Keeping My Promise After Four Years
Keeping my promise after four years... U.S. bankruptcies are on the rise again... Unwinding the biggest mega-bubble in all recorded history... WeWork is headed for bankruptcy... Another familiar name could soon join it... An unprecedented moment in financial history... I can't predict – but I can help you prepare...
Today, I (Dan Ferris) am keeping a promise that I made four years ago...
You see, in the October 25, 2019 Digest, I wrote about beleaguered coworking-space operator WeWork (WE).
At the time, news just broke that Japan-based conglomerate SoftBank planned to take control of WeWork. As part of the deal, WeWork co-founder Adam Neumann was set to get a fat paycheck and ride off into the sunset. (I always tell you that we can't predict the future.)
But more importantly, in that Digest, I made a promise to readers...
I'll keep writing about WeWork until it's gone, and probably long after that.
Here's the thing... WeWork is almost gone.
So in today's Digest, I'm keeping my promise to you...
I'll share all the details of WeWork's impending demise. I'll tell you about another familiar name that will likely soon go bankrupt as well. And finally, I'll discuss what investors like us can do during these unprecedented and unnatural times in the financial markets.
In that October 2019 Digest, I made an important point about WeWork...
[WeWork is] a pristine example of the nonsense that prevails when investors get excited about risky, awful businesses that light money on fire.
I've occasionally pointed out that all the best investors are more interested in negative action (what not to do) than positive action (what to buy today). It can sometimes be difficult to get that point across to subscribers who think they're paying us for stock picks.
Yes, if you're a subscriber, you're paying us at Stansberry for stock, bond, and options recommendations... But you're also paying us to have more insight than the folks on the other side of those recommendations. You're paying us to know what to avoid, too.
I hope you listened to the part about "negative action" – what not to do...
After all, the unwinding of the biggest mega-bubble in all recorded history is picking up speed. And as investors, we've had to dance around a lot of pitfalls in recent years.
For one thing, a lot of companies are going bankrupt...
Market-intelligence firm S&P Global recently reported that 516 U.S. companies have gone bankrupt so far this year (as of September 30).
That rivals the first three quarters of 2020, when 518 U.S. companies went bankrupt. So when it comes to bankruptcies, we're near "shutting down the entire global economy" numbers.
Great.
Other than that year, it's the highest number of U.S. bankruptcies in the first three quarters since 2010. Back then, the biggest financial crisis since the Great Depression was still working its way through the economy.
That year, 657 companies went bankrupt in the first three quarters. And 2010 finished with 827 bankruptcies.
At least 17 companies with more than $1 billion in liabilities have gone bankrupt this year.
Teeth-straightening service SmileDirectClub tops the list. It filed for bankruptcy at the end of September. Other familiar names on the list include 99-year-old trucking company Yellow, home-goods retailer Bed Bath & Beyond, and Silicon Valley-based bank SVB Financial.
In its most recent report, S&P Global cited the Federal Reserve's "higher for longer" interest-rate policy as a factor that added to "economic pressures."
In other words, a lot of companies can't handle normal rates. And if not for four decades of declining rates and more than a decade of 5,000-year-low borrowing costs...
They might've never existed at all.
That brings us to the latest developments with WeWork...
Again, it's known as a coworking company.
That just means it leases expensive buildings in big cities for terms of 10 years or more. Then, it rents out office space in those buildings for as short as a month – mostly to startup companies and individuals.
In its early days, the company offered a fun atmosphere – with free beer and nice furniture. It was a cool company, with an equally cool co-founder in Neumann...
In the past, Neumann charismatically opined that he aspired to become the world's first trillionaire or its president (yes, of the whole world). He also liked to smoke a lot of weed and drink a lot of tequila.
Heck, I must admit... Even I liked Neumann's mojo at first.
Who doesn't like a guy with big dreams, who attracts a lot of money, and gets plenty of press coverage, which then gives him the platform to express his desire to rule everything – starting with his real estate empire?
Neumann was like a young, modern version of Donald Trump. His version was just updated with more hair, trippy modern values, drugs, and alcohol.
Neumann's vibe is evident in WeWork's 2019 filings with the U.S. Securities and Exchange Commission, when it planned to go public. In all capital letters, the document began...
WE DEDICATE THIS
TO THE ENERGY OF WE –
GREATER THAN ANY ONE OF US
BUT INSIDE EACH OF US.
A few pages later, the mission statement included this gem...
Our mission is to elevate the world's consciousness.
I bet you've never heard a landlord talk like that before! (After Neumann left the company, WeWork replaced the mission statement with something less ethereal.)
Now, one thing I need to make clear...
Extreme eccentricity in a businessperson is best served with success and growth – and ultimately, profitability. That makes the eccentric vibe seem like some kind of magic.
"Weird guy makes a ton of money for himself and his investors while running a wonderful business" is a great story. We've heard it many times over the years – Warren Buffett, Steve Jobs, Jeff Bezos, Elon Musk, you get the picture.
But if you light billions of dollars of investor capital on fire, all that weirdness turns to red flags in the rearview mirror. (With that said, in our current environment, even Neumann will never appear to be quite as clueless as the investors who gave him all the money.)
