How To Squeeze Yields Up To 6.9% From Blue-Chip Stocks

Closeup of blue poker chip on red felt card table surface with spot light on chip

Preferred stocks are the little-known answer to the dividend question: How do I juice meaningful 5% to 6% yields from my favorite blue-chip stocks? “Common” blue chips stocks usually don’t pay 5% to 6%. Heck, the S&P 500’s current yield, at just 1.3%, is its lowest in decades.

But we can consider the exact same 505 companies in the popular index—names like JPMorgan Chase (JPM), Broadcom (AVGO) and NextEra Energy (NEE)—and find yields from 4.2% to 6.9%. If we’re talking about a million dollar retirement portfolio, this is the difference between $13,000 in annual dividend income and $42,000. Or, better yet, $69,000 per year with my top recommendation.

Most investors don’t know about this easy-to-find “dividend loophole” because most only buy “common” stock. Type AVGO into your brokerage account, and the quote that your machine spits back will be the common variety.

But many companies have another class of shares. This “preferred payout tier” delivers dividends that are far more generous.

Companies sometimes issue preferred stock rather than issuing bonds to raise cash. And these preferred dividends have a few benefits:

  • They receive priority over dividends paid on common shares.
  • Sometimes, preferred dividends are “cumulative”—if any dividends are missed, those dividends still have to be paid out before dividends can be paid to any other shareholders.
  • They’re typically far juicier than the modest dividends paid out on common stock. A company whose commons yield 1% or 2% might still distribute 5% to 7% to preferred shareholders.

But it’s not all gravy.

You’ll sometimes hear investors call preferreds “hybrid” securities. That’s because they act like a part-stock, part-bond holding. The way they resemble bonds is how they trade around a par value over time, so while preferreds can deliver price upside, they don’t tend to deliver much.

No, the point of preferreds is income and safety.

Now, we could go out and buy individual preferreds, but there’s precious little research out there allowing us to make a truly informed decision about any one company’s preferreds. Instead, we’re usually going to be better off buying preferred funds.

But which preferred funds make the cut? Let’s look at some of the most popular options, delivering anywhere between 4.2% to 6.9% at the moment.

Wall Street’s Two Largest Preferred ETFs

I want to start with the iShares Preferred and Income Securities (PFF, 4.2% yield) and Invesco Preferred ETF (PGX, 4.5%). These are the two largest preferred-stock ETFs on the market, collectively accounting for some $27 billion in funds under management.

On the surface, they’re pretty similar in nature. Both invest in a few hundred preferred stocks. Both have a majority of their holdings in the financial sector (PFF 60%, PGX 67%). Both offer affordable fees given their specialty (PFF 0.46%, PGX 0.52%).

There are a few notable differences, however. PGX has a better credit profile, with 54% of its preferreds in BBB-rated (investment-grade debt) and another 38% in BB, the highest level of “junk.” PFF has just 48% in BBB-graded preferreds and 22% in BBs; nearly a quarter of its portfolio isn’t rated.

Also, the Invesco fund spreads around its non-financial allocation to more sectors: utilities, real estate, communication services, consumer discretionary, energy, industrials and materials. Meanwhile, iShares’ PFF only boasts industrial and utility preferreds in addition to its massive financial-sector base.

PGX might have the edge on PFF, but both funds are limited by their plain-vanilla, indexed nature. That’s why, when it comes to preferreds, I typically look to closed-end funds.

Closed-End Preferred Funds

CEFs offer a few perks that allow us to make the most out of this asset class.

For one, most preferred ETFs are indexed, but all preferred CEFs are actively managed. That’s a big advantage in preferred stocks, where skilled pickers can take advantage of deep values and quick changes in the preferred markets, while index funds must simply wait until their next rebalancing to jump in.

Closed-end funds also allow for the use of debt to amplify their investments, both in yield and performance. Should the manager want, CEFs can also use options or other tools to further juice returns.

And they often pay out their fatter dividends every month!

Take John Hancock Preferred Income Fund II (HPF, 6.9% yield), for example. It’s a tighter portfolio than PFF or PGX, at just under 120 holdings from the likes of CenterPoint Energy (CNP), U.S. Cellular (USM) and Wells Fargo (WFC).

Manager discretion means a lot here. That is, HPF doesn’t just invest in preferreds, which are 70% of assets. It also has 22% invested in corporate bonds, another 4% or so in common stock, and trace holdings of foreign stock, U.S. government agency debt and cash. And it has a whopping 32% debt leverage ratio that really helps prop up the yield and provide better returns (though at the cost of a bumpier ride).

