Newsletter Archives

The Market Outlook for the Week Ahead, or Digestion Time

Before you even ask, I’ll give you the answer you’ve all been waiting for: It’s too late to sell and too early to buy.

Stocks may still have some digesting to do having soared by 27% in six months. Nobody wants to look like an idiot by buying a market top. As I have learned over the decades, investors fear looking stupid more than they fear losing money, especially if they are professionals.

Everyone knows the market is eventually going higher so they are not selling in any meaningful way unless they are short-term, algos, or day traders.

This means we may have a whole lot of nothing going on in the coming weeks or months.

That leaves us time to examine the most interesting trends going on in the markets right now, especially the new bull market in commodities. Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently come to the fore.

Remember Covid?

Since October, copper prices have risen by 22%, oil by 23%, gold by 34%, and uranium by a gobsmacking 83%. What’s causing this sudden new interest? It’s not a recovering Chinese economy, that’s for sure. Investors have been waiting for a bounce back in the Middle Kingdom seemingly forever. But China remains hobbled by the bitter fruit of a 40-year one-child policy and an ineffective government. History tells us that the United States does not make a great enemy.

So what’s driving the new demand? Remember Covid? Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently started to play catch up.

Commodities are unique in that they have such a long lead time to add new supply. It can take 5-10 years, to map out new sites, get government approvals, deliver heavy equipment, and mine, process, refine, and ship the final product.

In the meantime, enormous new demand has arisen. There have been 10 million EVs manufactured in recent years and each one needs 200 pounds of copper. AI means the electric power grid has to double in size quickly. Commodity markets are unable to meet the supply. Therefore, prices can only go up.

That enabled Freeport McMoRan (FCX), the world’s largest copper producer, to handily beat its earnings expectations, helped by higher production and easing costs. The mining giant said its quarterly production of copper rose to 1.1 billion pounds from 965 million pounds a year earlier, helped by a 49% jump in output from its Indonesia operations. (FCX) said it was working with the Indonesian government, which has put a ban on raw material exports, to obtain approvals to continue shipping copper concentrates and anode slimes. Its current license is set to expire in May. Buy (FCX) and (COPX) on dips.

Corporate raiders have taken notice.

Activist Elliot is taking a Run at Mining Giant Anglo American, accumulating a $1 billion stake. BHP, the largest iron ore miner, is also making a takeover bid here on the coattails of which Elliot is trying to ride. It just highlights the global interest in mining shares.

Anglo American plc is a British multinational mining company that is the world's largest producer of platinum, with around 40% of world output, as well as being a major producer of diamonds, copper, nickel, iron ore, polyhalite, and steelmaking coal. On a side note, copper hit a two-year high above $10,000 per metric tonne in the London Market last week.

Needless to say, the commodity boom could continue for another decade.

So far in April, we are up +4.24%. My 2024 year-to-date performance is at +13.61%. The S&P 500 (SPY) is up +6.50% so far in 2024. My trailing one-year return reached +32.40% versus +23.14% for the S&P 500.

That brings my 16-year total return to +690.24%. My average annualized return has recovered to +51.77%.

Some 63 of my 70 round trips were profitable in 2023. Some 25 of 33 trades have been profitable so far in 2024.

Tesla Delivers Worst Earnings in 12 Years, with a 9% revenue drop, but the stock rallies big as the disappointment was well telegraphed. Revenue declined from $23.33 billion a year earlier and from $25.17 billion in the fourth quarter. Net income dropped 55% to $1.13 billion, or 34 cents a share, from $2.51 billion, or 73 cents a share, a year ago. The drop in sales was even steeper than the company’s last decline in 2020, which was due to disrupted production during the Covid-19 pandemic. Tesla’s automotive revenue declined 13% year over year to $17.38 billion in the first three months of 2024. I’ll watch (TSLA) from the sidelines from now.

Personal Consumption Expenditures (PCE) Comes in Warm for March, up 2.8% YOY, the same as for February. Service prices led. But the numbers were not as hot as feared so both bonds and stocks rose.