Neumann has been a godawful disaster as a businessman...
The COVID-19 pandemic supercharged the "work from home" migration. And that shift hurt WeWork's core business.
But you can't blame the company's failure on that move alone...
After all, the company has reported operating losses for its entire 13-year existence. Its operating losses from its 2010 founding through this past June totaled about $16 billion.
As far as anyone can tell, it was never a viable business. And yet, as the Wall Street Journal reported yesterday...
WeWork's lowercase, serif-font logo sprang up on buildings in more than 100 cities from Beijing to São Paulo. It became the largest private tenant in both New York and London and built enough desks to fit the population of Baltimore.
WeWork peaked in early 2019, when tech speculator Masayoshi Son's SoftBank gave Neumann more than $10 billion in funding. That move raised WeWork's valuation from $17 billion to $47 billion.
It was always an absurd number. And it started falling later that year...
By early November 2019, WeWork's valuation had plunged to less than $5 billion. It was down nearly 90% in about 10 months. And that happened even before it went public.
That finally happened two years later...
On October 21, 2021, WeWork went public with the help of a special purpose acquisition company ("SPAC").
I can't believe it ever reached that point. And I doubt it could've gone public without the enormous SPAC boom in 2020 and 2021 – a classic sign of a massive mega-bubble top...
If the Fed didn't push rates to zero in response to the pandemic-related shutdown of the global economy, WeWork probably would've gone "gentle into that good night" a lot sooner.
The Fed and the government's massive stimulus efforts helped do what all bubbles do...
It lit a lot more investor capital on fire.
In other words, the bailouts magnified the losses – which punished the masses even more.
WeWork, some of the worst garbage in the stock market, had already topped out by then. Today, it's down more than 99% since it went public at a split-adjusted $392 per share.
Now, the Wall Street Journal reports that WeWork could file for bankruptcy as early as next week...
The company's latest balance sheet showed $18.7 billion in total liabilities. That figure included $13.3 billion in long-term lease obligations and $2.9 billion in long-term debt.
Meanwhile, since WeWork's founding, investors have put nearly $30 billion of capital into the company (most of which has already gone to money heaven).
Three members of WeWork's board of directors quit in August. And notably, four new directors with experience in complex restructuring transactions replaced them.
WeWork missed an interest payment on October 2. That triggered a 30-day grace period. And on Tuesday, the company said bondholders were giving it an extra seven days.
The clock is ticking...
The extra seven-day period is up next week. So sooner or later, depending on the bondholders' patience, WeWork will need to either pay up or file for bankruptcy protection.
Of course, as we discussed earlier, WeWork isn't alone in the bankruptcy line this year. It won't be the last company to die in 2023. And you might even recognize another name...
Another one of my favorite Digest targets looks to be close to bankruptcy as well...
I'm talking about movie-theater operator AMC Entertainment (AMC).
Risk-management and credit-monitoring company Creditsafe said Wednesday that AMC's debt-to-equity ratio and late payments could be the warning signs before its demise.
AMC's latest balance sheet showed negative $2.6 billion in shareholder equity. That means the company's liabilities are $2.6 billion more than its assets.
It has $4.8 billion in debt. That's an insane debt-to-equity ratio of negative 186%. An extremely negative debt-to-equity ratio like that is a classic sign of high financial risk.
Creditsafe also said AMC has gotten a lot slower at paying its bills. As MarketWatch reported on Wednesday...
AMC's Days Beyond Terms (DBT), which is how many days past payment terms it typically takes to pay invoices, also deserves attention, according to Creditsafe...
The credit monitoring company says AMC's DBTs jumped from 9 days in March to 14 in April. They then dropped slightly over the next two months, before spiking drastically to 21 by August. Typically, a lower DBT score indicates that a company is a more reliable payer.
I couldn't help but notice another item on AMC's balance sheet...
Today, the company's property is valued at $1.6 billion. Most of that value is in leasehold improvements, equipment, furniture, and fixtures.
Let's do a little bit of "back of the envelope" analysis to simplify things. Specifically, we'll divide the property value by the total number of AMC theaters – both leased and owned.
According to AMC's 2022 annual report, the company owned or leased a total of 865 theaters at the end of that year. At $1.6 billion in total property value, each theater would be worth roughly $1.9 million.
At the end of 2017, AMC reported a total of 1,014 owned or leased theaters. They were valued at around $3.1 billion on the balance sheet that year – or about $3.1 million per theater.
During that same period, AMC's revenue fell from nearly $5.1 billion to about $3.9 billion. It stopped making consistent profits in 2016. Since 2017, it has generated roughly $7.4 billion in net losses. And attendance dropped from 1.2 billion in 2017 to 708 million in 2022.
Putting it all together...
Revenue is down nearly 25% over the past six years. The company has lost billions of dollars in that span. The amount of folks going to its theaters is down more than 40%. And its per-theater property value fell about 39%.
I can't help but wonder if AMC's accountants have been conservative enough in valuing the theaters. And then, I think about what would happen to the value of all those leasehold improvements, furniture, and equipment in a liquidation bankruptcy.