You have a similar situation with Flaherty & Crumrine Preferred and Income Securities Fund (FFC, 6.7%).

Here, you’re wading deep into the financial sector at nearly 80% exposure, with decent-sized holdings in utilities (7%) and energy (7%). Credit quality is roughly in between PFF and PGX, with 44% BBB, 37% BB and 19% unrated.

Nonetheless, smart management selection (and a healthy 31% in debt leverage) has led to far better, albeit noisier, returns than its indexed competitors. The Cohen & Steers Select Preferred and Income Fund (PSF, 6.0%) is about as pure a play as you could want in preferreds.

And it’s also a pure performer.

PSF is 100% invested in preferred stock (well, more like 128% if you count debt leverage), and actually breaks out its preferreds into institutionals that trade over-the-counter (83%), retail preferreds that trade on an exchange (16%) and floating-rate preferreds that trade OTC or on exchanges (1%).

Like any other preferred fund, you’re heavily invested in the financial sector at nearly 73%. But you do get geographic diversification, as only a little more than half of PSF’s assets are invested in the U.S. Other well-represented countries include the U.K. (13%), Canada (7%) and France (6%).

What’s not to love?

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

I graduated from Cornell University and soon thereafter left Corporate America permanently at age 26 to co-found two successful SaaS (Software as a Service) companies. Today they serve more than 26,000 business users combined. I took my software profits and started investing in dividend-paying stocks. Today, it’s almost impossible to find good stocks that pay a quality yield. So I employ a contrarian approach to locate high payouts that are available thanks to some sort of broader misjudgment. Renowned billionaire investor Howard Marks called this “second-level thinking.” It’s looking past the consensus belief about an investment to map out a range of probabilities to locate value. It is possible to find secure yields of 6% or more in today’s market – it just requires a second-level mindset.

Source: How To Squeeze Yields Up To 6.9% From Blue-Chip Stocks

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Critics:

A blue chip is stock in a stock corporation (contrasted with non-stock one) with a national reputation for quality, reliability, and the ability to operate profitably in good and bad times. As befits the sometimes high-risk nature of stock picking, the term “blue chip” derives from poker. The simplest sets of poker chips include white, red, and blue chips, with tradition dictating that the blues are highest in value. If a white chip is worth $1, a red is usually worth $5, and a blue $25.

In 19th-century United States, there was enough of a tradition of using blue chips for higher values that “blue chip” in noun and adjective senses signaling high-value chips and high-value property are attested since 1873 and 1894, respectively. This established connotation was first extended to the sense of a blue-chip stock in the 1920s. According to Dow Jones company folklore, this sense extension was coined by Oliver Gingold (an early employee of the company that would become Dow Jones) sometime in the 1920s, when Gingold was standing by the stock ticker at the brokerage firm that later became Merrill Lynch.

Noticing several trades at $200 or $250 a share or more, he said to Lucien Hooper of stock brokerage W.E. Hutton & Co. that he intended to return to the office to “write about these blue-chip stocks”. It has been in use ever since, originally in reference to high-priced stocks, more commonly used today to refer to high-quality stocks.

References:

Ethereum Creator Loses Over $400 Million As Crypto Market Collapses

TechCrunch Disrupt London 2015 - Day 2

Vitalik Buterin, co-creator of the world’s second most-valuable blockchain Ethereum, has taken a major hit to his net worth after the price of ether (ETH) dipped below $2,000 earlier on Monday.

As of 3:15 p.m. ET, ETH is trading at $1,938 according to Messari, down by more than 50 percent just five weeks after reaching its all-time-high of $4,338 on May 12. The decline of the second-largest cryptocurrency falls in line with the rest of the market, as crypto prices have fallen across the board since news broke of a renewed clampdown on bitcoin miners in China.

Buterin’s two main ether addresses currently hold 325,001 and 1,366 ETH worth a collective $632,499,246 as of 3:15 p.m. ET. The current value of his holdings is $457,500,754 less than the $1.09 billion it was worth on May 3 at 1:30 p.m. ET, according to Messari, when Buterin became the world’s youngest crypto billionaire at age 27. When ETH’s value first surpassed the $3,000 price level Buterin held 333,520 ETH worth $1.09 billion. Forbes is unable to account for the 7,153 ETH difference between his holdings now versus on May 3.

