Saudi Aramco, a microcosm of International Equities issues.

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TomCat96
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Saudi Aramco, a microcosm of International Equities issues.

Post by TomCat96 » Tue Nov 05, 2019 6:47 pm

Saudi Aramco is set to go IPO, with valuations going anywhere from 1.2 Trillion to 2 Trillion.

Will you be participating in this IPO?


At the end of 2018, the total world stock market capitalization stood at 40.6 trillion, with the United States occupying 54.4% of that.
The remainder Ex-US was at 45.6%
here

There is a school of thought here, that international equity markets are efficient, that holding a percentage of companies in accordance with their market weight is optimal because of the efficiency of allocation of the market, and that any other position is a form of market timing and/or active investing. Who are you to know better than the market?

What we have here is quite an opportunity. According to this article, the latest go-around has the company valued at
1.5 Trillion.


1.5 Trillion is 3.69% of the World Equity Portfolio if you were to hold at global market cap--Vanguard World.
It would be a whopping 8.09% of your international equity allocation, if held at market weight.

But, here is your opportunity to trust the will of the market. Purists should be anticipating quite the change in their portfolio allocation, if not now then in the near future.

Personally, I don't believe international equity markets are efficient...at all. In the past I have posted red-flags when it came to investing in China, Japan, and I will later post what I believe to be some red-flags concerning the Saudi Aramco IPO.

Will you be participating in this IPO, either now or some point in the future, passively?

Thesaints
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Thesaints » Tue Nov 05, 2019 6:52 pm

Whoever holds an international index fund "will participate". So what ?
It seems like you know something others don't and Aramco's actual value is in fact a lot lower than what the market estimates presently.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Smith1776 » Tue Nov 05, 2019 6:52 pm

Null.
Last edited by Smith1776 on Sun Apr 12, 2020 6:20 am, edited 1 time in total.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by columbia » Tue Nov 05, 2019 6:57 pm

How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Thesaints » Tue Nov 05, 2019 7:02 pm

columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
Right, I forgot Aramco is the only corporation in the World exposed to geopolitical risk...

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TomCat96
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by TomCat96 » Tue Nov 05, 2019 7:23 pm

Thesaints wrote:
Tue Nov 05, 2019 6:52 pm
Whoever holds an international index fund "will participate". So what ?
It seems like you know something others don't and Aramco's actual value is in fact a lot lower than what the market estimates presently.

Red flag number #1.
Do I dare know something the market does not?

Let's talk about this idea.
The idea here is that all of my considerations have been adequately priced into the market. After all what I know that highly paid individuals do not?

Let me ask you a question. I want you to play with it. What does the Saudi Royal Family know that the market does not? Who is the Saudi Royal family to defy the will of the market? Really get into it. Can they defy the will of the market? Legitimately, honestly, can they defy the will of the market when it comes to Saudi Aramco? Because right now your implicit assumption must be no.

Your assumption is that the Saudi Royal family does not have any power over the market, when it comes to their own oil company, in their land, under their law.

You see, your argument that I know something the market does not know, only makes sense if the market has sufficient pricing power to price Saudi Aramco efficiently.

Does the market have the power to price a giant like Saudi Aramco efficiently?

Here is the problem; if the Saudi Royal family has more power to price their own company than the collective will of the market does, then the price you are getting is not efficient.

You are getting a price. But it is not an efficient price. (emphasis added)

But Tomcat96, that would imply that the Saudi Royal family could profit abnormally based on their superior pricing power and information, and that they can do this over and over again. To which I would reply, yes...that sounds about right.


Let's attack the argument which i know you have in your head: But Tomcat96, the market has taken all that into consideration already.

This is my counter:
No. That's the point we are arguing. Does the market have the power to actually take all that into consideration?

You cannot assume that it does. A market's ability to price things in is based on transactions, transactions being the intersection of a supply and demand curve. But where one market participant has enormous power relative to the market's ability to price in, the ability of the markets price to be efficient can be questioned.

