Here comes a rare event: a stock market wash

Last month, I outlined why a stock market shock was likely. Such episodes are intended to “shake up” the remaining weak investors from previously popular stocks, restore values, and create solid foundations for future earnings.

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Washes are a different process. They arrive when the markets are overloaded with detritus. Call it scrap, junk, or ugly leftovers. It’s what’s left after fashions fade and dreams of wealth evaporate. It is a cleanup of investments that have failed.

they are everywhere

During the stock market hype of 2021, many of today’s walking dead were alive and kicking. Examine them now and “Yuk!” is an apt description. Yet they keep going, albeit on life support provided by a die-hard fan base.

Why can’t they continue their empty existence? Because the markets will get rid of them. Without solid fundamentals, the trade dries up and they leave. Some will be so cheap that they will be acquired for some commercial reason, or for a forced sale. Others will go to the interior of the country or simply close their doors.

So which investments are ready for the laundering?

The main groups are these:

SPAC (Special Purpose Acquisition Corporations)

One of the worst creations on Wall Street. Sold as insurance (you can get your full $10 a share back!), the “magic” was that a brilliant person would discover an outstanding company to acquire. With the money available, the deal would close and the SPAC holders would make huge profits. The big problem, though, was that each SPAC had “sponsors” (a Wall Street label obscuring the real description: “freeload insiders”), and they received a whopping 20% ​​of the new deal at minimal cost. Mathematically, using $0 for backers, 100% of the cash provided by SPAC investors became 80% owned by the new company. Unless the acquisition was priced 20% below fair value, that meant investors’ actual book value was reduced by 20%. In addition, “backers” were then free to sell their shares at almost any price and still rack up healthy profits (the “buy” profit at almost $0). No wonder stock charts of completed transactions look so terrible.

biotech IPO

These deals were simply high-risk venture capital deals that raised money to pay for the company’s expenses. The operations were basically scientists working on a dazzling project (the compelling reason to buy it) whose low chances of success made it very likely to fail. That’s why virtually all biotech IPOs have losses of more than 90%: the money is gone and there’s nothing to show for it.

Stock IPO history

Like biotech IPOs, the money raised is venture capital to break even. Likewise, the “story” was a dazzling project. The problem was that it was a long and uncertain road to creation, production, sales, and most importantly, profit. Stocks of stories, without real, fundamental progress, are destined for the dump when the ostentation of the story tarnishes.

The so-called actions of Meme

These were short-lived bursts built on the idea that individual investors tied to the Internet could drive battered stocks and make Wall Street short sellers pay to cover (buy back) their short positions. Power to the people! Only things didn’t go as planned, leaving behind a trail of tears and loss for those who still hold on. (When GameStop
had its original preparation, I checked out Meme’s investor hangout site, Reddit. There were numerous congratulatory comments that had the same point of view and instruction: they could beat Wall Street if they stuck together and kept buying and holding, forcing short sellers to push the price even higher. Believing in chat forum “commitments” not to sell is so… Well, you provide the description. Anyway, the stock charts show the results full of losses, in addition to revealing the presence of the remaining holders.

Publicized IPOs of former public companies

The cash and borrowing capacity to provide “dividend” payments to private equity owners having been exhausted, shares of companies such as Dole and Weber returned to trading. The brochures included beautiful color photos and the discussions were about how desirable the company’s products were. Unfortunately, the money raised went to shore up the impoverished finances of the company in the first place. Growth was mentioned, but as an unlikely end result.

“Participation” Investments

When management wants your money but not your control, it offers less than 50% of the shares for sale, or creates another class of shares with less or no voting rights. But, hey, you can ride the wave, right? Well, no. For example, BDT Capital, the private equity fund that still owns 85% of Weber’s shares, just made an offer to buy back the 15% it sold for $14 a share less than a year and a half ago. Your offer of $8.05 has just been accepted by the board (who has the responsibility to look after the interests of the shareholders and who owns the majority of the shares?). Since The Wall Street Journal Article (underlining mine)…

“Weber’s board has already approved the deal, and interim CEO Alan Matula said the transaction provides”immediate and fair value” for minority shareholders of the company.”

The chairman of the board said the price was fair because the stock market and the company’s fundamentals deteriorated during those fifteen months. Was the forced sale of that block of 15% shares legal at a loss of more than 40%? Yes. Without 50+% ownership, those minority shareholders were at the mercy of the majority owners. So goodbye Weber.

Could Dole be next? Maybe…

The bottom line: good news awaits after the wash

Like a spring cleaning, a deep wash cleans the stock market. Out of sight means out of mind, and cool surroundings mean a fresh perspective. A fitting scene from the movie, “margin call,” occurs after many employees are fired in a day. The boss gathers the remaining ones and says: (emphasis added)

All of you are still here for a reason. 80% of this floor was sent home, forever. We spent the last hour saying goodbye. They were good people and they were good at their job, but you were better. Now they are gone. They must not be thought of again. This is your chance. You are all survivors. And that’s how this firm over the course of 107 years has continued to go from strength to strength.”

Long live the New York Stock Exchange…

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