Chris DeMuth's State of the Markets January 2023 (Episode #150)

Chris DeMuth joins the podcast to discuss the state of the markets in January 2023 and what’s catching his eye in event driven land, including updates on AVTI, the meme stocks roaring back, and why energy stocks seem poised to continue to perform well.

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Transcript begins below

Andrew Walker: Hello and welcome to Yet Another Value Podcast. I'm your host Andrew Walker. If you like this podcast and mean a lot, if you could follow rate, subscribe, review it wherever you're watching or listening to me, do it. With me today I'm happy to have my friend and the founder of Brings You Capital Chris DeMuth. Chris, how's it going?

Chris DeMuth: It's going great. Thanks for having me, Andrew.

Andrew: Thanks for coming on. For the the monthly state of the markets podcast. Let me start this way. Podcast the way do every podcast. First a disclaimer to remind everyone that nothing on this podcast is investing advice, that's always true but that's particularly true. Today, we're going to talk about a bunch of different stocks and situations. We were talking before this call and I think we went through, 100 million micro cap company. $500,000,000 meme stocks and distress all sorts of things. So, we're going to talk about a lot of stuff. Just remember, none of this investing advice. Please do your own research, consult your financial advisor. With all that out the way it is late January, 26th 2023, we've got a new year. Chris what's on your mind for the new year?

Chris: Well, I think going a little further a field within the event category than usual because the two big kind of stuck between a rock and a hard place problems and the ARB world for me are still very much in place. One tricky financing environment for deals that are just blowing up kind of pre-arb potential takeovers all the time. I mean, I did not do this but in hindsight looking at this past year, just shorting all of the kind of takeover rumors stocks would have been an extremely lucrative place to find shorts.

Andrew: Yeah, especially anything getting acquired by private equity, like a private Equity Fund. Would basically what we'd hear is they'd go in and they'd be doing, they're DCF model and they say, "oh, we're going to raise a bunch of debt at 6%." And then, 3 weeks into the LA be like, "okay, the debts 7%." And then, 3 weeks later, they be like the debts 9%. And obviously, I'm just pulling numbers out, but when your debt cost goes from six to nine or ten to fourteen, through 2 months of the process, all the sudden, the prices you can change, like everything's just been destroyed. So, yeah, it's been really tough on that side.

Chris: In the few optimists amongst the private Equity Firm buyers, right now. It's just a B.O. It's barely a leveraged buyout anymore and the syndication kind of windows closed. Something that might have been an example of me missing the forest staring at a tree was thinking about Twitter the whole time, thinking about that as an investment in the contract. Almost daily downgrading with the downside was and what it was worth as a standalone and what the incentive for the buyer was other than the contract. It was such an intoxicating topic that I don't think I pulled back enough to say. Think about all the other ones that have no contract, because that's what pre-arb takeover rumors are. It's this without a requirements and they pretty much all impostor had modest and take over premiums and so forth. All these dynamics are still there. So, I'm still grouchy and bearish on takeover rumors. I don't mind if we miss a few early on this year, like if we can get smarter about what environment we're in, I'll probably be cranky of the day we missed them, but the kind of well projected deals. Unless it just happens to be a company that we just really want to own anyways. And I haven't seen one of those. I'm going to be pretty shy on take over candidates.

And then, the other between a rock and a hard place, hard place is Zany Regulators that are on kind of crusades against companies and deals just trying to block everything, and just brutally difficult regulatory process season. Two things today, I just highlight as examples, interesting to see press from Bloomberg stating that the US regulatory process on Activision. The timing was driven by trying to disrupt the companies and their ongoing talks with European Regulators, which I find appalling. It's almost a regulatory body equivalent of tortious interference. You have a private company that happens to be an American taxpayer and that is in a discourse with a regulator trying to fix a perceived problem. So, these are real people with real problems and their non fictional world trying to make things better. And this American regulator say, "oh, God these guys are trying to solve a problem and fix something, we have to interfere with the process we're not involved in that would have universally applicable benefits including to American customers. We have to stop that because something good might happen and if it was good, it would make them look less bad. And so we would have less power over them." I mean, it's really gross, vulgar low behavior that if this was a private enterprise that would be criminal and should be.

Andrew: It reminds you. It just feels like a lot of regulators are living in their own world where companies are bad and generally I'm probably a little more bullish on, I don't know, bullish sorry. Accepting of regulators, then you who leaned a little more libertarian. But like, I think of the Shah hearing yesterday, I mean, you listen to more of it than me, but we're the Canadian Regulators almost thrown out of court because he goes in and he basically says, "hey, these guys have a fixed, but we don't like the fix. We didn't want them to fix this. We wanted to block this transactions. Well, that's not really your job. Your job as a regulator was fine, the original transaction would be harmful for consumers under your standard. Block it, get them to medic. But now that they have a remedy and it's fine, it's no longer a job to go and say, "oh no," we just didn't like this deal to begin with.

