For most of my life, the term “SPAC” has elicited memories of concerts and shows at the Saratoga Performing Arts Center. I saw my first concert there, Phil Collins: No Jacket Required (Sussudio anyone?), and later Guns N’ Roses: Use Your Illusion. I even walked across the SPAC stage for my high school graduation. But SPAC has taken on a different meaning these days, and investors should be cautious.
How would you like to give me some money to invest? I can not tell you what I am going to do with the money. In fact, I might not do anything with it at all. And by the way, I will likely let others, with inside information, buy later at a lower price, diluting your investment. Welcome to the world of SPACs (Special Purpose Acquisition Companies)!
SPACs, also known as “Blank Check Companies” (for soon-to-be obvious reasons), have been around for decades but have recently gained popularity as a means of bypassing the traditional IPO process. It sounds a bit bizarre, but SPACs raise money through an initial public offering (IPO), with the promise of acquiring another business. The SPAC has no business of its own, other than acquiring, and cannot disclose what, if any, acquisition targets it has in mind. Hence the blank check. On top of that, typically, after the IPO, additional private investors, who have been given inside information, buy-in at a discount (via a PIPE… but we will not get into that).
So should you invest in a SPAC? Generally no. The economics are set up to benefit the sponsors, the early investors, the PIPE investors, and the acquisition target. If you do not fall into one of those categories, you are at a disadvantage and are likely writing a blank check that could be better spent elsewhere.
Headlines This Week
Ways and Means
- The proposed $1.9T stimulus package is being pushed through the Senate via the reconciliation process, while the House committees continue to debate each element of the bill.
- The Ways and Means Committee already approved parts of the $1,400 stimulus checks and the child tax credit expansion.
- The Financial Services Committee passed another round of relief for airlines, with a $14 billion package.
- Democratic leaders are pushing to sign the stimulus into law before the extended unemployment benefits expire on March 14th.
- President Biden is calling for a $2T infrastructure plan if the U.S. wants to remain competitive with China. Otherwise, he said, China will “eat our lunch.” He met with a bipartisan group of Senators to pitch the infrastructure plan, but funding the said plan after stimulus relief might be difficult.
- Unlike stimulus, which is viewed as necessary government spending to keep the jobs and economy from spiraling into the abyss, to approve infrastructure spending, Biden’s administration will have to propose tax increases to cover the bill’s costs.
- President Biden’s administration has floated ideas about raising taxes on corporations, high-income individuals, and capital gains. No specifics yet, but taxes will likely rise for someone.
- Earnings for the S&P 500 index grew over 4% in the fourth quarter, led by the biggest contributing sectors, Financials and Technology.
- Over 74% of companies in the S&P 500 index have reported earnings, with 80% beating their estimates.
- It is encouraging to see the S&P 500 return to growth, but the index’s earnings were still lower versus the same period last year. Hopefully, today’s lagging sectors, like Energy and Industrials, will come back to full swing this year.
- An infrastructure bill may help get those two sectors over the hump.
The Week Ahead
A Peek Inside
Investors are set to look into the Fed’s mind next week when it releases the minutes from its January Federal Open Market Committee (FOMC) meeting.
- While the Fed’s headlines this week reaffirmed its commitments to near-zero interest rates and $120 billion a month in asset purchases, investors will try to glean further insight into the Fed’s thinking about its next steps.
- The Reserve Bank of Australia and the European Central Bank will also release their respective policy meeting minutes.
- The contrast, or lack thereof, between the central banks will undoubtedly be a point of focus for investors.
Year of the Ox
This past Friday was the start of the Chinese New Year celebration that lasts for 16 Days.
- The lunar New Year is celebrated not only in China, but in Singapore, Indonesia, Malaysia, Thailand, the Philippines, and many East Asian nations.
- The Shanghai Stock Exchange is closed until Thursday, and most businesses are closed for the week and potentially longer to reunite with families and celebrate together.
- The Ox is considered to be a bullish signal.
- COVID-19 will impact this year’s celebration, so some of the expected economic impacts may be muted.
- Xīn nián (new year) kuài lè (happy)!
Slow but Steady
US retail spending is poised to have a modest rebound, continuing the slow but increasing trend.
- Numbers for retail sales are out on Wednesday, with forecasts projecting a 0.7% month-on-month increase.
- This would be the first time since October that the metric has returned to positive territory.
- Industrial production had a much stronger finish to the year and is projected to have continued growing in January.
- Forecasters expect a month-on-month growth of 0.4%.
Presidents’ Day is Monday, with U.S. financial markets and banks closed in observance.
- Canadian markets will also be closed as our neighbors to the north will be observing Family Day.
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