The latest popular delusion on Wall Street may not end well

When Charles Mackay wrote about “extraordinary popular delusions and the madness of crowds” he obviously couldn’t have foreseen what’s occurred in the markets for GameStop, or AMC Entertainment, or Dogecoin but the title of his 19th century treatise on crowd psychology would appear to be applicable.

Earlier this year GameStop shares soared, and then crashed, as a horde of retail investors, motivated by internet chatrooms and facilitated by the no-fees Robinhood brokerage platform, imposed a massive short squeeze on hedge funds in an exercise that had a crusading, “stick it up Wall Street” undertone.

The AMC surge looks to be the latest example of investors taking aim at the Wall Street establishment.Credit: AP

Later there was the cryptocurrency boom and partial bust, with every utterance by Elon Musk moving their markets in either direction.

Then there’s AMC, the world’s largest theatre chain. With its theatres shuttered last year because of the pandemic, the already-stuttering and debt-laden group was on the brink of bankruptcy. It’s still under intense pressure, with a first-quarter loss of $US295 million ($380 million), more than $US10 billion of net debt and a clouded future.

Since the start of the year, however, its share price has climbed from just under $US2 to more than $US32 and its market capitalisation has soared from $US700 million before the pandemic erupted last year to $US14.3 billion today.

It has also been able to raise more than $US1 billion of new capital at ever-increasing prices despite its debt, its losses and nearly $US500 million of lease deferrals.

On Tuesday it raised another $230.5 million by issuing 8.5 million shares at about $US27 each to a hedge fund, Mudrick Capital, a transaction that would have given Mudrick about 35 per cent of the company had it occurred at the start of the year but represented only about one per cent of its capital base today. According to Bloomberg, Mudrick promptly sold the shares, at a tidy profit, because (surprise, surprise) it believes the stock is over-valued.

It isn’t alone in that view. Broking analysts are almost unanimous (only had a “buy” recommendation at $US16 a share that has been overtaken by events) that AMC is grossly overvalued and may yet become bankrupt.

Those analysts have gone a bit quiet, however, after being savaged, and threatened to the point where police have become involved, by a Reddit-inspired crowd that describe themselves as “apes” and the “ape army” references drawn from The Planet of the Apes movie franchise and the “apes together strong” line from War for the Planet of the Apes.

The apes are reprising their assault on the GameStop short-sellers and have drawn blood, with hedge funds thought to have lost the best part of $US1 billion, and perhaps significantly more, betting against the AMC share price.

The attention of the Reddit crowd – the AMC register now has more than three million individual shareholders, holding about 80 per cent of is capital -- has, not surprisingly, been welcomed by AMC. They have saved the company, to date, by giving it access to big slabs of equity.

It’s a reasonable bet that in taking on one corner of Wall Street the apes are handing big trading profits to another.

Even though the latest raising dilutes their interests; even though Mudrick appears to have dumped those shares near-instantly and even though AMC plans to use the process to buy more theatres rather than pay down some of its threatening debt, the apes pushed the share price up on Tuesday.

Their interest in AMC has little to do with the prospects of a business that, even as it plans to expand, remain under a dark cloud because of the structural boost the pandemic has given to streaming services. There’s an associated query as to whether theatre-going will be permanently impacted by residual fears of COVID.

The retail investors are ignoring the debt, the losses and the valuation metrics. AMC, of course, has no price-earnings multiple but, if it could restore earnings to pre-pandemic levels (which is a big “if”) it would have an enterprise-to-EBITDA (earnings before interest, tax, depreciation and amortisation) multiple of more than 30 times.

Instead the motivation appears to be the same “squeeze the hedge funds” and “give the Wall Street establishment a two-fingered salute” sentiment that characterised the assault on the GameStop Shorts, overlaid by the knowledge that some investors made (and some lost) a lot of money from that earlier play.

AMC’s share price has climbed from just under $US2 to more than $US32 and its market capitalisation has soared from $US700 million before the pandemic erupted last year to $US14.3 billion today.Credit: AP

What we’ve seen in GameStop, AMC and cryptos is not investing as we’ve known it, although the companies involved will be grateful to the Reddit crowd for saving them, or at least giving them a chance at survival, by providing them with large-scale access to ultra-cheap (in any context, let alone their circumstances) capital.

The apes appear to be millennials, a social media-savvy generation that has grown up video gaming and, in relation to the short squeezes, appear to see their pile-ons as just another form of gaming, albeit one played for real and quite serious amounts of money.

With their savings flush from America’s versions of job keeper and direct cash relief/stimulus payments and access to ultra-cheap borrowings in a system over-loaded with Federal Reserve Board-created liquidity – and with “no fee” online platforms for stock purchases, margin-lending and cryptocurrency transactions – they are having fun, thumbing their noses at Wall Street and, for the moment (on paper, at least) making some quite substantial profits.

As was speculated in the GameStop stoush, it isn’t clear whether there are more conventional players involved.

A number of hedge funds made large profits by running with and encouraging the Reddit crowd – and then taking their profits before the share price fell nearly 90 per cent. (The GameStop price has since recovered to about $US250, about 70 per cent off its peak level of almost $US350 a share and a far cry from its opening this year of less than $US19 a share).

It’s a reasonable bet that in taking on one corner of Wall Street the apes are handing big trading profits to another.

Indeed, one of those Wall Street players, Mudrick, has traded in an out of AMC’s convertible debt and equity markets, for profits that run into the hundreds of millions. Another, Silver Lake Partners, is reported to have swapped a $US600 million bond for shares, sold them and walked away with a $US100 million profit.

Last month AMC’s controlling shareholder since 2012, China’s Dalian Wanda, sold almost all of its shareholding at $US14 a share for about $US1.5 billion, claiming it had made twice its original investment (and less than half what it would have been valued at today).

Thus some of the corporate players have taken their profits and run. Whether the apes’ experience will be as profitable remains to be seen but the South Sea Bubble and railway manias of the 19th century that Mackay referred to as “popular delusions” didn’t, of course, end well for the crowds.

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