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TomCat96
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by TomCat96 » Tue Nov 05, 2019 7:24 pm

Thesaints wrote:
Tue Nov 05, 2019 6:52 pm
Whoever holds an international index fund "will participate". So what ?
It seems like you know something others don't and Aramco's actual value is in fact a lot lower than what the market estimates presently.
Let me ask you another question.
Is a monopoly efficient?

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by JBTX » Tue Nov 05, 2019 7:28 pm

columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
I think you touch on some valid concerns, but let's put this in perspective.
Despite the lower valuation, Aramco’s initial public offering will be the biggest in history, raising $40bn-$45bn, surpassing the record $25bn raised by China’s tech firm Alibaba in 2015.

The actual market cap in the IPO is only a fraction of the company.

the company supplies 13% of the world’s oil, and this year it revealed half-year profits of $46.9bn – more than the next six biggest oil companies combined.
It generates 13% of the world's oil, and nets nearly 100 billion a year. That's a multiple of around 15.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Kenkat » Tue Nov 05, 2019 7:34 pm

Microsoft is 3.59% of Total Stock Index so yes, cap weighting can lead to decent sized chunks of large companies in your portfolio. Aramaco could be a good investment, who knows? There’s risk but let’s just say that there’s a lot of people interested in Saudi Arabian oil too.

If this is a concern, it could be a good reason to diversify by size and value so that these large companies become a relatively smaller percentage of the total. I do some of that but it’s not helped much lately, so ya gotta be patient. Very patient.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by TomCat96 » Tue Nov 05, 2019 7:36 pm

JBTX wrote:
Tue Nov 05, 2019 7:28 pm
columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
I think you touch on some valid concerns, but let's put this in perspective.
Despite the lower valuation, Aramco’s initial public offering will be the biggest in history, raising $40bn-$45bn, surpassing the record $25bn raised by China’s tech firm Alibaba in 2015.

The actual market cap in the IPO is only a fraction of the company.

the company supplies 13% of the world’s oil, and this year it revealed half-year profits of $46.9bn – more than the next six biggest oil companies combined.
It generates 13% of the world's oil, and nets nearly 100 billion a year. That's a multiple of around 15.

On the point of the market cap in the IPO, the relevant inquiry there is how other company's market caps are taken into account.

Does the market cap weighted hold only the portion of the shares outstanding selling in the public, or over the entire market cap of the outstanding shares of the company?

I believe it is over the entire market cap weight of the company itself. What I mean is that if Google is worth 700B, and suppose that the founders of google hold 100B of its stock, the market cap is nevertheless still 700B, which is the passive weight used to index.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by bgf » Tue Nov 05, 2019 7:41 pm

microsoft and apple make up almost 10% of VOO, sp500 fund.

im not worried about Aramco making up a much smaller portion of VT, world fund.
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by JBTX » Tue Nov 05, 2019 7:46 pm

TomCat96 wrote:
Tue Nov 05, 2019 7:36 pm
JBTX wrote:
Tue Nov 05, 2019 7:28 pm
columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
I think you touch on some valid concerns, but let's put this in perspective.
Despite the lower valuation, Aramco’s initial public offering will be the biggest in history, raising $40bn-$45bn, surpassing the record $25bn raised by China’s tech firm Alibaba in 2015.

The actual market cap in the IPO is only a fraction of the company.

the company supplies 13% of the world’s oil, and this year it revealed half-year profits of $46.9bn – more than the next six biggest oil companies combined.
It generates 13% of the world's oil, and nets nearly 100 billion a year. That's a multiple of around 15.

On the point of the market cap in the IPO, the relevant inquiry there is how other company's market caps are taken into account.

Does the market cap weighted hold only the portion of the shares outstanding selling in the public, or over the entire market cap of the outstanding shares of the company?

I believe it is over the entire market cap weight of the company itself. What I mean is that if Google is worth 700B, and suppose that the founders of google hold 100B of its stock, the market cap is nevertheless still 700B, which is the passive weight used to index.

https://www.finra.org/investors/insights/market-cap

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Steve Reading » Tue Nov 05, 2019 7:54 pm

The CAPM framework says the valuation of a company(and hence, its expected returns) come from the diversification aspect it brings when combined with the market portfolio.

In other words, in theory, the market cap of all of the similar oil companies in the world would drop marginally and accordingly once the IPO takes place such that the market cap to this kind of company activity would not change as much.

