current admin or any future admin.
If a trillion market cap company that was a rushed out IPO tanks THAT badly and THEN has to be bailed about by the government (crony or otherwise) that will send massive shudders through the entire market and can absolutely be the kind of event that leads to all sorts of shakeups. Shakeup being a variable for "people seeing markets move unusually" to "major financial crisis" that's nearly impossible to predict.
To be crude about it, if you're at a water park and you're worried about someone peeing in the pool, well that's a choice. Elon and some of these other companies are backing up heavy machinery and swear it's not all urine and that you don't need to check. It's concerning.
The IPO price and whether or not the government will bail them out and how if they are underwater are two separate issues. SpaceX can go from 1 trillion to 100 billion and it fundamentally doesn’t change whether or not they’re solvent. That’s a measure of their cash flows and expenditures - the market cap is separately entirely.
The government also isn’t going to bail anyone out just because they’re sad that they bought SpaceX at some stupid valuation and it went down. They’ll bail out SpaceX if it’s insolvent and would have to cease operations and liquidate. Why? Because the US needs to be able to send things to space for measures of national security. Whether that takes the form of a cash injection or nationalization will depend on the administration at the time, but it’s not OK for the US to depend on Russia for space travel like before when yknow they’re hostile nation.
I think spacex’s true valuation is more like 100b, but it dropping from 100T to 100b isn’t going to matter in any way shape or form. It’ll make some investors, individuals and companies, sad. Oh well
Thank you, I did not understand that QQQ was a tech heavy index. TIL.
S&P 500 rejects SpaceX, also blocking entry for OpenAI and Anthropic
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