The “SPAC King’s” B.S.

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In today's email: Donald Trump, Letitia James, D.E. Shaw, Alan Weisselberg, Chamath Palihapitiya, and an army of financial regulators...

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The “SPAC King’s” B.S.

The smart money has already pulled out of Trump’s SPAC circus, just as Chamath Palihapitiya dumped his stake in Virgin Galactic. Plus: Is the Nasdaq nearing its bottom?

WILLIAM D. COHAN

The attempted launch of Truth Social, the flagship social media app produced by Trump Media & Technology Group, appears to have been a glitch-ridden embarrassment, as documented by my partner Tina Nguyen. Of course, that didn’t stop Digital World Acquisition Corp., the special purpose acquisition company, or SPAC, that is taking TMTG public, from popping 17 percent on the news. DWAC, which is being investigated by the S.E.C. and FINRA for potential insider trading preceding the merger announcement, was already trading at about nine times its I.P.O. price in a fit of late-cycle meme-stock hysteria reminiscent of AMC, GameStop and Virgin Galactic. We know how those stories ended.

Indeed, some of the smart money behind DWAC appears to have already taken its winnings and gone home. D.E. Shaw, which owned shares worth hundreds of millions of dollars in Donald Trump’s SPAC, has sold its entire stake, according to recent filings, presumably for a tidy profit. For some, it was a peculiar transaction, given that the company’s eponymous founder, the legendary David E. Shaw, is a Democrat who gave millions to Hillary Clinton’s election campaign. So why did the firm make the bet?

Pretty simple: to make money. That mission accomplished, why wait around any longer to try to squeeze the last drops out of the lemon, especially given Trump’s perfectly awful last week, which seems to be inching him closer and closer to legal peril. The other big news, besides the “launch” of Truth Social, was that a New York State judge ruled that Trump and Don Jr. and Ivanka will have to give a deposition and turn over documents to Letitia James, the New York State Attorney General, as part of the ongoing investigation into the increasingly beleaguered Trump Organization. But the Trumps, being Trumps, will likely appeal the ruling and, if they have to be deposed, will likely just plead the fifth. (As son Eric recently did.) They are well beyond being embarrassed by such things. Also, it’s a civil case, not a criminal case—that’s still in the purview of a Manhattan grand jury and the new Manhattan D.A., Alvin Bragg—so even if James brings a civil lawsuit against the Trump Organization, it will probably just result in some sort of fine, which Trump being Trump will likely figure out a way to avoid paying.

No, the bigger issue for Trump last week was the fact that his longtime accounting firm, Mazars, said it no longer stands behind the financial statements it prepared for the Trump Organization. Given the fact that Trump’s “in-house accountant” Alan Weisselberg has been indicted, as my buddy Tim O’Brien pointed out recently in a column for Bloomberg, and that Trump has more than $590 million of debt coming due in the next four years —half of which Trump himself has guaranteed to pay back—I would say that the Trump Organization could be getting ready to circle the drain, which would bring to six, by my count, the number of Trump-related entities that have filed for bankruptcy. I’m not sure there is a bank out there that will refinance the Trump Organization’s debts without having credible financial statements and I’m not sure there is an accounting firm out there willing to step into Mazars’ shoes at this point. (No offense meant, but Mazars isn’t exactly Deloitte.) If I’m D.E. Shaw, I’m bailing too, even if that DWAC SPAC is up about 800 percent since it went public last year. On Wall Street, there’s room for bulls and room for bears but pigs get slaughtered. Take your money and run, D.E.

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SPAC Brokers and Bagholders

For an indicator of how the Trump Media story might end, look no further than the stock price of the companies taken public by “SPAC King” Chamath Palihapitiya, who recently stepped down as chairman of Virgin Galactic, a year after he dumped his entire stake in the company, netting him about $200 million. Shares are now trading for around $7.80, down from a high of around $56, an 86 percent decline for anyone keeping score at home. Who’s at fault for this crash landing, one wonders? Is it the sponsors who took the company public, or the retail investors who bid up the price beyond all logic?

Let’s be clear once and for all: Palihapitiya is the 2022 version of Harold Hill (look it up), an egomaniac who has become far richer than he ever deserved to be. He even had the nerve to compare himself to Warren Buffett. Shame on him, shame on the business press for promoting Chamath hysteria, and shame on the idiotic investors who bought the myth. It’s not just Virgin Galactic. According to Bloomberg, a group of 10 stocks sponsored by the “SPAC King” has fallen 40 percent since late June 2021.

You can hate the player, but you also have to hate the game. As long as SPAC sponsors are taking 20 percent of the economics of a SPAC I.P.O., basically for free, SPAC I.P.O.s should be avoided like the plague. (One notable exception to the SPAC sponsor greed machine is Bill Ackman’s SPAC, Pershing Square Tontine Holdings, but that SPAC has struggled for other reasons.) Chamath’s gains are totally legal, yet another example of how opportunity in finance can sometimes reside not with the investor, but with the financial alchemists employing the best lawyers, underwriters, connections, accountants, and tax advisors. Retail investors in DWAC would be wise to take note, too.

A Tech Correction Correction?

It’s been a rough couple months for the market’s biggest tech stocks. Netflix is down more than a third. Apple is down ten percent. It’s enough for many to wonder if Wall Street executives are still bearish on the sector, even after the recent tech stock correction, or whether they generally expect the worst is behind us.

Year-to-date, the S&P 500 is down around 10.3 percent, the Dow Jones Industrial Average is down 8.1 percent, the Nasdaq is down 15.5 percent. As of this writing, the yield on the average junk bond is now 5.6 percent, up from 4.34 percent at the beginning of 2022, up a whopping 28.5 percent in fewer than two months. So, yeah, the markets so far in 2022 have been rough and volatile and are at or nearing correction territory, or are they?.

The worst is not behind us yet, I am sorry to say. All of this correcting—and there is more to come before the green shoots start appearing again—has come before the Federal Reserve has yet to make its first moves toward ending its “zero interest rate policy” and starts raising short-term interest rates and begins to wind down its long in the tooth program of Quantitative Easing, which has kept long-term interest rates at levels far below where they would otherwise be if the Fed had not been so busy buying $8 trillion of debt securities, which has pushed the assets on the Fed’s balance sheet to almost $9 trillion, from $900 billion before the 2008 financial crisis.

Yes, the markets are forward-looking and investors are busy trying to price in the coming era of higher interest rates, and that is happening to some extent. I just don’t believe—nor do my Wall Street sources, by and large—that the markets yet reflect the full extent of what the course correction that is coming, and is long overdue. (This is not investment advice.) But as I wrote last week here in this space, this is not a time for hanging your head. This is a time to stay calm, let the bloodletting continue, and then leap back into the markets with both feet. I mean, if you were crazy enough to like Tesla’s stock at $1,243 a share in November, it seems to me you should like it even better at $821 a share, or at a price even lower than that.

The same thinking goes for the stocks of other companies, such as, say, the aforementioned Netflix, down 37 percent in 2022, or Apple stock, down 10 percent year to date. (Nota bene: This logic does not apply to the stocks of companies that are actually troubled, such as the Palihapitiya’s SPACs or, say Peloton, or the meme stocks. Sometimes stocks are heading to zero for very good fundamental reasons and are not cheap enough, even at zero.) So buckle up, the rollercoaster is still on the way down. But this is America, we’ll be back soon enough.