It'll be interesting to compare before-after IPO market cap by sectors. I think most indexes/funds avoid buying IPOs immediately so it will take some time before we confirm the theory.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by alex_686 » Tue Nov 05, 2019 7:58 pm

TomCat96 wrote:
Tue Nov 05, 2019 6:47 pm
1.5 Trillion is 3.69% of the World Equity Portfolio if you were to hold at global market cap--Vanguard World.
It would be a whopping 8.09% of your international equity allocation, if held at market weight.
Nope. Indexes are based on free float. They are floating only about 1% of the company. So it will be closer to .1%.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by bluquark » Tue Nov 05, 2019 8:23 pm

The primary threat to Saudi Aramco is the same threat faced by every oil company -- the risk of an oil price drop. Another threat to oil companies is possible taxation or regulation due to carbon emissions. Aramco is one of the cheapest and lowest-emission oil extractors in the world.

As a point of comparison, Canadian oil stocks are more exposed than Aramco because the breakeven price for oil sands extraction to be profitable is high.
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by nisiprius » Tue Nov 05, 2019 8:44 pm

TomCat96 wrote:
Tue Nov 05, 2019 6:47 pm
...Will you be participating in this IPO?...
I'm perfectly happy to let Vanguard's index provider for VTIAX, FTSE, decide when to add it to the index, and to let Vanguard decide how to go about buying the shares.

I don't know how efficient the stock market is, but traditionally--from the 1920s right through the present--new stock issues and initial public offerings are places where there is a relatively high chance of shenanigans, inside information, preferential treatment of particular big investors, and a chance of the general public has a chance of getting taken to the cleaners. That probably spells "opportunity" for some, but not me. It is a time when the shares are in the hands of a relatively small number of people, and where the situation is being analyzed closely by institutional investors that know a thousand times more than I do about the oil business. To me, I hear "MbS" and I think "mortgage-backed securities?"

Yes, someone is going to get rich out of this, and it won't be me.
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by donaldfair71 » Tue Nov 05, 2019 9:09 pm

TomCat96 wrote:
Tue Nov 05, 2019 7:23 pm
Thesaints wrote:
Tue Nov 05, 2019 6:52 pm
Whoever holds an international index fund "will participate". So what ?
It seems like you know something others don't and Aramco's actual value is in fact a lot lower than what the market estimates presently.

Red flag number #1.
Do I dare know something the market does not?

Let's talk about this idea.
The idea here is that all of my considerations have been adequately priced into the market. After all what I know that highly paid individuals do not?

Let me ask you a question. I want you to play with it. What does the Saudi Royal Family know that the market does not? Who is the Saudi Royal family to defy the will of the market? Really get into it. Can they defy the will of the market? Legitimately, honestly, can they defy the will of the market when it comes to Saudi Aramco? Because right now your implicit assumption must be no.

Your assumption is that the Saudi Royal family does not have any power over the market, when it comes to their own oil company, in their land, under their law.

You see, your argument that I know something the market does not know, only makes sense if the market has sufficient pricing power to price Saudi Aramco efficiently.

Does the market have the power to price a giant like Saudi Aramco efficiently?

Here is the problem; if the Saudi Royal family has more power to price their own company than the collective will of the market does, then the price you are getting is not efficient.

You are getting a price. But it is not an efficient price. (emphasis added)

But Tomcat96, that would imply that the Saudi Royal family could profit abnormally based on their superior pricing power and information, and that they can do this over and over again. To which I would reply, yes...that sounds about right.


Let's attack the argument which i know you have in your head: But Tomcat96, the market has taken all that into consideration already.

This is my counter:
No. That's the point we are arguing. Does the market have the power to actually take all that into consideration?

You cannot assume that it does. A market's ability to price things in is based on transactions, transactions being the intersection of a supply and demand curve. But where one market participant has enormous power relative to the market's ability to price in, the ability of the markets price to be efficient can be questioned.
To me the point isn’t whether the price of Aramco, Apple, Twitter, or any isn’t whether it’s priced efficiently. It’s that the vast majority investors that make up the market could never really exploit its inefficiencies for any gain (or loss).

