Hope you’re having a fine weekend. It’s a smoky one here in Vancouver because of the ongoing forest fires. The Arora siblings were supposed to go on a hike yesterday morning, but we had to cancel because of the hazy skies and really poor air quality. Mostly that, but also because one of the Arora sibs is a teenager and has a new girlfriend and is moving away for university in the next couple weeks, so he only wants to hang out with his girl (Fine, I get it…). And the other Arora sib tends to run a bit on the lazy side. But really, it was the smoky weather why we had to cancel.
I played tennis thrice this week, and we spent a lot of time working on my footwork, so my feet were a goner by the end. I’d rather not bore you with all the details of it, but since we are on the topic of tennis, here is a cool tennis substack blog that I follow, and this week’s was a funny post. At the National Bank Open earlier this week, Karen Khachanov got in some trouble when he said the word “shit” during the match. Well he said, “mierda”, which is Spanish for shit but the Chair umpire Renaud Litchenstien wasn’t pleased and issued a code violation for ‘audible obscenity’ and a point penalty! The full exchange was quite funny and here is a brief snippet of it:
Seems like National Bank open (Rogers Cup) is a hotbed for shitty stories because I have one of my own. A few years ago, when I was still living in Toronto, my boyfriend at the time knew how much I loved tennis and surprised me with the Gold tickets to the Men’s Final match. I believe they were around ~$600 per ticket, and the poor guy didn’t even like tennis! (But he was (I’m sure still is) a sweetheart!) And he was coming to watch tennis with me — I was so excited! However, the excitement was short-lived as the Friday morning before the Sunday Finals, I found out that I had made it to the next round of this job I’d been interviewing for and as the next step, I had to do that “Build an LBO Model” test and turn it around in 48 hours. You know the ones where they send you the test Friday evening at 6 pm and it’s due Sunday by 6 pm. MIERDA!!
Well, as you can guess I ended up working on that stupid model all weekend and we never made it to the match. We also didn’t try reselling the tickets because we were hopeful that I’ll be able to finish the test ahead of time and that we’ll be able to get there as the match began at noon. You know those hope against hope type situations. But I couldn’t finish the test ahead of time and it was so stressful and heartbreaking because I spent the entire weekend frantically trying to finish the model and make it to the match. In the end, I didn’t get to do either. I still get so pissed thinking about that weekend. In hindsight, I didn’t even really want that job and I spent my weekend doing the opposite of what I truly wanted and would have enjoyed instead. But then hindsight is also 20/20.
And yes, I am aware that the National Bank Open Shit contagion is widespread and of course, exists in SPACs. Why else would I be telling you this longwinded story otherwise! There is no good SPAC news, only shit SPAC news. Although, I think its more reflective of the shitty sentiment around it versus the actual underlying news. Because, actually if you compare the SPAC arbitrage yields to treasury bond yields, you’re killing it right now. SPAC King Julian shared this chart, and you see that the 2-year T-bill is currently yielding 0.2% compared to the 2.1% for SPACs. Money market investors better knock it out of the park this year as this is a no-brainer!
So it’s not as shitty as you think on a relative basis but because the sentiment is so poor on an absolute basis, that there is limited affinity for a retail investor to scope out relative arbitrage opportunities in SPACs. Partly, it’s a design flaw because it is beyond the scope of a retail investor to generate outsized alpha from relative arbitrage trading because their capital pool isn’t the same as that of an institutional investor, who can outperform (relative to the retail bro) based on size. I guess size does matter when the alpha is so thin.
Imagine, a Robinhood investor with an average account size of $3500 compared to an institutional money manager like Millennium, which has $52B in AUM. With 95.8% of the SPACs trading below par, the arbitrage trade is obvious – buy below NAV, and redeem for par before the deal closes. Basic. The upside is capped but guaranteed — like the treasury bills (but with better return profile) This trade doesn’t require any real due diligence on the sponsor, on the target, on the deal because you are just trying to capture the arbitrage and not necessarily betting on anything. But while that trade is obvious, it is not the most obvious alpha generating trade for a retail investor because when a retail trader with $3500 buys a SPAC below NAV for $9.80 and sells for $10, he earns a 2% return (excluding transaction costs). Even though the institutional manager is earning the same return (excluding any leverage), but to a retail investor, making 2% on a trade ‘optically’ seems like a bad trade, especially right now, when they can buy $BTC or $ETH or $GME and earn way more than 2%.
I am in no way advocating or suggesting that this is a good or even the right approach, I am just trying to highlight that this is what currently is. And why it matters is because the retail investors are now an important and a voting shareholder of Stock Market Inc., and are responsible for driving the money flows in and out of the asset classes and therefore, impacting the market sentiment. So back a few months ago, when the retail investors could invest their $3500 in SPACs trading at $10, and then sell on deal announcement, earning 20 or 30 or sometimes even above 100% returns, they were all in on the SPAC game and the positive sentiment spoke for itself. But now, when you are earning ~2% on that same trade, the retail investor is all out. In their view, their $3500 can be invested in other asset classes and their money can go way further. And so, they have taken their money elsewhere, and downvoted the sentiment around SPACs to be shitty.
However, on the institutional side, the money is returning to the asset class and they are absorbing the demand leftover by retail investors by buying those SPACs below par and loading up in their portfolios. Not only are they participating in the relative arb trade but they obviously, also have the optionality to remain invested and HODL some winners. The sneaky and the interesting thing about this institutional re-entry is that by virtue of their additional demand for the product, they are also slowly and surely contributing to the sentiment change for SPACs. We may not see it just yet, but the wheels are turning.
In “The Sun Also Rises”, Ernest Hemingway writes this dialogue about two of his characters:
“How did you go bankrupt?” Bill asked. “Two ways”, Mike said. “First gradually, then suddenly”.
I love that last line. And while it’s not directly applicable as I’m not talking about SPACs going bankrupt (which yes there will be many but that’s a topic for another time), but about the sentiment shift. It will change. First gradually, then suddenly. Until then, they sit in the mierda.
*I do find myself in conflict at times writing about these nuanced dynamics of the retail vs institutional investors. Because it very quickly gets dragged into the polarizing debate of retail is good and institutions are evil. I feel that if we can peel the onion without any tears, there are very interesting layers to uncover which actually, help explain a lot of these macro dynamics and can be instructive in the long term understanding of money flows and sentiment shifts.
**Also to any umpires in the room, please don’t report me to substack for using ‘obscene language’!!
Have a great week ahead!
Nikita's Substack Feed
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