For AMC, The Rent Is Too Damn High

As COVID forced AMC to close all its movie theaters in the spring of 2020, it played hardball with its landlords in order to survive. From a letter to landlords:

“Without revenue from its theatres,” the letter continues, “AMC will cease paying rent and charges under the lease effective as of April 1, 2020.”

Even with rent relief, the company lost $900 million in the first 9 months of the year, per their latest quarterly report. Things are looking a little brighter these days with many theaters reopened and people being vaccinated, but one small matter remains…

AMC owes almost half a billion dollars in back rent to landlords:

Getting through 2022 will require theater attendance to rise and that landlords further delay or reduce outstanding deferred rent owed by AMC, totaling $450 million.

AMC expects to negotiate these payments, but is still looking at a big expense increase. From its latest quarterly report:

commencing in 2021, absent further negotiations with landlords, the Company’s cash expenditures for rent will increase significantly following periods of agreed deferrals

And landlords may be less willing to give AMC a break since it just raised $1.3 billion in additional capital. But having lost $100 million a month last year, plus owing $450 million in back rent, how long will it take AMC to chew through that $1.3 billion? I question whether that cash hoard can last through 2021, especially since studios are giving AMC less time to run each movie exclusively before the studios stream it themselves:

AMC was able to negotiate an exclusivity window with Universal Studios before new movies hit Peacock, owned by Universal’s parent company Comcast. AMC wanted 75 days of exclusivity, they got 17. That’s only one major studio.

However, AMC does have two things on its side: a great management team that even furloughed itself to save money, and a high stock price that could let the company raise more capital.

That said, given the company’s big obligations and increasingly diluted stock, I’ll be cheering for them from the sidelines.

For more on AMC and the Wallstreetbets phenonmenon, check out these posts:

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Photo: “The Rent is too Damn High.” by TenSafeFrogs is licensed under CC BY 2.0

Forget GameStop, Treasury Yields Are The Thing to Watch

Treasury bonds have been falling hard lately. Their interest rates are up significantly as a result:

The yield on the 10-year note, a bellwether for borrowing costs on everything from mortgages to corporate loans, has jumped to near 1.5% from around 1% in a matter of weeks, lifted by increased expectations that vaccines and government stimulus efforts will accelerate growth and inflation.

And the sell-off is making its way into the stock market today:

The sell-off in the bond market ricocheted into equities, pushing the broad S&P 500 down 2.3 per cent and the tech-heavy Nasdaq Composite down 3.3 per cent by afternoon on Wall Street.

A lot of this is the side effect of something good: people are getting vaccinated, new vaccines are coming, and economic stimulus could boost the economy further. That picture is leading investors to expect greater economic growth in the future, along with greater inflation (see the Feb 22 post):

Signs of a renewed economic boom, in tandem with pockets of price pressure, color that move in rates. Bianco Research notes today that Wall Street economists now expect U.S. real GDP growth of nearly 5% this year

But higher rates on Treasury bonds could affect other markets negatively in several ways:

  • Higher Treasury yields tend to mean higher rates in other areas. This could make it more expensive for companies to borrow to fund expansion, etc. That would hurt their shares.
  • If Treasuries offer more interest, that makes stocks less attractive by comparison.
  • Treasury yields, especially the 10 year note, tend to drive mortgage rates. Higher mortgage rates mean a weaker real estate market.

Nonetheless, the Fed remains committed to low interest rates and a loose monetary policy:

In his remarks to the House Financial Services Committee, [Federal Reserve Chairman Jerome] Powell said it could take more than three years before inflation reached the Fed’s target of 2%. That helped to reiterate the message that the central bank was in no rush to pare back on stimulus anytime soon, Deutsche’s Reid said.

I think that if rates spike too high, Powell will probably get the Fed in there buying lots of bonds (with printed money, if necessary) to get the rates back down. He doesn’t want to see higher rates derailing the economic recovery.

A slower rate rise may be less problematic:

“If it is stable and steady, it is easier for equities to digest,” O’Rourke said in an interview. “A quick spike has the potential to create a shock.”

Overall, this situation concerns me and it’s one I’m going to watch. But I am pretty confident that Powell will put a stop to extreme increases in Treasury yields.

For more on recent developments in financial markets, check out these posts:

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Photo: “Jerome H. Powell, governor of the Federal Reserve Board, discusses how markets currently function” by BrookingsInst is licensed under CC BY-NC-ND 2.0

Second Short Squeeze Is On As GameStop Triples in 1 Day

GameStop shares have tripled in under 24 hours. Naturally, the blue chip investors behind the rise had a solid case for their optimism. After all, what about the ice cream cone?