Big Tech Crashes, with all of the Magnificent Seven breaking 50-day moving averages. (NVDA) alone gave up 10% on Friday. The next stop is the 200-day moving averages, which are far, far away. If those hold this is just a correction. If they don’t the bear market is back.

Biggest Treasury Bill Auction in History is a Huge Success, at $69 billion for a two-year paper with a 4.898% yield. That is almost a risk-free government-guaranteed 10% yield in two years. Another $70 billion of five-year notes go on sale today. Half of this is going to foreign investors and central banks. Faith in America and the US dollar remains strong. Who else’s bonds would you rather buy? Passage of the Ukraine aid bill was probably a help. Wait for (TLT) to bottom.

Visa Pops on Earnings Beat, continuing as the powerhouse that it has been for years. Reported at $4.7 billion, showing a 10% increase year-over-year, slightly above the estimate of $4.943 billion. Visa is a call option on the growth of the Internet. Buy (V) on dips.

Apple China Sales Dive, by 19% as Chinese switch to cheaper Huawei phones for nationalism reasons. It’s also another sign of a slow Chinese economy. China remains one of the company’s biggest markets, but business there has grown harder after Beijing escalated a ban on foreign devices in state-backed firms and government agencies. Avoid (AAPL) until the turnaround.

Alphabet Earnings Beat Delivers Monster 10% Move, recovering a $2 trillion market cap. It also announced its first-ever dividend and a $70 billion share back, the second largest after Apple. Buy (GOOGL) on dips.

March New Home Sales Jump, by 8.1% when only 1.1% is expected, to 693,000. The median price of a home sold fell to $430,700 as builders pulled back on incentives like those cherry cabinets. It’s an uphill slog with those 7.0% mortgage rates.

CDC Birth Data Fall to Lowest Level Since the Great Depression, 1.1 births per 1,000 people. That is well below the Great Depression levels. Only 3,664,292 new Americans were born in 2021. It means there will be a shortage of consumers in 20 years so be out of stock by then. The good news is that Covid deaths have fallen from 4,000 per day to only 19 a day since January 2020.

My Ten-Year View

When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.

Dow 240,000 here we come!

On Monday, April 29, at 10:30 AM EST, the Dallas Fed Manufacturing Index is announced.

On Tuesday, April 30 at 9:00 AM, S&P Case Shiller National Home Price Index is released.

On Wednesday, May 1 at 2:00 PM, the ADP Private Employment Change report will be published

On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, May 3 at 8:30 AM, the April Nonfarm Payroll Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, I have wanted to visit Cuba for decades. But relations with the US have run hot and cold over the years and whenever I had the time and money to go, the was a chill on, sometimes an extreme one.

So when I arrived in Key West and learned they were offering Cuba tour packages, I jumped at the chance. Unfortunately, you need to book three months in advance so that option was out.

Then I thought, “Why not fly there myself?” After payment of some hefty fees, commissions, and some outright bribes, I scored a Cuban visa and an aging Britten-Norman Islander twin built in the UK some 40 years ago. It was perhaps the smallest twin I have ever flown, with two minuscule 270 horsepower engines.

Although it was only 90 miles to Cuba, I had to load up with full tanks. Cuban aviation fuel is often contaminated with sludge or water and is unsafe to use. Losing both engines over shark-infested waters doesn’t fit in with my retirement plan. So I needed enough 100LL avgas to make the round drip, which meant skipping breakfast to stay within my weight limitations.

It was a clear and balmy morning when I received my clearance for takeoff, the sky dotted with fluffy white cumulus clouds. Of course, I had to skirt the Bermuda Triangle to get there, but no worries.

Amazingly Cuban air traffic control spoke English. Soon, the green hills of Cuba appeared on the horizon, and I received the words I will never forget: “N686KW you are cleared for landing in Havana.” I haven’t felt like that since I last landed in Moscow.

Much to my surprise, I found other US aircraft there as I was parked near jets from Southwest and American Airlines. I was greeted by an immigration officer who escorted me into the country, putting my Spanish skills to the test.

I had some concerns that I might be arrested in case Russia put me on a wanted list due to my recent work in Ukraine. But my fears proved unwarranted. You see, you get paranoid in your old age. A private car, a French Citroen van, a driver, and a government guide were waiting for me outside the airport.

