Pricing impact on housing, stocks and SPACs
Hello, friends. Today, we’ll look at three things price, price, price.
Price: Its impact on stocks overall
Price: Its influence on the growth of SPACs
Price: How it has driven changes in residential real estate market growth
A quick look at government and the economy
In my opinion, appointing Janet Yellen as Secretary of the Treasury is a brilliant move by the Biden administration. You’d be hard-pressed to find anyone with as much relevant experience, intelligence, foresight and bipartisan approval (receiving an 84-15 Senate vote).
Make no mistake that despite the raging stock market, the economy is still precarious. Yellen understands what needs to be done to raise the bottom of the “K” in our current recovery so that more Americans find financial stability. As National Association of Realtors Chief Economist Lawrence Yun was quoted by Housing Wire:
“[She] recognizes the societal benefits and wealth building opportunities that homeownership can bring, especially among minority households.”
Simply, Janet Yellen gives me hope that economic policy will be skillfully navigated.
On to the markets
Looking at the markets, what I see are bubbles, but not the kind that explode and do damage like the dot.com-era bubble or the housing collapse of 2008. Instead, I believe that after continuing to rise some, we’ll see a return to a more moderate pace of growth.
In this blog, we’ve talked about some of the drivers behind the irrational exuberance in the markets:
Low-to-no gains to be had on interest-based investment vehicles, like CDs and fixed income securities
The emergence of retail-level, no-fee trading apps like Robinhood that open the markets to individuals in ways that hadn’t been mass-available before.
A significant portion of the U.S. population has invested in the markets -- primarily, professionals who retained their jobs during the pandemic but who found themselves with stimulus funds and “excess” savings because their typical leisure outlets were unavailable.
Here’s where price comes in, too: in addition to apps like Robinhood easing entry, the availability of fractional shares has enabled millions of people to invest in otherwise out-of-reach stocks like Tesla, Apple, Amazon and Alphabet and to buy into cryptocurrencies like Bitcoin, too.
You no longer need to base buying decisions on which shares you can afford; instead, fractional purchases mean that the financial price of stock ownership is immensely more available to everyday people. And while this is a good thing in theory—more equitable access to ways to build wealth—it’s also tricky, because investors at this level tend to be less experienced, more emotional and less likely to withstand significant market (and financial) swings. Clearly there is significant brand purchasing as well with little thought to the underlying back bone and financials of the company.
SPAC growth as another sign of overexuberance
Here’s another symptom of the red flags I see in the markets. There’s been a lot of media attention paid to SPACs—special purpose acquisition companies.
“A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.” (Investopedia)
Investors jump on board for many reasons—maybe a SPAC is created to find a business to acquire in a specific target industry, such as pharmaceuticals or property tech, or maybe someone with a proven record of success is behind a SPAC. But a SPAC can also attract investors for relatively banal reasons, such as a celebrity has created or endorsed it. And here’s something to keep in mind: SPACs result in massive valuations, often for companies that have never shown profits.
SOURCE: WSJ
Take a look at this article, “When SPACs Attack! A New Force is Invading Wall Street,” published January 23 in the Wall Street Journal:
“For now there is no end in sight to the SPAC attack, which coincides with a vast run-up in risky investments that has everything from U.S. technology stocks to bitcoin soaring. The SPACs are pulling in more than 70% of all money raised through initial public offerings this month, up from nearly half last year and about 20% the year before, according to Dealogic data through Thursday. The 67 SPACs created this year have already raked in nearly $20 billion from investors. That is well above the total from all of 2019, which was a record before last year’s historic haul of $82 billion.”
While SPACs in and of themselves are inherently fine—I tend to think of them as collectives for investing, kind of like dairy collectives in agriculture—I also believe that SPAC frothiness is another sign of the gamification of the markets. In my opinion, buying into SPACs is like buying a new car based solely on the brand or the look of the exterior—and absolutely nothing else.