If AMC had to liquidate the assets, it would be a bloodbath.
Like WeWork, AMC is a furnace that burns cash. It's not a viable business.
I suspect some of the individual theaters do well. I assume they can continue operating for several years. But many of them aren't successful. And unless they start printing money in the lobby, they'll unlikely ever be profitable again.
AMC's bankruptcy might not be imminent like WeWork. But it's inevitable.
As I implied above, the lowest interest rates in history led to WeWork's birth...
Neumann and his partners founded the company in 2010. That was only two years after the Fed took rates to zero.
Real estate loans and leases hinge on interest rates. Low rates can seem to justify buying or leasing real estate properties at exorbitant prices.
But without extremely low rates, it would've been a lot harder to convince a lender or building owner that it could pay for expensive long-term leases by offering short-term (and usually temporary) office space for a bunch of startups and lone entrepreneurs.
Likewise, AMC would've gone bankrupt by now if its "meme stock" status and zero-percent interest rates didn't bail out the company.
And of course, its meme-stock status was a direct result of the Fed shoving rates back down to zero during the pandemic. That move made it impossible for anyone to earn safe income on their savings. And in turn, it encouraged speculative gambling on stocks like AMC.
AMC would've had to pay much higher interest rates on its debt. That would've pressured its operating results. And perhaps, it would've taken the company into a position of generating consistent net losses even sooner than 2017.
The company itself might still be around in one form or another. But in that environment instead of what really happened, its equity would've gone to zero at least once by now.
You know what happened instead...
Rampant speculation turned what would've likely been a tame short-covering rally into the mother of all short squeezes.
AMC soared from about $20 per share in January 2021, to an intraday high of nearly $650 in June of that year. That's a gain of more than 3,000%. And most of that surge occurred in just about 20 trading sessions starting in May.
The remarkable ascent was a bright, shiny object that mesmerized the "apes" who became AMC's hyper-loyal shareholders. They poured boatloads of money into the stock without understanding how badly the business had already deteriorated.
Management saw an opportunity to raise money by issuing new shares. And it pounced...
AMC's share count rose roughly ninefold from the third quarter of 2020 to the second quarter of 2021. (That's less than one year.) The company raised more than $2.1 billion in total by selling both new stock and new bonds.
But of course, what was good for the company and its well-paid executives was terrible for shareholders...
The stock has fallen roughly 99% since its mid-June 2021 meme-stock high. The apes have lost nearly everything.
AMC's management team sold them shares, kept its paychecks intact, and destroyed the apes' wealth as tens of billions of dollars in market cap evaporated.
None of it would've likely happened without the extreme level of speculation that occurred in 2020 and 2021. And I don't believe the market would've gone "absolutely ape" without the massive central bank and government stimulus that occurred after the lockdowns.
To be fair, though...
By 2020, the excesses and misallocations of capital of more than a decade of record-low rates were already there. The post-pandemic speculative excess was simply the beginning of the end – the final "blow off" top that has signaled the death of all the big mega-bubbles.
Now, you might be wondering why I go through all this stuff again and again and again...
It's simple...
We're living through an unprecedented moment in financial history.
We just experienced 40 years of falling rates followed by more than a decade of zero rates.
That period warped our entire world out of all recognizable shape. But now, rates are returning to a normal level after the Fed hiked them at the fastest pace since 1980.
It's like we just stepped back on land after bobbing around in the ocean on a tiny boat for a few weeks. We got thrown around. And we won't be able to keep our balance for a while.
Companies like WeWork and AMC are so symptomatic of this era that I'll keep following them every step of the way. I'll track them both to their ultimate, inevitable failure.
With WeWork, that's a promise I made four years ago in the Digest. And now, it looks like the company's death could come as soon as next week.
But unfortunately, it's not the end of the entire saga of this mega-bubble. Because of the unprecedented and unnatural turn of events in the market (and its all-pervasive effect), I doubt many investors are ready for what comes next.
I can't predict what that will be. But understanding how different the current moment is from the past four decades is a great start to helping us all prepare for what's ahead.
That preparation will help us preserve and grow our wealth – whatever the future brings.
New 52-week highs (as of 11/2/23): Cameco (CCJ), CyberArk Software (CYBR), Cheniere Energy (LNG), Shell (SHEL), and Walmart (WMT).
Today's mailbag features feedback on yesterday's Digest, which was a classic essay from Stansberry Research founder Porter Stansberry.
As a reminder, Porter is back for the first time in three years. And he's sharing a new video message with all our readers and subscribers. The video covers the trouble he sees for the economy in 2024, how we got here, and how he suggests you prepare for what's to come.
You can check it out here – for free. And as always, if you have a comment or question, you can send it to feedback@stansberryresearch.com.
"I'm proud to say I've been with Stansberry Research long enough to have read the original publication of [yesterday's] missive.
"I miss Porter's commentary. This was part of the start of my personal education on economics and finance." – Subscriber Warren F.
"Welcome back, Porter! We've missed you!" – Subscriber Michael D.
"Just a note to say it was great to hear from Porter again." – Subscriber Ed E.
Good investing,
Dan Ferris
Eagle Point, Oregon
November 3, 2023