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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. US markets rally to start the month behind Apple

2. Microsoft confirms it wants to acquire TikTok's US platform

3. China and Europe post strong July PMIs

4. SPACs are red hot right now

Markets Closed

Dow
26,664.40
+236.08 (+0.89%)

S&P
3,294.61
+23.49 (+0.72%)

Nasdaq
10,902.80
+157.52 (+1.47%)

VIX
24.48
+0.02 (+0.08%)

Bitcoin
$11,421.60
+$381.71 (+3.46%)

US 10-Yr Yield
0.563
+0.027 (+5.04%)

Photo courtesy GettyImages/Sergio Delle Vedove/EyeEm

Markets Today

U.S. markets roared into August like a lion, following shares of Apple higher as that company continues to swell after its 4-for-1 stock split announcement last week. The Nasdaq made a new record high as technology stocks resumed their leadership, with shares of Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT) all trading higher. Microsoft gained more than 5% after confirming reports that it is in talks to buy social video app TikTok in the U.S. The talks are happening even as President Trump threatens to ban TikTok because of security concerns over its parent company's ties to China.

August is supposed to be a rough month for stocks, except during election years. This is not a normal year, and this won't be a normal election season, so anything goes.

China and Europe reported exceptionally strong PMI numbers for July as their economies are gaining traction. Unemployment is still high in parts of Europe, but the economic rebound appears to be strong across most regions.

Chart courtesy IHS Markit

Headlines:

Tailored Brands, the owner of Men's Wearhouse and JoS. A. Bank, and department store Lord & Taylor filed for Chapter 11 bankruptcy protection over the weekend. The Canadian unit of Chico's FAS Inc. declared bankruptcy on July 31. The previous week, it was Ann Taylor and Lane Bryant parent Ascena Retail Group Inc. At least 25 major retailers have now filed for bankruptcy this year, with 10 of these coming over the last five weeks.
A group of U.S. corporate leaders led by Starbucks former CEO, Howard Schultz, sent a letter to lawmakers asking for additional, longer-term support for small businesses, including federally guaranteed loans that could potentially be turned into grants for those hardest-hit by the pandemic. "By Labor Day, we foresee a wave of permanent closures if the right steps are not taken soon," Schultz said in the letter to Congress signed by almost 100 leaders, including the chief executive officers of Walt Disney, Merck, Alphabet, and Walmart.
Marathon Petroleum is selling Speedway, its convenience-store and gas station chain, to Seven 1 Holdings, the Japanese owner of the 7-Eleven franchise, for $21 billion in cash. The fuel maker has been under pressure from activist investor Elliott Management to split into independent companies. The arrangement includes a 15-year fuel supply agreement for approximately 7.7 billion gallons per year, and MPC expects more "incremental opportunities over time" in the relationship.
Apple has acquired Mobeewave, a startup with technology that could transform iPhones into mobile payment terminals, according to Bloomberg. The tech giant spent around $100 million on the deal, and shares of Square (SQ) were 1.4% lower in pre-market trading before recovering.
HSBC, the largest bank in Europe, said H1 2020 pre-tax profit fell 65% YOY to $4.3 billion, worse than analysts predicted. Revenue was down 9% at $26.7 billion. Credit losses provisions increased by $5.7 billion to $6.9 billion from the same period last year and loan losses could reach $13 billion in 2020. Outlook for H2 depends on COVID-19, the vaccine, and geopolitical tensions in markets like Hong Kong and the U.K.
Shares in ADT spiked 56% after the company announced a partnership with Google. Google's Nest hardware will be combined with ADT's security, professional installation, and monitoring service. Google will invest $450 million in ADT for a 6.6% stake, and both companies will commit $150 million for co-marketing, product development, technology, and employee training.

chart courtesy LPL Financial

The Dog Days of Summer Are Here

Investors chose to ignore history to kick off the month of August, sending all major indexes higher on the first day of trading. But August and September have tended to be quite weak for stocks, with August ranking as the worst month of the year over the past decade, according to LPL Financial. That said, August has been quite strong during election years in the past, but after the best July for stocks since 2010, and the fastest recovery out of a bear market in history, this month may revert to the historical trend.

Investors and traders are sending mixed messages.

