ETF Edge - SPAC Slowdown & Rising Inflation Concerns

Episode Date: April 26, 2021

CNBC'S Leslie Picker spoke with Mark Yusko, CEO of Morgan Creek Capital Management, Steve Grasso from Stuart Frankel, and Tom Lydon, CEO of ETF Trends. They discussed how sustainable the rally we’ve seen in reopening-sensitive groups like travel, leisure, and other cyclical plays and are investors getting too complacent? Plus, we’ll get more on the rising inflation fear factor and why the SPAC trade is fizzling out this month. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis and breaking down what it all means for investors. I'm Leslie Picker filling in for Bob Fassani. Today, we're drilling into the reopening story. How sustainable is the rally we've seen in reopening sensitive groups? like travel, leisure, and other cyclical plays, and are investors getting too complacent? Plus, we'll get more on the rising inflation fear factor than why the SPAC trade is fizzling out this month.

Here's my conversation with Mark Yusco, CEO of Morgan Creek Capital Management, Steve Grasso from Stuart Frankel and Tom Leiden, CEO of ETF Trends. So Steve, let's start with you. What do you make of all of these reopening plays right now? So, Leslie, I think there's still gas left in the tank for these reopening plays. We had, so reopening plays are basically in the value bucket. So when rates started to creep higher, that favors the value bucket and you wind up getting a sell growth in the face of higher rates because everyone in the financial industry

knows the knee-jerk reaction, rates move higher, you sell growth, you sell technology. But when you look at what's still left in the tank, we're looking at GDP of six or seven percent. That's virtually unheard of. We haven't seen those numbers and God knows how long. So who's going to benefit? Hotels, airlines, restaurants. That's how you started to leave there. Marriott Vacation Club. People want to go away on vacation, but they want to be in a time share, more of a condo set up versus anything else. But hotels will get the benefit. Airlines will get the benefit. Restaurants will get the benefit. And the other side to this is that you still have checks going out.

to individuals and we don't know when those checks will stop. So it's hard to call on end to the reopening trade when the money keeps flowing. But the money may not have flown to the bottom lines of these companies. Do you think, Steve, just to kind of follow up on that, that it's already priced into the market, that the market is anticipating that it will ultimately flow down to the bottom lines, since the market is supposed to be, at least, forward-looking? So absolutely, and I agree with you. In any other world, any other environment, I would have.

degree that 70%, 80% could be priced in. But we're talking about a pandemic. We're talking about the last time we've seen this was 100 years ago. So there's no real way, Leslie, to gauge past performance is indicative of future performance. So I think the mere fact that we have no clue what government's response will be, how long, how overextended it will be, and where rates will ultimately go, it will push people into risk assets. They'll go into risk. risk less assets. And when you just look at Peloton or you look at a Zoom that are off over 40% from their recent highs. And when you look at a planet fitness that's up 72% from August lows, there's still more in the tank. Mark, do you agree? Do you think the whole reopening trade

is already priced into the market at the moment? I definitely don't think it's all priced in the market. I think we've had a very nice recovery in airline stocks, hotels, restaurants, off the bottom, but I totally agree that there's a lot more to go. I wouldn't get too excited about this one big number we're going to see in GDP. That's just the law of small numbers. We're coming off the greatest drop in history, so the bounce looks really high. I think what has to happen is true recovery, right? People have to get back to normal. And I think that has yet to happen. I think it is happening. And so I think the real key here is the way advisor shares goes about it is active management.

