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Exclusive: Goldman Sachs offers new way for investors to bet on SPACs – sources

By Jessica DiNapoli

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Exclusive: Goldman Sachs offers new way for investors to bet on SPACs - sources
© Reuters. FILE PHOTO: The Goldman Sachs company logo is seen in the company’s space on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., April 17, 2018. REUTERS/Brendan McDermid/File Photo

By Jessica DiNapoli

(Reuters) – Goldman Sachs Group Inc (NYSE:) has come up with a new offering that allows investors to bet on special purpose acquisition companies (SPACs), its latest attempt to capitalize on the dealmaking trend, people familiar with the matter said.

The product is structured as a two-year bond that pays interest and gives investors exposure to SPACs without owning them, the sources said. It could appeal to institutional investors who want regular income through a portfolio of many SPACs, the sources added.

One of the sources, however, said Goldman Sachs has so far only arranged a handful of these products, referred to as “SPAC-linked structured notes.”

Goldman does not charge a management fee for the offering. The bank makes money by providing investors financing to participate in the product and by keeping some of the returns on the SPAC stocks for itself, depending on how well they perform, the sources said.

Investors also receive a payout based on the SPAC stocks’ performance at the end of the two years, the sources said. If they are willing to take on more risk to juice their returns, they can also borrow from Goldman to add leverage to the offering, but have to pay the bank back for any losses, the sources said.

Goldman Sachs declined to comment on the details of the product.

The boom in the SPAC market, whose size has reached $137.4 billion last month from $13.6 billion two years ago, has already been a boon for Goldman Sachs’ investment banking business. The bank said in April that financing SPAC deals – though a small part of its overall business – helped boost revenue and that advising SPACs on acquisitions would be a “tailwind” for earnings in the future.

The new SPAC product is being offered by a desk in Goldman Sachs’ global markets division, which is the sales and trading arm of the bank, rather than investment banking, the sources said.

Investors are allowed to bet on the shares of SPACs where Goldman Sachs bankers had a deal role, the sources added. SPACs sponsored by Goldman Sachs are excluded.

Investors have some protection against losses. SPAC stocks can be redeemed for their initial public offering value when shareholders vote on their mergers, and investors can provide instructions to Goldman Sachs to carry out such redemptions, according to the sources.

‘DOCTOR SELLING DONUTS’

Mike Stegemoller, a banking and finance professor at Baylor University in Waco, Texas who has studied SPACs, said that Goldman Sachs’ role as both adviser and financier of SPAC deals and seller of this new product poses a conflict, even if different parts of the bank are involved.

This is because SPACs cannot complete their mergers with companies if too many investors redeem their shares, bleeding them dry on cash they need to pay for their deal. By offering redemptions of SPAC shares as a safety net for its investor clients, Goldman Sachs is relying on a practice that is a thorn in the side of some of its investment banking clients – SPACs and the companies that do deals with them.

“It’s like a doctor selling donuts in the office,” Stegemoller said.

To be sure, many investors already exercise their right to redeem their SPAC shares, and Goldman Sachs’ new product will not change that. Reuters could not establish whether Goldman Sachs has informed its SPAC clients about the new product and what their reaction would be.

Goldman declined to comment on the conflict.

Goldman Sachs’ new product has already irked some hedge fund managers who hoped they would not be competing for investors with a top Wall Street bank.

“If you’re an investment bank underwriting a SPAC IPO, and advising on a business combination, it can be perceived as effectively working against clients and potential clients if you are soliciting investors to redeem SPACs,” said Julian Klymochko, founder and CEO at Accelerate Financial Technologies Inc, which manages an exchange traded fund that invests in SPACs.

Stock Markets

Morgan Stanley: bear market rally to continue

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One of Wall Street’s best-known bears, Michael Wilson, thinks the S&P 500 will rise another 7% before turning down, so the bear market rally will continue for now, writes Market Watch.

After the Dow Jones, S&P 500 and Nasdaq Composite joined their strongest weekly gains since at least May last Friday, Wilson, who is chief strategist and head of U.S. equity markets at Morgan Stanley (NYSE:MS), told clients that there could be another 5% to 7% before the downward trajectory of U.S. stocks resumes during the latest bear market recovery.

