Are Robinhood’s men in tights propping up this stock market? Or is the Federal Reserve’s god-like force preventing the pillars of Wall Street from collapsing? In the aftermath of the bloodshed on the New York Stock Exchange in March, everyone received stitches and bandages as equities stabilized and portfolios normalized. A few months later, the staples are beginning to reopen as the volatility and massive intraday swings return. The Street has metastasized into a fool’s paradise with armchair investors making hedge funds look like chumps and companies taking advantage of the retail suckers. Is there an escape from the gravitational pull of the stock tickers? Fed Chair Jerome Powell is a coquettish mistress.
Baby, Don’t Hertz Me
The curious case of Hertz has been a riveting labyrinth in today’s financial arena. The century-old car-rental company is a case study in irrational exuberance. It declared bankruptcy, but then shares skyrocketed more than 1,000% to above $6. Whether it was caused by the day-trading Robinhooders or not, Hertz management is taking advantage of its newfound popularity by issuing up to $500 million in common stock. This is rare for a business going through the Chapter 11 process.
But there is a catch: You will probably lose your money. Wait. What?
According to a Securities and Exchange Commission (SEC) filing, Hertz warned that it anticipates shareholders’ shares would likely not be worth anything. Until those with higher priority are repaid in full and there is a huge turnaround in travel trends, it is going to be an uphill battle. The company wrote in its government submission:
“Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.”
Unfortunately for Hertz, its honesty was too much for the Wall Street bros. The stock settled down 34% on the June 15 session, and it fell an additional 2% in after-hours trading. Have we now returned to the days of balance sheet investing? Please, sir or ma’am, walk over to the roulette table and enjoy some casino adrenaline rush. We might only be getting started. Just attach the Fed’s easy money to our veins!
Wanted: Scapegoat
The stock market is mostly forward-looking. Many have been stumped by its dramatic ascent, despite millions of unemployed Americans and an economy under lockdown. Others have been confused by how hedge funds have been out-traded by those punk kid hooligans over on Robinhood. The consensus among the investment community has been that the whippersnappers on the free web brokerage service are artificially propping up the stock market. They are elevating broken-down stocks and defying conventional trading wisdom that the dignified ladies and gentlemen on The Street have adhered to their entire careers.
Not everyone accepts this narrative.
Barclays published a fascinating piece of analysis that compared the holdings of Robinhood brokerage app users to the daily stock returns for S&P 500 companies. Analysts discovered that more Robinhooders pouring into stocks has led to lower returns – not higher ones. The financial institution used Coty as an example. The multinational beauty brand has been the worst-performing ticker on the index since March 13, but the number of Robinhooders that hold the stock has spiked six-fold.
Overall, the bank concluded that the data suggest “small, active ‘gamblers’ are playing some role in market flows and performance as they look for ‘lottery ticket’ stocks.” On the surface, it might seem like the neophytes are driving this market, especially since the number of Robinhood accounts surged in the first quarter. As is the new norm in today’s world, nothing is what it seems.
What is the cause of the bedlam in financial markets? Well, none other than the Federal Reserve System. The U.S. central bank has been instrumental in wiping out much of the market’s losses. The Fed’s multi-trillion-dollar cash dump makes a lot more sense than a bunch of kids in their pajamas buying five shares in Chesapeake Energy or J.C. Penney after a night of gaming and Red Bull. You could see this in real time during the June 15 trading session: The Dow Jones Industrial Average was down as much as 600 points, but it finished the day up nearly 200 points – it was also up more than 500 points in early-morning trading on June 16. Why? The Fed confirmed that it would begin to purchase individual corporate bonds, in addition to corporate debt in exchange-traded funds (ETFs).
“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and other criteria. This indexing approach will complement the facility’s current purchases of exchange-traded funds,” the Fed said in a statement.
A single monetary policy announcement from the smartest men and women at the Eccles Building erased triple-digit losses. Any time the market is in danger, the Fed comes to the damsel’s rescue.
‘This Will End in Tears’
In perhaps the best tirade on CNBC in a while, Leon Cooperman, the Omega Family Office chairman, prognosticated that "this will end in tears." American Airlines is worth more today because it has issued more debt? Hertz has value because it is insolvent? As Cooperman says, "It doesn't make any sense." Is this a case of sour grapes because the new generation is, for the time being, overtaking the old one? Perhaps we should check the score in a couple of years and see who comes out on top: the Wall Street pros or the men in tights. Unfortunately, a salty discharge will be rolling down everyone’s cheeks because the Fed will need to eventually tighten QE4ever amid rampant price inflation. In this scenario, the bulls would fall, the bears would roam the earth, and the gold bugs would be kings.
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Read more from Andrew Moran.
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