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DWAC, TMTG and the Trump TRUTH Social network. Place your bets?

Written By | Jan 9, 2022
Trump, TMTG, DWAC, TRUTH Social, confused US investors, stock analystsoptions expiration

Cars coming out of loop track of Rougarou (roller coaster) at Cedar Point in Sandusky, Ohio. Image by Bobby Proffer, via Wikipedia entry on Cedar Point. Creative Commons 3.0 license.

WASHINGTON – Digital World Acquisition Corp. (NASDAQ: DWAC) — the special purpose acquisition company (SPAC) said to be on track to merge with Donald Trump’s new social media entity, TRUTH Social, via the latter’s umbrella company TMTG — has experienced a wild roller coaster ride of ups and downs. It’s been a bumpy but mostly positive journey for these shares ever since news of the purported deal first hit the tape last fall, news we first reported here. We also issued a follow-up report on the volatility of this issue here, as speculation in DWAC continued in periodic bursts.

What’s a SPAC, you ask?

Good question. SPACs are basically a huge bag of cash sitting in a bank vault waiting for a promising startup entity they can invest in via a merger agreement. That eventual merger agreement neatly avoids all the time- and money-wasting rigamarole involved with actually placing an official Initial Public Offering (IPO) in order to publicly list a brand new stock. That’s because the SPAC itself had done the IPO. Thus it’s already publicly traded when it finds a deal it likes. Adopting the new name of its acquisition is, to a great extent, just a formality.

Unfortunately, SPACs in general have experienced an uneven track record over the last couple of years. Many have taken a nose dive in price after the initial merger excitement died down. This occurs mainly because most newbie companies don’t actually make a profit. Sometimes for several years. (And sometimes never.)

The driving force behind DWAC speculation is that its owners have allegedly reached an agreement with the Trump Media and Technology Group (TMTG). That agreement involves the merger of both organizations, at which point DWAC would essentially morph into TMTG and immediately begin trading under that symbol.




That’s why, at this point, investors regard DWAC as a proxy for the eventual launch of TMTG. IF the deal actually happens. This appears likely, and financial journalists regularly declare it so. But, like everything else on Wall Street, things could fall through at the last minute. Should this occur, DWAC could seriously tank, losing plenty of $$$ for all but its earliest investors.

The TRUTH of the TMTG matter

The latest thrill ride in this SPAC stock’s shares got underway this past Thursday. That’s when Trump announced the official launch date for TRUTH. Or, more precisely, TRUTH Social, the trade name for his new social networking entity. Under the umbrella symbol of TMTG (Trump Media and Technology Group), TRUTH Social will purportedly merge with DWAC. Presumably, on or about February 21, TRUTH Social itself will go live. The date is deliberately significant. It’s Washington’s Birthday (aka “Presidents Day”), which, in 2022, is celebrated on February 21. A New Beginning for the American Republic? We’ll just have to wait and see.

Via my broker’s website, MT Newswires (no public link), I belatedly discovered that Trump’s unexpectedly specific launch date announcement put some pep in the step of DWAC shares, likely on speculation that the DWAC-TMTG final merger deal was near.

“Shares of Digital World Acquisition, a special-purpose acquisition company, rose almost 20% at market close on Thursday after a Reuters report said Trump Media & Technology Group plans to roll out Truth Social on Feb. 21. Truth Social indicated on the Apple app store it expects to go live next month, CNBC reported.”

But Friday trading action in DWAC essentially reversed much of Thursday’s dramatic rally, as MT Newswires also noted.

“Short interest in Digital World Acquisition Corp., which plans to merge with former President Donald Trump’s Trump Media & Technology Group, increased ahead of media reports that the Truth Social app will launch in February.

“Short interest increased to almost 11.3% of shares outstanding as of Jan. 6, according to data compiled by S&P Capital IQ. The figure was close to 8.4% as of Dec. 26.”

The long and the short of things

For those not familiar with Wall Street trading jargon, there’s a good deal of significance in this information. Here’s why.

When most investors think of investing in the stock market, they envision buying a promising stock at a low or reasonable price, and then riding the share price up as business presumably improves and profits increase. At which point, those investors plan to sell their shares at the higher price, pocketing the difference as their profit. And indeed, that’s more or less the normal way of doing business for the average investor.

However, a riskier way to make money is by taking the other side of the trade. That’s known as “going short,” “selling short” or “shorting Company X.” In this riskier, leveraged transaction (executed in a margin account), the investor actually borrows (anonymously) x number of shares in the target company from his or her broker. Then that investor actually sells those borrowed shares, temporarily taking in the cash from that transaction.



In this seemingly perverse (but legal) transaction, the investor’s research has persuaded him or her that this now “shorted” stock’s share price is soon going to plummet. And if our investor is right, and if the stock goes down significantly, the investor plans to use some of that cash parked from the sale of the borrowed stock to buy back those shares back at the lower price, pocketing the difference as profit. And, of course, returning those borrowed shares to the brokerage or account that lent those shares for the original transaction.

The good news, the bad news, and the headline risk for DWAC and TMTG

There are a lot more details I could provide here, but that’s all you need to know with regard to what’s happening with DWAC shares right now. Suffice it to say that savvy investors who aren’t too risk-averse can indeed make money on some stocks whether they go up OR down. It’s a matter of being in the right place at the right time. And doing the research to justify placing a risky bet.