Now that they've got a remedy to fix the consumers, we're just were angry they have a remedy. That doesn't make sense or I think of one ongoing that we've talked on this podcast before. I mean, I don't think we're there yet but Spectrum Brands where not quite to the regulator saying, "oh gosh, they're going to get a deal through that." We didn't like to begin with, so, screw this, but we're getting close where Spectrum Brands, they have a merger, they're selling their high-end or division. They've got divestitures for everything that the government has problem, and they're going to the court because the government trying to block him saying, "hey, we've got a divestiture and fix the problem." The government's basic saying, "no, no, we don't care about the best." You're just block this deal. It's very yeah, I don't even know.

Chris: What does it does with terrific examples? I listened to the whole hearing yesterday morning in Canada. My wife thought I was not being respectful enough of the regulator and hopes that I'm not in front of the same guy ahead and some future deal [crosstalk] [inaudible]

Andrew: Or I might not be allowed to go to Toronto or right area or anything else.

Chris: But good Lord, this person was very clearly. I mean he was shaking he almost looked like he was crying because the thing he thought was a problem was going away and he wanted something to hang them with. He wanted a problem to maintain his kind of petty authority he didn't want. He was shaking to the point of almost crying that this problem would go away, which totally reveals the whole game. There was nothing about benefiting the consumer or anything about the [crosstalk] [inaudible] the law.

Andrew: Yeah. It was just, I'm a regulator. As a regulator I can block deals. Big company is emerging. I want to block deal and it's like no, that's not at no point. Is that, it just reminds me all the stereotypes of bad policeman or something new. They've got it. They've got a badge in the gun, they're going to let everyone know it. The regulators in this case, have a badge and a gun over big companies and they're going to let everyone know it whether what the big companies are doing or a good bad whatever.

Chris: I love the interaction between the competition commission lawyer and the appellate judges. The appellate judges, I thought were handled the whole thing very well but he had this point that he thought was incredibly fascinating that they just could not fathom what he cared about which was he got that the authorities approved the deal. And he got that they approved the deal that would happen in the only deal that would happen and the fix that would happen and the buyer of the fix and the price. They approved the thing that would happen, but he just thought it was just of utmost urgency that they go back and opine specifically on the deal. That's not going to happen that nobody's trying to do the unfixed deal. I mean, it seemed to him to be the most awful imaginable thing that this hypothetical thing that would not happen do not have a formal part of the process.

And, these judges were just trying to understand what his point was and a good friend of mine who never agrees with me in public policy arguments whenever I get shrill on a procedural point. He said, "just to save us time. Why don't we only discuss procedural points when they're against substantive interests?" Because he points out like we almost never have something where I'm reeling about. Some procedural point that wouldn't serve some end that I also substantively believed. it like never and he's like, "if we have anything really good to say about how we need to improve procedure, let's just mention it when it would hurt our subjective point we're trying to make," and that would remove pretty much 100%. He just hated the deal. He hated the companies, he wanted to hurt them, and so he had this thing, but the judges who didn't care and who never heard about this stuff before, they're like, "why are we even talking about this?"

Andrew: Yeah, and just to sum up in case listeners haven't been following this Canadian court case. But what he's doing is he's no telling if I remember correctly, Shawn Rogers had an original divestiture plan, that did not pass muster. It was going to get rejected. So they went and founded divestiture plan. They did pass muster. And basically, the regulator here was saying, "hey, judge I still need you to go back." It's like, if I turn in a final paper and the professor came back and failed me because she went and found my first draft and said, "oh Andrew, this first draft wrong on every single point." I was like, "yeah, but my final jacket was right. Why am I getting graded on this first draft?" Which shouldn't really see the light of day. Nobody should have cared about any of that type of stuff. Yeah.

Chris: Or you just kind of annoyed you can imagine a parent, you have a whole lecture prepared for them about missing curfew and they make it at the last minute.

Andrew: Yeah.

Chris: In theory or trying to subsidy [?] help something for the greater good. And that thing was done, you should be happy but you're kind of like, you had this, you had your speech already. And so, I think spectrum is actually, it seems so far to be in the same category where they enunciated a problem. The companies offered to 100% solve it. And, the government at least so far does not appear to even want to have a conversation about the entirety of the effects. So, again, it seems like a point they're trying to make. But, in terms of thinking about arbitrage and deal risk, I still am close to 10 out of 10 at the moment of my concerns on both the regulatory side and the credit side. So, I'm being fairly cowardly, or just want to really get paid well for either of those risks. I like wide spreads. And one reason why I like widespread is just analytically, is it's a big target. We have lots of ways to win.