Believe it or not, a GameStop board member posting a picture of a McDonald’s ice cream cone is one theory being bandied about to explain the red hot rally. Maybe it’s a sign? Or…maybe he just likes ice cream.

Also, the CFO was pushed out shortly before this rally, but it’s entirely unclear what that means for the company’s strategy.

There is no case for this rise based on the fundamentals, but there may be a technical one. I wrote about the possibility of a second short squeeze recently, and it may be happening. Shares short as a percentage of the float (stock that can be traded without restrictions) remains at 78%. Short sellers are losing a fortune:

Short-sellers are estimated to have lost $818 million on Wednesday from their bearish bets on videogame maker Gamestop

That’s losses of around 6.5% of the company’s entire market cap, in a single day. Ouch. (If you’re unfamiliar with short squeezes, check out this post for a quick explanation.)

But with repeated halts in GameStop trading and the fact that Robinhood could block buying again, it’s going to be hard for Wallstreetbets to wring the most out of this trade.

And either way, buying into a company with weak fundamentals just because there may be a short squeeze and the price could head higher is a very risky proposition. You don’t want to be caught holding shares in a moribund company once the short squeeze dissipates. And that could happen at any time.

If you’re interested in GameStop and the Wallstreetbets phenomenon, check out some of these posts:

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AMC Stock Is Acting Like COVID Never Happened

AMC burnt over $900 million in the first 9 months of last year*. That presented a bit of a problem.

They had just $429 million in cash left going in the fall of 2020, and that would be gone in a matter of months. So, to stave off bankruptcy, AMC went into fundraising mode, big time.

AMC got a surprisingly good reception from investors and was able to sell over $500 million in new stock and borrow a further $400 million. Since then, additional stock sales have boosted their cash hoard to over $1.3 billion.

This fundraising bought AMC at least a year’s worth of breathing room, even if 2021 is no better than 2020, which seems unlikely. But there’s one little problem…

AMC had just over 100 million shares outstanding in the fall of 2020, per their latest quarterly report. It now has close to 500 million shares outstanding. So, every dollar AMC makes in the future (if it makes any) is now 20 cents as far as shareholders are concerned. Each dollar of profit is only worth 1/5 as much if your shares represent a portion of the company that’s only 1/5 as large as before. This is called dilution.

So this must have cratered AMC’s stock, right? Wrong. In fact, it’s actually up! On December 30, 2019, the stock traded at 7.32. It’s at 8.27 as I write this.

Investors are saying that a share of AMC is actually worth more than it was before COVID annihilated its business and dilution took away 4/5ths of the ownership rights in each share. That makes no sense.

I suspect this stock is being traded on the basis of memes and pure speculation. Indeed, it’s currently mentioned on Reddit’s Wallstreetbets more than any other stock. The price is pretty much impossible to justify rationally unless AMC suddenly makes far greater profits than ever before. Why would that happen all of a sudden, even as COVID is still with us?

That said, I have to applaud CEO Adam Aron and everyone at AMC for doing whatever it takes to save this company. Even the CEO was furloughed in March 2020 to conserve cash! That’s what I call leadership. However, it doesn’t make their stock a good bet at the current price.

I’m going to leave this one to the crowd at Wallstreetbets.

For more on the Wallstreetbets phenomenon, check out these posts:

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*See 11/4/20 10-Q report cash flow statement, cash used in operating and investing activities.

Photo: “AMC Theaters” by JeepersMedia is licensed under CC BY 2.0

Tesla’s Shares Are Priced For a Future Where Tesla Makes Every Car on Earth

Reading about the enormous run-up in shares of Tesla, Inc., I wondered something…is Tesla bigger than the entire rest of the auto industry?

The answer is: almost. Tesla’s market cap ($655 billion), is nearly equal to the combined market caps of Toyota, GM, Ford, VW, Daimler, Fiat, BMW, Honda, Hyundai, Nissan, Mazda, Subaru and Aston Martin ($750 billion), per Yahoo Finance data. That’s pretty much the auto industry, with the notable exception of SAIC of China.

So, will Tesla make every car on earth? Probably not. Indeed, what scenario investors are expecting is unclear:

It doesn’t make sense that nearly all the cars sold in the world in the future will be Tesla vehicles, nor does it make sense that the size of the global auto market will double.

Therefore, Tesla’s massive market cap compared to the largest legacy auto companies in the world seems to suggest that investors believe other businesses outside of pure auto unit sales will play an extremely large role in Tesla’s future business model.

