Category Archives: IPOs

Is Trump Media proof of the Greater Fool theory?

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Really, it’s a wonder investors have fallen for this falling outfit

Source: Google

A few decades ago, I wrote about scamsters active in the Denver penny stock market. This was a market in which hustlers such as the folks at Blinder, Robinson (known as “Blind ‘em and Rob ‘em”) would take public companies that made big promises but lacked assets, business plans, etc. The stocks would come out at $1 or so per share, rise as the firm’s salespeople hawked them, and then plummet as the lack of intrinsic value became apparent.

The underwriters and those in early made money, while suckers paid the tab by buying the shares. Sometimes, these penny deals involved shell companies, which had no assets or business, but were already publicly traded. Thus, they were ideal vehicles for other outfits wanting to go public — especially for merger candidates that didn’t want to tell much to investors at first. By contrast, legitimate companies, making initial public offerings, had to provide lots of information about themselves in elaborate pre-offering documents.

I’m reminded of this by Donald J. Trump’s Trump Media & Technology Group, which went public through a shell company (now dressed up as a “special purpose acquisition company”). By merging with a SPAC, Trump Media avoided having to make uncomfortable disclosures before going public that might have given investors pause.

Source: TMTG

For instance, Trump Media didn’t have to reveal that, as The Wall Street Journal reported, “it nearly ran out of cash last year and would have struggled to survive without the recent deal that took it public.” That disclosure, along with an auditor’s note saying the outfit’s “operating losses raise substantial doubt about its ability to continue as a going concern” came out only after Trump Media started trading. The company lost more than $58 million last year, if anyone is counting.

Would smart investors have bought in anyway? Well, some traders would have – and did – as they played the rise and (mostly) fall of the stock. But would those who want to buy into a company with real business prospects have done so? Or would only devotees of Trump buy in, thinking they were getting a stake in a brilliant businessman’s newest venture? It has to pay off since the golden boy is running it, right?

Well, the fall to earth for Trump Media began, fittingly, a couple days before April Fool’s Day. The stock, which had opened at $70.74 on March 26 and added a bit to hit $79.38, started a deep slide from $69.70 on March 28 to $51.77 by April 2. That means that folks who bought at the opening have now lost nearly 27 percent of their investment.

Does this strike anyone as the Greater Fool theory in operation? Does it remind anyone of the penny stock world? Indeed, is it possible that Trump Media & Technology Group may someday fall to nearly nothing, as Trump’s casino stocks did a couple decades ago, when he ran those businesses into the ground?

Source: The Wall Street Journal

A lot of people lost money when Trump’s casinos failed, and they weren’t just investors. Folks who had done work for Trump or were otherwise owed money by him lost big. Cushioned by his wealth – money that had come by way of his rich father and that he had siphoned off the gaming halls — Trump managed to float above the disaster.

All this was reported, and folks who followed Trump’s career had long known about his failures. But, even as his casinos were being managed by others for the benefit of his lenders, the broad public didn’t see him as anything but golden, a god whose name adorned their still-glittering Atlantic City gaming palaces. I saw this firsthand in reporting out a story for BusinessWeek when I spent time with Trump, including a tour of one of his bankrupt casinos where gamblers sought to touch him in hopes his good fortune would rub off on them.

Even then, long before The Apprentice put a glossy sheen on this much-tarnished mogul, the gulf between the real Trump and the Trump his devotees see was apparent.

Of course, before his newest business whimsy craters, Donald J. Trump will likely cash out of Trump Media. His 57% stake in the company is worth a lot less than it was on opening day, but it’s still worth a bundle. And in time he could sell it off in bits and pieces as he needs cash, perhaps to pay off one $454 million civil judgment levied against him or another one, for $83.3 million – both of which he will delay paying as he appeals, of course.

When this is all reported, do Trumpies just dismiss it as the work of the “fake news” media? Do they shrug off such reporting as simply the product of people with anti-Trump agendas? Do they look on the justice system’s operations as nothing but persecution of their hero? No doubt, some do, and they may even just avoid reading such accounts. There are none so blind as true believers, after all.

Reporting accurately on Trump raises major problems for journalists, though. For one, they risk losing a good part of their audiences.

Chris Quinn, source: Advance Ohio

The editor of Cleveland’s Plain Dealer recently addressed the challenge in a note to readers. “The truth is that Donald Trump undermined faith in our elections in his false bid to retain the presidency,” editor Chris Quinn wrote. “He sparked an insurrection intended to overthrow our government and keep himself in power. No president in our history has done worse. This is not subjective. We all saw it.”

As reported by HuffPost, Quinn expressed sympathy with Trump fans who were frustrated that their local news source does not “recognize what they see in [Trump].” But he suggested that won’t stop the coverage.

