Almost All SPACs Lose Money and They’ve Never Been More Popular

I came across an incredible stat today:

Citing data from Dealogic, Barron’s notes that there have been 302 domestic initial public offerings (80% of which are blank-check outfits) raising an aggregate $102.3 billion, so far this year through March 10. For context, the 2020 full-year tally registered at 457 IPOs raising $167.8 billion, while the tech bubble-era high-water mark of 547 IPOs and $108 billion in proceeds was set in 1999.

These newly minted public companies have distinguished themselves beyond simple size and number. According to data from Robert W. Baird, 81% of last year’s vintage were loss making, compared to a previous cyclical high water marks of 68% and 73% in 1999 and 2000, respectively.

More here (see the March 15 post).

So almost all IPOs are SPACs, they’re raising more funds than ever before, and almost none of these companies makes a profit. Even recently, money losers like WeWork were shunned by public markets. But the market seems to have thrown all standards aside.

For now.

For more on SPACs and markets, check out these posts:

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Photo: Major SPAC sponsor “Chamath Palihapitiya” by jdlasica is licensed under CC BY 2.0

Big Investors Are on Zoom and They’re Not Going Back

I’ve been listening to an interesting podcast this morning with two major investors in early stage start-ups: Jason Calacanis and Paul Judge of Panoramic VC. They discussed meeting founders purely through Zoom, rather than in person, and how that’s changed the way they invest.

Both said they found it far more efficient to meet people remotely. Each remote meeting might take only half an hour, while an in person meeting might take several hours of commute time, chit-chat, etc.

The bottom line is they can meet way more founders and expand their “deal funnel,” or the number of companies they can pick from to invest in. Neither plans to return to in person meetings when this ends, given the huge efficiency jump they’ve experienced.

As a much smaller investor, I can relate. I’m meeting with an advisor in a couple of weeks, and it’s going to be remote. Even if COVID didn’t exist, I’d keep it remote, since he’s near Philadelphia and I’m in the NYC area. An in person meeting is a day trip, whereas a phone meeting is an hour tops. In terms of productivity per hour, the choice is clear.

Expect to see a continuation of virtual meetings after COVID. Many are finding the efficiency gains over in-person can’t be beat. People may still wish to get together from time to time and socialize, but I think much more business will be conducted remotely in the future, and we’ll be better off for it.

For more on start-ups and business, check out these posts:

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Photo: “Jason Calacanis” by Joi is licensed under CC BY 2.0

The 2nd GameStop Hearing Just Happened. Here’s What You Need to Know.

Congress held a second hearing on the mania in GameStop Corp. shares yesterday. It focused on the business model used by Robinhood and other brokers popular with retail traders, which is called “payment for order flow.”

In this system, companies that execute trades (such as Citadel Securities) pay the broker (Robinhood, etc.) to execute the trades. They execute the buy and sell orders at a price slightly better than the public markets, but still keep a bit of money for themselves.

This model introduces a conflict of interest: what if Citadel gives you a worse price than the public market, and Robinhood is happy to let them do so because Citadel is sharing the graft with them? This was a big focus of yesterday’s hearing:

Potential market weaknesses highlighted by the GameStop trading frenzy brought calls for further investigation and possible regulation at a second House Financial Services Committee hearing Wednesday.

Those weaknesses include the potential for conflicts of interest between payment for order flow and best execution, whether short sale disclosure is adequate and if settlement times should be shortened.

There’s research to indicate that payment for order flow lowers prices for investors, but Citadel and Robinhood have also been fined for giving investors worse prices than public markets. So the jury is out on whether this practice is good or not. One thing seems certain: if payment for order flow is banned, trading commissions are coming back.

Settlement times are another major issue. If I send you a text message, you get it almost instantly. If I send you money via Zelle or the Cash app, same thing. But if I ask to buy 100 shares of GameStop, the trade doesn’t actually happen for several days, no matter what the Robinhood app tells you.

Even in today’s wired world, it takes two full days for a trade to be fully executed, or “settled.” This presents big problems for a super volatile stock like GameStop. In those two days, the shares could’ve doubled in price, or halved! We have no idea how much money will actually be required to settle the trade.

So, the Depository Trust & Clearing Corporation (DTCC), which clears all those trades, makes Robinhood put up a bundle of money as collateral. This covers everyone if GameStop shares move wildly in price, putting Robinhood in a position of having to come up with a lot more money for shares than it actually has.

Robinhood couldn’t afford to post all that collateral, so they stopped people from buying shares in GameStop in January when the price was at its most volatile. This incensed users and even some members of Congress. But if the trades cleared instantly, this probably would not happen.

I can find no rational basis for such a slow system in the internet age. These trades amount to text messages, basically. Buy 100 shares GME at $150. We’ve got only four data points there: buy (vs. sell), number of shares, what stock, and what price. Send those to a computer program, match the orders, and get it over with! A 2 day clearing period might have made sense in a time of paper orders, but those days are long gone.