Ether’s current market capitalization is $223,752,321,616, second only to the original cryptocurrency, Bitcoin with a market capitalization of $606,843,934,844. Ethereum has gained notoriety this year as the birthplace of decentralized finance (DeFi) applications aiming to create decentralized alternatives to traditional financial services. At the time of writing there is $51 billion locked in the DeFi market, according to data aggregator DeFi Pulse.

Emily Mason

 

By:

 

Source: Ethereum Creator Loses Over $400 Million As Crypto Market Collapses

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Well, it’s not necessarily Ethereum that is a risky investment, it’s cryptocurrencies: They are highly speculative. Even though some experts and crypto supporters believe they could replace fiat currency one day, the answer is much more complicated.

Despite their bustling activity growth, efficiency, and impressive blockchain technology render, many countries are still anxious about cryptos replacing fiat currency. But even though peer-to-peer currency might be the bane of central banking systems around the world, the simple answer would be: no, cryptos won’t replace fiat. Why?

Because their usage is on the rise, their speculative popularity is why they won’t be adopted as mainstream legal tender: they are driven for value storage and speculative trading – rather than for transactional value.

For instance, very few mainstream businesses accept cryptos as legal tender – only 2’300 businesses accept it in the United States, which mostly only accept Bitcoins. When you consider that there are over 30 million businesses in the US, a thin fraction accepts Bitcoins, which puts Ethereum at a disadvantage.

As the past few weeks have proven, their volatility can be a double-edged sword: Between May 12 and May 24, Ethereum has lost nearly 50% of its value. While it has somewhat recovered since it is gut-wrenching to see.

Crypto Price Mayhem: Data Reveals Bitcoin Is Braced For A ‘Short Squeeze’

bitcoin, bitcoin price, crypto, image

Bitcoin traders and investors are still reeling from a steep sell-off that’s wiped around $1 trillion from the combined cryptocurrency market.

The bitcoin price has crashed from almost $65,000 per bitcoin to under $40,000 despite a flood of positive bitcoin news in recent weeks—including Twitter TWTR +0.2% chief executive Jack Dorsey teasing a bitcoin payments plan.

Now, analysis of bitcoin trading data has suggested the bitcoin price could be hit by a so-called “short squeeze”—when the price of an asset increases rapidly due to an excess of bets against it.

“Given bitcoin’s past market performance, when traders use excessive leverage to short the market during a horizontal price adjustment, there will often be a short squeeze phenomenon,” Flex Yang, the chief executive of Hong Kong-based crypto lender and asset manager Babel Finance, wrote in analysis seen by this reporter and pointing to market data that shows recent capital inflows are “from short-sellers and that leverage has greatly increased.”

Since the bitcoin and crypto market crashed in mid-April, the volume of bitcoin perpetual holdings on the crypto exchange Binance have increased by 110%, with the ratio of long to short traders reaching a new low of 0.89—pushing funding rates into the negative.

According to Yang, the reasons behind such excessive shorts include “many people are anticipating a bear market; bitcoin “holders are building hedges,” or “those who bought at high prices are locked in.”

Historical bitcoin price data between February and April 2018 and then again from June to late July 2020, suggests an increase in short-selling is often followed by a bitcoin price surge.

“In November 2020, there was a temporary sharp increase in the number of short-selling positions at a high price,” wrote Yang. “Afterwards, the price of bitcoin continued to rise, continuing its bull market position. No matter if the market outlook is trending downwards after rebounding or if bitcoin maintains its bull market status, short traders have always suffered the consequence of being squeezed out and liquidated.”

The early 2021 bitcoin price bull run was brought to a sharp halt in April when fears over a crypto crackdown in China and mounting concerns over bitcoin’s soaring energy demands sparked panic among investors.

Tesla TSLA +1.1% billionaire Elon Musk sent shockwaves through the bitcoin market when he announced Tesla would suspend its use of bitcoin for payments until the bitcoin network increased its use of renewable energy.

The bitcoin price has failed to recover its lost ground despite continued reports that Wall Street banking giants are increasingly offering bitcoin investment and trading services and the Central America country El Salvador revealed plans to adopt bitcoin as legal tender alongside the U.S. dollar.

Follow me on Twitter.

I am a journalist with significant experience covering technology, finance, economics, and business around the world. As the founding editor of Verdict.co.uk I reported on how technology is changing business, political trends, and the latest culture and lifestyle. I have covered the rise of bitcoin and cryptocurrency since 2012 and have charted its emergence as a niche technology into the greatest threat to the established financial system the world has ever seen and the most important new technology since the internet itself. I have worked and written for CityAM, the Financial Times, and the New Statesman, amongst others. Follow me on Twitter @billybambrough or email me on billyATbillybambrough.com. Disclosure: I occasionally hold some small amount of bitcoin and other cryptocurrencies.

