Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: June 2020

THE DAILY EDGE: 18 JUNE 2020

  • Beijing Virus Outbreak Contained, Top China Expert Says
  • China Offers Vaccines Under Development to Beijing Workers
  • Trump Says Coronavirus Will ‘Fade Away’ Even Without Vaccine

(…) “We’re very close to a vaccine and we’re very close to therapeutics, really good therapeutics,” Trump said Wednesday night in a television interview with Fox News. “But even without that, I don’t even like to talk about that, because it’s fading away, it’s going to fade away, but having a vaccine would be really nice and that’s going to happen.” (…)

But Fauci, a member of the White House’s mostly mothballed coronavirus task force, also warned last week that the infection won’t “burn itself out with mere public health measures.” (…)

  • Fauci calls for action to prevent coronavirus ‘surge’

Sweden Says Herd Immunity “Surprisingly Slow” To Develop Despite Avoiding Lockdowns

Despite allowing its economy and schools to remain open during the coronavirus outbreak, Sweden is finding that the incidence of COVID-19 antibodies among its population is still surprisingly uncommon, suggesting that the country hasn’t yet reached the point of “herd immunity”, unlike other European countries which embraced much more drastic measures to stop the spread and the deaths.

Speaking to the nation during an interview on a Swedish radio station, Anders Tegnell, Sweden’s government epidemiologist and architect of its coronavirus containment strategy (a model that Goldman analysts claim wouldn’t work elsewhere in Europe or in the US), noted that the development of herd immunity is taking much longer than expected. Per Tegnell: “the trends in immunity have been surprisingly slow.” He also says “it’s difficult to explain why this is so.”

To be sure, Tegnell noted, there is “always a lag in all such measurements,” and the percentage of the population with detectable COVID antibodies is likely higher today than it was a few weeks ago, when a surveillance test carried out by a private Swedish company found that only 14% of Swedes have antibodies, compared to more than 50% of Italians in some of the hardest-hit parts of Northern Italy.

Critics of Sweden’s strategy have been more vocal lately now that the country’s death toll has surpassed the 5,000 mark, leaving Sweden with a mortality rate well above its Nordic neighbors. (…) (ZeroHedge)

Pointing up There may be no immunity against Covid-19, new Wuhan study suggests

Humans may never develop immunity against Covid-19, according to new research on antibodies by Chinese and American scientists.

Their conclusion was based on a study looking at whether hospital workers in Wuhan who were directly exposed to infected patients at the early stage of the outbreak had developed antibodies. (…)

At least a quarter of the more than 23,000 samples tested could have been infected with the virus at some stage, according to the scientists. But only 4 per cent had developed antibodies as of April.

“People are unlikely to produce long-lasting protective antibodies against this virus,” the researchers concluded in a non-peer-reviewed paper posted on preprint website medRxiv.org on Tuesday.

Many efforts to fight the pandemic are being done on the assumption that people who have had Covid-19 will produce antibodies that will protect them from reinfection. (… )

But the new research in Wuhan suggested not everyone infected was producing antibodies, or producing long-lasting ones. Antibodies are the molecules generated by the immune system to bind with the virus spike protein and stop it from infecting cells. Some, like immunoglobulin G, or IgG, can remain in the system for a long time – it has been found in severe acute respiratory (Sars) patients 12 years after they were infected.

Led by Wang Xinhuan from Wuhan University’s Zhongnan Hospital and scientists from the University of Texas in Galveston, the study looked at samples from health care workers and general hospital staff in the city.

They found that 4 per cent of the health care workers and 4.6 per cent of general hospital staff had the IgG antibody.

Earlier research found that 2.5 per cent of hospital employees in Wuhan had contracted Covid-19 during the outbreak, but it has been estimated that the real proportion of infections among this group could be as high as 25 per cent. (…)

Patients with confirmed infections, where the symptoms were usually more obvious, tended to produce more antibodies, according to the researchers. An earlier study found all confirmed cases they looked at had developed the IgG antibody two weeks after the disease onset.

Wang’s team also suggested that more than 10 per cent of the people in their study may have lost antibody protection within a month or so.

“Our findings have important implications for herd immunity, antibody-based therapeutics, public health strategies, and vaccine development,” they said.

Based on their research, they said antibody tests may not be enough to tell whether someone had been infected, and the presence of antibodies like IgG may not necessarily provide immunity later.

“The idea of an immune certificate for recovered Covid-19 patients is invalid,” Wang wrote.

Meanwhile, a separate study by a team at Tsinghua University in Beijing suggested that the more antibodies produced by Covid-19 patients, the worse the outcome – the patient with the strongest antibody response in their study died.

They pointed to a phenomenon known as antibody-dependent enhancement, in which viruses “hitch a ride” on an antibody to infect cells they could not enter otherwise.

Wang said that was “a big concern to be closely monitored”.

But Wu Yingsong, director of antibody engineering research at the Southern Medical University in Guangzhou, said the Wuhan study should be treated with caution. He noted that most antibody tests only checked for a couple of antibodies to save time and cost – and that could mean false results.

“There are still a lot of fundamental things about the coronavirus we don’t understand,” he said.

EU in advanced talks with Johnson & Johnson on COVID-19 vaccine deal – sources The European Commission is in advanced talks with pharmaceutical giant Johnson & Johnson to reserve or buy up-front doses of its COVID-19 vaccine under development, two officials familiar with the talks told Reuters.
Powell Says Despite Signs of Stabilization, Risks of Long-Term Economic Damage Are Significant

(…) “Until the public is confident that the disease is contained, a full recovery is unlikely,” Mr. Powell told the Senate Banking Committee Tuesday at the start of two days of congressional hearings.

