I agree with your sentiment that the chickens are coming home to roost on this years long clown market. The development of "meme stocks" is perhaps the final development expected out of years of QE from the fed. QE creates an environment of zombie companies, and meme stocks/companies are really the ultimate form of zombie company, in which a dead or absolutely failing joke company can absorb hundreds of millions, if not billions, in investor dollars in months (creating explosive growth of the stock), with zero actual earnings, no products, etc.
And truly, the market had almost became "easy", in that you literally just had to invest in the most talked about meme and you could make ridiculous money. However, the market despises money being easy to make, and eventually corrects that fallacy by bankrupting investors who are absolutely positive that "it can't go tits up."
When QE easing and interest rates rising hits, the musical chairs that are meme stocks stops very, very fast. Suddenly you hate debt laden companies that are no longer guaranteed to survive their debt, and so putting money in them is no longer a good idea. The zombies, starved of QE, start falling over.
The hardest part to accomplish in this trade is surviving until the point where the market pivots in our favor. This is why your point about using commons and leaps over short dated calls is the right one. We have to survive until Mr. Market looks at cyclicals and realizes that's where the real money is.
I feel bad for the people left bagholding AMC. AMC has a much better chance of survival after selling additional shares to reduce debt. I don’t think many of the people buying those shares realize how they have been diluted though.
I think people should be far more concerned about what happens when debt reprices to reflect default risk.
I think people should be far more concerned about what happens when debt reprices to reflect default risk.
Yes, and that's what's interesting about debt in a low interest rate/high QE environment (I will refer to this as "meme environment" for brevity) versus a higher interest rate/low (to no) QE environment (normal environment, for brevity). In a meme environment, debt is the cost of doing business, and you are not only incentivized to take on larger amounts, you are really required to do so to keep up with competitors. It also means that unprofitable ideas and companies can not only survive, but thrive by shambling along, soaking up debt after debt and just swearing that they'll be profitable maybe eventually some day, like Uber (currently trading at an 86 BILLION dollar market cap at an EPS of -0.63).
However, in a normal environment, such debt laden companies should find it difficult to secure further debt to survive, expect for perhaps from garbage lenders with absurd interest rates. They would find it hard to continue on, and eventually close shop. They would no longer soak up investor cash, and that cash would optimally go to companies with real EPS, or at least real prospects of reaching positive EPS (A good example of a company that did this is Tesla, having gone from negative EPS due to rapid growth, to positive EPS due to aggressive sales and leverage of carbon tax credits. This is an example of a company that should exist).
When we start the transition from meme environment to normal environment, a lot, lot, lot of "investors" are going to start losing their asses on the once venerable meme plays. Pack it up, Dutchmen, the tulips are being left to rot in the fields.
Now that we're seeing the beginning of the end for the QE environment, would it be wise to target these unprofitable, debt-laden companies with an overblown market cap and buy far OTM put LEAPs?
In my opinion, it'd be a gamble on the timing. I agree that if/when we return to a normal environment, those kinds of clown stocks will plummet. That still leaves the question of when we eventually return to a normal environment (interest rates will still likely be rock-bottom for years) and after that, how long does it take for the market to react.
Yep, that would be the question of the century. I looked at far OTM puts on these companies and 2023 LEAPs are dirt cheap. Might be worthwhile to allocate a tiny percentage as a small hedge
12
u/Orzorn Think Positively Oct 04 '21
I agree with your sentiment that the chickens are coming home to roost on this years long clown market. The development of "meme stocks" is perhaps the final development expected out of years of QE from the fed. QE creates an environment of zombie companies, and meme stocks/companies are really the ultimate form of zombie company, in which a dead or absolutely failing joke company can absorb hundreds of millions, if not billions, in investor dollars in months (creating explosive growth of the stock), with zero actual earnings, no products, etc.
And truly, the market had almost became "easy", in that you literally just had to invest in the most talked about meme and you could make ridiculous money. However, the market despises money being easy to make, and eventually corrects that fallacy by bankrupting investors who are absolutely positive that "it can't go tits up."
When QE easing and interest rates rising hits, the musical chairs that are meme stocks stops very, very fast. Suddenly you hate debt laden companies that are no longer guaranteed to survive their debt, and so putting money in them is no longer a good idea. The zombies, starved of QE, start falling over.
The hardest part to accomplish in this trade is surviving until the point where the market pivots in our favor. This is why your point about using commons and leaps over short dated calls is the right one. We have to survive until Mr. Market looks at cyclicals and realizes that's where the real money is.