Will Seinfeld Shed A Tear? - In this issue - Harwood Financial Group
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In this issue Will Seinfeld Shed A Tear? Wild trading stories are all over the news. Stocks of bankrupt companies are surging higher, and others with no product to sell are worth as much as established institutions. What’s going on? June 19, 2020 1
Keeping The Reservation This is really strange because companies
file for bankruptcy when they can no longer
Having been a frequent flyer for over two
service their debts. The courts then assist
decades, the best advice I can offer is to
with the liquidation of assets to pay back
never rent a car unless you absolutely must.
creditors. There is rarely anything left after
The added time, hidden fees, and near
bond holders get paid back, so equity
certainty that the vehicle selected will not be
almost always goes to zero.
there upon arrival make the entire process
infuriating (the immortal genius of Seinfeld The story officially turned ridiculous last
is the only supporting evidence needed: week when Hertz announced plans to sell
https://www.youtube.com/watch?v=4T2G more of its stock to the public (since their
mGSNvaM). stock surged) and use the proceeds to pay
back creditors. In my entire career, I’ve
Therefore, when Hertz Rental Car filed for
never seen a move this bold from a
bankruptcy protection on May 22nd, it’s
company in this much distress.
hard to say that I was surprised. Hertz also
had around $19 billion in debt (that’s a lot) The amount of cash that could have been
and roughly 700,000 cars (that’s insane). raised from this stock offering was nowhere
Those cars were the collateral for the debt, close to enough to get them out of the hole.
so when used car prices began to plummet Meaning, anyone buying the new stock
in April, the company had to post more would most likely see their investment go to
collateral (cash). But they didn’t have it zero. Hertz even admitted in its prospectus
because people stopped traveling. that the investors could get wiped out in the
bankruptcy1.
So far, nothing too weird here. A company
in an industry disliked almost as much as The publicity and subsequent inquiry from
phone and cable back in the day the Securities and Exchange Commission
(https://vimeo.com/355556831) took on (SEC) convinced management to scrap the
too much debt, and an exogenous force plan a week later. But the fact that it got as
drove it into bankruptcy (pun intended). This far as it did is truly spectacular.
happens a lot during economic downturns.
This was not an isolated event either.
The story starts to get interesting four days Chesapeake Energy and J.C. Penny are
later. Between May 26 and June 8, Hertz’s both on the brink of bankruptcy, yet their
stock exploded in price from 56 cents per stocks also surged periodically over the last
share to $5.53 per share - a jaw dropping two weeks. The obvious question then is
rise of nearly 10 times1. who has been buying stocks that have
virtually no shot of rebounding.
2What’s In A Name? Ford. That’s pretty amazing, but what
transforms this story into borderline
Nikola Tesla was a brilliant engineer and
unbelievable is that they have yet to
scientist known for designing the
produce a vehicle. This paradox also begs
alternating-current (AC) electric system,
the question of who is buying.
which is the predominant electrical system
used across the world today. Tesla, now the Who’s buying?
most valuable car company in the world2,
For all intents and purposes, there are two
is named after him.
classifications for investors. The first is
There is a lesser-known electric vehicle professionals. They go to school to study
company called Nikola (also named after finance and economics, and they have
Nikola Tesla). This company focuses on spent years understanding the intricacies of
battery and hydrogen powered commercial financial markets and asset pricing. They
trucks, and they recently went public on tend to manage significant assets and are
June 3rd (through an unusual manner that often referred to as “institutional investors.”
is out of the scope of this discussion).
The second group of investors is everyone
Despite being publicly traded for less than else. This cohort is a blend of experience
three weeks, the chart below shows that and skill, but the one commonality is that
Nikola is now worth almost as much as they do not manage money for a living. The
3industry refers to these investors as “retail,” bubble. Stories of companies with no
due to the smaller size of capital they invest. revenue and stratospheric valuations don’t
often end well.
The irony of investing is that being a
professional does not guarantee better Furthermore, most institutions have strict
returns over time. I’ve met countless guidelines around buying stock of a firm in
individuals that patiently invested in index bankruptcy and/or a newly issued stock
funds that have outperformed professionals with no product on the market. If these big
with Ivy League degrees. Hence, the term money managers break their risk controls,
“retail” is by no means a derogatory one. they could be held liable for losses, so
It’s just meant to delineate the large these rules are rarely broken.
institutions from everyone else.
Since professionals are probably not the
But professionals do tend to be more skilled ones trading these stocks, let’s look to
at assessing risk. For example, some of the recent trends on the retail side.
professionals probably were not buying
Robinhood is a trading app for smart
Hertz after it filed for bankruptcy. The chart
phones that targets younger traders. They
below depicts what most professionals
were the first to offer free trading, and they
already know – stocks of distressed
are closely watched in the industry because
companies (based on their bond price)
they offer unique insight into retail trading.
almost never recover.
