‘I picked a hell of a day to quit drinking’
Russell Casse in Independence Day
Today we look at another institution that has been zombified by the feds — the stock market.
The stock market is supposed to allow investors to exchange shares in profit-making, wealth-increasing, goods and services-producing businesses.
Nobody ever knows what any share is worth. So the market ‘discovers’ the price…minute by minute.
This price may be based on a single, most recent trade, but it sets the current value of all the similar shares outstanding. And it changes as new information comes forward.
In the US, prices are quoted in dollars. And the Federal Reserve has been tampering with the dollar’s value for many years. In the 12 months starting at the beginning of March 2020, it inflated the base supply of dollars (the Fed’s balance sheet) by 78% — with most of it going directly into the asset markets.
Even a lot of the stimmy cheque money has gone into the stock market. In a poll by Deutsche Bank, for example, at least half the respondents said they planned to put some of their stimmy money into stocks.
This leads — naturally — to price inflation in the stock market…which leads, naturally, to investors thinking their stocks are more valuable…which leads to a very unnatural situation…
…as both investors and Mr Market himself begin to act a little funny…reacting to the rising prices, rather than actually discovering what individual stocks are worth.
We did not especially enjoy writing the above. It is a textbook-like description of a bubble. It sounds dull.
But bubbles are like wars — when normal, civilised life is suspended.
And today, the rational dollars-and-cents stock market has become a mad, mad, mad, mad war of the worlds, with fake money…fake interest rates…and fake prices…all guided by a delusional bunch of jackass generals at the Fed.
And this week, it was AMC Entertainment’s (AMC) turn to go berserk. On Wednesday, the price of the stock was twice what it had been on Tuesday. What happened?
AMC is a dying business…in a decrepit industry.
It has a chain of movie theatres. Even before the COVID-19 panic, it was in decline. And for many years, it’s been borrowing money to buy other theatres.
You have to wonder about the strategy.
Manufacturing horse-watering troughs at the beginning of the 20th century was a challenging business too, the new automobiles didn’t stop to take a drink. And gaining market share was not necessarily the best way to deal with it.
In 2021, buying more empty theatres may not be such a good strategy either. It’s not theatres that AMC lacks, it’s customers.
Big home screens are cheaper than they used to be. And the range of shows you can watch at home is now far greater too.
In the typical AMC multiplex, you may have the choice of 8–12 movies. On Netflix, Amazon, et al, you have thousands to choose from. And the theatres no longer get the best movies first.
Watching a movie at home is much cheaper too. AMC charges about US$10 per ticket. At home, you can pay US$2.99…and the whole family can watch.
And for the price of one evening out at the movies, you can buy your own vintage popcorn maker.
This is, of course, bad news for AMC. This flick is probably not going to have a Hollywood ending.
But thanks to the Fed’s bubbly, zombified stock market, AMC is a big hit.
The company is losing money; ticket sales in the industry have been going down for almost 20 years. AMC also has more than US$12 billion in debt that — by the looks of things — it can’t repay.
Still, as of this morning…the stock is up nearly 2,500% for the year.
No fools, they (the insiders at AMC), decided to take advantage of Mr Market’s apparent incapacity. They know their shares are overvalued. So what do they do? They sell more!
In two separate offerings in the last seven days, the company sold 20 million shares and raised US$800 million. That sell-a-thon followed earlier offerings this year, which altogether brought the zombie company US$1.6 billion in new blood.
But it’s not as if they were trying to pull a fast one. They’re just going along with the gag. In its offering document, AMC clearly warns the gamers:
‘Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.’
The story is a bit more complicated (we are not even trying to follow it carefully), but the corporation needed the shareholders to authorise more shares. So AMC’s CEO, Adam Aron, aka ‘Silverback’, tried to persuade them, giving us this gem:
‘If you arm us with the tool — meaning stock as the tool — to go find value-creating opportunities for AMC shareholders, we can do that.’
Go find ‘value-creating’ opportunities? Management seems to be turning itself into a special-purpose acquisition company (SPAC) with no time limit.
What will it do with the money? Nobody knows. Maybe it will stumble on something.
But what a crazy way to invest — buying a stock for 25 times what it is probably worth…giving your money to people who, just six months ago, were warning of bankruptcy…hoping they’ll find something else. Makes us dizzy just thinking about it.
But the fun isn’t over…
AMC then pulled what might be one of the slickest moves we’ve seen…one that could set the pace for a whole new level of hype…and nuttiness. It decided to talk directly to the players who were pushing up its stock.
Here’s the announcement…a work of genius:
‘AMC Entertainment Holdings, Inc. (NYSE: AMC) (“AMC” or “the Company”), announced today that it is launching AMC Investor Connect, an innovative, proactive communication initiative that will put AMC in direct communication with its extraordinary base of enthusiastic and passionate individual shareholders to keep them up to date about important company information and to provide them with special offers. Over the last several months, AMC has seen its retail shareholder base grow beyond 3 million owners. With this sizable number of retail shareholders, AMC is taking a groundbreaking new approach to investor relations and investor communications.
‘Beginning today, shareholders can sign up to receive special offers and investor updates by registering at amctheatres.com/stockholders. Investors who sign up starting today and in the coming weeks will be awarded with an initial free large popcorn usable this summer when attending a movie at an AMC theatre in the United States. The offer will be made available in their AMC Stubs rewards account.’
Matt Levine at Bloomberg summarises:
‘If you buy AMC stock it comes with popcorn.’
AMC is boldly going where no company has ever gone before…into the dark heart of the Reddit crowd…where it can stoke the fire of enthusiasm for its new product.
We’re not talking about its old theatre seats; nobody cares about them. We’re talking about its real product — its own stock.
And what do we take from this story? The price of the stock alone doesn’t have much information content. But combined with the background story, it is almost an encyclopedia of investing no-nos.
An inflated market…fake, free money…an overhyped stock…a bubble atmosphere…too much debt…bad business…falling sales…huge volume…staggering volatility…
And what’s this? What is Mr Market whispering? That the company is actually worth 25-times more in June than it was in January?
Or that the whole market is setting itself up for a disastrous ending…like a cynic’s version of Independence Day, where the aliens attack Earth — and win!
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PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.