You get Rica and you win and you get a big delay and you win. And if it's supposed to be the upside is an IRR that's a 100% or 80% and takes twice as long as you think it's going to win. Tight spreads are small targets and you kind of have to be right about everything or it's a stupid investment. And so, really wide spreads that already priced in kind of deal break probability on something where you won't mind owning it. Anyways, where you think it's an analyst clerical downside and we're already priced for regulatory aggression. So, we're getting there on Activision. We already have a complaint filed and I think things get more objective when you get in front of a judge. I mean, it's not exactly the same, but I think that, if you use the value investing analogy of Buffets kind of short-term voting machine, long-term weighing machine, the regulators or these regulators at least are a voting machine and the judges for the most part our weighing machines.

Andrew: Yep. No, look, I completely agree with just on Activision. We've discussed it Ad Navseam [?] on this podcast...

Chris: Yeah.

Andrew: It's funny. We've probably been discussing it for, I don't know, 6 months at this point and when we started discussing it the price was probably $75 per share and now we're still discussing the price is $75 per share. I think, I will say like the thing that vexes me, I think, the thing I email you once a week on the thing that you're smarter than me but I think we're both. So I'm clear on. Is Activision needs to get approved by three people at this point they need us Regulators to approve it and that's mainly the FTC. They need the EU Regulators approve it, and they need the UK CMA to prove it. And like, I feel good. They can beat the FCC in court. Even if the FCC is trying to torch the interfere with other jurisdictions, I think they can come to a settlement with the EU, the UK CMA. I think they can, but I just don't know. Like as you said, voting machine versus weighing machine. If the voting machine of UK Regulators doesn't approve this. I don't know how you gets the weighing machine step.

Chris: Yeah.

Andrew: So, that's one. And then, I'll let you say anything you want there. And then, we can talk about kind of the fundamental value as well.

Chris: Sure, I think, were I working on this for Microsoft? First of all, I decide if I really want to do the deal at this point, can see how much you really wanted to try. I think they are trying, I think it would be good precedent for getting this deal done. I think they want to buy the company. I sometimes think of my strategy and certain things, as my stupid face for it is reverse triage we basically have all this complexity interaction. Can you just get the easy stuff done first? Which not out of intellectual laziness, but out of, by the time you get to the really hard stuff, then you have fewer things to worry about. I would focus on the EU first and settle with the EU on terms that show how you interact with them. How you are fixed with luck. And of course, settling with the EU is really settling with large complaining competitors. Get them on board with the EU settlement, and then market that to the CMA. And then, market that in the US to the ALJ and settle in the US last and ideal. And so, that would be my order of operations. And I also would be looking for sneaking in as much as possible because this is gonna be a big expensive complex process and a big settlement.

I would work on sneaking in as much malice for my competitors as possible. If there's gonna be this big settlement that restructures the industry. The best thing that's been written about this recently, was this wonderful piece that basically went through. All the iterations, this Industries had going back over the last few decades and any big antitrust settlement would have frozen that permutation and Industry. That's just in constant tunnel. Who's on top and who's on bottom? How these companies are structured? They've put these together and rip them apart and does in times as the market has evolved. it's an incredibly competitive dynamic market and the government would just freeze it at one moment arbitrarily and then that's how it would be a hundred years from now, for something has nothing to do with technology. Nothing to do with helping customers, just has to do with the government, wanting to make sure it looks like it's in charge. But in this case, it could really use that against some of the complainers and some of the competitors and really put Microsoft in terms of how things are done in the relationship between consoles games, contents and platforms. They could make sure that if we're going to freeze everything, I think that Microsoft lawyers could do an incredibly good job freezing themselves on top so they could actually win on this deal in a number of ways.

Andrew: It makes it. I'd be pretty surprised if you can do a legal settlement now that froze the video game industry for in its current structure for 100 years. But I do hear what you're saying. And then just the other thing on Activision. I have so many people and it's generally generalists who reach out to me on this versus kind of experts, but the reach out and be like, hey, Activision Blizzard, I think it's a heads, I win, tails, I win more situation where the deal goes through. I'm buying at 75 and I think it's, you get over 90 from the Microsoft payment and they'll say, well, if the deal doesn't go through like the simple math is Activision will get two and a half or three billion dollars for Microsoft to have a ton of cash on their balance sheet. I think they can earn $4 per share this year. Four times twenty gets me to an $80 stock price, plus the cash on their balance sheet of the like fundamental value I win. Deal goes through, I win. What's the riskier?