Therefore, behaving as though it’s efficient, while being “diversified enough”, all while paying basically nothing, is the best chance for a Joe Public Investor to make headway in the market.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by columbia » Tue Nov 05, 2019 9:13 pm

Thesaints wrote:
Tue Nov 05, 2019 7:02 pm
columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
Right, I forgot Aramco is the only corporation in the World exposed to geopolitical risk...
There are legitimate reasons why PT Barnum is still quoted.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by MotoTrojan » Tue Nov 05, 2019 9:22 pm

Smith1776 wrote:
Tue Nov 05, 2019 6:52 pm
Valid concerns.

The solution, in my opinion, is to have part of your equities in market cap weighted indices. The other parts should be tilts to improve diversification and combat the problem you are articulating.
This. I do this on the domestic side but have been hesitant on International since it only makes up 25% of my equity portfolio. Have thought about going 50/50 with some small-value biased holdings such as DLS.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by arcticpineapplecorp. » Tue Nov 05, 2019 9:26 pm

Will you be participating in this IPO?
no, but that's because I don't "Chase the IPO Dream":

You might want to read Larry Swedroe's book "Rational Investing in Irrational Times". The edition I have covers 52 different types of mistakes common to investors (he revised with even more).

If you read it, you'll realize you're asking how to go about making Mistake 51 "Do You Chase the IPO Dream?"

In this chapter Larry goes through all the evidence that picking an IPO is the winning strategy...for the underwriters on Wall Street who generate great fee income and insiders who sell their shares on unwitting retail investors. The retail investors (OP) are buying lottery tickets.

The evidence of underperformance? Paraphrasing from Larry's Book:

Journal of Finance 1995. Study covering 1970-1990 looked at returns from buying every IPO at the end of the first day's closing price and holding for 5 years. The return was just 5% per year and it was 7% LESS than a benchmark of companies of similar market cap.

Wall Street Journal Feb 24, 1999. U. of Florida prof. Jay Ritter looked at 1006 IPOs that raised $20 mil 1988-1993. The median IPO underperformed the Russell 3000 by 30% 3 years after going public and 46% of IPOs produced negative returns.

Fortune Nov 23, 1998. How did IPOs issued in 1993 do through 1998? The average IPO returned 1/3rd as much as the S&P500 index. 1/2 traded below the offering price. 1/3rd were down over 50%.

Wall Street Journal March 30, 1999. U.S. Bancorp Pier Jaffray study looked at May 1988 - July 1998 (4900 IPOs). The outcome? Less than 1/3rd were above the IPO price, 1/3rd weren't even trading anymore due to bankruptcy, or were acquired or no longer trading in an active market.

And on and on for another four pages. The persistent underperformance continues.

Larry writes:
In the face of this poor performance, why do investors continue to chase the latest IPO? There are two explanations for this seemingly irrational behavior. FIrst, unless an investor happens to read scholarly publications such as the Journal of Finance, he or she is unlikely to be aware of the facts. Second, even when informed, investors often act in what appear to be irrational ways .In this case, it is another example of the triumph of hope over experience. Investors seem to be willing to accept the high probability of low returns in exchange for the small chance of a home run or, possibly even more important, a great story to tell at the next cocktail party.

There is an old saying in sports that sometimes the best trades are the ones you don't make. You can avoid the mistake of investing in IPOs by remembering that while IPOs have provided huge profits for the Wall Street firms that market them, they have generated very poor returns for investors.
viewtopic.php?f=10&t=290925=ipo
viewtopic.php?f=1&t=245067
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by junior » Tue Nov 05, 2019 10:04 pm

TomCat96 wrote:
Tue Nov 05, 2019 6:47 pm
Saudi Aramco is set to go IPO, with valuations going anywhere from 1.2 Trillion to 2 Trillion.