“The facts involving Trump are crystal clear, and as news people, we cannot pretend otherwise, as unpopular as that might be with a segment of our readers,” Quinn wrote. “There aren’t two sides to facts. People who say the earth is flat don’t get space on our platforms. If that offends them, so be it.”

It’s possible that some Trump devotees will chalk up the frothy debut of Trump Media and its likely slide over time to what they see as their leader’s business brilliance. After all, he’ll do well, probably. As Trump Media slides, he will be in a position to ride the stock down quite profitably; it’s all found money for him, much as was the case with penny stock insiders.

As for his investors? Perhaps they will have the satisfaction of knowing they helped their boy out in a pinch. They could consider their investment a donation, though the IRS might not agree. They could tuck their investment records into one of the Bibles Trump recently sold.

Of course, the smartest investors may be those who have avoided the stock but, instead, watch it slide from the sidelines. Perhaps they could take bets on how quickly the shares fall and on when Trump Media will crater altogether.

Labor Day: Celebrate Wall Street!

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Desperate for daylight at the end of a seemingly endless tunnel, investors took heart from the latest jobs report. The Dow climbed nearly 128 points on the Sept. 3 news that hiring seems to be getting back in style, at least in parts of the economy. But banks, hedge funds and other financial players on and off Wall Street seem not to have gotten the word. They’re still stumbling in the dark when it comes to adding staff.

Even while scattered reports of modest additions pop up in the daily press, there’s little evidence that the sun will shine soon on the financial sector. Nationally, the number of people working in financial services barely budged in August, according to the Bureau of Labor Statistics. Counting both finance and insurance, the tally has skittered to some 5.64 million people, the lowest monthly count since February 1999 and a sorry shadow of the nearly 6.18 million who toiled in the sector in the go-go days of late 2006.

What’s the problem? Blame economic sluggishness, Washington demagoguery and, most of all, rampant uncertainty. Financiers, like lots of other folks, don’t know whether a much-trumpeted double-dip recession is in the offing. They still don’t know what exactly the folks in D.C. will loose on them in the way of financial reform. And, more immediately, they don’t know whether those customers they’ve been currying favor with for months will ever get off the dime.

Just look at the paralysis in the new-issues market. Over 170 companies have filed for initial public offerings this year, the most since 2007. But now fears abound that the lackluster markets could keep many of those IPOs in the wings. Worse, while aged titans such as GM garner the attention, experts quoted by USA Today warn that lots of innovative little guys seem to staying on the sidelines. It’s those up-and-comers that have driven past market rebounds and created the fee-generating business Wall Street counts on.

The FUD factor seems to be keeping plenty of would-be bankers out of pinstripes, at least for the time being. Fear, uncertainty and doubt have long been enshrined on Wall Street, of course, though folks did seem to forget that in the first half of the opening decade of the 2000s. The last half of the decade, of course, restored FUD in all its ugly glory, cutting short plenty of budding investment-banking careers.

Sadly, the bloodletting has not stopped. Look at New York alone. A modest number of private-sector jobs (29,000) helped keep the statewide unemployment rate at 8.2% in July, the latest period measured by the New York State Department of Labor. But the job count in financial activities is down 7,200 from July 2009.

Eventually, the numbers in lower Manhattan and nationally will turn around. Finance is too important to keep shrinking. Companies will need capital and they’ll have to look to Wall Street to rustle it up. Investors, too, will rediscover value in those beaten-down stocks. It may be, in fact, that the market just got ahead of itself and needed the bracing slap it got in recent months.

But that doesn’t mean the capital markets couldn’t use some help from Washington. Certainly, money won’t be on the table – plenty was already spent and demagogues have made it all but impossible for more stimulus money to go to Wall Street, at least directly. What’s more, tax relief for big-money investors seems hardly likely.

What Washington could do, however, is clarify the rules. Chip away at that uncertainty by making it clear what sorts of risk-taking will be tolerated and what won’t be. Make sure that big banks have the ability to take prudent risks – certainly not the foolhardy ones that pushed a few erstwhile titans over the cliff a few years ago, but smart and necessary gambles, nonetheless. If animal spirits are suppressed, no real recovery is possible. If bankers fear more Congressional perp walks, how can they back the next Apple or Microsoft?

And another thing Washington could do is put an end to Wall Street-bashing. The next round of elections, sadly, will likely spawn a fresh wave of attacks on fatcats, bankers and assorted financial miscreants. The targets are all too easy to hit and pillorying them plays well in the hard-pressed corners of America where finance is a four-letter word. Look for the rhetoric to ratchet up.

Today’s financiers, of course, can shake off the attacks – so long as there’s no legislation attached to them. But if the best and brightest of the post-recession generation listen to the Populist set and shun the vilified sector, who will fill those jobs eventually? If we are to keep yet another national industrial champion – Wall Street — from losing out to foreign rivals, our most talented hands will be needed. Our leaders ought to be making them feel good about it, not ashamed. And our bankers ought to be taking a few more chances and hiring them.