I kind of just look at them like event investors will remember and XVI. And an XVI had the exact same thing when they were getting bought and the Chinese authorities blocked that deal from Qualcomm and the stock was 130 and everybody said, "oh this doesn't go through, it's going to 150. If it does go through its 135, we're getting it." And guess what? The deal broke and XVI 3 months later was treating like 70 or 80 per share and it didn't touch its higher now. But this was 2018 or so, it didn't touch a hundred per share again till mid 2020, late 2020 or something. I look at Activision like, "hey, companies under M&A, they tend to kind of freeze. Yes, it seems to be performing well now, but it's a video game company. Like, go look at take to, go look at Ubisoft, go look at these guys. Video game earnings can disappear in a hurry and yeah, I'm a little scared everywhere just because it's such a popular deal. It's the biggest merger Arbitrage out there like everyone's looking at it I'm just a little hesitant on it.

Chris: Yeah. I mean the market generally has been strong this year but just looking back over the last year. I think there's been an almost perfect record of it's already priced in not being correct and bear markets and I'll maybe it's just defined in terms of maybe it's otology but that in week markets something bad happens. If you look it's blocked, they want to get done it drains out. So, I think that, to the extent that at least at our scale. I mean I think it would be different if you wanted to buy a 58. It's a pretty big liquid stock, it might be less. The case of you wanted five-billion-dollar position. If you want a hundred million dollars or two hundred million dollars or per PA want a hundred thousand dollars, I think you can buy it after a break at a better price. Even if this is what you want to own, I don't think there's a need to own it. I doubt this is a real true actual Arbitrage, where you're going to win, either way, you can say that, but I don't think it's probably literally correct. It's probably not in terms of sizing. It's probably doesn't take you out on the downside right? Like a huge position.

Andrew: Yeah.

Chris: She's position in Twitter. Could have taken you out on a break? I don't think a huge position and Activision takes you out.

Andrew: That's a good point. Again, we've been talking about this since probably last summer. And last summer, it was a little bit different where I believe the stock market was down a little bit more, the stock market had a big rally recently. So, stock market down a little bit more, so you're probably looking at Activision's fundamental value being lower and Activision was not performing as well, right? Like the new Call of Duty, which I believe has been a huge hit hadn't come out. There were lots of questions around blizzard they were having all these issues. So, probably the fundamental performance and the multiples gotten better since then. So, it's a good point like you can run it too much. Much better downside today than you could a couple years ago. Anyway, I guess that's it on Activision. What else has been on your mind?

Chris: Yeah. Last last election [?] is over the holidays. I had family staying with me and every time I kind of growl staff people having to go back to work and my mom or dad would be in the house. It was always looking at Activision and checking on their new games. Which I had to tell him, I do this literally is the work. I did understand this video game company in these new games are putting out, but it looked so unserious that is like cheese. Now you could come up with like a project that looks more like work to other people than looking at this video game company. It sounded exactly 40 years ago. I would have sounded making an excuse on. Now, this really is my homework but anyways, yeah...

Andrew: It's like when we're looking at Bob Evans and we were just shoveling mashed potatoes and their mouths like, "look, this isn't because we're gluttonous. This is serious due diligence here." And if I remember correctly, my wife and I went and we had there, we wouldn't tried a lot of their menu and one of them was their candied bacon.

Chris: Yeah.

Andrew: We need two orders of the candied bacon. Not because candied bacon is the most delicious thing in the world, because this is serious due diligence.

Chris: You get this one, right? So, let's see. So, I think litigations very interesting this year. I think kind of waiting until we're in front of the judge. I think that there's interesting thinking about January, since we're kind of coming to the end of the month that we're talking about here. Interesting. That some of the kind of zany faddish retail meme stocks are kind of back in action this month. Even when I generally would think of as a more serious environment. Might migrate the entire bull market is can't we just raise interest rates to 5% for 1/4, just to wipe out everybody who shouldn't be in business. We can just kind of weird environment where you don't have a cost of capital, now you do. I would have thought to some extent things would just get kind of monotonically more serious but some of the zany stuff's kind of coming back to AMC. And Bed Bath & Beyond and some of the names that were kind of super hot over the last few years. Kind of kicking around a little bit this month, Tesla really well.

Andrew: Yeah, it's been. So a, my favorite meme for the past 9 months has been every time another meme stock does some type of squeeze. Somebody will post the meme of Jerome Powell be like "oh, if you guys keep doing this I'm going to raise interest rates by another 50 basis points," or something that's that's been my favorite meme. But yeah, it's been really weird this week. You've seen the return of not this month, you've seen the return of meme stocks. Oh, here we go. As you and I are talking Bed Bath & Beyond, which is one that you and I were talking about. Literally, as we're recording this podcast, they got a default notice from JP Morgan in the stocks, going crazy, but, Bed Bath & Beyond is the perfect one. Before we started recording this podcast, Bed Bath & Beyond had the stock price of 350 per share, let's call it, right? And that gave it a market cap of 400 million which is not huge but you could go look at the debt. The debt was trading for literally Pennies on the dollar. It was not trading 80% of par where maybe there's some UPS, it was trading 6% of par, right? When debt trades that low, there is no equity recovery for a bankruptcy. There were all these reports about their getting ready to file for bankruptcy, and nobody would give them a debtor in possession loan, right? If you can't get a debtor in possession loan in bankruptcy, forget unsecured bonds forget equity.