Source: Crypto Price Mayhem: Data Reveals Bitcoin Is Braced For A ‘Short Squeeze’

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Critics:

Predictions of a collapse of a speculative bubble in cryptocurrencies have been made by numerous experts in economics and financial markets. Bitcoin and other cryptocurrencies have been identified as speculative bubbles by several laureates of the Nobel Memorial Prize in Economic Sciences, central bankers, and investors.

From January to February 2018, the price of Bitcoin fell 65 percent. By September 2018, the MVIS CryptoCompare Digital Assets 10 Index had lost 80 percent of its value, making the decline of the cryptocurrency market, in percentage terms, greater than the bursting of the Dot-com bubble in 2002.

In November 2018, the total market capitalization for Bitcoin fell below $100 billion for the first time since October 2017, and the price of Bitcoin fell below $4,000, representing an 80 percent decline from its peak the previous January. Bitcoin reached a low of around $3,100 in December 2018.From 8 March to 12 March 2020, the price of Bitcoin fell by 30 percent from $8,901 to $6,206.By October 2020, Bitcoin was worth approximately $13,200.

Bitcoin has been characterized as a speculative bubble by eight winners of the Nobel Memorial Prize in Economic Sciences: Paul Krugman, Robert J. Shiller, Joseph Stiglitz, Richard Thaler, James Heckman, Thomas Sargent, Angus Deaton, and Oliver Hart; and by central bank officials including Alan Greenspan, Agustín Carstens, Vítor Constâncio, and Nout Wellink.

The investors Warren Buffett and George Soros have respectively characterized it as a “mirage”and a “bubble”; while the business executives Jack Ma and Jamie Dimon have called it a “bubble” and a “fraud”, respectively. J.P. Morgan Chase CEO Jamie Dimon said later he regrets calling Bitcoin a fraud.

How Spacs Became Wall Street Tree

If you want to see the future of so many of the special purpose acquisition companies currently flooding the market, look to the recent past. Nearly five years ago, Landry’s Seafood billionaire Tillman Fertitta took Landcadia Holdings public to the tune of $345 million. No matter that, true to the SPAC “blank check” model, there was not yet any operating business—dozens of hedge funds piled into its $10-per-unit IPO. 

In May 2018, Landcadia finally located its target: a budding online restaurant delivery service called Waitr that would merge with the SPAC in exchange for $252 million in cash. Fertitta touted the fact that the Louisiana startup, with $65 million in revenue, would now have access to 4 million loyalty members of his restaurant and casino businesses, and a new partnership with his Houston Rockets NBA franchise. Two years later, though, you very likely have never heard of Waitr. As such, its stock recently traded at $2.62, down more than 70% from its IPO price (the S&P 500 has climbed 76% over the same period).

Waitr was a disaster for pretty much anyone who bought the stock early. But the hedge funds that purchased Landcadia’s IPO units did just fine. Virtually all recouped their initial investment, with interest, and many profited by exercising warrants in the aftermarket. “SPACs are a phenomenal yield alternative,” says David Sultan, chief investment officer at Fir Tree Partners, a $3 billion hedge fund that bought into Fertitta’s Landcadia SPAC IPO—and pretty much any other it could get its hands on. 

The SPAC boom of 2020 is probably the biggest Wall Street story of the year, but almost no one has noticed the quiet force driving this speculative bubble: a couple dozen obscure hedge funds like Polar Asset Management and Davidson Kempner, known by insiders as the “SPAC Mafia.” It’s an offer they can’t refuse. Some 97 percent of these hedge funds redeem or sell their IPO stock before target mergers are consummated, according to a recent study of 47 SPACs by New York University Law School professor Michael Ohlrogge and Stanford Law professor Michael Klausner.

Though they’re loath to talk specifics, SPAC Mafia hedge funds say returns currently run around 20%. “The optionality to the upside is unlimited,” gushes Patrick Galley, a portfolio manager at Chicago-based RiverNorth, who manages a $200 million portfolio of SPAC investments. Adds Roy Behren of Westchester Capital Management, a fund with a $470 million portfolio of at least 40 SPACs, in clearer English: “We love the risk/reward of it.” 

