The Retired Investor: SPAC Attack
One of the hottest trends on Wall Street today is "special purpose acquisition companies" or SPACS. There is hardly a day that goes by without an announcement of a new SPAC, or the acquisition and merger of a private company by one.
It works like this. Even though they are called "companies," SPACs have no commercial operations, no sales, profits, or losses. All they have is a pile of cash. They received that money from investors in an initial public offering (IPO) with the promise that they would invest that money down the road into a private company with good prospects.
You are basically giving a blank check to a group of financial pros with a track record, betting that they will make good on their promises. The new SPAC usually prices its shares at $10 in the IPO, while the money raised goes into an interest-bearing count until the right target company looking to go public agrees to be acquired and merged into the SPAC. But that is no sure thing.
SPAC shareholders must vote their approval of the proposed target company. They can refuse or agree and exchange their SPAC shares into the merged company or redeem their SPAC shares at their original investment price, plus interest. There is also a deadline involved. The SPAC must come up with a suitable purchase within two years, or the SPAC is liquidated, and the money returned to investors with interest.
Initially, SPACs were conceived and marketed by Wall Street types, usually a team of institutional investors with reputations for making money in the hedge fund or private equity areas. Although the SPAC structure has been around for years, it was only used as a last resort by tiny companies that would have a difficult time going public through an IPO. The pandemic changed all that.
Many private companies that wanted to go public feared that investors would not have an appetite for new IPOs in an extremely volatile, coronavirus-fueled market. SPACs offered an easy, fairly streamlined alternative solution. Companies could close a SPAC deal in a few months, rather than waiting as much as six months or more for a SEC IPO regulatory approval. Going the traditional IPO route is expensive as well. Plus, prospective companies can negotiate their perceived public market value with the SPAC management instead of being at the mercy of their IPO investment bankers or the buying public during the road show.
Typically, the sponsoring SPAC receives a 20 percent stake in the final, merged company, which makes it a lucrative proposition for the sponsors. That payout has attracted a growing number of professionals looking to start their own SPACs. In addition, a slew of big-name CEOs and billionaires have jumped on the SPAC bandwagon, as have sports stars, singers, and others seeking to cash in on the trend.
If all this sounds like a dream come true, it is — at least for private companies that want to go public. Last year $83 billion was raised through SPACs, which was six times the amount raised in 2019, and almost equaled to the total new IPO market.
For the individual investor, however, it may not be such a great deal. More often than not, the track record of investing in SPACs is less than if you purchased a typical IPO. Although some SPACs do hit home runs, according to a recent Harvard study, the vast majority of post-merger SPAC share prices drop by one-third or more after the deal. The Harvard study went on to say that by the time the merger actually does occur, the $10 share price actually has a cash value of just $6.67. In this kind of transaction, it is the shareholder, and not the company, that is bearing the brunt of costs. There is another and more pressing issue with SPACs. They might also be victims of their own success in the future.
This army of new SPACs is already in fierce competition with traditional IPO bankers, as well as venture capitalists. They are all chasing the same dwindling supply of well-capitalized private companies with good prospects. The temptation may be to just find companies willing to merge, despite their prospects or financial condition. In addition, the temptation to value the targeted company at a price that will win their business over the competition is a real and present danger.
My own experience in buying SPACs is that I have made the most money buying pre-deal SPACs. I usually pay less, but that is understandable. I take on the risk of waiting for a deal. Remember, the SPAC could take two years to find a suitable merger company, if ever. In most cases, I usually sell some, or all, of my position in the days following the announcement of a successful merger. Of course, there have been some notable exceptions to that rule depending on the company, its products and future potential. It requires research, patience and work.
The Retired Investor: Clubhouse Comes of Age
The latest entrant into the social media orbit is an audio-only chat app called Clubhouse. The internet company had a $1 billion valuation before it had a business plan. That is even more surprising since membership is by invitation-only.
On Jan. 24, 2021, the company announced its latest $100 million fundraising effort, and for the first time presented a rough sketch of how it plans to start generating sales. Its Silicon Valley founders, Paul Davidson and Rohan Seth, are hoping to offer paid subscriptions, ticketed events, and other schemes to turn the site profitable.