We're a big believer that we are on the cusp of a pretty significant transition over the next decade toward active management, away from passive, away from indexing. And that's really going to favor these types of ETFs. Well, what you just said is that are you saying that basically there should be more active management with certain more targeted either? because when people hear ETS, they think of passive management. So you're saying that as an active manager, you should be pursuing more of these thematic, targeted ETFs in your investing approach. Yeah, look, I think the days of cap weighting being in charge are over. I think it's going to go back to the days of, again, active management winning, more of an equal weighted approach, more of a value-biased approach. And look, passive isn't passive, right? It's just

slow active. You know, over 30 years, 85% of the names in the S&P turn over. It's just that cap weighting is a momentum strategy. And momentum works when there's lots of liquidity. I think that liquidity is going to start to slow. I think we're actually going to talk about a topic here, inflation, which is going to cause some stress in the growth part of the market, the cap-weighted part of the market. That's actually going to be another tailwind to these types of companies, which will have some pricing power for the first time in many years. Yeah, I'm sure it would be a welcome aspect for them. Maybe not some others, namely the consumer.

But Tom, how do you see investors using some of these reopening ETFs as a tool for hedging? Is it used in the same way as more of the broad-based ETFs might be used? Yeah, well, first, I couldn't agree more with Mark. You know, coming out of the financial crisis, if you bought the S&P 500, it would have been really tough to beat it.

But then as we got into COVID, we realized that there were opportunities in certain themes or certain asset classes. And back to what Steve was saying, value for the first time and a long time is seeing some love. So if you are opportunistic, and it doesn't mean that you have to pick the individual constituents within an ETF,

but if you can actually pick certain themes or certain asset classes, that tend to be maybe trending in the right direction or unloved in the past. I mean, for example, when we're seeing the GDP numbers come out, a lot of that is going to be based on the backs of small companies. 65% of GDP is on the backs of small companies. That they are nimble. They can turn very, very quickly.

And they also have pricing advantages where everybody's got this desire to get out there, spend their stimulus checks, they don't have to be really tight on their pricing. They can actually put a little bit of leeway in there, which can lead to greater profitability. So I think what these guys are saying is what's happened in the past, especially as far as passive is concerned, worked really, really well. But if you're opportunistic in certain themes or certain asset classes in this opening trade, you can really do much better. Yeah. And to Steve's point, you know, past performance, not necessarily indicative of future performance. Keeping in line with the reopening story, commodity prices have surged as demand for everything from oil and lumber to soybeans,

sugar and even rubber is ramping up big time. Tom, sticking with you, how big of a red flag is inflation right now? We are surveying advisors every week. And since last fall, they were really concerned about inflation, especially as we start to see rates creep up a bit. But home prices, food prices, gas prices, commodity prices, right through the whole landscape, we're starting to see increases there, which are fairly concerning. And this is the first time in not 10 years, but almost 20 years, where we've started to see these types of spikes. So there's a couple of ETFs out there I wanted to bring to the surface. One in particular was the direction awesome. this broad commodity strategy.

And when you talk about active management, what they do is they break down 12 different commodities that basically use them on a trend following technique where those that are above their trend lines, they buy those that are below their trend lines recently, like gold and natural gas that has not been keeping up with other commodities,

actually does pretty well. So the ticker there is COM. And then the biggest diversified commodity ETS is by Invesco, PDB, that if you just want a basket of commodities futures and you don't have to worry about it, that's something to consider. Both don't have the hassle of K-1s, which has been a concern over time with commodity-based ETF strategies. Fascinating. Steve, what's the inflation prospect look like to you from the standpoint of growth versus value? We talked about that a little bit

with regard to the reopening trade. But what about with regard to inflation? So when you look at the 10-year, everyone got spooked, the growth sector got spooked because we spiked to about 1.75 in the 10-year. And then it leveled off. I think, Leslie, we're almost in a Goldilocks environment. I know that everyone is looking for rates to spike higher. And maybe they will eventually. But you have Chair Powell sitting on rates. You have the 10-year just sort of sitting out there in this. sweet spot where growth and value can actually perform. Obviously in the commodities that you're talking about lumber, just the chart looks incredibly bullish. That has to give it up sometime soon, but it's not hurt the builders. So far we've seen D.R. Horton up 35 percent, 45 percent year-to-date. Lenar up 35 percent,