Tesla has come out with some interesting non-auto products like its solar roof tiles and Power Wall, but does that make it worth three times as much as Toyota, the next largest auto company by market cap ($213 billion)?

Keep in mind, Toyota sold almost 10 million vehicles last year. That’s nearly 20 times as many as Tesla.

I’m a huge fan of Tesla and Elon Musk. I think it’s an amazing company and Musk is one of the greatest innovators and entrepreneurs of all time. But, it’s hard to justify the stock’s current level.

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Palantir Insiders Are Dumping The Stock. What Do They Know That You Don’t?

The lock-up that stopped insiders at Palantir Technologies from selling their shares recently expired. And boy, are they excited!

Palantir stock sank as much as 13% on Tuesday after regulatory filings showed the company’s co-founder Stephen Cohen and two other top executives offloaded 2.7 million shares.

And they’re not the only ones:

Just a month after Palantir went public last year, CEO Alex Karp and co-found Peter Thiel sold a combined 41.45 million shares, for more than $400 million.

These sales go way beyond what it would take to have financial security or fund most any lifestyle. To me, it suggests that they think the company has gone about as far as it’s going to and it’s time to cash out.

In a company destined for greatness, you would expect to see the insiders holding onto their shares. They wouldn’t want to miss out on the amazing times ahead!

But that’s not the case here. I agree with them. Palantir is overvalued with a questionable business model and should be making money by now, 18 years since its founding. But it’s never made a dime.

The picture isn’t all bleak: a certain number of insiders are buying. But seeing these huge sales by the founders and top executives would definitely give me pause.

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Photo: “PandoMonthly – April 2012 – Sarah Lacy Interviews Peter Thiel” by thekenyeung is licensed under CC BY-NC-ND 2.0

SPACs Are a Bubble and Nikola’s Fake Truck Is Proof

So Tesla is doing great, right? And I sure would love to make as much money as Elon Musk! So let’s make our own vehicle startup.

What should we call it? Hmm, picking a name is hard. Let’s just go with Tesla’s first name, Nikola!

Now we have to make a truck. But making the whole engine thingy is a pain! How about we just let it roll down a hill, take a video and raise lots of money? Yay!

Believe it or not, this is exactly what Nikola, the electric truck startup, did. And they even admitted it…once they were caught. But hey, they didn’t technically lie:

Nikola described this third-party video on the Company’s social media as ‘In Motion.’ It was never described as ‘under its own propulsion’ or ‘powertrain driven’.

How is this company with no real product even public? That’s where Special Purpose Acquisition Companies, or SPACs, come in. A SPAC raises money from investors to buy a private company to acquire. They’re exploding in popularity:

Amid the global stock market volatility, last year’s $83 billion haul by SPACs was six times the amount raised in 2019 and nearly equaled the figure mustered by IPOs.

Nikola went public via a merger with a SPAC in March of 2020. Just a few months later, it wound up under a federal investigation for securities fraud. Its stock is down from a high of over 60 to barely 20.

What made this SPAC want to acquire such a questionable company? SPACs collect a big fee if they acquire a company, but if they don’t acquire anything, there’s no fee. This gives the people who created it (“sponsors”) a strong incentive to acquire anything, regardless of merit:

More than 300 SPACs need to pull that off this year or risk being liquidated. But with only so many quality targets to go round, and SPAC founders’ strong incentive to close deals — even at the expense of shareholder value — SPACs may well end up in a negative spiral of poor quality/bad press/tighter regulation.

Since so many new SPACs are being created, and there are only so many quality private companies to go around, they’re getting less and less picky:

Then there is the fact that many firms taken public by SPACs have little to show in terms of business plan or revenue, in some cases triggering shareholder lawsuits by disgruntled investors.

Typically, a company with no profits isn’t a good candidate to go public. A company with no revenue is even more suspect. Maybe that’s why they’re not going the traditional IPO route.

Indeed, research on a large pool of SPACs and normal IPOs (127 SPACs and 1128 IPOs) show that the SPACs do much worse:

SPAC firms are associated with severe underperformance in comparison to the market

If they have such a well-documented record of underperformance, why are SPACs so popular? My hunch is it has to do with the fees for the sponsors, which are often several times greater than for a traditional IPO. That’s peachy for the sponsors, but I think investors are better served by avoiding all but the strongest SPAC deals. You’ll probably just wind up paying too many fees and buying an inferior company.

