What are the hallmarks of a bubble? An injection of freshly created money, a lot of speculation, and strange crazes engulfing Wall Street. Since the Federal Reserve cranked up the printing presses to flood trillions of dollars into the equities arena, a lot has happened other than COVID-19. The stock market has been abuzz with record highs, men in tights pumping and dumping tickers of all sorts, and a New York Stock Exchange filled to the rooftop with liquidity. Millionaires and billionaires, with all this extra money from the Eccles Building, are forming companies about nothing. Come again? Yeah, that’s right.
A Blank Check
Imagine, if you will, a business about nothing. If you thought this was an episode of Seinfeld, you would be wrong. This is the latest craze on Wall Street. A blank check company – also known as a special purpose acquisition company (SPAC) – is an enterprise without a business plan or an objective. Its sole reason for being formed is to go public, raise capital, and then finance an acquisition or merge with an unspecified company or individual. Everything is highly speculative, and it usually falls within the realm of a penny or microcap stock. Thanks to the Federal Reserve pumping so much liquidity into the stock market, investors can buy into a shell company and potentially make a profit without knowing what they are even buying.
Are there any examples of this succeeding? One of the most prominent instances of the blank check method is DraftKings. The fantasy sports and online betting company filed an initial public offering (IPO) and then merged with Diamond Eagle Acquisition that had been formed to help DraftKings go public.
Billionaire Bill Ackman and his Pershing Square Tontine Holdings are “looking to marry a unicorn” and “we’re prettying ourselves up for the most attractive possible partner.” He thinks the process of raising a cash shell, listing it on the New York Stock Exchange, and then issuing securities to take a private entity public is more efficient and less risky for private ventures. But can they outperform the broader market in the long-term? The data suggest they tend to underperform a few months after the action occurs.
Although this has been a Wall Street strategy for years, everyone is trying to grab a slice of the $22 billion pie that has surged 145% from last year. And now, traders can satisfy their appetites thanks to a new exchange-traded fund (ETF). The Defiance NextGen SPAC IPO ETF will track shares of companies that are listed on exchanges by merging with SPACs instead of conventional IPOs. It will soon trade under SPAK, and 80% of its assets will be invested in SPAC IPO offerings from the last 18 months.
CFRA Research’s Todd Rosenbluth told Bloomberg that there might not be enough diversification in these ETFs, but he noted that “asset managers are eager to skate to where the puck is possibly going, even if demand is not clear.”
Blame the Fed?
Years ago, a social network mobile app called Yo! raised millions of dollars and had a valuation of $10 million before it even sent its first Yo! Investors were hoping they had caught the next Twitter or Snapchat. If you assess many of the companies in the SPAC world, they are tech heavy. It makes sense why. Historically low interest rates and steady money-printing fueled the technology sector’s enormous growth, and we are going through it again. The Fed has pumped a few trillion dollars into the economy in a couple of months, and those closest to the printing presses are finance and tech, which are multi-billion-dollar companies receiving bailouts. Put simply, Wall Street is hosting another bubblemania.
It’s 2007 All Over Again
When was the last time the SPAC market had this much momentum? You guessed it: 2007. And everyone knows how much pain and suffering that market meltdown caused. Many folks are still paying for the sins of the past, but it was the Mephistophelean beast that nudged investors to adopt speculative behaviors. There is not much difference between now and then, except perhaps a highly infectious respiratory illness. Bubbles are forming, the Fed is kicking it into high gear, governments are spending like drunken sailors, gold and silver are popping, and everyone is chomping at the bit. The March bloodbath was a sneak preview of the anguish that millions of people will feel eventually.
Read more from Andrew Moran.