Pulte, up 25 percent. So when I'm looking at my value basket, I look at globally represented value names, not just domestic. I do think that the home builders will move sideways to lower because they are so domestic facing. Mark, I read in the producer's notes that you believe the saying sell in May and go away might actually apply to 2021. We are on the cusp of May. I think it's about next week. Why do you believe that? What are some of the warning signals out there that make you think that it could be a good idea to take some money off the table? these days? Yeah, look, we had just an unbelievable Q1 in just about everything that could be priced. Lumber prices, home prices. Home prices went up quarter over quarter, the highest in the history of

the index, 18% in one quarter. So we've gotten over a bullion. Oil prices are up 100% year over a year. Everything went up a lot. Copper prices are exploding. And I think, All of that's going to come through inflation here in Q2. I think the inflation numbers are going to spook people a lot. And I think, you know, if you think about the reason selling May and go away exists is if you hold from May till October, you usually lose a little bit of money. You make all your money in a normal year on the tail ends on the other sides. And I think that spike in inflation, a spooking, again, a jump back in interest rates

are going to get people to sell off the high-growth stocks. And then on top of it, we've got the threat of higher capital gains taxes. That'll exacerbate the problem. So I can see a big rotation, growth to value, and there will be places to hide. But generally speaking, I think the markets will be pretty volatile through the summer and into the fall. And you're just better off to raise some cash, kind of sit it out, and then buy some things on sale in the fall. Notoriously, a period of lower liquidity as well. well as a lot of people decide to check out in August and other time periods to go on vacation.

So it would make sense that we could see some additional volatility over the summer. Speaking of volatility, the SPAC attack was all the rage earlier this year with a record 109 new pre-merger blank check deals in March alone. But with four days left in April, we've only seen about 10 SPAC deals this month, perhaps as a result of tightening SEC regulations and cooling investor interest for speculative assets overall. So is the SPAC spigot drying up? It clearly looks like it from that chart right there. But let's ask Mark, who just launched a SPAC ETF of his own at the start of this year. Are you still seeing, Mark, the same amount of interest as you did, you know, when you first

launched? Yeah, certainly not seeing the same amount of interest, Leslie. But I think that's misplaced. And since this is a long-term trend, you know, the SPAC merger, we believe, will become the preferred method for high-growth, innovative companies, or what we call the companies of the future to go public. That trend isn't going to go back in the bottle. Yes, first quarter is always a big quarter for new IPOs and new issuance. Not surprising it would see a pullback. And then there was this rumors of the clampdown on the way you treat warrants spooking some people. So I do think it's normal and natural to have a little lull after the just very first. frenetic pace of Q1. But for us, SPACs are the right way for the individual investor to get

democratized access to late-stage venture. Companies used to stay private much longer. All that wealth was going to accredited investors and qualified purchasers, not to the average investor. We really like the SPAC structure that allows the average investor to participate in those later-stage venture rounds. Steve, I hear you have some strong feelings about Spacks right now. Care to elaborate? Yeah, so I couldn't agree more with Mark's last couple of thoughts there. This is the first time the average investor gets to get in where the institutional or the inside investors get in. So around that $10 price range. Look at the IPO market, Leslie. The individual investor gets hit over the head with the IPO market.

They come out with an issued price. On the day it starts trading, it always opens up 20, 30, 40, 50% higher. The investor, the individual investor, buys into that elevated price. And then what happens on that first day, it'll reach the highs, comes in, it's still above the issuance price. The retail investor is underwater. All the insiders have a huge profitable day. The retail investor is left out in the cold, sometimes for years until he makes his money, back with the SPAC, you get in at $10, either vote for the deal or don't vote for the deal,

and you get to be on equal footing and get inside those investor rounds where you're in any other place in the market, the retail investor can't get in there. Regulation, definitely a headwind, but I think we should all realize that SPACs are, you can regulate them a little bit with their forward guidance looks, but other than that, they are the best vehicle for a retail investor. I hear you on that front, but I'm going to push back just a little bit because there is this part of the SPAC market that's become increasingly popular. That is the pipe, which is private investment in public equity. It oftentimes comes as these deals get consummated as they get signed and announced in the market. And what you have is a very small group of institutional investors that get to invest in the pipe at the IPO price,

even though oftentimes the publicly traded shares are above them. At least that's how it had been previously in the first quarter. So you are seeing certain discounts made for institutional investors in not the same way as you would in IPO, but of course they are finding a way to capitalize. Additionally, there was a story in the Wall Street Journal over the weekend about how SPAC sponsors are able to still get compensated very handsomely despite what the actual returns for SPACs are.