Personally, I don't believe international equity markets are efficient...at all. In the past I have posted red-flags when it came to investing in China, Japan, and I will later post what I believe to be some red-flags concerning the Saudi Aramco IPO.
Is this leading to another thread against international index investing?
Last edited by junior on Tue Nov 05, 2019 10:10 pm, edited 1 time in total.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by AlohaJoe » Tue Nov 05, 2019 10:09 pm

alex_686 wrote:
Tue Nov 05, 2019 7:58 pm
TomCat96 wrote:
Tue Nov 05, 2019 6:47 pm
1.5 Trillion is 3.69% of the World Equity Portfolio if you were to hold at global market cap--Vanguard World.
It would be a whopping 8.09% of your international equity allocation, if held at market weight.
Nope. Indexes are based on free float. They are floating only about 1% of the company. So it will be closer to .1%.
Exactly. It is always amazing that so many people think international is flawed but don't even know the basics of how it works.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by bluquark » Tue Nov 05, 2019 10:18 pm

In fairness that's mostly the fault of financial media which is highlighting the eye-popping valuation in headlines and mentioning the percent planned to be floated in the 10th paragraph if at all.
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by EddyB » Tue Nov 05, 2019 10:18 pm

columbia wrote:
Tue Nov 05, 2019 9:13 pm
Thesaints wrote:
Tue Nov 05, 2019 7:02 pm
columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
Right, I forgot Aramco is the only corporation in the World exposed to geopolitical risk...
There are legitimate reasons why PT Barnum is still quoted.
You mean some people believed the FUD in the OP, based on an exaggeration of the significance of the listing by two orders of magnitude?

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by asset_chaos » Wed Nov 06, 2019 1:44 am

columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
I would have thought the market can price this risk about as accurately as it does the risk of an Exxon refinery in Houston being flattened by a hurricane.
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Valuethinker » Wed Nov 06, 2019 3:44 am

TomCat96 wrote:
Tue Nov 05, 2019 6:47 pm
Saudi Aramco is set to go IPO, with valuations going anywhere from 1.2 Trillion to 2 Trillion.

Will you be participating in this IPO?


At the end of 2018, the total world stock market capitalization stood at 40.6 trillion, with the United States occupying 54.4% of that.
The remainder Ex-US was at 45.6%
here

There is a school of thought here, that international equity markets are efficient, that holding a percentage of companies in accordance with their market weight is optimal because of the efficiency of allocation of the market, and that any other position is a form of market timing and/or active investing. Who are you to know better than the market?

What we have here is quite an opportunity. According to this article, the latest go-around has the company valued at
1.5 Trillion.


1.5 Trillion is 3.69% of the World Equity Portfolio if you were to hold at global market cap--Vanguard World.
It would be a whopping 8.09% of your international equity allocation, if held at market weight.
This statement is factually inaccurate. See other posts and below.
But, here is your opportunity to trust the will of the market. Purists should be anticipating quite the change in their portfolio allocation, if not now then in the near future.

Personally, I don't believe international equity markets are efficient...at all. In the past I have posted red-flags when it came to investing in China, Japan, and I will later post what I believe to be some red-flags concerning the Saudi Aramco IPO.

Will you be participating in this IPO, either now or some point in the future, passively?
It is only being listed in Riyadh at this point. Tiny free float. Not sure if it will be included in international indices? There's a 25% free float rule in place on the London Stock Exchange for example - however they were prepared to alter the rules to get the home listing of Aramco.

If is in international indices it will be c 0.1%.

Over to 3Com & Palm. 3Com spun off, from memory, 25% of Palm. The implied valuation of the the 100% of Palm was greater than the 3Com share price. So if you bought 3Com shares you were in effect paying a negative price.

Burton Malkiel in many editions of his books takes you through the Investment Trust discount problem.

There is a host of academic papers about this - 3Com & Palm in particular - whether it means that markets are inefficient.

It's perfectly possible for a share price to be rigged in some sense, and markets still to be efficient.

If you look at the valuation of Gazprom it does seem to reflect the risks of being in partnership with the Russian state.

International stocks at the moment happen to be unusually cheap compared to US stocks. There's sectoral reasons for that, around Financial Services and Tech stocks in the US in particular. But there also seems to be a genuine PE discount - perhaps reflecting the market's (rational) views of likely future EPS growth.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Valuethinker » Wed Nov 06, 2019 3:50 am

columbia wrote:
Tue Nov 05, 2019 6:57 pm
How does the market *accurately* price in that their extraction, processing or distribution facilities might (as happened in the last six weeks) or might not be militarily attacked?

