Oh, SPACs…TrueOptions@BanyanHill.com.) As usual, I’m challenging our True Options Masters… Today, the crew gets elbow-deep in the messy world of special-purpose acquisition companies — and, as always, you’ll get to tell us whose take bests the rest.The hottest investment of a simpler time — by which I mean, 2021. In theory, they sound great. At some point down the road, the SPAC you buy will turn into a much-anticipated public listing of this or that company. It’s like buying an IPO before the IPO. What’s not to love? Well, if you look at the charts of last year’s biggest SPACs, you’ll have your answer… A large number of SPACs, even those headed by billionaire investors, are down by half (if not more) in the span of one year. Blame the bear market all you want, but the truth is these names started to unwind well ahead of the broad market. What went wrong? Was it always a terrible idea to let companies go public without the scrutiny of an IPO? Or was it just a matter of right place, wrong time? And could these SPAC-listed companies, now down double-digits, be worth a second look? Don’t worry, I’m not testing you. (Though if you have some thoughts, don’t hesitate to write us at
Mike: SPACs Called the Top
SPACs were proof of the bubble.See, every bubble has to have a financial innovation. In the 1630s, it was futures on tulip bulbs. In 1718, the introduction of paper money led to the Mississippi bubble. Two years later, the South Sea bubble was built on publicly-traded shares of stock. Jumping ahead 200 years, unit investment trusts (similar to mutual funds) drove the bubble in the 1920s. Portfolio insurance drove a bubble in 1987. The 2008 crash was fueled by mortgage-backed securities. Each of these examples was a good idea that went too far. SPACs were also a good idea. They allowed weak companies to go public without a lot of scrutiny. They’re not right for everyone, but some investors could benefit from exposure to SPACs. But once again, the idea went too far. Companies shared wild projections to go public. One example is View (VIEW). The company makes windows that automatically change in tint based on sunlight. Innovative enough… but in a rather delusional investor presentation, View likened itself to market giants Amazon and Tesla. It merged with a SPAC in 2021 — but management hasn’t filed financial statements in more than a year and the company is running out of cash. There’s no need to worry about management, though. They got over $800 million from the SPAC and are doing just fine. Don’t worry about the sponsors of the deal, either. They got paid at closing. And Wall Street lawyers and investment bankers got paid before the SPAC raised any money. The only group who lost on this deal were the individual investors who paid to make all those other people a little richer. That’s how bubbles always end, with a transfer of wealth from Main Street to Wall Street (or wherever the exchange is located). SPACs served their purpose. They signaled the top. Many investors ignored that warning and are facing losses. And now, they’ll likely start rebuilding savings to fund the next bubble…
Amber: Too Many Traders Ignored This GIANT Red Flag
Many years ago, a comedian named Groucho Marx supposedly said, “I don’t care to belong to a club that accepts people like me as members.”That sums up my thoughts on SPACs. For companies, the appeal of a SPAC is that they can go public without the scrutiny of an IPO. SPACs are much more expensive, but they don’t require audited financials and they can say almost anything without facing the threat of a securities fraud investigation. Frankly, I don’t know what the appeal of a SPAC was for investors. The fact that the company wasn’t willing to undergo the scrutiny of an IPO was a giant red flag. Unfortunately, it was a flag many investors ignored. While I’m a trader, I rely on securities regulators and exchanges to make sure the game is fair. When I see companies skirting the rules, I stay away. I think that’s a rule most investors could benefit from.
Chad: Just Wait for the Bubble to Pop…
Companies going public, one way or another, is good for investors.For decades, it’s been a way for individual traders to make money from profitable businesses. But when the market enters bubble periods, like we saw last year, it almost always ends badly. Historically, SPACs clearly don’t have an impressive track record. But, after the bubble-popping phase that we’re going through, I think we see a new environment where SPACs can enter a period of outperformance. In other words, don’t avoid them simply based on their history. We’re in a unique market environment with plenty of opportunities to profit. You should still keep an eye on SPACs as this market looks for a bottom in the months ahead.
Chris: SPACs = More $$$ (IF You Pick the Right One)
Mike Carr has an interesting theory on this — he says SPACs were proof of the market’s top.A financial innovation that cuts out most if not all of the red tape of the IPO process, allowing companies to go public faster, easier, and more efficiently? Sounds great on the surface. The problem, as we now know, is this meant terrible companies who could never dream of jumping through the hoops of the formal IPO process, now had a way to go public. Is it healthy when terrible companies with horrible financials go public, allowing unsuspecting investors to throw money at them? Probably not. Ultimately as investors, we just need to treat these opportunities as more speculative. SPACs often have 1/10th the market cap or less of the typical IPO, because IPO companies typically spend years going through the formal process. That means they had time to grow. SPACs, on the other hand, are an opportunity to get in early… Meaning more money if you pick the right one. Personally, I’m interested in the eVTOL space. That’s “electric vertical takeoff and landing.” Basically, a precursor to flying cars. A lot of these companies went the SPAC route and have gotten absolutely demolished. That means they’re cheap. A cheap investment can always get cheaper, but this is an exciting opportunity I’ll be jumping into sometime in the next year.
You know what’s next…Click here to vote for the winner of this week’s SPACdown!Amber Hestla reclaimed her crown last week, with a generous 52% of the votes. Can she take home the title again — or will one of our other experts have their time in the sun?You decide… In the spirit of good decisions, be sure to also click here and put your name down for PRIORITY ACCESS to Trade Kings. One hour a day, four days a week, to tackle this bear market with one of the world’s TOP floor traders… Not to mention, the first 1,000 members will get in at a ridiculously low price. It’s a no-brainer. Put your name on the waitlist here, now.And keep an eye on your inbox for more options insights this week.
Regards,Mike Merson Managing Editor, True Options Masters