So, you know, are there certain warning signs that retail investors should be aware of when it comes to these SPACs that, you know, may not be as evident on the surface of the vehicle themselves? So I guess the issue that I deal with is you have to do your own due diligence no matter what investment vehicle you're using. I would always say that if you're going to buy a SPAC, you go for the management team right off the bat that's going to find the best companies. That's rule number one. Rule number two, if you don't like the company that they target, you could always sell that spec. So you have to make sure, is the company profitable? Will they be profitable one day?

Do you agree with their strategy, their business strategy, their management teams? So it's no different than anything else. But having said when you start talking about the pipe and or the management team, there always has to be a cost of financing. Look at the traditional IPO prices. process. Those are magnified 10x, 20x, 30x as far as the fee structure that we're talking about now. SPACs are the most streamlined. Can things do better the whole going public process? Can that do better? Of course. What SPACs has streamlined it the most efficient way in this whole process of going public.

Mark, did you want to add anything there? Yeah, I just wanted to push back on the pushback in that the fact that a pipe investor gets a good deal doesn't take the good deal. Doesn't take the good deal. away from the initial investors. Steve said the great thing about a SPAC is you get to, as an individual investor, participate for the first time in the IPO price rather than this inflated price of the traditional IPO, where if you're not a fat cat client of the underwriter, you don't get IPO shares. The second part of that is the sponsors have to put money up and it has to be locked up for a year. It's risk capital. It's venture. your capital. If you don't do a deal, you lose it all. If you do a deal, you don't get to sell

at the IPO like a traditional IPO. So look, incumbents spread a lot of fun, fear, uncertainty, and doubt, no matter what the disruptive force is, whether it's Bitcoin and blockchain, or whether it's SPACs. The incumbents, the banks and the underwriters, don't like the competition. As J.P. Morgan said, I like a little competition. And they will spread this misinformation. And I think it's great that we have a chance like this to talk about some facts as opposed to the FUD. The FUD. Tom, what do you say? Are SPACs the kind of vehicle that investors should pursue through an ETF? Should they be buying the individual shares and or warrants when these vehicles do go public at the $10 price? Well, first of all, Leslie, you know, coming back on what Mark was saying in the FUD,

I wrote that down. We need more education for retail investors for sure. And people have to understand SPACs aren't an asset class. They're a form of liquidity. So a lot of people are getting caught up in the hype. Yes, there's a way of diversifying with ETFs. And Mark's crew does a great job talking about active management. That's what they're all about. So they're going through not only who's bringing that SPAC to market, what they've done in the past, but also pre-pipe and post-pipe opportunities. So they're digging in a little bit deeper to the constituents that are in that ETF. If you want to a bigger position of all are the biggest spacks that are coming to market to find the next generation spec, which is SPAK, has 180 spACs in there, not necessarily as critical as far as what's in the index there, but something to think about. And then finally, Tuttle tactical management can actually go short some SPACs in their ETF, SPCX, so something to think about. But I would say, Mark is right. You need active management in the SPAC area. And this is an area for the average investor who probably doesn't have the skills of the capabilities to dig deep into the team

and also what might be on their radar as far as acquisitions. Excellent. Well, that does it for this week's ETF Edge. Maybe we could change the name temporarily to SPAC Edge because that was a really great conversation. I'm Leslie Picker. My thank you, my deepest thanks to Mark, Steve and Tom for joining us today. And we'll see you next Monday. Same time, same place. Bob Pisani, though. Have a good week. Invesco QQQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at investco.com slash QQ. Investco Distributors, Inc.