For instance, options traders are the most optimistic they've been since earlier this year, betting on markets to continue to rise through the year. On the other hand, individual investors like us are more cautious than we have been in awhile. Both are contrarian indicators in that markets usually tumble when options traders get too optimistic, and they usually rise when sentiment is overly bearish. As we've said before, a lot of the traditional investing axioms and patterns have been thrown out the window in 2020, so anything can happen.

chart courtesy Goldman Sachs

SPACs in the Spotlight

Special Purpose Acquisition Companies (SPACs) are the latest, hottest trend in high-end investing circles right now A 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. Also known as "blank check companies," SPACs have been around for decades. In recent years, they've gone mainstream, attracting big-name underwriters and investors, and raising a record amount of IPO money in 2019. In 2020, more than 50 SPACs have been formed in the U.S., as of the beginning of August, raising some $21.5 billion.

Legendary hedge fund manager Bill Ackman sponsored his own SPAC, Pershing Square Tontine Holdings, raising $4 billion in its offering on July 22, the most ever raised for one of these. According to Goldman Sachs, most of the SPACs launched this year have been centered around technology and Internet services, since that's where the money is.

Why Are SPACs so Hot?

Companies that went public through SPAC mergers in recent months include electric truck-maker Nikola (NKLA), DraftKings (DKNG), Virgin Galactic Holdings (SPCE), and dozens more.

SPACs offer companies a path to the public markets as an alternative to a traditional IPO. Companies can avoid the traditional and tedious road shows where they fly around the world presenting their financials and beautiful power points to deep-pocketed investors who may want to invest. It also cuts out traditional underwriters like investment banks, who charge massive fees to take a company public. But there are other features that more and more companies are finding attractive:

Forecasts and proceeds: In the traditional IPO process, issuers are prohibited from including any forward-looking guidance in their Form S-1 registration. As a result, prospective investors are required to evaluate the merits of investing in the company based on their own expectations. SPACs allow target companies to present forecasts, which give investors more visibility and more opportunities to acquire other companies with complicated business models.
No limits on capital raising: In a traditional IPO, the amount of new capital raised is limited, typically to 20%–25% of the value of a company. But in a SPAC transaction, no limit exists on potential proceeds. A SPAC can acquire as much or as little of a target company that it wants, giving it more flexibility.

Photo courtesy Lordstown Motors

The Latest Electric Truck SPAC

Right on cue, today we saw shares of DiamondPeak Holdings (DPHC), a SPAC, jump more than 16% after the company announced today that it will merge with electric vehicle company Lordstown Motors. Lordstown makes the Endurance electric truck, the latest entrant into the hottest market on the road. Given the enthusiasm shares of Nikola have received since it merged into a SPAC, this could be a SPAC to scope out.

More News:

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Canopy Growth Earnings: What to Look For

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(chart courtesy YCHARTS)

Shares of Varian Medical Systems are up by 22% after Siemens Healthineers agreed to buy the medical technology company for $16.4 billion. McKesson's stock price rose by 6.5% following Q1 profit and revenue results that beat estimates.

Shares of Carnival fell by 5% amid a delay of its AIDA Cruises from Germany, which were originally scheduled to return to service this Wednesday. Norwegian's stock price fell by over 4% after 41 people, including 36 crew members and five passengers, tested positive for COVID-19 while aboard one of its cruise ships.

Word of the Day

Lead Underwriter

A lead underwriter is an investment bank or other financial outfit that has the primary directive for organizing an initial public stock offering or a secondary offering for companies that are already publicly traded.

The lead underwriter will usually work with other investment banks to establish an underwriter syndicate and thereby create the initial sales force for the shares. These shares will then be sold to institutional and retail clients. The lead underwriter will assess the company financials and current market conditions to arrive at the initial value and quantity of shares to be sold. These shares carry a hefty sales commission (as much as 6% to 8%) for the underwriter syndicate, with the majority of shares being held by the lead underwriter.

Photo: TRS80.org

Today in History

Aug. 3, 1977:

Tandy Corp. introduced one of the earliest affordable personal computers, the TRS-80 (soon to be affectionately nicknamed the "Trash 80"). It has four (yes, four) kilobytes of memory, a black-and-white monitor, and uses floppy disks that truly flop when you shake them. It retailed for just $599.

http://www.trs-80.com/