People are questioning if your business can like, every dollar that goes in, they think it's going to get lit on fire because debtor in possession loans are some of the best loans, generally you can make. And this stock again, I understand it's only a couple hundred million market cap. It's getting squeezed around like crazy but it's just really weird and so... Anyway, that one was weird but I understand there's no borrow all this type of stuff. The one that really jumps out to me is AMC-APE, which I know you and I've talked about you've written up a little bit. Anyone who wants to talk about this, I've read the contract. I'd love to hear anybody who's got actual other thoughts. If you've read the contract and stuff, I don't want to hear AMC-APE to the moon. But AMC stocks are shrieking for 550 per share. Eight is trading for a dollar seventy per share. They're under contract to collapse those two securities and I think it's going to happen in the next 60 days. Maybe it's the next hundred days but those are securities are going to collapse. You can buy two Apes for less than 1 AMC right now. And those SEAM Securities are going to collapse, I think. So, they're under contract. They have every incentive to the world to do it. I keep looking at this again. I understand there are borrow issues there, people are worried AMCs going to squeeze. But when you've got that big spread, I did a post late last month, you can use options to cover the difference and still make a really attractive return. I just keep looking at this and be like, "what am I missing here?"

Chris: The prices can't all be right. We know there's a paradox. And we know the less expensive side of it. And what we don't know is how the more expensive side of it behaves and it's hard to do just stock for stock ratio in a way that is particularly attractive. So you have to use options or just do it on hatched or just say, "look, I am going to stipulate part of my trade. I'm not going to justify part of my trade, I'm going to stipulate it." and they say, "there are people out there who think this is worth a certain amount demonstrably today, think it's worth a certain amount." I am not one of those people that I'm going to just defer to them in the coming months that they are going to hold their view or within 50% of their view with 60, 70% of view. I mean, it's a big fat target. Big spreads are big targets. Lots of crazy things can happen and you can still make money just owning the cheap side of it.

Andrew: It's a good point, because what you're saying is, because AMC so difficult to borrow if you want you can just go buy APE and say, look, AMC and APE are going to collapse. I'm just going to bet that the collapse is somewhere between where AMC and APE at trade right now. Hopefully, the collapse is not like, wow below[?]. And, if you do that with smart sizing, I think it can work well. But, the thing I struggle with there and I do think it's fine because, AMC is so clearly popped up by these meme traders. And, the bonds, they're not Bed Bath & Beyond, they're not trading at six hundred dollars, but they're closed. The bond street about 50 cents on the dollar and I think the equity is fundamentally quite impaired. So, like you're buying a security looks or those, but as you said, like, who are we to question the market? The market says, one's a dollar ninety once five. Why should we say, oh, the value zero? Just because we think, it's just tough.

Chris: They're not doing what you do badly. They're doing something else. If I was going to own a share of MGM and said, "oh my gosh, what if everybody approach the slots?" With my view of what their rational behavior would be tomorrow than it would say, "okay." Then it's going to go to zero tomorrow. But I don't think everybody's going to do what I think is rational for them tomorrow. I think they're going to keep kind of doing the same thing they're doing today.

Andrew: My mom and grandma certainly aren't coming with that rational view. That's their favorite thing in the world.

Chris: And so, they're going to kind of. So I'm going to Simply stipulate what slot lovers are going to do with slots next month. I'm not going to demand that they instantly start agreeing with me and what's optimal irrational, and that's my view of AMC stockholders. I don't think they're trying to do what I try to do. They're doing something else and I don't have a reason to think that's going to change immediately at least. It's harder if you give me a year or two, I just think it's going to be for a month or two more or less the same. And with some shot, if you said something crazy happens with AMC in the next month or two, I don't know. It could also go up ten times or something like you have all sorts of crazy things. I just don't see it being less risky or less volatile with a big hedge and the world of kind of hedge fund guys wanting to do a arithmetically correct hedge. I'm always worried about the Volkswagen Type scenario of just like something, we're just on the cheap part of it and it might be less dangerous than what is mathematically more precise, but in a world where something crazy can happen, it might hurt you.