In all, I don’t see a lot in this hearing to affect the stock right now. But if payment for order flow is banned or settlement times are shortened, it could have a big impact on markets in the long term.

For more on GameStop, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Behind Clubhouse’s Meteoric Rise: User Obsession and Timing

Everyone at once seems to be talking about Clubhouse, the 11 month old social media app that has attracted the likes of Elon Musk, along with a $1 billion valuation. I found myself wondering, why is this app so popular?

The basic architecture seems pretty simple: Zoom without the video, plus the ability to see which discussions are happening now. But this seemingly simple product has grown from zero to 10 million users at warp speed.

The timing of the launch, along with the user obsession of Clubhouse’s founders, seems to have driven this incredible growth.

Clubhouse launched in April 2020, just weeks after the lockdowns began. What better time to debut an app that connects people? And Clubhouse connected us in a live, personal, and serendipitous way. Unlike Twitter or Instagram, you never knew who would show up. These chance interactions were precisely what we were missing while stuck in our houses.

…Hoover said he believed the ephemerality makes the app special. “It better reflects how we communicate in the real world and encourages a more authentic conversation,” he said.

More from Wired:

Clubhouse arrived at a perfect moment. It delivered spontaneous conversations and chance meetings to people stuck at home.

Clubhouse’s founders have also eagerly sought feedback from day one:

Every Sunday, thousands of Clubhousers attend a town hall with the app’s two cofounders, Paul Davison and Rohan Seth.

This strikes me as brilliant and perhaps comes from their history of having built social products before, some of which didn’t make it.

Since I use Android rather than iOS, I actually haven’t tried Clubhouse yet, but I look forward to checking out their forthcoming Android app.

What do you like or dislike about Clubhouse? Let us know in the comments below!

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Photo:

Short Sellers Are Bailing On These Stocks

Short sellers are abandoning their positions as the market reaches new highs:

Short interest in U.S. stocks fell to just 2.95% by the end of February, S&P Global Market Intelligence says. That’s down 45 basis points from the short interest level at the end of 2020 when it was 3.4%. Short sellers, it seems, simply couldn’t take the heat and got out. Many closed short positions rather than enduring more brutal losses as the shares rallied.

Stocks including GameStop Corp. have seen huge drops in short interest. Other heavily shorted stocks like Ligand Pharmaceuticals and Bed Bath and Beyond have also seen short sellers head for the exits.

Below are the S&P 1500 companies with the largest decreases in short selling:

This will make it harder for the likes of Reddit’s Wallstreetbets to engineer short squeezes. But it also reflects a positive view of the economy and buoyant markets.

For more on stocks and Wallstreetbets, check out these posts:

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Photo: “Old EXIT sign. AbandonedCharleston Navy Yard.” by slworking2 is licensed under CC BY-NC-SA 2.0

GameStop Hearing 2.0: What You Need to Know

At 10am Eastern time today, Congress will be having its second hearing about the frenzy in GameStop Corp. shares that sent the stock up 1700% in January. This hearing is unlikely to affect the price of the stock much. Rather, it will dig into whether or not the trading system around it is fair.

A major focus will be a process called “payment for order flow”. This is the revenue model used by brokers including Robinhood, which handled many of the trades in GameStop. Under this model, the app user pays nothing to trade stocks. Instead, Robinhood gets money from the companies that execute the trades for the privilege of fulfilling those orders.

Experts on payment for order flow will testify:

Sal Arnuk, co-founder of trading firm Themis Trading, plans to spotlight the growing role of payment-for-order-flow, where retail brokerage houses such as Robinhood channel customer orders to specific trading firms in exchange for payments.

“These practices create a massive incentive for such brokers to sell their clients orders to sophisticated trading firms uniquely tooled to profit off of them,” Mr. Arnuk will say, according to preliminary testimony released by the House committee. “This is a needless conflict that can harm retail investors, and it degrades the integrity of the market ecosystem as a whole.”

Why do the companies, like Citadel, that execute the trades want to pay to do it? Because they can find a price better than the public market, buy or sell to you for a slightly worse price (but still better than the public market), and keep the difference for their trouble.

Robinhood and Citadel maintain this is a better deal for investors. And indeed, there is independent research to support that claim. However, Citadel has been fined for giving customers worse prices than public markets, as has Robinhood.

A month ago, I called for Robinhood and Citadel to release a data set of executed trades to prove their service is a better deal than public markets. Congress may demand something similar. If their service really is better, they have nothing to lose and everything to gain by showing us what a great deal they provide!

For more information on payment for order flow and GameStop, check out these posts:

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Photo: “Maxine Waters” by Gage Skidmore is licensed under CC BY-SA 2.0

10 Years of Legal Weed: Fewer Opioid Deaths, More Jobs and Tax Revenue

I got an interesting message in my e-mail this morning. The NPR Planet Money newsletter reviewed the prior nearly ten years in legal marijuana in some states, and came to some interesting conclusions:

What’s changed:

  • More marijuana use
  • Way more jobs
  • Way more tax revenue. California makes over $600 million a month.

