Alice Falls Down the Rabbit Hole

It was another lather, rinse, and repeat week in the markets. The S&P 500 finished up 1.37%, 10-year US Treasury notes rose 0.3%, gold gained 1.17%, and the Nasdaq 100 added 2.23%. Notably, Bitcoin has continued to struggle, falling midweek to $33,000, or roughly 50% below its all time high. Similarly, Dogecoin is currently 57% below its all time high.

If momentum has, at least temporarily, abandoned the crypto space, it hasn’t completely left the building. Speculative players piled back into the old favorites: Gamestop and AMC Entertainment. This morning AMC made an intraday high of 36.72, a full 204% above last Friday’s closing level. At that point, it was more valuable than it has ever been in its history. Remarkable, to say the least, but perhaps better said: completely obscene. I can only say that the company posted a $4.6 billion loss in 2020. AMC’s market cap in 2019 was less than $1 billion. While today, AMC price hit its all-time, from a valuation standpoint it is currently 3.3 times more valuable than it was in 2016. How did it achieve this crazy valuation you may ask? Well, if the Federal Reserve has perfected the art of printing money, AMC has perfected the art of printing shares. Since the beginning of the pandemic, AMC has gone from a float (shares outstanding) of 100 million to 360 million. Yet, somehow, buyers don’t seem to give a hoot. Similarly, Gamestop has also issued more shares and its valuation never stops rising. GME is also more valuable than it has ever been, despite the fact that since 2007 nearly all video game sales have transitioned to online or direct download. Its revenues are nearly 50% lower from its 2010 peak, while the company has failed to make money since 2017.

It is easy to call out a few situations of ridiculous valuation and still continue to whistle past the graveyard. But cryptocurrencies and meme stocks are symptomatic of a market run amok. In hindsight I’m certain this will all look obvious, but for now the crazy train has left the station and it has a whole bunch of happy riders. The situation has become absurd, but there seems to be no end in sight. While most of the world is hoping that 2021 is the return to normalcy, it appears that for markets it’s just getting warmed up. 

Thanks for reading,

Zach and Dave

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