Andrew: And look like AMC-APE, right? I remember. So, AMC had one share of stock just AMC. They hit their statutory limit, their certificate of incorporation. They hit the limit on that and their shareholders wouldn't approve more. So they issued APE as like a workaround. And I remember when APE came out. APE and AMC economically are equivalent things. They only treat different because of that one loophole. When it came out, I remember AMC was at like eight and APE was at five, and I got so many emails that were like, short, AMC, long gate go to the beach. And before this collapse happened, AMC was seven and APE was about 60 cents. So if you insured name see and gone to the beach, you were getting margin calls at the beach left and right because the AMC bar was crazy. But what I love about this is like, you've got the companies under contract collapse these things. They've got all the economic incentives in the worlds collapse these things. It's a massive spread.

Nothing on here is financial advice. But if you're trying to play this by either just buying APE or using options cover. I think the fundamental value is worthless. But if you got a meme squeeze and this collapse, APE could go from 2 to 20, you never know. So, you're giving yourself the upside exposure of something wildly different than what you and I think it's going to happen happening there. But it just wild and I can't. I know these are meme stocks and everything. So it's a joke, they're weird, but there's also securities, we can look at them and weird things should have miss price. I remember when game stock went from 200 to 600, there was somebody who bought a hundred fifty dollar, put the next day GameStop has gone from 200-600, the put have gone up in value because the volatility had gone so high or, game stop like what's 99% of the money were trading with such implied ball? You can make really good money, you can make money on meme stocks. You don't have to just completely normal just because they're crazy.

Chris: Because I like to write about these things after we set ourselves up. However, we set up, I'm coming of more familiar with some of these reactions that I would be otherwise and the two that really stand out for me are only on writing about the AMC, APE divergence and realizing there's some people who just like the AMC stock and they don't want to talk about anything else. And these are not people who are ever going to do a debt loan or something. I'm always saying, okay, passive [?] view on a company optimized were in the capital structure. You have the best upside downside probability, but they're not thinking about upside or downside or probability. The thing about they like the stock the same thing earlier on with. I remember getting the reactions to think it was Nikola and the stock being super expensive, relative to warrants or anything. It was incoherently expensive and it just got these reactions those speculation just like any other equity, bro. Trust me. I understand the logic. But I made a ton of with the stock already, and if it goes up or down, I'm okay with that. And that was when you get hundreds of reactions like that. And so you think, okay, they're not trying to do the same thing, but they exist. They can do markets. They're in some of these things and they brought crowded in, too. I mean, I don't think it's a huge part of the market abroad, but they've crowded into these very few equities largely on free trade mobile apps. And so, I don't think they go away all at once again. I think they kind of get squished with rising rates but that at least in January, you wouldn't want to take massively out sighs bets things that they love are going to go away right away.

Andrew: So just the retail focus nature reminds me. I saw this earlier, I thought you would love it. So, what made this connection was AMC. I believe if you and AMC stock they give you discounts on popcorn and AMC will have AMC shareholder day where they'll try to bring AMC shareholders. So, they're really playing up to our retail base. I know in the past you've talked about there are wine companies where if you're a shareholder they'll give you just kind of wine [inaudible] companies.

Chris: It's like earlier in Japan, it's in Japan. The Japanese kind of middle-class Japanese investors can sometimes have like a house just full of free stuff not as common in the US but it was...

Andrew: It's nice. I can understand like Buffett Berkshire. If you own a Berkshire share, Geico will give you 8% off your insurance and I can encourage your mindset, I get it. But my current favorite is my friend just sent me this this morning. I'm looking at my phone to see, I believe it's 20. If you own 20 shares of WeWork, they will give you 50% off a WeWork all access plus membership for 3 months. WeWork stock trades at a dollar 50 right now. So, for $30 worth of WeWork stock, you can get 50% off of WeWork all access pass, which if I remember correctly, it's either a hundred dollars per month or like $200 per month, depending on which one you get. But obviously, 3 months. It's just crazy. You basically get free ownership in WeWork plus you get a hugely discounted rent. So [crosstalk] I think that's my favorite example.

Chris: I love something like that. Emotionally, I'm very still agnostic to free stuff for bargains. It's funny it's like, we owe some big position and it'll be a significant upside and free little things, I'll maybe be less happy, but I'll be half as happy about it. Even if it's a millionth as big a deal.

Andrew: Well, you do have to get the WeWork membership, which obviously, eventually, you'll be out. But if you want WeWork membership, anyone who's listening? That's the trade for you go. It's not it's not a bad one.

Chris: I just randomly wave my daughter walked by the window. And I've never had somebody walk by while we were recording before. So, that was my looked up surprised. I'm not going to mention it until I double check that it's legit. But there's a new site that can link into a brokerage account and based on your Investments gives out freebies, based on what you own and some of them are real arbitragers. You own $50 in the stock and get $50 freebie this and that. So, I'll write it up if it's legit but I'm going to play with it a little bit first, just to make sure there's not some catch.

