The four letters that defined markets in 2020: Morning Brief

Tuesday, December 5, 2020

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“In history books, the year 2020 will forever be known for the deadly pandemic,” writes Goldman Sachs equity strategist David Kostin in his latest note to clients.

“Economists will study the unprecedented recession and recovery. Investors will note the swift 34% bear market and dramatic 65% rally. But from a capital markets perspective, this year will undoubtedly be known as the year of the SPAC.”

Special Purpose Acquisition Companies, or SPACs, have been around for a while. Often called blank check companies, SPACs pool capital and trades on the public market with the goal of later finding an acquisition target. The SPAC then subsumes the target and voila, a new public company exists. This is how DraftKings (DKNG), Nikola (NKLA), and Fisker (FSR) — among dozens of other companies — came to market this year.

The surge in the popularity of SPACs comes at a time when the traditional IPO market is booming, when direct listings have risen in popularity, when cryptocurrencies have garnered increasing institutional attention, and the world is still mired in a global pandemic. So far this year, some 82 SPACs have announced their IPO targets and 36 of these deals have actually been consummated, according to Goldman’s data.

And the unprecedented popularity in this once-obscure financing scheme adds yet another wrinkle to what’s been a complicated and momentous year in financial markets.

In Kostin’s view there are three main reasons why SPACs have gained popularity this year: the sectors targeted by SPACs, investor enthusiasm for “non-traditional and early stage businesses,” and lower opportunity costs given low interest rates.

To take these points in order, if the buyout industry has typically been focused on beaten down sectors and companies, the recent SPAC vintage has focused more on growthy areas of the market like pharma, tech, and electric vehicles.

Meanwhile, the surge in retail trading during the pandemic has bolstered the desire for investors to own what Kostin calls “highly-volatile shares in firms with perceived hyper-growth prospects.” DraftKings, Nikola, and Virgin Galactic (SPCE) are certainly examples here.

And as has been the case for most of the last decade-plus in markets, low rates change the calculus around all kinds of investments. Because when you earn nothing in cash, why not put your money in cash with a potential call option to own shares in a company that goes up a lot? Which is essentially what SPACs offer investors.

“Of course, there is an opportunity cost of not owning equities given the 16% YTD return of the S&P 500 and our forecast of a 16% return next year,” Kostin writes. “But SPACs can be a cash substitute when Fed funds are at the lower bound. The focus on growth industries also means that SPACs are long duration assets that benefit from low long-term interest rates.”

As for when this boom cools off, Goldman thinks that day is not coming soon.

“We expect a high level of SPAC activity will continue into 2021,” Kostin adds. “Simply put, the state of play outlined above is likely to remain in place. New SPAC issuance has accelerated dramatically in 2H as 53% of the capital raised YTD has taken place since Labor Day. The most recent wave of issuance has broadened the universe of SPAC sponsors and lent institutional credibility to the SPAC process.”

On Monday, Bespoke Investment Group also looked at the SPAC space and surfaced one stat that is sure to keep this boom alive until further notice.

Of the 287 SPACs that have come to market over the last two years, just six are down 10% or more from their IPO price. In contrast, there are 15 SPACs which have more than doubled from their IPO price.

“In other words, more than twice as many SPACs are up 100% as down 10%,” the firm writes.

“If that isn’t a sign of exuberance, we don’t know what is!”

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

What to watch today


  • 8:30 a.m. ET: Empire State Manufacturing Index, December (6.9 expected, 6.3 in November)

  • 8:30 a.m. ET: Import prices month-over-month, November (0.3% expected, -0.1% in October)

  • 8:30 a.m. ET: Import prices year-over-year, November (-0.9% expected, -1.0% in October)

  • 8:30 a.m. ET: Export prices month-over-month, November (0.2% expected, 0.2% in October)

  • 8:30 a.m. ET: Export prices year-over-year, November (-1.6% in October)

  • 9:15 a.m. ET: Industrial Production month-over-month, November (0.3% expected, 1.1% in October)

  • 9:15 a.m. ET: Capacity utilization, November (73.0% expected, 72.8% in October)

  • 4:00 p.m. ET: Net long-term TIC flows, October ($108.9 billion in September)

  • 4:00 p.m. ET: Total net TIC flows, October (-$79.9 billion in September)

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