Suddenly, I found myself in a strange new world. A darkly tanned people wore tired polyester clothes. Everyone was rail thin and the only obese people I saw were foreign tourists. There was an incredible variety of vehicles on the road, including ancient cars from Russia, China, Poland, and Japan. Apparently, Chevrolet had a great year in Cuba in 1956 because no American cars have entered the country since then and they are everywhere.

We headed straight for Earnest Hemingway’s Cuban home, known as Finca Vigia, or “Lookout Farm” built in 1886 on a hilltop overlooking Havana. The building was falling apart and showed large cracks, but going inside I was transported in time back to 1960, when Hemingway left the property ahead of the Cuban Revolution.

Finca Vigia has been untouched since. The walls are covered with an assortment of hunting trophies from Africa, including springboks, cape buffalo, lions, and leopards. They were collections of African spears and gun cases. Mounted on the walls were paintings of bullfights in Spain, cartoons about Hemingway, and family photos.

Magazine racks were stuffed with the 1960 issues of Life, Look, and The Saturday Evening Post. The National Geographic issues looked positively prehistoric. And there were thousands of books. Anyone who read his books would recognize all of this.

Hem, as his friends called him, bought the property in 1940 for $8,000, living there with wife three for five years, the famed war correspondent Martha Gellhorn, and wife four, Time magazine reporter Mary Welsch, who became his widow.

After passing on a Che Guevara T-shirt in the gift shop, I enjoyed a glass of freshly squeezed sugar cane juice. Then I headed into Havana, escorted by my guide, Eliar. The trip turned into a Hemingway bar crawl. I visited the well-known La Floridita, which made Hem’s favorite Daiquiri, La Bodegita, which mixed the best mojito and had lunch at his favorite roof terrace restaurant.

Cuba has long been one of the worst-managed countries in the world, second only to North Korea, and I learned why after grilling my guide all day about economic conditions. It’s 11.2 million people earn a per capita of $11,255, with 71% living below the poverty line. The real figure is a third of that as there are now 300 pesos to the US dollar, not the fictitious 120 that the government pretends.

When the Soviet Union collapsed in 1992, generous subsidies ended and Cuba quickly lost 33% of its GDP. With some of the richest farmland in the world, it imports 80% of its food and is currently suffering a food crisis. Even the bottled water I drank came from Panama.

Oil accounts for 100% of its energy supply which mostly comes from Russia and is paid for with raw sugar. Cuba’s largest exports are tobacco, nickel, and zinc most of which are exported to China. China also provided $11 billion in loans which Cuba promptly defaulted on.

The country would have been much better off if only Fidel Castro had accepted an offer from the Washington Senators to play US major league baseball in the early 1950s. Cuba is officially one of the last communist countries in the world, with Russia and China abandoning it years ago. After reforms in the 1990s, what they now practice is an odd mixture of communism and capitalism, with the government and the private sector competing side by side.

With thousands fleeing the country every year the real estate market has collapsed. You can buy a two-bedroom apartment in Havana for $30,000. Flying over the countryside at low altitude you fund vast expanses of agricultural land undeveloped for want of machinery and parts. There is unused labor everywhere. Cuba should be one of the richest countries in the world with all those beaches. The tourism possibilities are enormous. But with a 60-year trade and investment ban from the US, nothing can happen.

American credit cards and cell phones don’t work, so I brought in $200 in ones. You can’t bring back to the US the country’s only two worthy exports, rum and cigars. But there are buskers everywhere and by the end of the trip, I ended up giving it all away in tips. I did OK with the food, but only ate overcooked meals in high-end restaurants. Salads were out of the question but drink all the local beer and rum you can.

I ended my trip with a tour of the enormous Revolution Square where Fidel Castro used to give four-hour speeches to one million. One area the government did not skimp on spending was on the massive ministry buildings that surround the square. It seems the image of a strong government, especially the police, is essential in a workers’ socialist paradise.

Then it was back to the airport where surprisingly I obtained immediate clearance for takeoff. No passport stamps, as the government wanted to leave no evidence of my visit in an American passport. I returned to Key West just in time to catch a magnificent sunset over the Gulf of Mexico. US customs recognized my face and waved me right through.

