Robin Hood: Men in Tights - a great movie from the early 90's (which, not to make anyone feel old but was 30 years ago) starring Westley from The Princess Bride, Dave Chappelle, and Patrick Stewart.
Brilliant! Anyway, it's a Mel Brooks movie, so it's a hilarious parody of the Robin Hood story, in a similar vein to Young Frankenstein. And this is relevant to this month's note because there is another hilarious Robinhood parody playing out right now: Robinhood, the online brokerage platform, and the parody is the stock market, and by hilarious we mean sad.
With nothing to do except stay at home under shelter-in-place orders, people apparently turned to day trading in a big way. It seems like the combination of time, boredom, stimulus checks, and no sports to bet on have people piling into the market (see: anything from Dave "Davey Day Trader" Portnoy, founder of Barstool Sports-turned day trading stock market guru who picks stocks out of a Scrabble bag and whose first maxim of investing is: "Stocks never go down"). E*Trade, TD Ameritrade, and Charles Schwab all saw record new accounts in the first quarter of the year. All 22 trading days in March were among Schwab's 30 most active days ever.
Robinhood is another online discount brokerage platform. Their selling points are apparently gamification of investing, zero commissions, fractional share ownership (that you can only trade with other Robinhood users), and a tag line that goes something to the effect of: "we'll give you your first stock for free." They have also seen a spike in activity since lockdown.
Unlike Schwab and TD, Robinhood is exclusively retail accounts and also makes public a lot of data about what its users are holding, so it's kind of perfect for gaining some anecdotal insight into the absurdity that has been the market these last few months.
What we mean by absurdity is that the S&P 500 rose over 40% from the March lows to come this close to flat on the year earlier this month. It has since backed off a bit from there, but come on. First quarter GDP was down 5%, and the Atlanta Fed has GDP down around 45% year over year since May.
That doesn't exactly scream economic recovery to us. Neither does the fact that weekly initial jobless claims are still over 1 million a week. The worst week during the Great Financial Crisis saw 665,000 initial jobless claims. The worst week all-time prior to this year was 695,000, back in 1982. We have been averaging 3.3 million - five times more than the worst week of the Great Financial Crisis - for 14 weeks and counting. We have lost more than twice as many jobs in the last three months (~47 million) as were created in the last decade (~22 million).
But yeah, sure. Never mind that the additional federal unemployment assistance of $600/week expires next month. Never mind that the PPP "promised payroll protection" expires in August. Never mind that the mortgage forbearance rate has climbed to 8.5% (the peak of the subprime crisis saw 10% delinquency rates). Never mind that bankruptcies have spiked to the highest level since the Financial Crisis. Seems like a great time to be buying stocks at all-time highs.
Allow us to take a quick detour and address a couple points. The first is the way investing math works. The S&P 500 dropped about 35% from February peak to March trough. It then climbed about 45% from March trough to June peak. So - down 35% and then up 45% leaves you...?
Answer: Still down about 6%.
The second point is the argument that stocks are looking "across the valley" and factoring in future post-COVID earnings. That's stupid. Or rather, that's fine - but if your assumption is based on a future earnings recovery in 2022 post-COVID (like Morgan Stanley recently came out with), then not only does everything have to go exactly right for the next two years so that those earnings materialize, but you also should then expect zero returns for the next two years. Zilch. Nada. If you've already priced in a future earnings recovery then you've also already priced in the future gains.
Detour over, let's resume the tour tour. If our contention is that there is a lot of stupid money in the stock market right now making it do stupid things, surely there should be some examples? Why, yes, yes there are, thank you for asking.
Let's start back in March. Here's the chart for Zoom Technologies, ticker (at the time) - ZOOM:
Note the 1,000% increase in March, followed by a sudden 98% decline. Note also the heavy volume (green and red bars) over that same time period. What happened? Zoom Technologies is a Chinese company that develops and sells electronic communication products for mobile devices. It's ticker symbol was ZOOM. People wanted to buy Zoom Video Communications (those Zoom calls everybody started using), ticker symbol ZM. The 1,000% increase was people mistakenly buying the Chinese Zoom (ZOOM) instead of Zoom (ZM). Note that this persisted for an entire month before the SEC suspended trading in the Chinese Zoom and made them change their ticker to ZTNO.