What’s not to love when “risk” is all but risk-free? There’s only one loser in this equation. As always, it’s the retail investor, the Robinhood novice, the good-intentions fund company like Fidelity. They all bring their pickaxes to the SPAC gold rush, failing to understand that the opportunities were mined long before they got there—by the sponsors who see an easy score, the entrepreneurs who get fat exits when their companies are acquired and the SPAC Mafia hedge funds that lubricate it all. 

It’s about to get far worse for the little guy. Giant quant firms—Izzy Englander’s Millennium Management, Louis Bacon’s Moore Capital, Michael Platt’s BlueCrest Capital—have recently jumped in. Sure, they all raised billions based on algorithmic trading strategies, not by buying speculative IPOs in companies that don’t even have a product yet. But you don’t need AI to tell you the benefits of a sure thing. And that means torrents of easy cash for ever more specious acquisitions. Says NYU’s Ohlrogge: “It’s going to be a disaster for investors that hold through the merger.” 

In the first 10 months or so of 2020, 178 SPACs went public, to the tune of $65 billion, according to SPAC­Insider—more than the last ten years’ worth of such deals combined. That’s just one indication that the current wave of blank-check companies is different from previous generations. 

In the 1980s, SPACs were known as “blind pools” and were the domain of bucket-shop brokerage firms infamous for fleecing gullible investors under banners such as First Jersey Securities and The Wolf of Wall Street’s Stratton Oakmont. Blind pools circumvented regulatory scrutiny and tended to focus on seemingly promising operating companies—those whose prospects sounded amazing during a cold-calling broker’s telephone pitch. The stockbrokers, who typically owned big blocks of the shares and warrants, would “pump” prices up, trading shares among clients, and then “dump” their holdings at a profit before the stocks inevitably collapsed. Shares traded in the shadows of Wall Street for pennies, and the deal amounts were tiny, typically less than $10 million. 

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Former stockbroker and convicted felon Jordan Belfort was immortalized in The Wolf Of Wall Street. In the late 1980s and early 1990s, blank check companies, similar to today’s SPACs but known as blind pools, were his stock and trade. Getty Editorial

In 1992, a Long Island lawyer named David Nussbaum, CEO of brokerage GKN Securities, structured a new type of blank-check company, with greater investor protections including segregating IPO cash in an escrow account. He even came up with the gussied-up “special purpose acquisition company” moniker. 

The basics of the new SPACs were as follows: A sponsor would pay for the underwriting and legal costs of an initial public offering in a new shell company and have two years to use the proceeds to buy an acquisition target. To entice IPO investors to park their money in these new SPACs as the sponsors hunted for a deal, the units of the IPO, which are usually priced at $10 each, included one share of common stock plus warrants to buy more shares at $11.50. Sometimes unit holders would also receive free stock in the form of “rights” convertible into common stock. If a deal wasn’t identified within two years, or the IPO investor voted no, holders could redeem their initial investment—but often only 85% of it. 

GKN underwrote 13 blank-check deals in the 1990s, but ran into regulatory trouble with the National Association of Securities Dealers, which fined the brokerage $725,000 and forced it to return $1.4 million for overcharging 1,300 investors. GKN closed in 2001, but Nussbaum reemerged in 2003 running EarlyBirdCapital, which remains a big SPAC underwriter today. 

SPACs fell out of favor during the dot-com bubble years, when traditional IPO issuance was booming. In the early 2000s, interest in SPACs returned with the bull market, and the deals started getting bigger. Leading up to the 2008 crisis, dealmakers Nelson Peltz and Martin Franklin both turned to SPACs for financing, raising hundreds of millions of dollars each.

Around 2015, SPACs began to offer IPO investors 100% money-­back guarantees, with interest; the holder would also be entitled to keep any warrants or special rights, even if they voted against the merger and tendered their shares. Even more significantly, they could vote yes to the merger and still redeem their shares. In effect, this gave sponsors a green light on any merger partner they chose. It also made SPAC IPOs a no-lose proposition, effectively giving buyers a free call option on rising equity prices. As the Fed’s low-rate, easy-money policy propelled the stock market higher for over a decade, it was just a matter of time before SPACs came back into vogue. And so they have, with unprecedented force. 

Hedge funders may be the enablers of the SPAC boom, but they certainly aren’t the only ones getting rich. In September, a billionaire-sponsored SPAC called Gores Holdings IV said it would give Pontiac, Michigan–based entrepreneur Mat Ishbia, owner of mortgage lender United Wholesale Mortgage, a $925 million capital infusion, which would value his company at $16 billion. If the deal is completed, Ishbia’s net worth will rise to $11 billion, making him one of the 50 richest people in America. “I never knew what a SPAC was,” Ishbia admits. “I felt like it was a more efficient process.”

