Chris DeMuth's State of the Markets January 2023

Episode Summary

Executive Summary: Andrew Walker and Chris Demuth discuss a January 2023 market environment shaped by falling energy prices, volatile meme stocks, and unusually difficult merger-arbitrage conditions. They are broadly bearish on takeover rumors amid financing and regulatory risk, skeptical of Activision’s risk/reward despite apparent upside, and convinced that retail-driven distortions in names like AMC/APE and Bed Bath Beyond can persist longer than expected. They end on a strong structural bullish case for energy/commodities due to underinvestment and supply constraints.

Main Topics: Merger arbitrage is harder due to financing and regulatory risk (Priority: 5/5): Chris argues that deal financing has become unstable and regulators are increasingly interventionist, making pre-arb and takeover rumors unattractive unless spreads are very wide and the downside is acceptable. Activision Blizzard/Microsoft deal analysis (Priority: 5/5): The hosts debate whether Activision is a true arbitrage or a risky event-driven bet. They consider FTC, EU, and UK CMA approvals, potential settlement pathways, and the possibility that a failed deal could cause the stock to re-rate lower than fundamental bulls expect. Regulatory overreach and deal process frustration (Priority: 4/5): A major theme is the perception that regulators are blocking or delaying deals for institutional ego rather than consumer welfare, with examples from Activision, Shaw/Rogers in Canada, and Spectrum Brands. Meme stocks and retail speculation (Priority: 4/5): The discussion covers Bed Bath Beyond, AMC, APE, Tesla, and other retail-favored names. The speakers emphasize that irrational retail demand and short-squeeze dynamics can keep these securities mispriced for extended periods. Energy equities vs. commodity prices (Priority: 5/5): They revisit the mismatch between energy company valuations and commodity curves, arguing that equities still look too cheap even after oil and natural gas prices fell sharply from prior highs. Structural commodity scarcity and underinvestment (Priority: 5/5): Chris makes a broader macro case that the world is underinvested in commodity supply, creating a fragile balance where small disruptions could cause large price spikes. ESG, infrastructure, and policy incoherence (Priority: 4/5): The conversation closes with criticism that energy-transition rhetoric conflicts with real-world needs, especially around pipelines, natural gas, and Europe/New England energy constraints.

Key Arguments: Pre-arbitrage takeover rumor stocks are less attractive when financing costs rise and private-equity leverage becomes harder to assemble; many such deals may break or reprice badly. Regulatory approvals are not purely analytical; in some cases, regulators appear motivated by blocking deals rather than fixing consumer harms, which adds asymmetric downside to event trades. Activision is not a simple 'heads I win, tails I win more' situation because a failed deal could lead to a substantial re-rating lower, as seen in prior broken deals like NXPI. The best deal-ratio opportunities are wide spreads with multiple paths to win, especially when the stock is still attractive as a standalone investment. Retail-driven securities like AMC and APE can remain distorted because many holders are not acting on traditional valuation logic, so obvious arbitrage can stay mispriced. Owning the cheap side of a merger or corporate-action trade can be rational if the cheap leg has large embedded volatility and can still produce positive outcomes under multiple scenarios. Energy equities have lagged commodity fundamentals too much; even after major pullbacks in oil and gas prices, many producers still look disconnected from replacement value and cash generation. The global commodity system is structurally short due to years of underinvestment, meaning small supply shocks can lead to outsized price moves. ESG and policy preferences often conflict with practical energy needs, creating shortages, poor infrastructure decisions, and investment opportunities in conventional energy and commodities.

Data Points: Podcast date: January 26, 2023 - The episode is framed as a monthly state-of-the-markets discussion in late January 2023. Delupa company count: Over 3,000 companies - Sponsor copy claims Delupa’s data coverage spans more than 3,000 public companies. Activision share price discussed: About $75 per share - Andrew notes the stock was around $75 when they started discussing it months earlier and remained near that level. Activision approval jurisdictions: 3 regulators - They identify the FTC (U.S.), EU regulators, and the UK CMA as the key remaining approvals. Bed Bath Beyond share price: About $3.50 per share - Chris cites this as the stock price while discussing the default notice and distressed capital structure. Bed Bath Beyond market cap: About $400 million - He contrasts the equity value with the distressed debt situation. Bed Bath Beyond debt price: About 6 cents on the dollar - Used to argue the equity had little or no bankruptcy recovery value. AMC stock price: About $5.50 per share - Referenced in the AMC/APE collapse trade discussion. APE stock price: About $1.70 per share - Referenced as the cheaper leg in the AMC/APE convergence trade. AMC/APE collapse timing: 60 to 100 days - Chris says he expects the securities to collapse together within this time frame. WeWork membership offer: 20 shares for 50% off for 3 months - A shareholder perk was discussed as a retail-investor engagement gimmick. WeWork stock price: About $1.50 per share - Used to highlight how cheap the stock is relative to the membership perk. Natural gas spot price (summer reference): $9 - Andrew recalls discussing much higher natural-gas prices over the summer. Oil spot price (summer reference): $100-$120 - Used to contrast prior energy-market conditions with January levels. Natural gas price in January: $2.80 - Andrew notes the sharp drop from summer levels. Oil price in January: $80 - Andrew cites the lower January oil level versus summer. Interest-rate joke reference: 50 bps - A meme referenced the Fed chair raising rates after meme-stock squeezes.

Pivotal Quotes: "I still am close to 10 out of 10 at the moment of my concerns on both the regulations side and the credit side." — Chris Demuth: His overall risk assessment for merger-arbitrage and deal situations. "Big spreads are big targets." — Chris Demuth: Explaining why wide merger spreads are more attractive than tight ones. "I feel like the world is short, like structurally short, every type of commodity." — Chris Demuth: His macro thesis on underinvestment and supply constraints in commodities.

Implications: Listeners should treat deal arbitrage, meme stocks, and energy trades as regime-dependent rather than formulaic. Wide spreads, distressed capital structures, and commodity equities may offer opportunity, but regulatory and crowd-driven risks can overwhelm simple valuation models.