Andrew: I'm just imagining like, "hey, you own one share of a Ferrari for what is it? It's like $200 per share. We're going to give you a free Ferrari $200,000 car.

Chris: Yeah.

Andrew: Anything else you want to talk about?

Chris: Ferrari, actually does have freebies and by which I mean, well we can be there, they do give cars to their best clients that are big discounts the market price. So, that's an interesting one, but that's an expensive game to get into.

Andrew: My one bedroom New York apartment with. I don't think we're getting into the Ferrari game anytime soon.

Chris: Yeah. But anyways, what other things I just want to check to see if anybody asked questions we can peel off.

Andrew: I'll just say, while you're looking through questions, the one thing that's kind of struck me as interesting is, when we started doing these over the summer, Nat gas was nine, Oil was 120, those are spot prices, not future's prices, I fully acknowledge that, but you and I are doing this in January, Nat gas is 280. Oil is 80, right? There's been big draw downs and like one thing that jumps out to me and I've more written about it and talk to the podcast. But look, I was saying it all summer is the curves, the cursor energy and energy company prices are completely diverged. Energy companies are pricing in $60 oil and $3 Nat gas and oil is a hundred and Nat gas is ten. It makes no sense. Everyday, that this exists cash is gushing into these companies, and we've kind of seen it play out, right? Amplify is one of our favorites that we talked about written about ad nauseam, and this stock has done well, while oil and nat gas have come in a lot. And that's because it was so discounted. And, I know you and I both believe the stocks going to do really well once beta comes online. It's got all these other catalysts, probably not the time to fully discuss every single catalyst with this position we've written talked about. But, it just strikes me is over the summer saying oil and energy, prices are going to come down like and then what's going to happen to your energy stock? Fine. Look at the prices and I think there's a lot of places where there's something kind of similar in the market right now.

Chris: Underpaying solves everything, I didn't know it was gonna be a really warm winter, I didn't know. Now, if I didn't have a great way to do this, I wouldn't have done this speculatively because one of the problems with like hedging your book with the commodities outside of the equities, as if they are monkeying with at the same time you could easily be massively over hedged in. Screw it and earn a good idea to a terrible one. But boy, if we had hedged out, natural gas versus our natural gas equity exposure, that would have been a bonanza. But...

Andrew: I know there are people who do it. I think it takes a lot of money and a dedicated trader to hedge commodities is really hard because doing bodies are always rolling nat gas in the winter. When nat gas really in demand, it's generally more expensive than nat gas in the fall. So which are you hedging? But it's just, it's really tough. And, you expose yourself to. As you said, what happen if nat gas is short for one delivery cycle and nat gas goes from 2 to 20 on delivery or Oils, the most famous, you could have been long oil short and Energy company. In 2020 saying, these energy companies are pricing in the energy curve and then oil goes from 30 to negative 30 in a day. And all the sudden you're like, "oh okay. Yeah, I just blew." It's just really hard to hedge equities with commodities.

Chris: It probably made our risk and volatility worse, but it's just, you look at this, I think. What? Across energy and commodities right now, it's just amazing. How much the equities still? I mean, just have survived this move so far and still just look disconnected. And I think Jerry Rapers done incredibly good work on the coal side. But a lot of these you just met of what you could get back in cash in a very short period of time, you own all these things, free and clear. Hold your breath and you're in a few years from now, like just if you just think about it. The easiest way for me to think about this is always 1 x leverage my own money. Forget about the audience, forget about the volatility, forget about the explaining day to day, or week to week, and that's not our whole job. I mean, you have all the kind of short-term issues you have to deal with in terms of pressure. But if nobody was looking right now, if we had no audience, it was just your money and my money, 1 x leverage plus, nobody else, I think the most interesting thing right there is just what you can own free and clear that you pay nothing for and out of what you get back in cash. In things that I think are incredibly unpopular to own, what I think largely because of the ESG stuff and cyclical and volatile and exposed. I think very exposed and it's very, very hard to have precise correct views on the demand side or you have to know about macro and this or that don't supply side, it's quite analyzable. And...

Andrew: If you'll see me like across all commodities, not all commodities, but most commodities, it just feels to me. And I feel like a crazy Doom prepper, but it feels like the world is short. Structurally short every type of commodity. And/or if it's not short, the balance is hanging on a knife's edge. And if Freeport in Texas blows up, that's actually not a great. But you know it just feels one little kink [?] it's turning to the ranch and all these things to your parabolic because the demand is so tight for them. And, the supply is just so limited because these things, their infrastructure basically, it takes years and years to build them up and it just feels like we've under invested so much. I feel like a doom prepper looking at all the stuff, but I'm just like, I feel it from a value investor. These some like, "hey, I'm paying 20% below the curve even after the curves come down a lot. And by the way, it seems like we're structured short these things." So it seems like the curve has it's more pressure to the upside and downside. Like it's almost the best of both worlds.