During exuberant market runs, people don’t see inherent risks. They think it’s win, win, win, like a lucky streak at a casino. The markets don’t work that way, though. They’re more of a zero-sum game: For every positive, there’s a corresponding negative.
Much like gambler-friends who only tell you about their wins, SPAC press these days focuses largely on the millions and billions made by their creators. In reality, most won’t be winners. Effectively speaking, a SPAC is a form of venture capital. It’s as if you’re investing in 10 startups in the hope that one hits it out of the park. So, optimally, if you invest in 10 SPACs, you could do really well on one, maybe two. What you have to ask yourself, then, is whether you can afford losses on highly speculative investments, just as you would as a venture capitalist.
Options are another area of speculation and exuberance
Options are inherently a more leveraged instrument and there’s record volume now. Early in my career as a professional market maker in options, I learned that if we think of trading options like gambling at a casino, I can tell you that the one who sells options essentially owns the casino, so to speak; the one who buys the options is the gambler.
Here’s my oversimplified example: as an options trader—as the casino—all I need to do is sell options and neutralize my position and I can make money, similar to an insurance company. It’s important to know that almost all options go out worthless, so clearly, the seller is the house (in my casino example). If you study options in the long game, they’re nothing other than insurance instruments.
When considering all of this, remember the adage that I’ve said before: It takes 10 years to accumulate wealth and 10 minutes to lose it—and you don’t want to be in those subsequent 10 minutes.
Price and housing markets
Simply put, prices drive actions in housing, too.
Pandemic-driven trends show people leaving major urban areas for smaller cities and suburbs to gain square footage for lower prices. The result, of course, is that these emerging secondary markets suddenly realize spectacular home sales prices, making these markets less affordable.
PHOTO CREDIT: David McBee from Pexels
In the Washington Post article, “Experts Predict What the 2021 Housing Market Will Bring,” Realtor.com predicts these are 2021’s hot housing markets: Sacramento; San Jose; Charlotte; Boise, Idaho; Seattle; Phoenix; Harrisburg, Pa.; Oxnard, Calif.; Denver and Riverside, Calif.
Droves of pandemic relocators came because prices were lower and these suburbs and small cities and towns gave them more of the space and safety they wanted. But after they’re vaccinated, will they still want this as their “new normal?”
The question remains, then, will this trend last beyond the pandemic or will people leave nearly as quickly as they came? It’s hard to predict, but it certainly seems to parallel what we see in the stock markets: Price is driving extreme action.
Take stocks, for example: Although a handful of big-name companies get all the attention, currently stocks priced around $5 or less (aka, “penny stocks”) are also doing very well, because they can be a good place to do a little value investing and give some growth to your cash, if your shares increase in value. In other words, price is the only driver. Does anyone remember what earnings and cash flow are?
It’s similar in housing: People are “value investing” in places where they can get the best result for their money, like square footage and amenities. Markets that were growing pre-pandemic, like Austin and Nashville, boomed, while broad-market regions like metro Chicago have shown some stability, although there was out-migration to the suburbs, because the things that make cities desirable were unavailable.
Where does this lead?
Early in this new year, it’s looking like 2021 will be better in many ways (we hope, given the vaccine and the highly experienced and stable team managing this). We should see forward progress simply because of what we’ve learned over the last year.
SOURCE: CNN
But widespread inoculation won’t happen quickly and thus many industries—travel, sports, leisure and others—won’t bounce back for another year or two.
Last year was exhausting in many ways and in my opinion, we’re not out of the woods, we’re just learning to navigate them a bit better.
Looking ahead, then, I think we need to be cautious of human propensities for greed and belonging (manifested as FOMO). An interesting way to gauge this is through CNN’s Fear & Greed Index, which indicates overall investor sentiment.
It’s fun to see where the collective falls, but the critical question to consider is this: Where do you?
“Be fearful when others are greedy and greedy when others are fearful.”
—Warren Buffet