Intellectually honest people know that the answer to the above is “It can’t.”

If accurate price discovery isn’t a concern, then sure, I guess...maybe.
Lots of companies are exposed to event risk.

Consider BP. Once in the running to be one of the world's largest privately-owned oil companies. Then Deepwater Horizon blew - BP flirted with bankruptcy, if they had not been able to stop the gusher.

The point is as these are single bad events, and often "unknown unknowns", the market can only price them probabilistically. Boeing and the Super Max would be another example. There's always a risk with an airframe manufacturer that something goes horribly wrong. That could be the A380 (Super Jumbo that does not sell enough planes to make back its development cost) or it could be the software problems on Super Max.

To assess it you'd need to use option pricing techniques. And then, you probably don't have enough data about probabilities to do it.

So the market puts a discount on Big Oil, relative to say Microsoft or Amazon (or indeed the average sector). Reflecting a host of concerns that may or may not come to pass. But if any one Big Oil company has a Deepwater Horizon, we can't say the market anticipated that event - it just generally discounts risk among Big Oil companies.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by asset_chaos » Sun Nov 17, 2019 3:40 pm

The updated prospectus for Aramco reportedly states the Saudis will float 1.5% of the company shares and will seek to raise $25 billion from the sale of those shares, valuing the entire company at $1.6-1.7 trillion. If they get the $25 billion, aramco's initial weight in total world index fund would be (based on Vanguard's holdings list for total world) about 0.14%, just outside the 100 largest companies and about the size of airbus. Reports say the major index makers will or are considering fast tracking aramco's inclusion in indices from late december or early january, depending on the exact listing date and other criteria.

To stay on topic in this thread
In its prospectus released last week, the company lists a variety of investment risks ranging from terrorist attacks to geopolitical tensions in a region dominated by Saudi-Iran rivalry.

The 600-page prospectus also includes the government's control over oil output as another potential risk.
Regards, | | Guy

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by WildBill » Sun Nov 17, 2019 10:48 pm

Howdy

I am very familiar with Aramco, having worked with them for many years.

They have a lot of oil and their lifting costs are low, the lowest in the world.

They are a bloated and very inefficient company. A management team focused on efficiency could turn them into a stupendously unbelievable ridiculously colossal producer of cash.

But that ain’t going to happen. And do all the discounted cash flow analysis and rational valuation scenarios you want - I would not be a minority partner of the Saudi royal family at the point of a gun.

Happy production declines

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by sf_tech_saver » Sun Nov 17, 2019 11:48 pm

I only own VTI for equities. I believe the American financial system is the most efficient in the world.

Not all 'markets' are equal. Owning a stock on a young exchange run by a dictator/monarch doesn't sound very Jack Bogle at all to me:

https://www.reuters.com/article/us-saud ... SKBN1XM0KL

Just saying "oh markets are smarter than me" has limits and I think treating the NYSE and this new exchange as fungible is just lazy....

"One reason investors kept their distance was the murder of Khashoggi, said Steven Holden, CEO of Copley Fund Research." <---NO THANKS!!

2 cents :) :beer
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by dmcmahon » Mon Nov 18, 2019 12:10 am

nisiprius wrote:
Tue Nov 05, 2019 8:44 pm
TomCat96 wrote:
Tue Nov 05, 2019 6:47 pm
...Will you be participating in this IPO?...
I'm perfectly happy to let Vanguard's index provider for VTIAX, FTSE, decide when to add it to the index, and to let Vanguard decide how to go about buying the shares.

I don't know how efficient the stock market is, but traditionally--from the 1920s right through the present--new stock issues and initial public offerings are places where there is a relatively high chance of shenanigans, inside information, preferential treatment of particular big investors, and a chance of the general public has a chance of getting taken to the cleaners. That probably spells "opportunity" for some, but not me. It is a time when the shares are in the hands of a relatively small number of people, and where the situation is being analyzed closely by institutional investors that know a thousand times more than I do about the oil business. To me, I hear "MbS" and I think "mortgage-backed securities?"

