The invasion of the retail day traders continues on the New York Stock Exchange as scores of Americans are seeping into the equities market. It might explain why bankrupt companies like Hertz are witnessing monumental gains thanks to the spigot of dumb money flooding Wall Street. In another incarnation of irrational exuberance, we are seeing armchair investors try to beat the billionaires who have gone as far as selling their positions in insolvent firms.
Taking Stock of Hertz
Hertz stock recently collapsed to as low as 40 cents a share after trading at a 52-week high of $21 in February. It seemed like its misfortunes would only amplify, but then something extraordinary happened out of nowhere: Hertz shares skyrocketed more than 800% in one week to just under $4. Huh? Did the Oracle of Omaha suddenly pour billions into the stock? Did President Donald Trump extend a bailout to Hertz? Nope. It was a case of work-from-home retail investors speculating.
Before the big bankruptcy announcement, about 43,000 Robinhood accounts owned shares of Hertz. By close of business for the week, this figure surged to roughly 73,000.
Could this trend continue throughout the rest of June? Perhaps to answer that question requires digging deeper into Hertz's financial woes and assessing one billionaire's multi-million-dollar loss.
Ouch! That Hertz
For more than a century, Hertz has been renting cars to the public, establishing the business with a fleet of Ford Model Ts. The company has survived everything: multiple wars, numerous recessions, many oil-price shocks, and the Ice Capades. Its luck seemingly ran out as the rental giant became a victim of COVID-19.
Hertz recently declared bankruptcy after incurring vast sums in losses and debts. As of March 31, the company maintained $18.8 billion of debt, with only $1 billion in cash on its balance sheet. Hertz reported a $356 million net loss in the first three months of 2020.
But while it will not shut down, the brand will go through a complete overhaul by restructuring its debts and erect "a more robust financial structure." Some of its first steps have been to terminate 12,000 North American workers, furlough 4,000 more, and engage in credit negotiations with lenders.
Carl Icahn, the billionaire-activist hedge fund manager, owned 39% of its outstanding shares. He had piled into the company as early as March when Icahn's investment lost 60% of its value. The famous investor then sold his 55 million shares at 72 cents for approximately $40 million. He said in a security filing that he would continue to monitor the firm's reorganization efforts as he will "look forward to assessing different opportunities to support Hertz in the future."
So, if Icahn and his advanced team could not find any reason to continue investing in the company, how come John and Jane Smith are scooping up Hertz stock? Speculation is most likely a big reason. But pouring dumb money into worthless stocks has been par for the course in the covidepression market as people with nothing but time on their hands throw their $1,200 stimulus checks at the wall and see what sticks.
A Day Trader is Born
Liberty Nation recently reported on the spike in retail investing amid the Coronavirus lockdown. The data highlight the increase in middle-class Americans using their COVID-19 funds to trade stocks. But this breed of traders is not purchasing stakes in value names, such as Walmart, McDonald's, or Berkshire Hathaway. Instead, many of these sudden experts are building positions in high-risk tickers, like Carnival, Delta Air Lines, GE, and GoPro. To be fair, many did take advantage of Disney's plunge to $80.
When you cannot gamble on sports or bet your entire life savings on black at the casino, the only way to get your fix is by acquiring stock. Right now, dumb money may be dominating Wall Street, fueling the pump and dump schemes and elevating stocks. Instead of using the coronacrisis as a lesson in becoming a responsible balance sheet investor, The Street's neophytes are searching for the next big payday.
MarketWatch reported on a 28-year-old investor who poured most of his "entire life savings" into Luckin Coffee, the Chinese java company that was discovered to have falsified its sales figures. But it did serve as a valuable lesson because he revealed on Reddit's WallStreetBets that he would only acquire the unsexy vehicles of exchange-traded funds (ETFs), gold, and bonds. Unfortunately, considering the massive bubble in the bond market, he may be in for another harsh tutorial.
Giveth and Taketh
The stock market can giveth – and it can taketh. For the 45% who are not exposed to stocks, bonds, and ETFs, they cannot be faulted for thinking the stock exchange is one giant casino. The way some people are treating exchanges worldwide, it has metastasized into a craps table. But the stock market is more than putting $50,000 on black or red. It is an arena of information, giving us everything from pricing signals to confidence levels in certain businesses. Warren Buffett had sage advice in February, recommending that anyone with a brokerage account refrain from buying shares in Kramerica Industries or Acme International as a speculator. How should you invest? As an owner in the enterprise. This can be easy to forget when John Q. Public can buy a fraction of a share in Amazon and then sell the stake if it goes up 1.1% in a single session. It turns out that boring investing is perhaps the way of the game.
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Read more from Andrew Moran.
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