Chris: I think I have less and less to say because I just don't think I'm that persuasive on it. I'm not sure that I'm right on kind of philosophical trade-offs that are on the efficiency curve between economic growth and environmental protectionism say. But I'm incredibly interested in and feel sort of bold about not philosophical differences been about incoherence. So if the world says, we want an energy transition, we want green new energy, we want intermittent fuel and we're going to not just rhetorically commit, but we're going to actually commit with our capital to something that may or may not be a good idea. I'll set aside whether it's a good or bad idea for 2050, but it is not available for 2024 but were acting as if we just kind of blocking our ears for what we're going to do with a multi-decade difference between our philosophical preferences in our day-to-day needs or your needs. And, we're just going to run into this in a few years and in some cases we're actually going to trade down on the environmental benefits, just because of the practical needs. And, we've kind of had a little bit of a waiver because of this warm winter, but if this winter was a surprisingly cold, it was surprisingly warm. We would have been hit with that immediately and it could be next year.

Andrew: The one that jumps us is, everybody loves nuclear now, I get it. I'm all on board. Nuclear is clean. It's really efficient like all this great. The one that really jumps out to me and Europe, geopolitically should you have seen getting all your gas from the Russians might have put you in a weird spot. Probably, but I can understand not being prepared for this major gas supplier to basically go offline because they decide to launch a war into another country, right? But the one that always jumps out to me and everybody points to it, but it is so crazy to me. New England, over the winter is burning oil because they don't have enough natural gas and it's cold. The US has more natural gas, then we freaking know what to do with. All we have to do is build pipelines and natural gas, obviously, it's not the greenest thing in the history of the world, but natural gas is really clean. And, as a transition source, yeah, I'd rather be on nuclear for base literate, but you're burning oil and wood instead of natural gas, because you won't build a freaking pipeline from wherever you want to call him. The Middle East in the midwest or Texas, you won't put a pipeline. It's absolutely crazy to me and you look at the stuff, these decisions have ramifications. And, if I wrote in the oil thing, the reason we stopped having peak oil fill fears in the late 2000s, early 2010's is because we found the Permian Basin. We found the Shale Revolution, everything in the US. If that happens today, would politicians even allow for the infrastructure to exploit all of that to be built. I don't know. Anyway, I feel like a crazy person because I'm generally on board with transitioning to clean yourself. I think electric cars are awesome. But why can't we have both like clean nat gas, nuclear and start a transition?

Chris: Wherever we want to ultimately end up. I think it's almost definitional of being an adult and being rational to say let's do what makes the most sense now. Now, we can talk about later - later and I think that in some of these environmental conversations it feels more like having a conversation with somebody else about their religion where they're not trying to meet you with logic on a kind of secular footing of just upside downside probability. It's really, I think it started with a philosophically driven group that was very effective at convincing people in the government. And then they subsequently have gotten very good at convincing people in the investing community. There would be good for them as a business. If you look at places like black rock, some of the most strident environmentalists now are massive capital allocators. There are a lot less strident about it when they're investing in China, where they don't have the same influence, even where there's a lot that's dirty or mean trying to solve these problems globally. You just walk into this Buzz, if you can't control China, it's almost it's very fraught at getting it better just in the developed Western world. But the ESG stuff has been a really good bizz [?]. I mean, you look at even just a marketing, it has been really effective. And so, once you have the capital allocators and the government and the philosophical environmental movement, it's just been incredibly effective in my concern. We have a lot of concerns but the concern that I think is the one that we can express as an investment is that there's just this difference between the practical needs and the kind of hopes and the identity that people want to associate with, in terms of where they put their money. And so, you just have these underinvested needs. And then, you got these just crazy situations where the saying another price is too high, so, we need to crash supply.

Andrew: It's crazy. Yeah, it's been what people wanted to hear us, go on a rant about...

Chris: Sorry about that.

Andrew: ... energy supply. We've been going all this hour. Anything else you want to talk about or should anything else you want to get out before we talk in particular[?]

Chris: I think I liked our energy rant. I think that, that's pretty good. Thank you for having me on.

Andrew: I've liked to run into your into because it's also been profitable I do. But no, it's just crazy. Thanks for coming on Chris. Looking forward to seeing you New Canaan[?] next week. Looking forward to China's podcast next month and we will talk then.

Chris: Talk to you then. Bye bye.

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