Yes, someone is going to get rich out of this, and it won't be me.
Agree 100%. I've always wondered about the mechanics of these IPOs, many of which I wouldn't touch as a direct investor. But if it's big enough, presto, it's in the index and all of us have to buy it. I'm hoping the index makers have rules and the like to ensure they don't force us to swallow these deals at the worst possible price/time.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by pokebowl » Mon Nov 18, 2019 12:33 am

After reading all these comments I decided to look into Aramco's IPO and would like to request some validation. It appears the IPO and public shares will only be available on the Saudi stock exchange with no current plans to offer the Aramco stock to international buyers (if ever). The solution appears to be not using your Saudi brokerages to buy Aramco. :wink:

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by bluquark » Mon Nov 18, 2019 12:45 am

pokebowl wrote:
Mon Nov 18, 2019 12:33 am
After reading all these comments I decided to look into Aramco's IPO and would like to request some validation. It appears the IPO and public shares will only be available on the Saudi stock exchange with no current plans to offer the Aramco stock to international buyers (if ever). The solution appears to be not using your Saudi brokerages to buy Aramco. :wink:
Index funds buy securities on your behalf on many foreign stock exchanges. In the past, the Saudi stock exchange was too tiny to bother with, but some of the emerging market indices started including the Saudi stock exchange this year in preparation for this IPO. I expect the Total International type of indices will soon follow.
Last edited by bluquark on Mon Nov 18, 2019 1:39 am, edited 1 time in total.
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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by TropikThunder » Mon Nov 18, 2019 1:33 am

Valuethinker wrote:
Wed Nov 06, 2019 3:44 am
It is only being listed in Riyadh at this point. Tiny free float. Not sure if it will be included in international indices? There's a 25% free float rule in place on the London Stock Exchange for example - however they were prepared to alter the rules to get the home listing of Aramco.

If is in international indices it will be c 0.1%.
Why is this such a source of angst if it’s only going to be ~0.1% of VXUS?

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Valuethinker » Mon Nov 18, 2019 4:03 am

TropikThunder wrote:
Mon Nov 18, 2019 1:33 am
Valuethinker wrote:
Wed Nov 06, 2019 3:44 am
It is only being listed in Riyadh at this point. Tiny free float. Not sure if it will be included in international indices? There's a 25% free float rule in place on the London Stock Exchange for example - however they were prepared to alter the rules to get the home listing of Aramco.

If is in international indices it will be c 0.1%.
Why is this such a source of angst if it’s only going to be ~0.1% of VXUS?
It's another attack on international investing.

Since international investing to me includes investment in US domiciled & listed companies, I am somewhat immune to it ;-).

The problem with the critique is it picked on a particularly egregious example which will probably not be investable by international index funds.

Should have picked on Tencent or Alibaba. Or CNOOC (a Warren Buffett investment, I believe).

As one analyst in London noted, the London Stock Exchange, despite its slavish and egregious rule bending to permit Aramco to list on LSE, has probably dodged a bullet on this one. The corporate governance issues are horrific. You can only value this one on a dividend yield basis - what income you can earn from it.

I gather that in Saudi Arabia you are allowed to borrow money to invest in the IPO. The Saudi stock market has always been something of a casino, this is not going to improve its reputation.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Valuethinker » Mon Nov 18, 2019 4:07 am

bluquark wrote:
Mon Nov 18, 2019 12:45 am
pokebowl wrote:
Mon Nov 18, 2019 12:33 am
After reading all these comments I decided to look into Aramco's IPO and would like to request some validation. It appears the IPO and public shares will only be available on the Saudi stock exchange with no current plans to offer the Aramco stock to international buyers (if ever). The solution appears to be not using your Saudi brokerages to buy Aramco. :wink:
Index funds buy securities on your behalf on many foreign stock exchanges. In the past, the Saudi stock exchange was too tiny to bother with, but some of the emerging market indices started including the Saudi stock exchange this year in preparation for this IPO. I expect the Total International type of indices will soon follow.
Also there was a legal restriction against foreigners investing in the Saudi stock market. I am not sure when that was relaxed - but in the 2000s if not 2010s.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by Valuethinker » Mon Nov 18, 2019 4:12 am

WildBill wrote:
Sun Nov 17, 2019 10:48 pm
Howdy

I am very familiar with Aramco, having worked with them for many years.

