#157 - The Canadian Economy Is Cracking, Social Media is Old Media and Matt Damon on Movie Evolution
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Canadian Economy is showing cracks
Cars are too expensive… Now what?
Tiktok will lose to Meta… But why?
Mat Damon Explains Why They Don’t Make Movies Like They Used To
Audience and Attention Value Is Changing Hands
Forbes Most Valuable Teams
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
After a few up weeks in a row, the stock indexes finally had a down week. Interest rates are slowly rising again, and so is the US Dollar. Those factors have been big headwinds for stocks this year. The big question is if this is just another pullback to a rising 20-day moving average or the beginning of a new leg lower. The groups that led the market higher in the summer – biotech and software, are already below their 20-day moving average and the indexes are starting to stall near areas of technical resistance.
The good news for the bulls is that there are still plenty of decent-looking long setups and the market continues to react positively to most earnings reports. Even last week when most stocks were under pressure, we saw companies beating earnings estimates like GLBE, WOLF, and BILL breaking out with big volume.
From a short-term psychological perspective, we know that the stock market tends to zig when most people expect it to zag.
After a few up days in a row, most are getting FOMO and turning wildly bullish. Then, the market pulls back for a few days and all of a sudden, everyone is getting bearish.
This sentiment cycle repeats over and over again in both bull and bear markets and in different time frames.
We will see if next week will be any different.
MEME Stocks Are Back - “APE”
by Matt Levine
My basic meme-stock corporate finance advice is that, if you are a public company, and people want to pay a lot of money for your stock for no real reason, you should sell it to them. If your stock is overpriced, you should sell it. This is good for your existing shareholders, because you are selling shares for more than they are worth, which is accretive. It is bad for the people buying the shares from you, because they are overpaying, but on the other hand they were going to buy the shares anyway from someone else on the stock exchange, so they might as well buy them from you instead.
While this feels right as basic high-level advice, there are some complications that can make it tricky. The US Securities and Exchange Commission, for instance, doesn’t love meme-stock issuers taking advantage of dumb prices to sell stock, so if you’re going to do it you have to warn potential buyers that the price is dumb. (This is not much of an impediment; the buyers don’t care.) In egregious cases — if for instance you are actually in bankruptcy — the SEC won’t let you do it at all.
AMC Entertainment Holdings Inc. is a huge meme stock and has, over the last couple of years, been particularly aggressive about selling stock into its meme rally. In June 2020, AMC had about 104 million shares of stock outstanding; now it has about 516 million. Roughly 80% of all AMC shares were issued in the last two years, partly out of late-2020 desperation (a pandemic is bad for movie theaters) but partly out of early-2021 opportunism (a meme-stock rally is great for movie theaters I guess?). Retail investor enthusiasm got AMC out of some real financial difficulties. And then it kept going. In March it bought a gold mine? AMC, led by its meme-loving chief executive officer Adam Aron, has seized every opportunity provided by its legion of meme-stock retail investors to shore up its finances, pivot into new businesses and become sort of a meme-stock conglomerate.
There is, however, a weird complication limiting how much AMC can do. A public company’s certificate of incorporation will say how many shares it can issue, and that number can’t be changed without a vote of the majority of outstanding shares. AMC is limited to issuing 524,173,073 shares of common stock. It has issued 516,820,595 of those shares, leaving about 7.4 million to spare, though some of those might be reserved for employee stock-based compensation or other uses. In round numbers, AMC is out of shares to issue. So it can’t sell more shares to raise money, and it can’t issue more shares to, for instance, attract new employees or buy new gold mines.
AMC sensibly tried to address this problem by asking shareholders to authorize 500 million new shares, but shareholders objected and AMC ultimately withdrew the proposal. So it is stuck with the shares it has. (I once proposed that it should issue its last available share for millions of dollars, because there is a ton of meme value to owning the last AMC share, but I guess I was kidding?)
On the other hand, AMC has preferred shares. Its certificate of incorporation authorizes it to issue up to 50 million shares of preferred stock, and like most companies it hadn’t issued any. As is typical for public companies, this is what is called “blank-check preferred”: The board of directors can decide how much to issue, what its rights are, how much to sell it for, etc., without shareholder approval. This is a pretty significant loophole. What the board can do is issue preferred stock that looks like common stock. Specifically:
The preferred stock can have the same voting rights as the common stock.
The preferred stock can have the same economic rights as the common stock: If AMC pays a cash dividend on the common, the preferred gets the same dividend; if AMC is acquired in a merger, the preferred gets paid the same price as the common, etc.
The preferred stock can be convertible into the common stock, if AMC’s shareholders ever approve enough shares.
Technically you have to deal with the 50-million-share cap on preferred shares, but that can be managed: You can say “each preferred share is equivalent to 100 shares of common stock,” giving you 5 billion share equivalents to play with. Then you can set up a depository receipt program where AMC issues shares of the preferred stock to a depository, and the depository issues receipts for 1/100th of a preferred share to investors. Then each receipt should be economically equivalent to one common share.
This all sounds weird, when I write it down like that. But it is actually a pretty well-known technology, in the niche world of companies without enough authorized shares. Surely lots of bankers and lawyers pitched it to AMC. Yesterday AMC did it:
AMC Entertainment Holdings Inc.’s preferred stock made its debut Monday amid a selloff in other meme stocks and the broader market, making for a volatile day. ...
AMC issued a dividend after Friday’s close of one preferred equity unit for each share of the common, in effect putting in place a 2-for-1 stock split. The preferred shares traded for the first time Monday on the New York Stock Exchange under the “APE” symbol, a term Reddit users coined to refer to others who are bullish on so-called meme stocks. The split sparked some volatile trading, triggering multiple trading halts in earlier trading Monday for both classes of shares.