Damn! Should have picked up some of those $5 bottles of rum.

It's all just another day in the life of John Thomas.

At Hemingway’s Cuban Home

A Look Back into 1960

Where Hem Wrote “Old Man and the Sea”, Standing

Hemingway’s Office

I passed on Che

Meeting an Old Friend for a Round at Floridita

Mixing it up with the Locals

One of Cuba’s Only Exports

Looks Like Chevy had a Great Year in 1956

Good Luck and Good Trading,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

April 29, 2024 - Quote of the Day

Diary, Newsletter, Quote of the Day

“I think the market is going to get slammed this summer. The Fed is bad for financials, the dollar is a problem for industrials, and commodities are a problem for everybody,” said Scott Nations, president of NationShares.

April 25, 2024

Diary, Newsletter, Summary

Global Market Comments
April 25, 2024
Fiat Lux

Featured Trade:

(RISK CONTROL FOR DUMMIES) or (THE HEADS I WIN, TAILS YOU LOSE STRATEGY),
(SPY), (FCX), (NVDA), (TLT)

Risk Control for Dummies

Diary, Newsletter

Whenever I change my positions, the market makes a major move, suffers a “black swan” or reaches a key level, I stress test my portfolio by inflicting various scenarios upon it and analyzing the outcome.

This is common practice and second nature for most hedge fund managers.

In fact, the larger ones will use top-of-the-line mainframes powered by $100 million worth of in-house custom programs to produce a real-time snapshot of their positions in hundreds of imaginable scenarios at all times. This is the sort of thing Ray Dalio used to do.

If you want to invest with these guys feel free to do so.

They require a $10-$25 million initial slug of capital, a one-year lock-up, charge a fixed management fee of 2%, and a performance bonus of 20% or more.

You have to show minimum liquid assets of $2 million and sign 100 pages of disclosure documents.

If you have ever sued a previous manager, forget it.

And, oh yes, the best-performing funds have a ten-year waiting list to get in, as with my friend David Tepper. Unless you are a major pension fund like the State of California, they don’t want to hear from you.

Individual investors are not so sophisticated and it clearly shows in their performance, which usually mirrors the indexes with less of a large haircut.

So, I am going to let you in on my own, vastly simplified, dumbed down, the seat of the pants, down-and-dirty style of scenario analysis and stress testing that replicates 95% of the results of my vastly more expensive competitors.

There is no management fee, performance bonus, disclosure document, lock up, or upfront cash requirement. There’s just my token $3,500 a year subscription and that’s it.

To make this even easier for you, you can perform your own analysis in the Excel spreadsheet I post every day in the paid-up members section of Global Trading Dispatch.

You can just download it and play around with it whenever you want, constructing your own best-case and worst-case scenarios. To make this easy, please log into your Mad Hedge Fund Trader, click on “MY ACCOUNT”, then click on Global Trading Dispatch, then Current Positions, and download the Excel spreadsheet for April 25, 2024.

There you will find my current trading portfolio showing:

Current Capital at Risk

Risk On

(NVDA) 5/$710-$720 call spread 10.00%

(TLT) 5/$82-$85 call spread 10.00%

(FCX) 5/$42-$45 call spread 10.00%

Risk Off

(NVDA) 5/$960-$970 put spread -10%

Total Net Position 30.00%

Total Aggregate Position 40.00%

Since this is a “for dummies” explanation, I’ll keep this as simple as possible.

No offense, we all started out as dummies, even me.

I’ll the returns in three possible scenarios: (1) The (SPY) is unchanged at $505 by the May 17 expiration of my front month option positions, which is 15 trading days away, (2) The S&P 500 rises 5.0% to $530 by then, and (3) The S&P 500 falls 5.0% to $480.

Scenario 1 – No Change

The value of the portfolio rises from a 5.07% profit to a 13.00% Profit. My existing longs in (FCX), (TLT), and (NVDA) expire at their maximum profits. So does my one short in (NVDA).

