Often times it’s difficult to find true tops and bottoms in financial markets but this one thing for me, this marked an entre’ to – the beginning of the end of the U.S. expansion and hence this latest bull market? If you know what to look for there will be signs that market speculation has gone too far, and SPACs, (Special Purpose Acquisition Companies), are a good sign that we are getting into the latter phases of a substantial climb in asset prices. Late, late, late, so gotta love SPACs right? Not really… read on.

The first time I heard the term “SPAC” – a few years ago, suddenly a gut-wrenching feeling enveloped me, reminded me of the late 1980’s. I quickly looked at everything I was holding in client portfolios just to make sure they would indeed fail the “SPAC” test. Exactly what kind of ignorance gets involved in these speculative things I thought? A special kind, that’s for sure. Usually they are people who have come into new money, like pro athletes or entertainers who have zero investment acumen or others into new money getting caught up in the frenzy of some promoter, who happens to be promoting nothing but hot air. I couldn’t help but harken back to the investment bubble of the late 1980’s, just prior to the 1987 stock market crash. The equivalent to today’s SPAC was known back then as a “Blind Pool”, and they were popping up everywhere. Of course once the bubble pops these blind pools totally dissolve into thin air where all participants lose 100% of their investment. Well, not everyone loses money, the promoter(s) are the only ones that walk away with money, sound familiar? 🙂

How do promoters get away with this? You’d be surprised – here’s how this stuff works. A promoter files papers of incorporation with the intent to be a “holding company”. This shell of a company then names “officers” with no function because in the beginning, during the early stages of its creation a SPAC literally owns nothing. That’s where investors come in, the new holding company (SPAC) seeks your seed capital investment and announces intent to purchase companies with whatever seed capital they can raise. You notice anything odd yet? This operation is totally ass backwards from 99% of initial public offerings; private corporations that usually launch an initial public offering (IPO) already have established operations, they’re usually performing a multitude of profitable functions, and it’s made pretty clear early on that they are succeeding in their chosen business niche. Not so with these new shell companies, i.e. SPACs and blind pools. But it gets worse. Ever wonder where the Security and Exchange Commission, (SEC) sits in all this? The truth is the SEC doesn’t care, let me repeat that – the SEC doesn’t care what SPACs are up to as long as they have filed the required paperwork to announce an intention to go public and then had an attorney write a “prospectus” for the available offering of shares in their very “non-business”. As long as this document is available and distributed to any potential investor(s) in the initial public offering (IPO). One could include in their prospectus something like, “Guess what potential investors? Our intention is to sit on your seed capital for years, maybe even take a few personal vacations, and over-pay ourselves continually and we may even move to some tropical island with no forwarding address – all by using your seed capital. Right now I’m LMAO! Because the SEC does not care. As long as the prospectus addresses an intended use for the money raised and those intentions are made clear, the SEC could give a shit. Now if [after all this] investors still want in, this shell of a company is under no obligation to make shareholders any positive return on their investment(s), none! [simply because they disclosed the information required by securities’ laws as set forth in a prospectus on file.]

Now maybe you see how risky this SPAC crap is, and that’s pretty much all it is, fluffy crap that no one should ever need get involved in. There are few public entities in the United States that began as “holding companies” that can claim any success. Very few. The largest success story has to be Warren Buffet’s Berkshire Hathaway. Less than half the public knows the true story behind the holding company known as Berkshire Hathaway. Berkshire was not incorporated by Warren Buffet. What happened was Mr. Buffet was managing money for private clients under a limited partnership arrangement. He was acting as the General Partner when he decided it would be better to pour every client’s interest into a corporation where they would receive shares in place of their limited partner interests. The Berkshire Hathaway name was originally incorporated as a textile company which had failed and hence had no operation. Years later Warren Buffet comes along and buys the rights to use this previously incorporated shell that was once Berkshire Hathaway, and he simply never changed the name. Then Warren transfers [on limited partner agreement] all limited partnership interests and his own general partnership interest into existing Berkshire stock. From there he slowly began to take positions [over time] in other entities, even purchasing some companies outright years later, the entire time using cash and leveraging the capital of his [now] Berkshire stock investors. However, Warren made some very smart moves along the way, probably the smartest is that if/when ever he took a controlling interest in a company he preserved the upper management of the organization always, and usually for years so as not to upset the apple cart. A practice that has become the industry standard for corporate takeovers today – always lock up key management whenever you’re taking an existing successful operation over. Otherwise you are trying to reinvent the wheel and risk having your investment fail.

Addendum:
[This is not an endorsement of Warren Buffet, not at all. Unfortunately for Mr. Buffet, a political conservative would be aghast of his personal political beliefs, as they are no less than bizarre! Money is not everything, as Warren will take zero of the billions he’s made in this world into his first meeting with God. He’ll no doubt need to explain his support for some very bad persons in this life. And God doesn’t accept the U.S. dollar in exchange for any wrongs. 🙂 Warren’s lifelong loyalty to the Democrat Party and Americans like Bill Gates and Hillary Clinton has placed his legacy in an undesirable place forever, in my mind. There is absolutely no excuse for some of his Leftist actions and the many perverse comments he has made over the years, several times stating how that U.S. tax rates should be raised on ordinary Americans, and his big financial support and promotion of Leftist Socialist Democrats for office, even Democrats involved in criminal activities, such as the Clintons. There is no excuse for his behavior or his ideology, and as for me, I will forever question his intellect…]