Specifically, the trade was to (1) authorize 1 billion new APE units, each of which is equivalent to one common share and (2) issue about 516.8 million of them to holders of existing AMC common shares as a dividend. So if you owned an AMC common share on Friday, on Monday you owned an AMC common share plus an APE unit. That is “in effect” a 2-for-1 stock split: Each APE unit has the same economic and voting rights as a common share, so you went from owning one common share to owning two-ish common-ish shares.
In practice, this is all a bit strange, and the APE units trade at a discount. AMC’s common stock closed at $10.46 yesterday; the APEs closed at $6.00. (AMC closed at $18.02 on Friday, before the split, so the total package was down about 8.7%.) As of 11 a.m. today the APEs were up (to about $6.53) and the AMCs were down (to about $9.91), and you might expect to see a certain amount of convergence if AMC’s shareholders agree that the APEs are equivalent to the common stock.
But the point isn’t really the stock split. The point is that now AMC has 483 million APE units that it hasn’t issued. At yesterday’s APE closing price, that’s $2.9 billion worth of stock to play with. In its Frequently Asked Questions about the APE dividend, AMC does some foreshadowing:
Authorized but unissued AMC Preferred Equity units can be issued in the future in the same way that AMC can issue authorized but unissued shares of common stock. Normal regulations and requirements with respect to share issuances apply, including potential filings with the SEC and public disclosure, along with the circumstances under which shareholder approval is or is not required.
AMC Preferred Equity units provide AMC with a currency that can be used in the future to further strengthen our balance sheet, including by reducing our debt and other liabilities. The AMC Preferred Equity units also give AMC the ability to invest in shareholder value-enhancing and transformative M&A investment opportunities. In addition, the flexibility provided by the Company’s AMC Preferred Equity units immensely lessens any survival risk as we continue to work our way through the impact of the COVID pandemic towards recovery and transformation.
If you are a company with a meme stock, you should sell stock. If you run out of stock to sell, you should create more, and then sell it.
💸Reformed Millennials - Post of The Week
George Soros Is Buying Stocks.
George Soros is “The Man Who Broke the Bank of England”
He’s made billions by executing massive simple bets on the global economy.
Soros has often been quoted saying that the key to his fortune is the theory of reflexivity. In this group we've talked about Reflexivity at nausium.
SO WHAT IS REFLEXIVITY - AND HOW CAN YOU USE IT TO BEAT THE MARKETS?
Lately, Soros Fund Management has been betting big on Big Tech.
It bolstered its holdings in Amazon, Alphabet, and Salesforce - three of its top ten positions.
WHY IS SOROS SO BULLISH?
Soros founded his first hedge fund in 1969. He’s seen countless market crashes come and go.
He knows better than anyone that no bear market lasts forever.
With the Nasdaq 100 down 18.4% this year, now is the perfect opportunity to buy shares at a discount.
THE THEORY OF REFLEXIVITY UNDERPINS ALL OF SOROS’S TRADES.
He believes that investors don’t base their decisions on measurable fundamentals but on a filtered perception of reality.
This seems obvious but incredibly difficult to do in practice... Traders chase trends, and markets generate their own momentum that far outpaces fundamental reality.
But it contradicts a lot of mainstream economic theories.
The efficient market hypothesis tells us that prices only change on new information.
To see reflexivity in action, let’s look at Soros’s greatest trade: Black Wednesday
In 1992, Soros took a short position against the British Sterling, worth US$10bn worth of GBP (British pounds)
Soros knew the British government couldn’t artificially prop up the currency forever.
On Black Wednesday, the GDP was withdrawn from the ERM mechanism.
The exchange rate crashed, and Soros pocketed a $1bn profit...
And his fund made another $1bn from parallel trades, like longs on British stocks and German bonds
When Soros made his bet against the Bank of England, he wasn’t just thinking about the fair value of the Sterling.
He was anticipating the panic selling that would follow the ERM withdrawal.
This is the theory of reflexivity in play.
SO WHAT IS SOROS DOING TODAY?
His largest position is electric vehicle maker Rivian.
He’s recently added to his positions in Tesla and Ford.
This gives him a multi-pronged play on the electric car market.
Tesla is an established EV marque, and the clear market cap leader.
Ford is a massive American automaker that’s breaking into the EV market and many experts believe they will surpass Tesla in sales by 2025.
Rivian is an up-and-coming brand that can innovate quickly.
And you can trust that Soros has reflexivity in mind on these trades.
Reflexivity produces unstoppable feedback loops.
Investors see prices going up and buy, pushing them further. So they make a profit and think they must have been right. Often, they buy even more.
Eventually, prices become completely detached from reality. Which is already fairly clear in $TSLA
Soros likes to be ahead of this curve.
He has an incredible track record of getting multi-billion dollar bets right.
All because he anticipated the stories that the market was telling itself.
This is the power of reflexivity.
I'm not interested in the EV products such as cars as much as I'm interested in the charging infrastructure that's going to receive an enormous amount of government subsidy in the coming decade.
🐦 Twitter Thread of The Week 🐦
The cost of poor energy policy is rolling blackouts, starving third world economies, draconian energy management and the destruction of the consumer in Europe.
🔮Best Links of The Week🔮
Ottawa signs EV deal with Mercedes-Benz and Volkswagen - BNN
AND1: The Best Shoes of a Legendary Brand - Weartesters.com
Reconciliation bill includes nearly $80 billion for IRS - CNBC
Raytheon: Shares Weak Since Q2 Results - Librarian Capital Research