Scenario 2 – S&P 500 rises to $530

You can easily forget about the long positions in (FCX), (TLT), and (NVDA) as they will expire well in the money. If they go up fast enough, I might even take an early profit and roll into a June or July position. Our short in (NVDA) might take some heat. But in the current environment of going into the summer doldrums, there is no way (NVDA) shoots up to a new all-time high, right where our strike prices were set at on purpose. The net of all this is that our portfolio should expire at a maximum profit for the year at up 13.00%.

Scenario 3 – S&P 500 falls to $480

All three of my stocks fall, but not enough for my three call spreads to go out of the money. (FCX) will stay above my stop-out level at $45, (TLT) at $85, and (NVDA) at $720. Obviously, the short in (NVDA) becomes a chipshot. Again, we expire at a maximum profit for the year at up 13.00%.

Up we make money, down we make money, sideways we make money, I like it! This is why I run long/short baskets of options spreads whenever the market allows me. It’s a “Heads I win, tails you lose strategy”.

If the market goes up, I’m looking for stocks to sell. If the market goes down, I'm looking for securities to buy. Boy low, sell high, I’m thinking of patenting the idea.

This is the type of extremely asymmetric risk/reward ratio hedge funds are always attempting to engineer to achieve outsized returns. It is also the one you want after the stock market has risen by 25% a year since the 2020 pandemic.

All that’s really happened is that the world has gone from slightly good to better this year. I can rejigger this balance anytime I want. If I think that a change in the economy or the Fed’s interest rate policy is in the works.

Keep in mind that these are only estimates, not guarantees, nor are they set in stone. Future levels of securities, like index ETF’s are easy to estimate. For other positions, it is more of an educated guess. This analysis is only as good as its assumptions. As we used to do in the computer world, garbage in equals garbage out.

Professionals who may want to take this out a few iterations can make further assumptions about market volatility, options implied volatility or the future course of interest rates. Keep the number of positions small to keep your workload under control. I never have more than ten. Imagine being at Goldman Sachs and doing this for several thousand positions a day across all asset classes.

Once you get the hang of this, you can start projecting the effect on your portfolio of all kinds of outlying events. What if a major world leader is assassinated? Piece of cake. How about another 9/11? No problem. Oil at $150 a barrel? That’s a gimme. What if there is an Israeli attack on Iranian nuclear facilities? That might take you all of two minutes to figure out. The Federal Reserve launches a surprise interest rate rise? I think you already know the answer.

The bottom line here is that the harder I work, the luckier I get.

April 25, 2024 - Quote of the Day

Diary, Newsletter, Quote of the Day

Favorite headline of the day: "Greece Offers to Pay Back Debt With Giant Horse."

April 24, 2024

Diary, Newsletter, Summary

Global Market Comments
April 24, 2024
Fiat Lux

Featured Trade:

(THEY’RE NOT MAKING AMERICANS ANYMORE)
(SPY), (EWJ), (EWL), (EWU), (EWG), (EWY), (FXI), (EIRL), (GREK), (EWP), (IDX), (EPOL), (TUR), (EWZ), (PIN), (EIS)

They’re Not Making Americans Anymore

Diary, Newsletter

If demographics is destiny, then America’s future looks bleak. You see, they’re not making Americans anymore.

At least that is the sobering conclusion of the latest Economist magazine survey of the global demographic picture.

I have long been a fan of demographic investing, which creates opportunities for traders to execute on what I call “intergenerational arbitrage”. When the numbers of the middle-aged big spenders are falling, risk markets plunge. Front run this data by two decades, and you have a great predictor of stock market tops and bottoms that outperforms most investment industry strategists.

You can distill this even further by calculating the percentage of the population that is in the 45-49 age bracket.

The reasons for this are quite simple. The last five years of child rearing are the most expensive. Think of all that pricey sports equipment, tutoring, braces, SAT coaching, first cars, first car wrecks, and the higher insurance rates that go with it.

Older kids need more running room, which demands larger houses with more amenities. No wonder it seems that dad is writing a check or whipping out a credit card every five seconds. I know, because I have five kids of my own. As long as dad is in spending mode, stock and real estate prices rise handsomely, as do most other asset classes. Dad, you’re basically one generous ATM.