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Photo: “Nikola Two Semi Truck” by 666isMONEY ☮ ♥ & ☠ is licensed under CC BY 2.0

I Got The Moderna Vaccine! Here’s What It’s Like.

At 1:48pm today New Jersey time, I got my vaccine!

I’ve been waiting for this moment for many months, and I’m so grateful to have a chance to get it. It was the Moderna vaccine and I got it through the Hudson County vaccination site. So far, I feel 100%!

Having lived through the dark period of spring 2020 in the New York City area, when sirens were almost constant and my neighbors were dying in huge numbers, reaching this moment is cathartic. It prompted a lot of feelings for me: relief, gratitude, and hope!

So, what’s it like? This is a drive through site, and I don’t own a car, so I took an Uber. The driver very patiently waited with me in the lengthy line to get the jab. Many cars slowly snaked ahead in the cold snow.

Once we finally made it to the front, I showed a QR code on my phone that the county had e-mailed me. Shortly therafter, the nurse came up and asked if I had been feeling sick today. Then, she gave me the shot!

I barely felt a thing, which was surprising. Since then, I’ve had no side effects that I can discern. I hope it stays that way!

Just after the shot, we took the picture above. It’s actually staged…she had already given me the jab before we ever thought to document the moment for posterity! So she posed with the needle near my arm, and I took a snap to record this wonderful moment in my life that I’ve waited so long for.

“This is a historic moment,” she said. I agreed.

If you’re still trying to get an appointment, don’t give up! I’ve been checking every area provider’s website repeatedly for months. And I almost wasn’t going to check again today, but I did, and found an appointment for just 90 minutes away! Perhaps someone cancelled last minute. The best strategy seems to be to check over and over.

Now, I can begin to plan for a life after COVID. A week after the 2nd dose, which will be around the end of March, it should have achieved its full 94% efficacy. I will finally be able to get on a plane and visit my mom for the first time since December 2019! And I’m looking forward to getting some great protection even sooner: just 2 weeks after the first dose, the vaccine is 80% effective.

I really encourage everyone to get this vaccine, although I know each person has to make their own decision. COVID may be something to fear, but this really isn’t! If I didn’t keel over after, you won’t either! 🙂

How to Build a Network, from Bumble Founder Whitney Wolfe Herd

The dating app Bumble recently went public, making founder and CEO Whitney Wolfe Herd a billionaire at the ripe old age of 31. I heard an interview with Herd a while back, and her genius at marketing really struck me.

She had just created Bumble…now, how can she get anyone to sign up?

…we ran as fast as we could to the fraternity row, and went into the frat houses and said a different pitch, and said, “Hey guys, I bet you have no other way to access hundreds of sorority girls right now. Download the app, because they’re all waiting for you! They’ve all just downloaded this app and they’re all waiting for you to like them.

This is incredible marketing genius, even if it involves a little white lie. Hurry boys, and you can have all the ladies to yourself! (What man will say no to that?) Quickly girls, the most desirable boys are waiting for you! With 2 meetings, she solved the problem of how to get enough people on the app to make it a real network.

This interview is truly a master class in marketing and worth a listen in its entirety. The quote above is from about the 10:10 mark.

I only wish I had been in on that IPO!

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Photo: “File:TechCrunch Disrupt San Francisco 2018 – day 2 (30647055838).jpg” by TechCrunch is licensed under CC BY 2.0

Texas Failed to Prepare Its Energy System for a Deep Freeze

As many in Texas enter a fifth day without power in freezing temperatures, I searched for information on how such a disaster could’ve happened.

I came upon some excellent perspective from Professor Daniel Cohan at Rice University:

See the entire Twitter thread here. Very much worth reading.

Not preparing the full energy system, from natural gas wells to the electrical grid, for a deep freeze seems to be the culprit.

This makes sense to me as someone who has lived his entire life in the frozen North…northern Maine, Wisconsin, and New Jersey. We’ve had storms and cold even worse than what Texas is experiencing on a regular basis, but I don’t recall the power ever going out. And I’m very grateful for that as I type this in my warm living room.

To me, this calls into serious question the Texas regulatory model, where ERCOT regulates a Texas-only grid that’s exempt from Federal oversight. If they can’t plan for extreme events, why do they exist?

In the mean time, as families resort to making little fires in their homes to stay warm, perhaps Governor Abbott can help. If the Governor’s Mansion has power, why not invite people to come there and warm up? Even a small gesture like that could bring warmth to a few people.

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Photo: “Caricature: Texas Governor Greg Abbott” by DonkeyHotey is licensed under CC BY-SA 2.0