You need to know an existing member in order to get an invite to join Clubhouse. Once you become a member, you can join the conversation on a variety of topics. Everything from cryptocurrencies to the latest sports games, to any other topic you can imagine. You can wander what is called "the hallway" and listen in on various live conversations in process as you pass different rooms.
So, who, you might ask, would want to pay just to listen in or have a conversation with someone? Well, it might depend on who was doing the talking. What if Elon Musk, or Mark Zuckerberg, Oprah, or Drake were the guest speakers?
The site's virtual rooms are organized into a host, moderators, and audience members. The host and moderators determine the conversational flow, who can speak, and when, as well as any question-and-answer segment if applicable. It is quite similar to a virtual panel discussion you might attend through Zoom or GoToMeeting. However, this is an audio-only event with no videos.
Each event or topic may be different. And if, for example, the subject matter is performance-related, as in acting, or presenting a comedic routine, or the topic is designed for listen-only, then the panel member may not allow audience feedback or a Q&A.
The founders are betting that you will not only be attracted to Clubhouse's exclusivity, but will also be willing to pay for a seminar by a famous influencer on topics like the future of coronavirus, or watch the Clubhouse production of "The Lion King."
To date, there are about 180 investors, including several large venture capital firms, and a group of smaller, independent investors that have funded the effort. There are an estimated 6 million registered Clubhouse users, which continues to grow by leaps and bounds.
Clearly, the formula for success is providing the membership a growing list of relevant topics and "influencers" who are loyal to the site. Tesla CEO Elon Musk made his first (and only) appearance on the site on Jan. 31. He is credited with single-handedly driving membership from 3 million to more than 5 million users worldwide in a matter of days. New members sprouted up in Taiwan, China, Hong Kong, and Japan.
Much of the credit for the APP's early success lies with a group of talented Black artists who transformed what was a geeky tech hangout into something more that would appeal to a much wider audience. But success does not come without a price.
Clubhouse in its earlier days had its fair share of hate speech, nasty conversations, and verbal harassment of speakers, moderators, and audience members. Since then, the company has developed its own set of community guidelines as well as "block," "mute" and "report" buttons. In addition, some of Clubhouse funds are now used to hire more professional moderators as well as for training of those members who host and/or moderate rooms. Given the varied and heated opinions of these divided states, I suspect it will become even more difficult to maintain civility in these rooms depending upon the topics presented.
The Clubhouse success has also spawned competitors. Twitter recently launched a live audio feature called "Spaces," Facebook is reported to be developing something similar, and the Chinese are putting together their own version of the app.
As for me, I am still waiting for someone who is a Clubhouse member to send me an invite. I would greatly appreciate it. My email is email@example.com.
The Retired Investor: Gambling, the Vice We Love
The pandemic has altered the behavior patterns of many Americans. It has also forced states to re-examine their thinking in several areas, especially in taxation and spending. One of the biggest winners in this process appears to be gambling.
Clearly, with most of the nation's leisure activities shut down, more and more Americans are looking for something to occupy their time. At the same time, thanks to massive losses in tax revenues, states are scrambling for ways to make ends meet. Sports and other forms of online gambling are an easy answer to shoring up state budgets, while satisfying the consumer's demand for more action in this burgeoning leisure market.
The trend toward legalizing gambling both on and off the internet has been around for the last several years, but the pandemic has added momentum to that process. Back in 2017, the U.S. Supreme Court ruled that states have the right to decide the status of sports betting for themselves. As a result, more than 24 states have legalized betting either online or at casinos or both.
Sports betting is only the latest offering in a field crowded with other gambling pastimes. Whatever your poison — poker, slots, sports betting, or live casino games — you can increasingly access it online. More and more Americans are doing just that.
For those veteran gamblers who enjoyed the excitement of the brick-and-mortar atmosphere of established gambling casinos, it took the pandemic to lure them onto the internet side of things. They found that online sites offered their own brand of adrenaline rush. Slot machines, for example, tend to be much more fun than the traditional, one-armed bandits of yesteryear. If that is not your cup of tea, you can access live studios where the game and dealers are in real-time and the light shows are often dazzling.