As soon as kids flee the nest, this spending grinds to a juddering halt. Adults entering their fifties cut back spending dramatically and become prolific savers. Empty nesters also start downsizing their housing requirements, unwilling to pay for those empty bedrooms, which in effect, become expensive storage facilities.

This is highly deflationary and causes a substantial slowdown in GDP growth. That is why the stock and real estate markets began their slide in 2007, while it was off to the races for the Treasury bond market.

The data for the US is not looking so hot right now. Americans aged 45-49 peaked in 2009 at 23% of the population. According to US census data, this group then began a 13-year decline to only 19% by 2022.

You can take this strategy and apply it globally with terrific results. Not only do these spending patterns apply globally, they also back-test with a high degree of accuracy. Simply determine when the 45-49 age bracket is peaking for every country and you can develop a highly reliable timetable for when and where to invest.

Instead of pouring through gigabytes of government census data to cherry-pick investment opportunities, my friends at HSBC Global Research, strategists Daniel Grosvenor and Gary Evans, have already done the work for you. They have developed a table ranking investable countries based on when the 34-54 age group peaks—a far larger set of parameters that captures generational changes.

The numbers explain a lot of what is going on in the world today. I have reproduced it below. From it, I have drawn the following conclusions:

* The US (SPY) peaked in 2001 when our first “lost decade” began.

*Japan (EWJ) peaked in 1990, heralding 32 years of falling asset prices, giving you a nice backtest.

*Much of developed Europe, including Switzerland (EWL), the UK (EWU), and Germany (EWG), followed in the late 2000s and the current sovereign debt debacle started shortly thereafter.

*South Korea (EWY), an important G-20 “emerged” market with the world’s lowest birth rate peaked in 2010.

*China (FXI) topped in 2011, explaining why we have seen three years of dreadful stock market performance despite torrid economic growth. It has been our consumers driving their GDP, not theirs.

*The “PIIGS” countries of Portugal, Ireland (EIRL), Greece (GREK), and Spain (EWP) don’t peak until the end of this decade. That means you could see some ballistic stock market performances if the debt debacle is dealt with in the near future.

*The outlook for other emerging markets, like Indonesia (IDX), Poland (EPOL), Turkey (TUR), Brazil (EWZ), and India (PIN) is quite good, with spending by the middle age not peaking for 15-33 years.

*Which country will have the biggest demographic push for the next 38 years? Israel (EIS), which will not see consumer spending max out until 2050. Better start stocking up on things Israelis buy.

Like all models, this one is not perfect, as its predictions can get derailed by a number of extraneous factors. Rapidly lengthening life spans could redefine “middle age”. Personally, I’m hoping 72 is the new 42.

Emigration could starve some countries of young workers (like Japan) while adding them to others (like Australia). Foreign capital flows in a globalized world can accelerate or slow down demographic trends. The new “RISK ON/RISK OFF” cycle can also have a clouding effect.

So why am I so bullish now? Because demographics is just one tool in the cabinet. Dozens of other economic, social, and political factors drive the financial markets.

What is the most important demographic conclusion right now? That the US demographic headwind veered to a tailwind in 2022, setting the stage for the return of the “Roaring Twenties.” With the (SPY) up 27% since October, it appears the markets heartily agree.

While the growth rate of the American population is dramatically shrinking, the rate of migration is accelerating, with huge economic consequences. The 80-year-old trend of population moving from North to South to save on energy bills picking up speed, the Midwest is getting hollowed out at an astounding rate as its people flee to the coasts, all three of them.

As a result, California, Texas, Florida, Washington, and Oregon are gaining population, while Missouri, Iowa, Nebraska, Kansas, and Wyoming are losing it (see map below). During my lifetime, the population of California has rocketed from 10 million to 40 million. People come in poor and leave as billionaires, as Elon Musk did.

In the meantime, I’m going to be checking out the shares of the matzo manufacturer down the street.

April 23, 2024

Diary, Newsletter, Summary

Global Market Comments
April 23, 2024
Fiat Lux

Featured Trade:

(WHY MOST SPAC’S ARE A SCAM)
(DJT), (PSTH), (SPAK), (NKLA)

Why most SPACs are a Scam

Diary, Newsletter, Research

I have been watching with some amusement the trading of the Trump Media & Technology Group (DJT).

