Baby, you can drive my car

The US stock market has, as a whole, regained virtually all its value since the initial trauma of the Covid-19 outbreak. Markets recover, but the speed of this one was surprising. It is interesting to drill down into the detail though as, this time, there are huge disparities between the winners and losers (e.g. Amazon vs Boeing).

The pandemic is producing some strange behaviour; none more puzzling than the share prices of some bankrupt companies in the US. For example, take the car rental company, Hertz.

Hertz recently suspended its plan to sell around $500 Million in shares in a ‘last-ditch’ effort to raise money after the US regulator (the SEC) announced an investigation into their proposal.


Background:

Hertz’s business went into freefall following the Coronavirus travel restrictions, and it filed for bankruptcy on 22nd May. Just four days later its share price hit a low of 40 cents. What followed was mind-boggling.

Hertz’s share price went berserk, rocketing around 1,400% to a high of more than $6 on 8th June. Hertz was not alone, being one of many company’s share prices behaving just as erratically. Who, in their right mind, would buy bankrupt company shares?

Well, as it turns out, not fund managers or other professionals but..... gamblers!!

The lockdowns that have kept billions of people indoors have halted the world’s most significant sporting events: from US basketball and baseball, to European football, Indian cricket and even the summer Olympic Games in Tokyo.

Gamblers who cannot bet on professional sport because fixtures have been scrapped are flocking instead to the stock markets. In addition to binge-watching and bread-baking, day trading among individual investors has taken off, creating a new class of customer for online brokerages and adding fuel to the global market rally.

Meanwhile, as all this was going on, Hertz was still bankrupt, meaning it didn't have enough assets to satisfy its debt obligations (and Hertz was almost $19 billion in debt) and a turnaround was extremely unlikely.

Following the SEC announcement, Hertz wrote, "We expect that common stock-holders would not receive a recovery through any plan unless the holders of more senior claims and interests... are paid in full."


Translation:

Even if Hertz emerged from bankruptcy, the shares it planned to sell would almost certainly end up worthless.


The moral of the story

From selling loo roll and hand sanitiser at massively inflated prices, to buying up bankrupt shares, some people will always try to profit from someone else's misery. Despite all the clapping for the NHS, the millions of individual acts of kindness and altruism, the pandemic has not eliminated greed.

There was an explosion in scams following the financial crisis in 2008, and we are expecting the same pattern to emerge this time. So, if someone contacts you with a ‘hot’ share tip or some other 'get rich quick' scheme, then please, please, please tell them to take a hike.

By the way, if you are missing sports, then why not take a look at 'Jelle's Marble Run' - marble-sports.com/jmr It's weirdly addictive to watch, child and adult friendly and you can probably even bet on it (if so inclined).


On a more serious note

We hope you enjoy the summer edition of our newsletter, 'Moneywise'.

As usual, please do not hesitate to contact us if you have any questions or need anything.






Important: We’ve attached a separate article about ‘Child Benefit’. We missed the print deadline for Moneywise so decided to include it here. Please read it as it may affect you or someone you know, and its contents are very time sensitive.