Good Luck With That, Chamath
The 'SPAC King' gives up... This 'Bull Club' favorite isn't what it used to be... 'We ultimately walked away each time'... Expect many more SPAC liquidations... Good luck with that, Chamath... Blue chips can be risky for investors... In a mega-bubble, business quality doesn't matter... The 'top dogs' change all the time...
Believe it or not, one 'Bull Club' member actually threw in the towel this week...
Three weeks ago, I detailed the two major clubs that matter in a mega-bubble – the Bull Club and the Bear Club. I made those names up, but they're pretty self-explanatory.
Today, I (Dan Ferris) want to focus on the Bull Club...
This club is where all the wannabe cool kids go during the boom times. Its members include ARK Investment Management CEO Cathie Wood, WeWork founder turned real estate "guru" Adam Neumann, and Archegos Capital Management's Bill Hwang.
Although I believe MicroStrategy (MSTR) co-founder Michael Saylor is the real deal, I explained in the September 2 Digest why he's in the Bull Club as well. His huge, leveraged bet on bitcoin devastated his company's stock after the crypto plunged from its record high.
One key trait of Bull Club members is their conviction. And importantly, this conviction is a major driving force behind our current mega-bubble woes. As I said earlier this month...
The [Bull Club] is made up of folks who get you into [a mega-bubble]... and try hard to keep you there.
They'll do anything to convince you to stay. And they'll do it even after their favorite asset has generated massive losses and clearly hasn't lived up to its exaggerated promise.
The members of this group are hailed as geniuses on the way up. And they're deemed hucksters (or worse) on the way down.
With their steadfast conviction, the Bull Club's loyal members usually never give up.
Well, maybe Bull Club member Chamath Palihapitiya doesn't want to be seen as a 'huckster' anymore...
Palihapitiya is a venture capitalist and former Facebook executive. And in the Bull Club, his weapon of choice is the special purpose acquisition company ("SPAC").
Or... it was.
As regular Digest readers know, SPACs surged in popularity in recent years...
In short, they allow companies to go public without enduring the drawn-out, often mundane process of an initial public offering. And they're often called "blank check" companies...
That's because a SPAC sponsor takes it public without having any business operations. The sponsor promises to use the money raised to acquire a real business within two years – or give the money back to investors. So until then, they're just publicly traded piles of cash.
Palihapitiya got into the SPAC boom at the perfect time...
In 2020, his first SPAC tripled four months after it merged with space-tourism hopeful Virgin Galactic (SPCE). And before long, he raised more than $4 billion to fund five other SPACs.
Palihapitiya's success led to an all-too-familiar nickname in the investing world – "SPAC King." Overall, he has sponsored 10 SPACs. They're all tech- or biotech-focused.
Of the 10 SPACs, six completed mergers...
- Virgin Galactic
- Online real estate brokerage Opendoor Technologies (OPEN)
- Insurance tech provider Clover Health Investments (CLOV)
- Online lender SoFi Technologies (SOFI)
- Biotech Akili (AKLI)
- Biotech ProKidney (PROK)
However, like many Bull Club ideas during a mega-bubble, investors aren't too fond of SPACs these days...
As the New York Times noted on Tuesday...
Interest in SPACs has recently waned. SPACs raised more than $160 billion in public offerings last year, according to the database SPAC Research. So far this year, SPACs have raised about $13 billion.
That's a big shift... SPAC funds are down more than 90%. And Palihapitiya, the man in charge of the SPAC Chapter of the Bull Club, finally appears to see the writing on the wall...
He announced on Tuesday that his company, Social Capital, would close two SPACs it co-created and return their funds to investors. The two SPACs held about $1.6 billion overall.
Basically, Palihapitiya's two-year deadline was fast-approaching – without any good options to spend $1.6 billion. (I wish I had that problem.) As he wrote on his blog...
Over the past two years, we evaluated more than 100 targets and while we came close to doing a deal several times, we ultimately walked away each time.
Palihapitiya isn't the only recent SPAC sponsor who failed to find a merger, either...
