LMF Acquisition Opportunities

January 10, 2021 – Weekly Comment

In the late 1990’s, the dot-com bubble was in full force. Companies that wanted to attract investors to boost stock valuations simply added “dotcom” to their business names. There were a lot of crazy listings. What popped into my mind, and this of course is NOT crazy, is Pets.com. Look around today, and everyone has some sort of emotional support pet, a fact that has probably helped many weather the covid storm. *raises hand*. Pets.com had a famous sock puppet as its mascot (allegedly modeled after the unparalleled Triumph the Insult Comic Dog, see bottom), and the company went on an advertising blitz to gain market share. Partially backed by Amazon, Pets started operations in early 1999. According to Wikipedia, “…during its second fiscal year the company continued to sell merchandise for approximately 27% less than cost, so the dramatic rise in sales during Pets.com’s second fiscal year only hastened the firm’s demise.” How do we do it? VOLUME! Going public at $11 in February 2000, the company almost perfectly top-ticked the market; Nasdaq posted its bubble top in March 2000. By November, the stock was trading at $0.19 and the company declared bankruptcy.

For a bit of background on conditions, I lifted this from thebalance.com:
In 1998, GDP was 4.5%, unemployment was 4.4%, and inflation was 1.6%

In 1999, GDP was 4.8%, unemployment was 4.0%, and inflation was 2.7%

In 2000, GDP was 4.1%, unemployment was 3.9%, and inflation was 3.4%

In 2001, GDP was 1.0%, unemployment was 5.7%, and inflation was 1.6%

So there was a round-turn in inflation from 1998 to 2001. In ’98 the Fed had cut the FF target to 4.75% in the wake of the LTCM blow-up. By March of 2000 (again, the Nasdaq top) it had been jacked to 6% in a series of 25 bp increments, and in May, the coup de grace 50bp hike to 6.5%. By the end of 2001 the Fed had slashed the target to 1.75%. Nasdaq had more than doubled from its Oct 1999 low of 2300 to reach 4816 in March ’00. In another year (March 2001) it was 1700.

And now, fittingly announced by the Pets mascot, we present to you, LMF Acquisition Opportunities!

From the Preliminary Prospectus, and no, I am not making this up (thanks HB for the link!):

LMF Acquisition Opportunities, Inc. is a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses, which we refer to as our initial business combination. While we may pursue an initial business combination target in any business, industry or geographical location, we intend to focus initially on transactions with companies and/or assets within the financial services industry, including potentially the financial technology (“FinTech”) sector, and related sectors. We have not selected any specific business combination target and we have not, nor has anyone on our behalf, initiated any substantive discussions, directly or indirectly, with any business combination target.

https://www.sec.gov/Archives/edgar/data/1831868/000156459021000649/lmao-s1.htm

That’s right. Yesterday’s news: dot-com. Today’s innovation: SPACs. No product. No plan. Brilliant!

“Our sponsor, LMFAO Sponsor, LLC, a Florida limited liability company, has agreed to purchase an aggregate of 4,598,000 warrants at a price of $1.00 per warrant…in a private placement that will close simultaneously with the closing of this offering.
We have applied to list our units on The Nasdaq Capital Market, or Nasdaq, under the symbol “LMAOU”

Is that ‘laughing my ass off’ WITH you, or AT you?

I’m sort of old school, in a Frank the Tank way, but I think that LMAOU, if it flies, though exceptionally well-timed to coincide with bitcoin in the fintech sphere, and brilliantly conceived as a marketing tool for the Robinhood crowd, is a sign that perhaps there is too much liquidity sloshing around.

In terms of liquidity, President-elect Biden vows to get the $2000 payments out, and has said his stimulus package will be in the “trillions of dollars” the details of which he will reveal on Thursday. Stocks are at all time highs. The dollar index has started the year at lows not seen since early 2018. Bitcoin has gone up 4x to $40k since October. And the treasury is set to auction $120 billion of debt this week: $58b 3s on Monday, $38b 10s on Tuesday and $24b 30s on Wednesday. With, as we like to say “more behind”. Now of course our friendly central bankers can help the market absorb that supply. However, long-end buyers are quite a bit less enthusiastic recently as can be seen by recent curve moves to new highs.

From Dec 31 to Friday, 2/10 has gone from 79.6 to 97.6, 17 bps. 5/30 from 128 to 138.5. And red/gold Eurodollar pack spread (2^nd year to 5^th year) from 72 to 94, or 22 bps. Refer back to data from thebalance above. Inflation went from 1.6% to 3.4% in two years. That was with the Fed hiking in an environment of positive real rates. Sure, the Fed has vowed to fund juicy positive carry for a couple of years, but what happens if little clues like Friday’s yoy Avg Hourly Earnings print of +5.1% and last week’s ISM MFG Prices Paid of 77.6 (high since the 2018 peak of 7.5) are not just one-offs, but are a sign that inflation is actually becoming entrenched?