How much research do you have to do about a company to know what its ticker symbol is? And then we're supposed to believe that people are coming to any kind of back-of-the-napkin fair value estimate that they are expressing through their investing choices? Yeah right.
Meet Fangdd (ticker: DUO), a Chinese real estate company:
Not a bad little 600% jump there on...no news. But you did have about 3,700 new Robinhooders pile into the stock that very day!
This is either people searching for and the piling into the wrong "FANG" stocks they hear about or a StockTwits group with a trading strategy of driving up Chinese penny stocks the day before earnings releases. Either way, it's a head scratcher.
And the pièce de résistance: Hertz. Hertz filed for bankruptcy in May, at which point the stock dropped to 50 cents, because it was worthless. Then, something magical happened. Having filed for bankruptcy, volume started picking up, and Hertz stock rose from $0.50 to $5.79, a hefty 1,200% gain. There were multiple days where Hertz stock was up 100% on the day.
Meanwhile, here is what the Hertz 2022-maturity bonds were doing: nothing. That's a $4B bond issue that has been under 40 cents on the dollar since the bankruptcy announcement.
Quick primer on bankruptcies and capital structure: bondholders are senior to stockholders. Bondholders are literally owed something by the company, whereas stockholders aren't. In a bankruptcy, bondholders are first in line for company assets. In this case, the bonds that mature in 2 years are trading at 40 cents on the dollar. For a $4B bond issue, that means there's about a $2-$2.5B hole before the stock of the bankrupt company has any chance of being worth anything at all. So, having filed for bankruptcy and given the state of Hertz's balance sheet, the stock is very literally and demonstrably worth nothing. Who then, is responsible for not only the volume spike seen post-bankruptcy, but a volume spike with apparently no regard for any kind of valuation?
Anecdotally, the number of Robinhood users owning Hertz went from 43,000 pre-bankruptcy to 175,000 after the bankruptcy filing! As of writing, that number is still roughly 160,000.
It got so absurd that at one point Hertz actually floated a plan to sell up to $1B in new stock, because there was so much retail demand. For a bankrupt stock worth, at best, pennies. This was something that has never, ever happened ever in history, ever, because bankrupt stock is worthless. So of course the stock price jumped from $2 (where it had fallen, down from $5.79) up to $3 instantly on the news. It should have taken about two seconds of analysis to discover that bankrupt stock is still worthless, even if the company could get an additional $1B out of people, but apparently in today's market that news means a 50% up day.
Since then, the bankruptcy judge said (paraphrasing), "Sure, go for it", but then the SEC stepped in and said (paraphrasing), "Nah brah, just like we can't keep letting people buy the wrong Zoom, we really shouldn't let you sell them $1B of snake oil". So the plan got scrapped, and Hertz stock has slid back down to $1.75 on its way to $0 and being delisted.
Ditto for Chesapeake Energy. After closing on Friday June 5th at $24.80, CHK closed Monday June 8th at $70. Why, you ask? Because after the market closed that Friday afternoon, Chesapeake announced...that they were preparing a bankruptcy filing that would hand the company over to senior creditors (nb: categorically not stockholders). They haven't officially filed for bankruptcy at the time of this writing, but they just skipped the June 15th interest payments, and their senior bonds are trading at about 3 cents on the dollar.
Based on the size of their outstanding debt, there's about a $5B hole before CHK stockholders should expect to see even a penny. But yeah, let's have a 300% up day on the news.
There's enough blame to go around when trying to parse the "why" of these irrationalities, but what Hertz, Chesapeake, and Zoom have shown, in the micro, is that eventually valuations do matter. It's our contention that this will hold true for the market at a macro level as well.
The original Robin Hood was about stealing from the rich to give to the poor. Unfortunately, it looks like this newest iteration is also doing a bang-up job of parodying that, too. If you find yourself tempted to join in with this Robinhood's merry band of men in tights, make sure you hold on to those purse strings.
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