Back in July 2020, hedge-fund manager Bill Ackman raised $4 billion in the biggest SPAC sponsorship in history. For me, it was a tell-tale sign of the developing bubble in the space.
Sure enough, the bubble started bursting – taking down Ackman's record-setting SPAC in the process. Like Palihapitiya, he liquidated his SPAC and gave all the money back this past July.
In my view, the SPAC bust is far from over...
I believe many more SPAC liquidations are on the way.
Earlier this month, the Financial Times reported that $75 billion worth of SPACs face expiration and will likely liquidate between now and the end of February. Then, another $36 billion is set to expire in March alone.
You might recall that the SPAC boom peaked in March 2021. And since SPACs normally allow themselves two years to find a deal, it makes sense that a huge number of liquidations will happen between now and March – and that they'll top out that month.
I'm confident most of these SPACs will liquidate because of what Chamath said about exploring more than 100 different companies and still not closing a deal. Given the powerful incentives to get a deal done... that tells me a huge bubble still exists in private companies.
Perhaps that bubble will fully burst after more than $100 billion in SPACs liquidates by the end of March. The financial markets could start getting really, really ugly between now and April or May – sometime after all these SPACs liquidate.
Palihapitiya apparently knows he'll be kicked out of the SPAC Chapter of the Bull Club at that point. But he's still not completely giving up his full club membership. As he concluded in his blog post...
Our view on SPACs remains consistent since our first deal – SPACs are just one of many tools in our toolkit to support companies as they enter subsequent stages of growth.
Good luck with that in the middle of a raging mega-bubble, Chamath.
On that note, before you start your weekend, we need to cover another recent news story...
As my colleague Corey McLaughlin shared on Tuesday, FedEx (FDX) caught many folks off guard last week...
In short, the delivery giant "pre-announced" a terrible earnings report last Thursday.
FedEx also withdrew its full-year guidance. And importantly, management said that it "expects business conditions to further weaken in the [fiscal] second quarter."
The company is now making changes to cut costs. As Barron's reported last Friday...
Sales were close, but management said revenue was impacted by "global volume softness." The economy is slowing. Costs are also a problem. The company is going to close more than 90 FedEx office locations, slow hiring, and consolidate some package sorting operations, among other actions, to save some money.
FedEx's stock fell more than 21% on Friday. Nearly $12 billion in market cap evaporated. According to Barron's, data going back to 1978 showed it was the stock's worst day ever.
Pay attention...
FedEx is telling you something I've warned folks about before...
In the fall of 2017, as I do every year, I presented at our annual Stansberry Conference. One point I made was that many folks falsely think mega-cap "blue chip" stocks are safe...
It's true that these stocks tend to carry less risk than many of their small-cap counterparts. But that doesn't mean you can just rest easy...
Blue chips can be risky for investors, too.
You see, most people understand that small-cap stocks are risky. So they act accordingly. It's much worse to believe a stock is safer than it really is.
In 2017, with the stock market raging, I told the crowd something unbelievable...
I said that beloved stocks like the company formerly known as Facebook, Amazon (AMZN), and Alphabet (GOOGL) could easily plunge 20% in a single day. I explained that these stocks were all riskier than most folks would ever think.
It didn't take long for the market to prove me right...
On July 26, 2018, Facebook fell 19% in a single day. It lost $119 billion in market cap.
Then, it happened again on February 3, 2022...
The social-media giant now known as Meta Platforms (META) fell 26% in a single day. The drop set the record for a one-day market cap loss at $232 billion.
Keep in mind...
I'm not saying blue chips are riskier than other stocks. I'm saying they're riskier than most folks believe. And I'm saying a 20% or more loss in a day is likelier than they believe, too.
It's a matter of expectations versus reality... When you act in a way that underestimates risk – even when buying blue-chip stocks – you're more vulnerable to a big, sudden loss than you realize.
That's why I always urge folks to prepare for a wide range of outcomes.
I bet more so-called blue chips will suffer massive single-day drops over the next few years...
