Today’s stock market makes about as much sense as a speech delivered by former Vice President Joe Biden. As Liberty Nation’s Tim Donner likes to quip on his radio program, trying to understand today’s Wall Street is a simple question with a complicated answer. The Federal Reserve is buying corporate debt, the leading indexes are rallying despite global uncertainty, and bankrupt companies are all the rage. What the heck is going on? It is simple: People are buying a new tank for their dead fish.
Bankrupt? Time to be Bullish!
Liberty Nation reported on how Hertz, which recently filed bankruptcy, spiked 1,000% in one week. Despite billionaire hedge fund investor Carl Icahn selling his entire stake in the century-old car rental business, the vultures circled the carcass and feasted on its remains. Hertz has pared some of its massive gains, but it is still considerably up from the 40 cents a share it held when the company became insolvent. It turns out that Hertz is not the only bankrupt company retail investors are bullish over.
Chesapeake Energy has been a stumbling oil and natural gas producer for years with a balance sheet filled with red ink. The March mayhem accelerated its demise. Its 52-week high was $430, but it cratered to as low as $7.77 per share. When Bloomberg reported on bankruptcy preparations, the stock skyrocketed 85%.
Whiting Petroleum is another energy firm that formalized a restructuring deal in April and has seen its share price spike 180% in five sessions.
J.C. Penney is a retailer whose best days are likely behind it. The department store has tried everything over the years to survive the shift to digital shopping. The stock has also followed suit, crumbling to a penny stock since peaking at $86 in 2007. In May, it filed for bankruptcy as part of its restructuring initiative. But armchair traders lifted the stock 105% in a week.
GNC Holdings is reportedly preparing for bankruptcy proceedings. And, yes, you guessed right: Shares have spiked 145% since it was first reported a couple of weeks ago.
Pump and Dump, Baby
During normal times, a Chapter 11 filing would trigger substantial losses for equity investors. But these are not standard times. Millions of people are still at home with nothing to do. The Federal Reserve is pumping trillions of dollars into the economy and leaving interest rates at historic lows. Zero-commission margin trading is ubiquitous. Dumb money is prevalent throughout the entire market. These are ingredients for a toxic stew on Wall Street, and this could be the new diet on The Street.
In the early days of the Coronavirus pandemic, millions of dollars were being pumped into highly speculative stocks and dumped within only a few sessions. At the time, investors were betting on penny stocks that were a part of the COVID-19 hysteria, particularly biotech and personal protective equipment (PPE) manufacturers. Some people made a killing, while others lost a lot as they entered the frenzy too late.
The same trend may be unfolding for bankrupt tickers as there are indicators that sanity is reigning supreme. During after-hours trading on June 9, many of these companies saw their share price tumble double-digits. In other words, speculators dove into the stock, drove up the price, and then sold, leaving those late to the party to hold the bag.
Traders do not have any long-term plans for holding onto these stocks. Their bond prices have been paralyzed, suggesting that there is little value for equity holders once the bankruptcy process is finished. Hertz’s notes that are scheduled to mature in 2022 were worth 40 cents. As part of Whiting’s negotiations with its bondholders, only 3% of the new equity will be given to current shareholders. What is the endgame here?
Is this another case of moral hazard? It certainly is Jerome Powell’s mad, mad, mad, mad world – and we are merely trading in it!
One of the most exciting developments in this market is the generational shift. Seasoned veterans with gray hair are scratching their heads, befuddled by the rise of certain stocks. The young whippersnappers are taking their $1,200 stimulus checks and turning the funds into $10,000 by investing in airlines, cruise lines, casinos, hotels, and now bankrupt firms.
Robinhood called it a “generational-buying moment” during March madness. The Silicon Valley startup witnessed three million new accounts in the first quarter and saw first-time investors buying two types of equities: stay-at-home and beaten-down stocks and speculative names. The top five most popular stocks? Genius Brands International, American Airlines, XpresSpa Group, Vislink Technologies, and Luckin Coffee – four out of five ain’t bad!
Because the market is so democratized, millennial investors are encouraged to jump into stocks. Indeed, zero commissions and even fractional trading are the biggest factors in the rush of new investors to the stock market. It is hard to say if these same people would be willing to buy stocks if it cost $10 per trade like it is in Canada.
Despite the Nasdaq Composite Index recently hitting a record high and the other top indexes reclaiming their gains, many pros are skeptical of this substantial recovery. Is the consternation justified? Perhaps or perhaps not. The Federal Reserve is willing to buy an unlimited amount of assets, investors have access to vast margin accounts, and debt is cheap. Sure, this is Bubble Economics 101, but when society has adopted the Keynesian approach to the economy – we are all dead in the long run anyway – what difference does it make how money is made and lost?
In this market, anything goes – so toss out the rule book and buy all the stocks!
Mr. Powell, Investors Are Ready for Their Closeups
When Norma Desmond (Gloria Swanson) shot Joe Gillis (William Holden) in the great Sunset Boulevard, she finally lost her marbles. When police officers and news cameras swarmed her home, Desmond thought she was getting ready to shoot the next Cecil B. DeMille feature, leading her to deliver the iconic line, “Mr. DeMille, I’m ready for my closeup.” Well, that is what the stock market has turned into: The bloodbath in March led to investors losing their minds, thinking that unlimited quantitative easing is a return to normal. This is what happens when you get high on goofballs supplied by the Fed and Jerome Powell. As they keep imbibing freshly printed dollars, the newly crowned day-trader will inform the Eccles Building that he is ready for his closeup.
Read more from Andrew Moran.