Anthony Speciale Stock Market Analyst

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The Better Way to Trade SPACs to Beat the Market

Over the past few weeks, all eyes have been on the Jerome Powell, the Federal Reserve and its plans for monetary policy.

But one thing investors overlooked was the Financial Accounts of the United States report, which shows basically where all the money is in the United States. It also allows you to figure out exactly how much of U.S. household net worth is invested in the stock market.

Tracking this has been the most accurate predictor of 10-year forward returns and explains about 70% of all the returns in the stock market. But when you crunch the numbers, this report becomes a bit problematic.

What I see now is that over half of U.S. household wealth is in the stock market. And every time that happens, it’s been terrible for the forward return of stocks. The higher that number is, the lower the forward 10-year return of the stock market is likely to be.

And the current reading is the highest I’ve seen since the first quarter of 2000, right before the internet bubble burst. Over the next 10 years, nobody made any money in the broader stock market.

But it’s not just this indicator. Many others are approaching 1999 levels, and some are even above levels seen back then. So, there are a lot of warning signs out there right now.

How to Beat the Market with SPACs

However, there are a few ways that I believe can still provide great returns going forward. One of them is small community bank stocks, which I talk about all the time.

But the one I want to tell you about today is one of my favorites, and that is my Special Purpose Acquisition Company (SPAC) arbitrage strategy.

SPACs, or blank check companies, have been very hot over the last couple of years. And the way that SPACs are structured makes them perfect for exploiting arbitrage opportunities.

And because of the redemption feature, which I discuss in more detail in the video, this is about as close to a sure thing as you’re going to find on Wall Street. That sets up a couple of really great trades.

SPAC Arbitrage Trade #1

First, B. Riley Financial, Inc. (RILY) has a SPAC called the B. Riley Merger Corp., along with a couple others that have made substantial profits for their original IPO investors. They know what they’re doing.

So, with B. Riley Merger Corp., you get one-third of a warrant with each share, which are currently trading for about $9.70. That means you can buy the shares for $9.70, and if the deal comes out and it’s good, the stock is going to move higher, and you’ll get a chance to sell and lock in some profits.

But if the deal is terrible, we can simply kick back, redeem and collect a gain of about 3% plus a bit of extra interest. And when you do this enough, you end up with a strategy that doesn’t care about what the market is doing.

Your worst-case scenario on every trade is a small profit, with the potential for a much larger profit. And over time, this strategy can provide a very nice rate of return with no real stock market risk.

SPAC Arbitrage Trade #2

Now, the second trade involves buying the units for about $9.90, and for every 100 shares, you’d get 33 warrants. You could sell the shares if they rise in value. But the real goal here is to redeem the shares and hold onto the warrants.

Basically, the strategy is to buy the units for $9.90 and redeem them for $10, while holding onto the warrants that are good for five years. So, you’ve got a five-year option with an $11.25 strike price that management can execute to get the stock a lot higher.

Build a portfolio of those, and if only a third of these hit, you can make an enormous amount of money. There are literally hundreds of SPACs running around looking for deals and hundreds more registered at the SEC waiting to go public.

In other words, there will be plenty of opportunities for the next several years to engage in SPAC arbitrage trades. And in a world with lower future returns expected, this strategy can go a very long way.