The 5/30 treasury spread trades at the high of the year at 138.6, and the attached chart shows that print just matches the high of the Trump presidency. Just after the election, 5/30 traded 139.7 on November 10, 2016, as an expected surge in economic activity was expected due to tax cuts and loosened regulatory constraints. The Fed had the same expectation and began ‘normalizing’ with both rate hikes and balance sheet tapering. By July 2018, the curve signaled the Fed had gone too far as inversion occurred in the red/gold euro$ pack spread; it had peaked over 100 after the election and is 94 now. The $50 billion per month balance sheet tapering which started in October 2018 combined with the last Fed hike in December of that year was the final straw and SPX declined by a third in Q3 2018.

Now we have a federal government spending spree and a Fed which vows to accommodate it. Happy days. By the way, the high of this century thus far in 5/30 is just over 300 bps in November of 2010.

OTHER MARKET THOUGHTS/ TRADES

A lot was packed into the first week of 2021. Democrats won control of the government with a sweep of the Georgia Senate run-offs. The US Capitol was mobbed in the wake of a pro-Trump rally. Clarida gave a speech on the economy.

2020 was a year of mob mentality. It swept through major cities abetted by mayors and politicians, fueled by social media and mainstream news alike. Businesses and livelihoods were looted, burned and destroyed. Hopefully it culminated with last week’s episode abetted by Trump, but I doubt it.

It is the case of an unlawful mob, which in itself is a crime; a mob bent on mischief; a mob that has no rights. They are too dangerous. It is like a fire. One man may do something. Two will do a much more; three will do more than three times as much; a crowd will do something that no man ever dreamed of doing. The law recognizes it. It is the duty of every man–I don’t care who he is, to disperse a mob. It is the duty of the officers to disperse them. It was the duty of the inmates of the house, even though they had to kill somebody to do it. Now, gentlemen, I wouldn’t ask you to take the law on my statement. The Court will tell you the law. A mob is a criminal combination of itself. Their presence is enough. You need not wait until it spreads. It is there, and that is enough. There is no other law; there hasn’t been for years, and it is the law which will govern this case.

The excerpt above is from Clarence Darrow’s closing argument in defense of Henry Sweet in 1925. Nearly one hundred years ago. It’s a long piece. I’ve provided a link below.

In the markets, I believe there is also mob mentality at work, supported in part by the monetary authorities. Clarida’s speech on Friday made no mention of financial stability; he stuck to the two original mandates of employment and inflation, the latter in the context of the Fed’s new averaging framework. He said, “Although a little more than half of participants judged risks to be broadly balanced for economic activity, a similar number continued to see risks weighted to the downside for inflation.” I would not argue that curve measures currently warrant a Fed change, but things could easily reach the point where the Fed misses the signal to provide restraint, just as it missed the signals in Q3 2018 on the other side.

From late 2011 through 2019, the ten year yield stayed within a range of just over 300 bps to around 140; a low of 136 occurred in July 2016. That lower end of the range should now provide upside resistance. On a shorter timeframe, last week’s high just over 111 bps hit the upper channel which has been in place since August. I would expect a bit more pressure in the early part of the week before the auctions wrap up, and then a rally in the context of what has now become a bear market in the long end. Wednesday brings CPI with PPI on Friday. The move in both the ten year yield and the gold pack in Eurodollars (5^th year forward) are of about the same magnitude as the one which occurred June 2^nd to 5^th of last year as stocks were running and there was a blockbuster employment report. At that time tens jumped from 63.6 to 89.6 or 26 bps, and golds fell about 29 bps. Currently tens have gone from 91.4 on Jan 4, to 111.7 or 20.3 while EDM25 has fallen from 9911.5 to 9885 or 26.5.

	12/31/2020	12/31/2020	chg
UST 2Y	11.9	13.5	1.6
UST 5Y	35.8	48.2	12.4
UST 10Y	91.0	111.0	20.0	w/I 111.5
UST 30Y	164.0	186.8	22.8	w/I 187.2

GERM 2Y	-70.0	-70.1	-0.1
GERM 10Y	-56.9	-51.9	5.0
JPN 30Y	64.4	64.6	0.2
CHINA 10Y	314.6	314.9	0.3
EURO$ H1/H2	1.0	2.0	1.0
EURO$ H2/H3	7.5	15.0	7.5
EURO$ H3/H4	28.5	38.0	9.5

EUR	121.77	122.20	0.43
CRUDE (active)	48.52	52.24	3.72
SPX	3756.07	3824.68	68.61	1.8%
VIX	22.75	21.56	-1.19