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SPAC MVP: United Wholesale Mortgage’s Mat Ishbia won a national basketball championship with Michigan State twenty years ago but missed his only shot in the finals. His first attempt at the SPAC game could be a slam dunk. Jacob Lewkow for Forbes

There are also the sponsors, underwriters and lawyers who create SPACs, each taking their pound of flesh from the deals. Sponsors, who pay underwriting and legal fees to set up and merge SPACs, normally wind up with a generous shareholder gift known as the “promote”—roughly 20% of the SPAC’s common equity after the IPO. 

Alec Gores, the private equity billionaire who helped take United Wholesale Mortgage public, has listed five SPACs and raised over $2 billion. In the United Wholesale Mortgage deal, Gores and his partners are entitled to purchase $106 million worth of “founder shares” for $25,000, or $0.002 a share. Gores’ private equity firm hasn’t raised a new fund since 2012. With easy scores like this, why would he? 

Among SPAC sponsors, few can match Chamath Palihapitiya’s frenetic pace. Palihapitiya, 44, is a former Facebook executive who founded Silicon Valley venture capital firm Social Capital in 2011. With his venture business slowing down, Palihapitiya has recently turned to the public markets. In the span of 37 months, he has raised $4.3 billion in six New York Stock Exchange–listed SPACs that go by the tickers IPOA, IPOB, IPOC, IPOD, IPOE and IPOF. The founder’s stock he has received for his “promote” will amount to no less than $1 billion, by Forbes estimates. In late 2019, Palihapitiya used one of his SPACs to take Virgin Galactic public. Two other deals have already been announced: mergers with home­buying platform Opendoor at a $5 billion valuation and with medical-insurance company Clover Health at $3.7 billion. Palihapitiya and Gores point out that they intend to invest hundreds of millions via private placements in their deals.  https://c4087b1b1645d1a0dc9c9c6154fc97c6.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

Of the $65 billion raised in SPAC IPOs so far in 2020, Forbes estimates that all told, sponsors like Gores and Palihapitiya should net more than $10 billion in free equity. Great for them, but terrible for the rest of the shareholders. In fact, by the time the average SPAC enters into a merger agreement, warrants afforded to hedge funds, underwriting fees and the generous sponsor’s promote eat up more than 30% of IPO proceeds. According to the study of recent SPACs by Ohlrogge and Klausner, a typical SPAC holds just $6.67 a share in cash of its original $10 IPO price by the time it enters into a merger agreement with its target company. 

“The problem with the typical founder-shares arrangement is not just the outsized nature of the compensation or the inherent misalignment of incentives, but also the fact that the massively dilutive nature of founder stock makes it difficult to complete a deal on attractive terms,” says billionaire Bill Ackman. 

A handful of billionaires like Ackman are structuring fairer deals with their SPACs. In July, Ackman raised a record $4 billion SPAC called Pershing Square Tontine Holdings. He’s shopping for deals, but his shareholders will face much less dilution because his SPAC has no promote. 


“A handful of billionaires are structuring fairer deals with their SPACs. but most SPAC deals don’t come with benevolent billionaires attached.”


Billionaire hedge fund mogul Daniel Och, backer of unicorn startups Coinbase, Github and Stripe via his family office, recently raised $750 million in a SPAC IPO called Ajax I but reduced its promote to 10%. His investing partner in Ajax, Glenn Fuhrman, made billions in profits running Michael Dell’s family office; the SPAC’s board includes an all-star lineup of innovators: Kevin Systrom of Instagram, Anne Wojcicki of 23andMe, Jim McKelvey of Square and Steve Ells of Chipotle. The group has pledged their personal capital into Ajax’s future deal. 

“We’re lowering the sponsor economics to make clear that this is not about promoting someone’s capital,” Och says. “It’s about investing our own capital, and then finding a great company that we can hold for a long period of time.” 

Most SPAC deals don’t come with benevolent billionaires attached. In fact, if history is any guide, the average post-merger SPAC investor is in for a fleecing not unlike the ones dealt out in the shoddy blind-pool deals peddled by those bucket shops of the 1980s and ’90s. 



According to NYU’s Ohlrogge, six months after a deal is announced, median returns for SPACs amount to a loss of 12.3%. A year after the announcement, most SPACs are down 35%. The returns are likely to get worse as the hundreds of SPACs currently searching for viable merger partners become more desperate. 