They had a staggering 3 million new
Professional investors also likely remember accounts open in the first quarter of 2020.
or have read extensively about the dot-com That’s nearly double the 1.58 million new
Source: Verdad bond database. Data for USD corporate high-yield and investment-grade bonds 12/31/96 – 5/30/20. Uses average bond price for
unsecured bonds, secured bonds if no unsecured bonds, and subordinated bonds if no secured or unsecured bonds.
4account openings for Charles Schwab, TD stock market since, and the Pavlovian
Ameritrade, and E-Trade combined3. response to “buy the dip” is engrained in
their psyche. They are afraid of missing out
Add up all of these accounts, and it appears
on the next Tesla because they feel they
that several new retail traders entered the
missed out on Tesla. It’s only human nature.
stock market this year. But why now?
Another theory that has gained some
The Bottom Line traction is that it’s a pivot from sports betting.
Blaise Pascal was a brilliant seventeenth Apparently, the demographics of a
century mathematician and philosopher Robinhood customer are similar to that of a
who famously once said: sports bettor (men aged 25-34)4. Since live
sports aren’t happening right now, the
“All of human unhappiness comes
demand to gamble may have moved to the
from a single thing - Not knowing how
stock market.
to remain at rest in a room.”
If any of these explanations are correct, then
In my opinion, Pascal nailed this one.
Godspeed. All the best to those who have
People are just bored. They haven’t been
the courage to throw caution to the wind
able to go out to eat, travel, or socialize.
and treat the stock market like a casino. Just
That was mostly illegal until recently, so
remember that when a venue gets treated
many have been sitting at home with an
like a casino, the outcome tends to look like
empty Netflix queue and no sports to watch
a casino too (play long enough and you’ll
(more on this shortly). Those that crave
most likely lose).
action haven’t had it for some time, and
boredom can lead to destructive behavior. Lastly, don’t confuse any of this with what’s
behind the broader stock market rally.
The stock market is perfect to scratch this
These stories represent a microcosm of
itch. It’s fast-paced, there are dedicated
overall trading, and while retail investors do
news channels that follow its every move,
have a collective impact, there is simply no
and best of all, it’s easy to play. Thanks to
way the $20 trillion U.S. stock market could
companies like Robinhood, all you need is
rise the way it has since late March without
a cell phone and a bank account.
the support of institutional investors.
There are other theories floating around that
The bottom line is that we are just now
try to explain this surge in retail trading. One
beginning to see the unintended
is the fear of missing out (FOMO). So many
consequences of forcing people to stay
people remember what happened after the
home for months. It’s likely that all of these
financial crisis and every correction in the
5factors are fueling this most recent surge in expressions of opinion reflect the judgment of the
authors as of the date of publication and are subject
retail trading.
to change. Securities investing involves risk, including
Sincerely, the potential for loss of principal. There is no
guarantee that any investment plan or strategy will be
successful. The foregoing content reflects the
opinions of Harwood Financial Group and is subject
to change at any time without notice. Content
provided herein is for informational purposes only and
should not be used or construed as investment
Mike Sorrentino, CFA advice or a recommendation regarding the purchase
or sale of any security. There is no guarantee that the
Chief Investment Officer statements, opinions or forecasts provided herein will
prove to be correct. Past performance may not be
indicative of future results. Indices are not available
for direct investment. Any investor who attempts to
Sources
mimic the performance of an index would incur fees
1 https://www.vanityfair.com/news/2020/06/bankrupt-hertz- and expenses which would reduce returns.
is-a-pandemic-zombie
2 https://www.visualcapitalist.com/tesla-is-now-the-worlds-
most-valuable-automaker/
3 https://www.cnbc.com/2020/05/12/young-investors-pile-
into-stocks-seeing-generational-buying-moment-instead-of-
risk.html
4 https://netinterest.substack.com/p/the-stock-market-as-
entertainment
Disclosures
Investment Advisory Services offered through
Harwood Advisory Group. Insurance products and
services are offered through the Harwood Insurance
Group. Harwood Advisory Group and Harwood
Insurance Group do business collectively as Harwood
Financial Group, DBA. Harwood Financial Group is
registered as an investment adviser with the SEC. The
firm only transacts business in states where it is
properly registered, or is excluded or exempted from
registration requirements. This
newsletter/commentary is a publication of Harwood
Financial Group. It should not be regarded as a
complete analysis of the subjects discussed. All
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