Wilson has held a bearish view of the stock market for about 2 years and correctly predicted a sell-off this year.

Wilson explained in a research note sent out to clients on Monday that a pullback in the 38-50% drop in the stock market this year “would not seem like something unnatural, not consistent with the previous bear market rally.”

While growth concerns have triggered a sell-off in commodities and lowered inflation expectations, the fact that the U.S. economy is already slowing and heading toward recession means that any market rally is likely to be short-lived, and U.S. stocks are likely to eventually fall.

Wilson mentioned in the note that the bear market is not over yet, although it may appear otherwise in the next few weeks as the market takes the rate cut as a sign that the Fed can still manage a “soft landing” and prevent a meaningful revision to earnings forecasts.

U.S. stocks rose last week as investors now hope the slowing economy and falling commodity prices may inspire the Fed to raise interest rates less sharply. Federal funds futures, a derivative used by investors to bet on the pace of the Fed’s monetary policy changes, estimate with a high probability that the Fed will be forced to start cutting interest rates again as soon as next summer.

They also consider the lower peak in the federal funds rate: it will peak around 3.5% at the end of 2022 instead of 3.75% just a couple of weeks ago. Wilson also pointed out the drop in Treasury yields: the 10-year Treasury bond yield went from 3.230% to a low of 3.07% on Friday before rebonding again on Monday.

Wilson expects the S&P 500 index to fall to around 3,400 points if the U.S. Federal Reserve manages to get a “soft landing” for the economy — which Fed Chairman Jerome Powell said last week would be “a very difficult thing to do.”

Wilson expects that if the U.S. economy plunges into recession, the S&P 500 index will fall to around 3,000 points. In any case, Wilson believes that U.S. stocks are still highly valued because the risk premium — that is, the measure of compensation that investors receive for the extra risk of owning stocks instead of bonds — remains about 300 basis points higher than the 10-year Treasury bond yield, which is considered a “risk-free rate.” 



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Stock Markets

Easing chip shortages to help Volkswagen in H2 – CEO

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© Reuters. FILE PHOTO: Volkswagen logo is pictured at the 2022 New York International Auto Show, in Manhattan, New York City, U.S., April 13, 2022. REUTERS/Brendan McDermid/File Photo

BERLIN (Reuters) – Volkswagen (ETR:VOWG_p) sees a strong second half of 2022 and expects progress in catching up with rival Tesla (NASDAQ:TSLA) as easing chip shortages start to offset supply chain bottlenecks and rising costs, the carmaker’s CEO said on Tuesday.

“We are earning more than ever,” Chief Executive Herbert Diess said at a works meeting, adding Volkswagen is ramping up electric vehicle volumes in its biggest markets in Germany and China thanks to easing semiconductor shortages.

This should allow the carmaker to narrow the Volkswagen-Tesla gap this year and meet its goal of becoming market leader by 2025 if it seizes the moment while the U.S. electric car maker burns cash on large investments, the CEO said.

“Elon (Musk) has to ramp up two highly complex factories in Austin and Gruenheide at the same time – as well as expand production in Shanghai. That’s going to take strength out of him,” Diess said.

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Stock Markets

Reliance Chairman Mukesh Ambani steps down as director of telecom arm

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© Reuters. FILE PHOTO: Mukesh Ambani, Chairman and Managing Director of Reliance Industries, arrives to address the company’s annual general meeting in Mumbai, India July 5, 2018. REUTERS/Francis Mascarenhas

BENGALURU (Reuters) – Reliance Industries Chairman Mukesh Ambani has stepped down as director of Reliance Jio Infocomm Ltd, the conglomerate’s telecom arm said on Tuesday.

Reliance Jio said https://refini.tv/3Nrs773 it has appointed Mukesh’s son and non-executive director Akash Ambani as the chairman of its board. Akash has been involved with the telecom unit since its launch in late 2016, where he started as a director.

India’s telecoms sector had been upended after the entry of Jio, which triggered a price war that forced some rivals out of the market and turned profits into losses.

Jio, which started out offering mobile teleservices, has been aggressively investing in services like internet broadband and forging ties with handset makers to launch low-cost smartphones and providing 5G services.

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