They have a lot of oil and their lifting costs are low, the lowest in the world.

They are a bloated and very inefficient company. A management team focused on efficiency could turn them into a stupendously unbelievable ridiculously colossal producer of cash.

But that ain’t going to happen. And do all the discounted cash flow analysis and rational valuation scenarios you want - I would not be a minority partner of the Saudi royal family at the point of a gun.

Happy production declines

W B
The question is why are they selling off, in effect, a piece of their national oil reserves, now? This was after the McKinsey study which has set MBS's economic strategy for the country. Possible explanations:

1. they foresee a world in which oil consumption is restricted on environmental grounds. We are moving closer to peak oil demand (fracking has made the supply issue moot - there will always be more oil for a given oil price).

2. they want to diversify the national portfolio away from oil using the proceeds. One ambition they definitely have is to build more renewables.

3. they don't think the price of oil in the future will be what it has been in the past, due either to consumption restrictions and technology shifts, or due to increased production (fracking)

We may look back and realise in the last 10 years we crossed a couple of critical boundaries: when batteries got power dense enough and cheap enough to serve as storage source for 250 mile range personal passenger vehicles, and when solar actually got cheaper than any other source of electricity (at the plant level, rather than the whole system level). Once you hit those tipping points, you are on the S Curve and the pace of adoption begins to become non linear.

This IPO' hangs something of a "sell" sign on the world's oil companies.

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by asset_chaos » Mon Nov 18, 2019 6:22 pm

dmcmahon wrote:
Mon Nov 18, 2019 12:10 am
nisiprius wrote:
Tue Nov 05, 2019 8:44 pm
TomCat96 wrote:
Tue Nov 05, 2019 6:47 pm
...Will you be participating in this IPO?...
I'm perfectly happy to let Vanguard's index provider for VTIAX, FTSE, decide when to add it to the index, and to let Vanguard decide how to go about buying the shares.

I don't know how efficient the stock market is, but traditionally--from the 1920s right through the present--new stock issues and initial public offerings are places where there is a relatively high chance of shenanigans, inside information, preferential treatment of particular big investors, and a chance of the general public has a chance of getting taken to the cleaners. That probably spells "opportunity" for some, but not me. It is a time when the shares are in the hands of a relatively small number of people, and where the situation is being analyzed closely by institutional investors that know a thousand times more than I do about the oil business. To me, I hear "MbS" and I think "mortgage-backed securities?"

Yes, someone is going to get rich out of this, and it won't be me.
Agree 100%. I've always wondered about the mechanics of these IPOs, many of which I wouldn't touch as a direct investor. But if it's big enough, presto, it's in the index and all of us have to buy it. I'm hoping the index makers have rules and the like to ensure they don't force us to swallow these deals at the worst possible price/time.
The index makers do have rules. But, according to the article I linked above, all the major index makers are going to bend their rules and make exceptions in order to "fast track" inclusion of aramco. It seems to be two rules they will break. One is minimum free float: companies aren't included unless free float is above X, and X is supposed to be greater than 1.5% for all the index makers. But they'll make an exception here. The other rule to break is the fast tracking: rules states companies should trade for a minimum amount of time and/or are then included at the next index reconstitution. Again all the major index providers were quoted as saying they would add aramco to indices within weeks of listing.

At the end of the day, I hold the global index and I'm just trusting that, in this case, FTSE knows what it's doing about adding this company. That the holding will be relatively small for total world means the exact thing that happens is not crucial, but I'd prefer they not make ad hoc exceptions to their, presumably, well thought out rules. On the other hand, it's probably not the first time index makers have made exceptions to their rules about how to add a company---just we weren't talking about those cases because they weren't in the news for geopolitical reasons.
Regards, | | Guy

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Re: Saudi Aramco, a microcosm of International Equities issues.

Post by gougou » Mon Nov 18, 2019 6:44 pm

Reminds me of PetroChina, the first trillion dollar company and a terrible investment since its IPO.

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