Problems are already surfacing in the great SPAC gold rush of 2020. 

Health-care company MultiPlan, one of the most prominent recent deals, may already be in trouble. Acquired by a SPAC called Churchill Capital Corp. III in a $1.3 billion deal, its shares plunged 25% in November after a short seller published a report questioning whether its business was deteriorating more than it let on. 

The Churchill SPAC is one of five brought to market by former Citigroup banker Michael Klein, which have raised nearly $5 billion. Klein and his partners now sit on stock holdings worth hundreds of millions, thanks largely to the lucrative promotes. Klein’s investment bank, M. Klein & Co., has made tens of millions of dollars in fees advising his own SPACs on their deals. In the case of MultiPlan, Klein’s bank earned $30 million in fees to advise Churchill to inject SPAC capital into MultiPlan. IPO proceeds, however, are now worth only 70 cents on the dollar.  https://c4087b1b1645d1a0dc9c9c6154fc97c6.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

“Coming out of the financial crisis there was all this talk about the expected outcomes when you have all these traders who have heads-they-win-tails-they-don’t-lose incentives, because it’s somebody else’s money,” says Carson Block, the short seller who called out MultiPlan. “Those incentive structures are alive and well on Wall Street in the form of SPACs.” 

Nikola Motor, the SPAC that broke the dam on electric-vehicle speculations, now faces probes from the Department of Justice over whether it misled investors when raising money. Its founder, Trevor Milton, is gone, and a much-hyped partnership with General Motors is in doubt. Shares have traded down 36% from where they stood when the SPAC merger was completed. 

Electric vehicles aren’t the only overhyped SPAC sector. So far 11 cannabis SPACs have either announced a deal or are searching for one. And in online gaming, there are no fewer than 10 SPACs in the works. 


Blank Checks For Billionaires 

SPACs were once shunned by savvy investors. Today they’re beloved by THE WEALTHIEST. 


It wasn’t long ago that fracking was all the rage on Wall Street, too, and SPAC IPOs provided quick and easy capital infusions. Energy private equity firm Riverstone Holdings issued three large SPACs—one in March 2016, for $450 million; then two more IPO’d in 2017, raising $1.7 billion—all intent on profiting from shale oil-and-gas investments. 

Riverstone’s Silver Run II SPAC acquired Alta Mesa Resources in 2018, but the company quickly went bankrupt, incinerating $3.8 billion of market capitalization on oil fields in Oklahoma. Its other two SPACs completed mergers, and now both are trading below $3 per share. 

Despite its dismal track record, Riverstone had no trouble raising $200 million in October for its fourth SPAC IPO, “Decarbonization Plus Acquisition.” Shale fracking is yesterday’s game, so Riverstone has moved on to clean tech. 

Hope springs eternal—especially when you can count on hedge fund money to back you up.

Antoine Gara

Antoine Gara

I’m a staff writer and associate editor at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, mergers, and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheStreet and Businessweek. Before becoming a financial scribe, I was a member of the fateful 2008 analyst class at Lehman Brothers. Email thoughts and tips to agara@forbes.com. Follow me on Twitter at @antoinegara

Eliza Haverstock

Eliza Haverstock

I’m an assistant editor at Forbes covering money and markets. I graduated from the University of Virginia with degrees in history and economics. More importantly, I covered breaking news for its student paper The Cavalier Daily, while also writing for the school’s underground satire magazine. Since then, I’ve worked at Bloomberg and Pitchbook News, writing about everything from plastic straws to pizza robots.

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Bloomberg Markets and Finance

SPACs (special purpose acquisition companies, or “blank check” companies) have become all the rage on Wall Street in 2020. Sonali Basak explains how they work and why they have grown so popular.

What is a special purpose acquisition company (SPAC)? What is a blank check company? Should you invest in SPACs, and how do they work? Both a SPAC and blank check company are publicly-traded shell companies that raise collective investment funds through an initial public offering (IPO) in the form of a blind pool. The funds are placed into a trust until an acquisition is made or a predetermined period of time elapses and the fund is liquidated.

