Here's how people make money in a pandemic
As the Covid-19 bush fires continue to flare across financial markets, we are seeing events considered to be sheer fantasy six months ago.
Here are three unusual developments that have got lost amongst the market rallies and sell-offs:
The Cramer Covid-19 Index
That’s right, there’s already a sharemarket index of companies who out-perform in a pandemic. With every flare-up in the virus these firms go higher, because they help grease the stay-at-home economy.
Most of the index use technology in some way. We are talking the likes of Peleton the cycle company, Zoom for video communication, Docusign, Cloudflare and Livongo Health.
Amusingly, Jim Cramer from CNBC (a financial news company) designed the Covid-19 Index and it appears to be the first in history to always rise. How?
When he doesn’t like the look of one of the 100 companies in it, he lobs it out and sticks in something having more of a rally. He liked Kelloggs. Maybe we were all eating cornies for lunch in the depths of lockdown, but it got the heave-ho in favour of the mining company Newmont (gold’s been going up).
Being the host of Mad Money, Cramer’s Covid-19 Index should be seen as nothing more than entertainment with a fairly sound premise that tech-led companies and glittery gold are where it’s at right now.
Trump demands a TikTok bribe
The US-China trade war has been heightened by the pandemic and the fire stoked by Trump tweeting “China-flu” at every opportunity.
Last week the US president threatened to ban the Chinese social media platform TikTok. Days later, there was a better idea. As the broker of a forced sale of TikTok to Microsoft, the US Treasury should be paid a large wodge of the proceeds. Trump calls it a key-money payment (a real estate industry term), but even Wikipedia use the word ‘bribe’ to describe this type of payment.
TikTok is video after video of my niece doing ‘The Woah’ in her Cashmere High blazer, her brother with a levitating carrot and a sheep called Burt Chop who lives on Banks Peninsula. Microsoft see the advertising value in these three Kiwi comedians and want to carve out the New Zealand and Australian arms of TikTok along with the US and Canada. Even Hollywood couldn’t make it up. A Canterbury sheep and two TikToking teens are financial cogs in an unprecedented demand for money by Donald Trump.
It’s bold-faced, undeniably novel and like all things Trump, may end up as bluster. Yet the sheer gravity of key-money has been lost in the noise of the pandemic. It could change global trade practices and the role of government forever. Jacinda, Justin and Scott should be demanding their own cut. How dare Donald make money out of Burt Chop and Cashmere High.
The SPAC (Special Purpose Acquisition Companies)
It’s the new method of choice for the Wolves of Wall Street to make mega profits. The more market volatility the pandemic causes, the more SPAC’s we will see.
Very simply they’re a shell company full of cash.
In current conditions it’s very difficult for firms to go public and raise capital using the normal method of an Initial Public Offering. The costs are high and it’s hard to fix a price with the pandemic raging. Companies in pain are taking the route of selling to a SPAC.
They’re often referred to as ‘blank cheque’ companies, because investors pile in with cash, not having a clue what the SPAC will buy on their behalf. When they find a target, they’ve got a blank cheque to play with as they’ve already raised the funds. Ex-rock stars of the financial world often run these engineered vehicles and investors rely on their big reputations for deal making.
Goldman Sachs report there have been 51 SPACs in 2020 raising a record $32.6 billion from investors (up 145 per cent on a year ago).
Richard Branson’s Virgin Galactic plopped itself in a SPAC this year and the share price doubled. The largest SPAC in history occurred in July 2020 when Pershing Square Tontine Holdings raised $6b. It’s run by Bill Ackman who famously turned a bet of $40 million into $3.9b when Covid-19 caused sharemarkets to plummet earlier this year.
The reality is summed up by the Financial Times. “It is hardly a ringing endorsement of efficient markets that such a cumbersome invention as the SPAC is the thing that is thriving in lieu of IPOs”.
The one thing you can be sure of in a crisis – there’s money to be made.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.