That’s surely the way it’s gone for DWAC shares over the last few months. Still consisting of only a pile of cash looking for a presumably hot company in which to invest (i.e., TMTG), good news quickly drives these shares up and bad news slams them right back down. Yet at this point, it’s all just speculation and emotion. Good news and bad news. (Or rumors.) To see how all this works, check out our CDN article here.

In that article, we highlighted the negative volatility in DWAC that occurred when DWAC reported an (apparently) routine SEC inquiry on the Trump-DWAC tie-up (the “bad news”). At the same time, we also noted the surprise appointment of popular Conservative US Representative Devin Nunes (D-CA) to helm Trump’s new media company. (the “good news”). At that time, Nunes announced his imminent resignation from his Congressional seat as well.

Now, back to the present

Interestingly, the moment Trump’s TRUTH Social start date announcement came out this past week, DWAC shares took off like a cannon shot to the upside. But nearly as fast, short sellers slammed into the shares Friday morning, driving them right back down again. That echoes what happened late last year when the allegedly “bad news” of an SEC inquiry involving DWAC hit the wires.

Why the massive shorting? Perhaps the Deep Staters and Great Reset People are already trying to sabotage Trump’s fledgling social media company by hurting people currently investing in DWAC. Well-heeled hedge funds and short sellers can (and often do) gang up to short the dickens out of targeted shares. Substantial short-sales drive target company shares down hard. This, in turn, scares many inexperienced little-guy holders and speculators to bail out of the target stock. They fear, and with some cause, that they might lose their hard-earned investment dollars on their bet.

That’s why this whole DWAC SPAC spec might prove a bit dangerous for newbie investors and MAGA fans with a bit of extra cash they want to put to work. Personally, I made great money on DWAC’s first surge last fall. But after selling those shares, two subsequent attempts to catch another bottom and ride the shares back up again ended up in the red. Happily, I’m still ahead on the total series of trades I’ve made. But maybe not enough to write home about.

Otherwise occupied last Thursday, I missed the train on DWAC’s latest surge. But ironically, if I’d gotten on board late during that Thursday rally, my position would have been promptly clobbered hard on Friday. Lesson: Sometimes not playing at all can be the right investment strategy. That’s proved particularly true during this unfortunately irrational  era of Bidenomics.

Big shorts vs Meme Stock traders?

The flip side of the current, dicey DWAC / TMTG game might be this: Perhaps in some measure, many of those piling into DWAC Thursday were part of that ever present horde of Reddit “meme stock” investors. You know, the ones that swarmed out of the woodwork early in 2021 to buy a ton of widely shorted stocks like GameStop (NYSE: GME ) and AMC (NYSE: AMC). Subsequently, that huge and utterly unexpected attack blew out the short sellers on high volume. Because, of course, short sellers get their investment clocks cleaned when the shares they’ve shorting go UP. Big time. Reverse transaction, remember?

Fun fact: The theoretical loss for a short seller is – wait for it – infinity. If you buy a stock for $10 and hope that it goes up – known as taking a “long” position – but if that stock subsequently goes bankrupt and disappears, your maximum loss would occur when the stock price hits zero ($0). But that’s it. You can only lose what you invested and nothing more.

But if a seller shorts a stock at $10, and it goes up and up and up … and UP… the short seller is eventually forced to exit the position by buying those borrowed shares back at a much higher price and ponying up the difference (the loss) with more cash. Otherwise, the short seller will get wiped out. And that’s just what the “meme players” did to many of those big GME and AMC shorts who shorted those admittedly troubled stocks on a massive scale.

So is this same kind of back-and-forth game afoot with DWAC? Who knows? But we’re likely about to find out very soon.

Full Disclosure:

As noted earlier, I’ve traded in and out of DWAC for a couple of months now, winning big one time and losing some of that back on subsequent attempts. I’m out right now, but if the tea leaves seem promising at some point, I plan to get back in. But not with my life savings by any stretch.

Frankly, this intriguing investment situation remains a crap shoot right now. It all involves an investor’s ability to read the market’s mood at any given point. And, of course, parse those often politically loaded headlines on this particular SPAC spec.

DWAC  and TMTG: An intriguing investment possibility. But no guarantees…

In short, the message is this: I’m absolutely not making any kind of stock recommendation here. DWAC and (eventually) TMTG have created in intriguing and unique situation. Only canny traders are consistently making any money on the daily motions and emotions reflected in the price of DWAC shares. Further down the road, perhaps the merged company will tank like many other SPAC mergers have. No track record, no guarantees.

But that said, in these emotionally volatile fiscal and political times, one thing is certain. Whether you’re a moderate, a conservative, a liberal or a Marxist, anything involving Donald Trump and business will likely involve a continuing wild ride. Thus, playing this particular game is not for the faint of heart.

Big money is already queuing up at the DWAC window on both the short and the long side of this trade. And investors could make – and lose – serious money participating in this high stakes game. But at this point, it’s totally unclear if either the investors or the short sellers can win big. (Or lose big.) And that’s the TRUTH of the matter.

Meanwhile, stay sane. Another weird investing week begins tomorrow.

 

 

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17