SPACs are increasingly being viewed as an alternative to the IPO process in particular for silicon valley companies since the failed WeWork IPO. Some recent SPAC mergers have been controversial such as Nikola Motors (NKLA) and Luckin Coffee (LKN). Many argue that these companies would not have made it through the traditional IPO process. We will also learn about Direct Listings, like the Spotify listing which is another alternative to the IPO process. Patricks’ Books: Statistics for Traders: https://amzn.to/3eerLA0 Financial Derivatives: https://amzn.to/3cjsyPF Corporate Finance: https://amzn.to/3fn3rvC Visit our website: http://www.onfinance.org Follow Patrick on Twitter Here: https://twitter.com/PatrickEBoyle Patreon Page: https://www.patreon.com/PatrickBoyleO…

The Stock Market Is Shrinking. That’s a Problem for Everyone – Jeff Sommer

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The American stock market has been shrinking. It’s been happening in slow motion — so slow you may not even have noticed. But by now the change is unmistakable: The market is half the size of its mid-1990s peak, and 25 percent smaller than it was in 1976.

“This is troubling for the economy, for innovation and for transparence,” said René Stulz, an Ohio State finance professor who has written a new report on these issues for the National Bureau of Economic Research.

When I say “shrinking,” I’m using a specific definition: the reduction in the number of publicly traded companies on exchanges in the United States. In the mid-1990s, there were more than 8,000 of them. By 2016, there were only 3,627, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business.

Because the population of the United States has grown nearly 50 percent since 1976, the drop is even starker on a per-capita basis: There were 23 publicly listed companies for every million people in 1975, but only 11 in 2016, according to Professor Stulz.

 

This puts the United States “in bad company in terms of the percentage decrease in listings — just ahead of Venezuela,” he said. “Given the size of the United States, its economic development, financial development and its respect for shareholder rights,” he added, one might expect that tally to be climbing, not falling.

In his new paper, “The Shrinking Universe of Public Firms: Facts, Causes, and Consequences,” Professor Stulz surveyed the body of academic research on the topic. In an interview, he said that the casual observer may not entirely grasp the implications of the changes that have taken place.

“The headline is that the number of public firms is shrinking, but it’s not just that,” he said. Profits in the overall market are now divided among fewer winners. And as capital-intensive companies have been supplanted by those whose value is largely found in their intellectual property, the marketplace is less transparent — with troubling consequences.

Consider these big shifts:

■ The companies on the market today are, on average, much larger than the public corporations of decades ago. Fast-rising upstarts are harder to find.

In 1975, 61.5 percent of publicly traded firms had assets worth less than $100 million, using inflation-adjusted 2015 dollars. But by 2015, that proportion had dropped to only 22.6 percent.

Because of this, Professor Stulz said, “It’s not possible for the general public to invest in a diversified portfolio of really small, publicly traded companies in the way they could a few decades ago.”

■ Profits are increasingly concentrated in the cluster of giants — with Apple at the forefront — that dominate the market. For a far larger assortment of smaller companies, though, profit is often out of reach. In 2015, for example, the top 200 companies by earnings accounted for all of the profits in the stock market, according to calculations by Kathleen Kahle, a professor of finance at the University of Arizona, and Professor Stulz. In aggregate, the remaining 3,281 publicly listed companies lost money.

In theory, as a shareholder, you are entitled to a piece of a company’s future earnings. That’s one of the main arguments for buying stock in the first place. But the reality is that you often are buying a piece of a money-losing proposition. Aside from the top 200 companies, the rest of the market, as a whole, is burning, not earning, money.

■ A quirk of accounting is at the root of some of that profit deficit, especially for smaller and younger companies. Increasingly, value resides in intellectual property — “intangibles” like software and data and biological design — rather than in the production of physical objects like cars.

But under generally accepted accounting principles, or GAAP, which American companies must follow, research and development must be deducted from corporate income — and those charges can reduce or eliminate profits. (Capital expenditures — in physical things like factories — appear on corporate balance sheets, not income statements, and don’t reduce profits.)

Without deep knowledge of a company’s critical research — which businesses may be reluctant to share, for competitive reasons — it’s difficult for outsiders to evaluate a start-up’s worth. That makes it harder to obtain funding, and it may be partly responsible for certain trends: why there are fewer initial public offerings these days, why smaller companies are being swallowed by the giants, and why so many companies remain private for longer.

That creates opportunities for private equity firms, which have insider access to innovative start-ups that may never go directly to the public markets. Meanwhile, Main Street investors are consigned to a less diverse universe than they may realize.

 

There’s a broader problem. Our visibility into the inner workings of public companies isn’t great, but we know far more about them than we do private companies, which aren’t required to disclose nearly as much information.

And these changing dynamics mean we know far less about many of the creators of American profits and jobs than would otherwise be the case.

In a democracy in which corporations already have enormous clout, that is worth worrying about.

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