Another benefit of online sites is safety. Gamblers can feel safe because there are plenty of reliable websites that have been licensed by the state. They offer a transparent and fair game with high-security protocols. They are also open 24 hours a day, and you don't need to wear make-up or comb your hair to gamble. In addition, there are no lines, social requirements, expensive dinners, hotels, or worries about costly transportation to the casino.
The nation's attention was drawn to sports betting last weekend thanks to the Super Bowl. Wagers on the game were expected to break all records in legal sports betting. The American Gaming Association predicted that as many as 23.2 million people would be wagering bets on the outcome of the game. That would be a 62 percent increase from last year's wagers, totaling $4.3 million.
The nation's media featured a Texas businessman and owner of a furniture store, "Mattress Mack" Jim McIngvale, who placed a $3.46 million bet on the game and won $6.18 million. It was thought to be the largest bet made at the game.
Mattress Mack placed the bet on his smartphone through DraftKings (DKNG), a public company that is one of the top betting platforms in the nation. The publicity has been good both for the furniture store as well as for the price of DraftKings. The company's stock price has climbed substantially over the last few months as investors became aware of just how large the betting public has become.
Worldwide, the online gambling market is valued at $59 billon, according to Statista, a data research firm, and is expected to reach $92.9 billion by next year. That has investors excited. And like so many other areas affected by the pandemic, gambling could become even bigger in the future with online betting leading the way.
The Retired Investor: The Business of Space
Space! It holds the promise of riches beyond our wildest dreams -- solar systems bursting with precious resources ripe for the taking. Just the idea of such prizes has set off a frenzied rush by global business entrepreneurs to claim stakes in this new frontier.
The private sector has increasingly pushed aside governments and their contractors in a frenzied bid to develop commercial space exploration. At the same time, using all their cost-cutting prowess to reduce the cost of putting people and objects into orbit, and that is only the first step.
This year, for example, there are three separate missions to Mars, which are scheduled to arrive in February. The Emirates Mars Mission is due to arrive next week on Feb. 9. Its task is to study weather cycles and the Mars atmosphere overall. A Taiwanese spacecraft will touch down two days later. Its orders are to map the surface of the Red Planet, do atmospheric tests, and launch a rover that will search for signs of life. Finally, a week later, on Feb. 18, NASA will land another rover on Mars' Jezero Crater to collect soil samples, rocks, and hopefully return to earth with its treasures.
While all of this may send our blood racing and hearts pumping, the more mundane business of turning a profit in this fledgling industry is centered on the transportation side of commercial space. The budding business is built upon the bet that more and more companies will want to fill the skies with much-improved, (and cheaper) nanosatellites constellations, that will allow greatly expanded communications, imaging, and the use of scientific instruments to measure everything from temperature to energy consumption.
Over the next few years, an entirely new fleet of private sector rocket companies with names such as Virgin Galactic, SpaceX, Blue Origin, Alen, Astra, and Rocket Lab, are hoping to launch daily rockets laden with thousands of pounds of satellites into orbit for commercial and government use.
SpaceX, the company founded by electric vehicle pioneer, Elon Musk, is the front runner in this race for space. Last year, SpaceX launched astronauts to the International Space Station twice and is scheduled to do it again this year. If all goes as planned, expectations are that SpaceX will become the successor to the U.S. government's former space shuttle program.
The company also planned to fly a mission for a Texas-based company that has purchased a trip for a crew of four tourists to the space station. Could this be a forerunner of a sort of private sector cruise line into space?
Although none of these ventures have yet to make a profit, stock investors anxiously await their debut as public companies. Virgin Galactic, the only pure play in space, has seen a doubling of its stock price in the last six months, but it is not the only public company involved in the industry. Aerospace giants Boeing, Lockheed Martin, and Northrop Grumman are also major players in this arena. Additionally, there is also an exchange traded fund (ETF), the Procure Space ETF, (symbol UFO) that is widely traded, which has gained 33% in price during the last three months.
Another space rocket startup, Astra, is planning to go public using a blank check company, or Special Purpose Acquisition Corporation (SPAC), in the near future, worth a $2.1 billion valuation, according to the Wall Street Journal. Space tug company, Momentus, founded in 2017 by Russian-born, Mikhail Kokorich, is also planning to go public via a SPAC, Stable Road Acquisition Corp, in a $1.2 billion transaction this year.