After the IPO was issued in 2023, it soared to $130, then collapsed to $15. It has just completed another round trip, plunging 50% over the last month. This is for a company that posted a horrific $58 million loss in 2023. In no way can that support a $5 billion market cap at the current $22 share price unless it’s the next AI stock we don’t know about. (DJT) has become the latest meme stock.

So many hedge funds have lined up to sell that the borrowing costs have skyrocketed to an incredible 550%. (DJT) has become the latest meme stock. The former president owns 60% of the shares. Accusations of insider trading and fraud are rife. If the former president loses the election, goes to jail, or dies as a result of his unhealthy lifestyle (he’s 50 pounds overweight) the shares become worthless. In other words, it’s a stock that no professional investor would touch with a ten-foot pole.

Every investment bubble creates its special instruments of self-destruction and this one is no different.

There were highly touted leveraged commodity and gold funds during the seventies, portfolio insurance during the eighties, money-losing tech companies with lots of “eyeballs” in the nineties, and subprime lending in the 2000s.

In this cycle, we have the Special Purpose Acquisition Companies, otherwise known as “SPACs.”

The goal of a SPAC is to raise money first on some generalized investment theme, and then merge with a target company to achieve those goals. This allows companies to go public while skipping most disclosure requirements.

SPACs have their advantages for some people. It enables start-up companies with no track record or earnings to go public faster without the costs and regulatory scrutiny of the burdensome public IPO process. Promoters promise to get investors into the next Amazon (AMZN) or Facebook FB) early.

Easier said than done.

Some $162 billion was raised for SPACs in 2021 followed by a much more modest $15 billion in 2022 and $125 million in 2023. The largest has been hedge fund manager Bill Ackman’s Pershing Square Tontine Holdings Ltd. (PSTH) at $4 billion. There is even a SPAC for SPACs, the Defiance Gen SPAC Derived ETF (SPAK).

The performance of SPACs so far has been dismal. There have been 915 SPACs created since 2015. Only 93 managed to invest their funds in a target company and only 29 of those have produced a profit. This was during one of the greatest runaway bull markets of all time.

You would have done better to simply buy the cheapest Vanguard index funds or 90-day T-bills. In the meantime, the issuers of SPACs for the most part became wealthy.

The quality of the management who had stepped forward to run SPACs has been mixed at best, including Ackman himself, who recently ran two gargantuan money-losing years back to back. They include former House Speaker Paul Ryan and NBA Hall of Famer Shaquille O’Neil, not exactly known as financial wizards.

Then there’s Nikola (NKLA), an electric/hydrogen vehicle company that has promised to take on Elon Musk, unfazed by the complete lack of a functioning vehicle. These shares have cratered by 92% since their market peak among multiple fraud allegations aimed at the founder.

The risks and limitations of SPACs are legion. You are essentially betting on the good faith and judgment of a single individual unmoored by any filings with the SEC. There are no guarantees they can achieve anything. These disclosures to the government are there to protect you. Without them, you are swimming without a swimsuit.

The conflicts of interest are enormous. SPAC issuers get to buy the equivalent of call options on their funds at deep discounts prior to the issue. When issuers make fortunes overnight with little money upfront, you want to run a mile.

And here is the big problem with SPACs. They are essentially roach motel investments, easy to check in but impossible to check out. Liquidity going in is unlimited but coming out is nil. You can often only redeem your investment at a huge discount, or if another buyer is willing to take out at any price. That makes marks to market challenging at best.

Investors that buy SPACs are giving up all the protections of SEC protections for much higher risks and lower returns.

Suffice it to say that if PT Barnum were working in the financial markets, he’d be up to his eyeballs with SPAC offerings.

Personally, I’ll give them a pass. You should too.

The Problem is that it’s a Dummy

April 23, 2024 - Quote of the Day

Diary, Newsletter, Quote of the Day

"If there were no way to short stocks, the probability of stock market bubbles would be much greater," said hedge fund manager, Bill Ackman, of Pershing Square.