What hasn’t:

  • No effect on crime or traffic accidents
  • No change in price of marijuana. Evidently the product and service at the legal stores is so good people prefer it to anything else.

What might have:

Use of opioids. In the working paper linked from the newsletter, I found this incredible stat:

…Chan, Burkhardt, and Flyr (2020) show that RMLs [recreational marijuana laws] reduce opioid mortality by 20% to 35%, implying that both opioid use and misuse decline as legal marijuana access expands.

Given the mass death caused by opioids, this alone seems like reason enough to legalize marijuana in my book.

I read this newsletter with particular interest since I live in New Jersey, which recently legalized marijuana but doesn’t yet have weed stores the way California, Colorado and other states do. It looks like we mostly have positive changes to look forward to.

For more posts on politics and news, check these out:

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Photo: “Vancouver Global Marijuana March 2015 – by Danny Kresnyak” by Cannabis Culture is licensed under CC BY 2.0

GameStop Short Squeezes Are Over

GameStop Corp. soared in January as short sellers were squeezed by a legion of buyers from Reddit’s Wallstreetbets. The shorts had to buy in order to close out their positions and stanch the bleeding, driving the stock even higher.

It seems they’ve learned their lesson. Short selling of GameStop shares has decreased dramatically, and the stock is no longer particularly heavily shorted:

Short interest in GameStop shares, a figure that represents bets against the stock on Wall Street, fell below 10 million at the end of last week, or just over 18% of the outstanding float. That’s down from around 57.8 million shares, or 113.3% of the float, when short-selling against the group peaked and Reddit-fueled buyers took the stock to a record high of $483 per share.

Many other stocks in the market are much more heavily shorted, such as Senseonics at 69% or GSX at 48%.

Where does that leave us? With stock in a money-losing company locked into long term leases on stores that were losing a fortune even before COVID. Without the possibility of another short squeeze, there is no catalyst for this stock to move much higher.

For more on GameStop, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

GameStop Options Expiration Could Crater Reddit’s Favorite Stock

Call options covering four million shares in GameStop Corp. expired on Friday, and the stock dropped right on cue:

A call option gives you the right to buy a stock at X price. For the market maker to be able to sell you that option without risking going broke, they need to own the stock themselves. Let’s say you bought an option to buy GameStop stock at 300. What if it goes to 600? The market maker is out $300/share. To mitigate this risk, the market maker owns the underlying share so they’ll have the $300 they need if that happens.

But when call options expire, the market makers who sell options don’t have to hold the stock anymore. Option expiration may have helped extinguish the last big GameStop rally:

In the last rally, the weekly January 29th expiry date marked the beginning of the end for GME

I believe this happened because market makers were released from their obligation to hold GME stock as a hedge.

Now another huge block of options has expired. And an even larger block will expire this Friday, March 19:

I see a catalyst that could start the collapse of this bubble as a large number of options are set to expire this Friday the 12th. Market makers will be released from their obligation to hold almost 4 million shares. If that doesn’t do it, another 6.6 million shares will be freed up the following week.

I could definitely see this driving down GameStop shares further, especially since we haven’t seen any significant good news on this company recently. And its fundamentals are weak, with huge losses on its 5,000 physical stores that predate COVID.

For more on GameStop, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

Who Is the Secret Dogecoin Billionaire?

Someone owns $2.1 billion worth of dogecoin. And no one knows who it is:

Records show that a person, or entity, owns about 28% of all of the cryptocurrency in circulation—a stake worth about $2.1 billion at current prices. The holder’s identity isn’t known, which is common in the opaque world of digital currencies.

The account could belong to an exchange on which dogecoin is traded, or to the individuals and groups who run the software that keep the digital currency’s network going, researchers say.

There is some speculation that the secret dogecoin billionaire could be the not-so-secret Tesla billionaire Elon Musk, but the evidence is thin:

The address also offers an intriguing “Easter egg” for people trying to decipher the identity of the owner: the account has on multiple occasions received 28.061971 dogecoins. Mr. Musk’s birthday is on June 28, 1971.

Despite his interest in dogecoin, the major holder’s address is unlikely to belong to Mr. Musk, said Elias Ahonen, author of “Blockland.” Anyone can send dogecoin to a publicly listed address, which could explain the amounts linked to Mr. Musk’s birthday.

Having 28% of the currency in the hands of a single, unknown person makes dogecoin very susceptible to wild swings in price. If that holder sells suddenly, it could crash the currency. One has to balance that against a major positive for dogecoin: it uses the same technology as bitcoin but is a tiny fraction of the price.

Any guesses on who it is? Leave them in the comments!

For more on dogecoin and cryptocurrencies, check out these posts:

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Photo: “Doge Meme: Japanische Hunderasse Shiba und Vorbild für den DogeCoin” by marcoverch is licensed under CC BY 2.0