Specifically, I'm wondering when it might happen to Apple (AAPL) and Tesla (TSLA).
Why those two mega-cap stocks? Two reasons...
First, Apple and Tesla are among the five largest stocks by market cap in the S&P 500 Index, the Nasdaq Composite Index, the Russell 3000 Index, and probably dozens of other stock indexes. In other words, they're two of the market's most important assets.
Second, they haven't performed as poorly as Microsoft (MSFT), Alphabet, and Amazon so far this year. Those three other mega-cap dominators are all down roughly 30% in 2022. Meanwhile, Apple is down around 15% and Tesla is down about 23%.
But mark my words... before the bear market ends, Apple and Tesla will crack like the rest.
The progression of stocks peaking then performing poorly is clear...
It started with the worst garbage in the market peaking in February and March 2021. Since then, bubbles in unprofitable tech companies (like the ones in Wood's flagship ARK Innovation Fund), cannabis, clean energy... and yes, SPACs... have all burst.
Then, in November 2021, the Nasdaq and the small-cap-focused Russell 2000 Index peaked. Both indexes are down more than 30% since then.
This past January, the higher-quality S&P 500 and Dow Jones Industrial Average peaked. They've both dropped roughly 20% this year. And they're on the downswing yet again.
If you want to figure out what inning of the bear market we're in, just keep your eye on Apple and Tesla...
Since Tesla isn't a great business and is already underperforming Apple, I suspect it will crack first. By the end of this year, I believe Tesla could lose 20% or more in a single day.
Then, Apple will crack. That will be the beginning of the end...
Now, don't get me wrong – Apple is a phenomenal business...
Everybody loves Apple. Everybody loves iPhones. You either own one or want one.
(I can already hear the keyboard cowboys typing their hatred for Apple and iPhones. Don't bother. Nobody will believe you. You're probably even writing the e-mail on your iPhone.)
The most important thing is... everybody knows Apple is one of the greatest businesses in the history of human commerce. Everybody.
That's the point... In a mega-bubble bear market like the one we're living through right now, business quality doesn't matter even a little bit.
No company can escape the carnage when a mega-bubble goes bust – not even Apple. And Apple plunging 20% or more in a single day would go a long way toward convincing everyone that this bear market is real and brutal.
With that in mind, one of the best things you can do as an investor is be proactive...
You should always look for ways the landscape has changed since the last big storm.
Aside from the COVID-19 pandemic, the last big storm in the markets happened during the 2008 financial crisis. And the landscape looks a lot different today than it did back then...
For example, the biggest market-cap companies in the world's stock indexes have completely changed over that span. And in general, they don't stay the same for long.
Market-research firm Research Affiliates refers to these stocks as the market's "top dogs." And as you can see, most of these top dogs change every decade – or faster...
(If you're curious, Tesla is currently No. 6 on the list of top dogs globally.)
Whether you realize it or not, the changing of the guard is likely underway again...
I don't know what the top five will be in another 10 years. But the odds are against Apple or any of today's other four top dogs staying there – and almost certainly not all five of them.
Keep that in mind as you navigate the bear market and try to figure out how to position your wealth for the next few years.
And remember, blue chips are riskier than you think.
New 52-week highs (as of 9/22/22): SPDR Bloomberg 1-3 Month T-Bill Fund (BIL), General Mills (GIS), Northrop Grumman (NOC), and the short positions in Capital One Financial (COF) and iShares U.S. Real Estate Fund (IYR).
Our inbox is overflowing with "yes" answers to our suggestion of creating a "bottom is (probably) in" checklist based on indicators we've shared over the past few months. Given the interest, we'll plan on putting that checklist together soon. And as always, we'll keep you posted on all the developments in the markets.
Other than that, stay tuned this weekend for a pair of Masters Series essays from our friends at Chaikin Analytics. And if you have any comments, questions, concerns, or other suggestions, you can e-mail us at feedback@stansberryresearch.com.
Good investing,
Dan Ferris
Eagle Point, Oregon
September 23, 2022