In addition, Ark Investment funds CEO, Cathie Wood, is also planning to launch a new space-focused ETF to join her stable of seven successful disruptive technologies ETFs.
Critics of the space boom point to the fact that all these companies are losing money. The likelihood of profits, they say, could be years away (if ever). Space bulls argue that early investments in electric vehicles was derided with the same arguments, and look what happened to those with the courage and vision to risk their capital.
For the people attracted to investing in some version of tomorrow's Starfleet, be forewarned that it will require an enormous amount of patience, an extended time horizon, and possibly as much volatility as the Millennium Falcon's frequent jumps into Hyperspace.
As for me, color me Buzz Lightyear, since I am already convinced that "infinity and beyond" could be the future of space investment.
The Retired Investor: Make Way for the Retail Investor
By now, you may have realized that this is not your father's stock market, nor will it ever be again. An entirely new army of investors have arrived on the scene with different attitudes, values, and beliefs. You can either hop on this train or be left behind.
Back in the day, burnt by the Financial Crisis of more than a decade ago, many investors decided to forsake the stock market, embracing bonds instead. Over that time, Americans amassed a $3 trillion in savings and 94 percent of that money went into bonds. Those bond buyers have had a good run, but all good things must come to an end.
Most fixed income investors are scrapping the bottom of the barrel if they are hoping for further increases in bond prices. Interest rates are less than one percent, and there isn't much room to fall further. Dividend-paying stocks are yielding more than most bond investments. Plus, the chances for price appreciation appeared to be much greater in the equity than in the bond market. The retail investor is waking up to this fact.
Last year, while Main Street suffered under the black hand of the coronavirus, the stock market roared higher, after a big correction in March 2020. That pullback was just the excuse many investors needed to dip their toes back into equities. After all, what better way was there for the unemployed worker or small business owner to supplement their income than in a market that was suddenly 30 percent cheaper than it had been at the beginning of the year?
Americans of all ages, spurred on by the pandemic-induced, stay-at-home trend, took a new interest in the financial markets. The government's stimulus checks provided the capital they needed to get involved. For those working remotely, there was also a lot more time to trade with no boss watching over their shoulder. The commission-free trading and ease of execution also helped. The rest is history.
It would be too easy for old timers like me who have witnessed doubles and then triples in stocks of fledgling companies in mere days to warn of the excesses that this is causing in the market. It may be, but the fact that Google or Apple have done the same thing is perfectly acceptable because that happened over a longer period. Who is to say that what has happened in the past must happen in the future?
Others might scoff at these newbies who know so little about markets, earnings, and the trends that make a difference. The mantra I hear most is that this will end badly, so just wait for it. Talk of bubbles abound.
In the meantime, these new traders continue to invest in areas where they see a future. Electric vehicles, solar power, ESG investing, the Cloud and more. While seasoned investors point to the fact that many of these companies earn nothing and won't for years and years, Robin Hood traders ignore them. They are buying what they know, and so far, they have been right. If price talks then these new traders are walking the walk, in my opinion.
Check out what has happened to Bitcoin (or "digital gold" as investors are calling it). A year ago, high-paid strategists and analysts were still writing off crypto currencies as a fad with no future, while retail buyers ignored them. And well, they should, because they were already using Bitcoin to make purchases and pay their bills.
But what of the excesses, surely there will be a time when some of these traders will hit a brick wall? I am sure there will be a reckoning of some sort. For example, this week's craze is to buy stocks with heavy short interest, bidding up prices and forcing the "Big Guys" to cover their shorts. Thousands of retail buyers converged on this week's phenomena, GameStop, a console and video game maker, to do just that. The price of the stock has been climbing by almost 100 percent per day and where it will end no one knows. In the meantime, other heavily shorted stocks are rising in sympathy. It won't last forever.
The point is that the markets are changing. And like with all change, there is good and bad. I have no doubt that the excesses will be dealt with in due course. Some traders will get burnt, but many more will continue to profit. I for one, encourage these young bloods to experiment. Their participation helps me in my own investing and has taught this old dog a whole bag of new tricks; so I say keep it coming.