Mr. Powell also warned that because recent job losses have fallen hardest on low-income workers, including minorities and women, the current downturn risked aggravating longstanding socio-economic disparities in living standards. (…)

This last stage could take some time, keeping employment and activity below their pre-pandemic levels, said Mr. Powell. “There are parts of the economy that will struggle to return to their old ways of activity,” he said. (…)

Mr. Powell said the Fed hadn’t made any decisions about whether to employ yield caps. “If rates were to move up a lot and for whatever reason, and we wanted to keep them low to keep monetary policy accommodative, we might think about using it,” he said. “It’s sort of an early stage thing we’re evaluating.”

Almost Daily Grant:

Monday’s announcement that the Fed is set to begin outright corporate bond purchases took center stage in yesterday’s testimony, as such a program is uncharted territory for the 107 year-old institution.

That move to buy corporate bonds, the former Carlyle Group partner said, was made “out of an excess of caution” in order to maintain functioning markets.  “I don’t see us wanting to run through the bond market like an elephant snuffing out price signals and things like that,” Powell assured Congress. While the epic snap-back in credit spreads seemingly mitigated the need for such direct support, market credibility was front of mind for the chairman: “We feel we need to follow through and do what we said we would do.”

The corporate credit markets have been counting on it.  According to S&P’s LCD unit, the first 12 days of June have featured fresh junk bond issuance of $24 billion, the second-heaviest monthly pace on record.  Year-to-date supply of domestic high-yield debt stands at $181 billion, or 61% ahead of this time last year, while $1.1 trillion in new investment-grade supply stands 73% above that of 2019.

Not that balance sheets were too conservative before COVID-19 barged onto the scene. According to data from CreditSights, corporate liabilities stood near a record-high 135% of GDP as the calendar turned to 2020, up from 105% in 2007.

Banks rush to borrow record €1.3tn at negative rates from ECB Central bank offers ultra-cheap loans to prevent pandemic becoming credit crunch

CONSUMER WATCH
Unemployment Claims Are Still High but Have Eased Substantially A historically high number of workers continue to seek unemployment benefits each week, but applications have decreased substantially since an early spring peak amid signs the labor market and broader economy are recovering from the coronavirus-induced shock.
Americans Skip Millions of Loan Payments as Virus Exacts Toll The surge in skipped payments on debts including student loans suggests that the layoffs related to the coronavirus have taken a severe economic toll.

Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S., the latest sign of the toll the pandemic is taking on people’s finances.

The number of accounts that enrolled in deferment, forbearance or some other type of relief since March 1 and remain in such a state rose to 106 million at the end of May, triple the number at the end of April, according to credit-reporting firm TransUnion.

The largest increase occurred for student loans, with 79 million accounts in deferment or other relief status, up from 18 million a month earlier. Auto loans in some type of deferment doubled to 7.3 million accounts.  Personal loans in deferment doubled to 1.3 million accounts.

The stimulus package signed into law in March, for example, allowed most borrowers to stop making monthly payments through Sept. 30 on federal student loans.

The stimulus package also allowed homeowners hurt by the coronavirus or its economic fallout to ask their mortgage servicers for permission to pause their payments for up to 12 months. If the mortgage is backed by the government, the mortgage servicer is generally supposed to grant the request. (…)

Capital One Financial Corp., COF -2.89% for example, has been working with customers who say they can’t pay their bills. The bank said earlier this month that about 2% of active card accounts were in forbearance at the end of May, up from 1% as of mid-April. Some 13% of its auto-loan accounts were in forbearance, up from 9%. (…)

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Goldman Sachs: Consumer spending measures rose by 0.8pp to 88.9% of the pre-virus level over the last week, up from an April bottom of 74%. Of the highly-impacted consumer services industries, the retail sector has recovered the most, with foot traffic now back to 79% of the pre-virus level, while the entertainment and leisure industry remains the most depressed, now only back to 45% of the pre-virus level.

We have adjusted our real GDP growth forecasts and now expect -33% in Q2, +33% in Q3, and +8% in Q4 (vs. -36%, +29%, and +11% previously) in qoq annualized terms. This would bring 2020 to -4.2% on an annual average basis (vs. -5.2% previously) and -2.6% on a Q4/Q4 basis (vs. -3.8%).

The reason for our upgrade to Q2/Q3 is that the recent economic indicators—including the May retail sales report—suggest that the coronavirus hit is abating more quickly than expected. However, we still expect real GDP to return to its pre-virus level around mid-2021, which implies somewhat slower sequential growth in Q4 and early 2021.

Consumers are the Power Behind Reopening the Economy

(…) The recent reading on Refinitiv/Ipsos Consumer Sentiment around reopening the economy suggests that consumers have been very concerned for the most part, although progressively in favor of restarting the economy going into June 2020. The data below is a summary from the special Ipsos Covid-19 report, conducted from March through May 2020.

Here are the study highlights:

  • 55% of consumers believe live concerts, theater performances and movie theaters should NOT reopen to the public before a vaccine is available.
  • 76% are unlikely to attend a sporting game or event in person right now, if government restrictions were lifted.
  • 41% expect to attend a live concert, theater performance or movie theater when there is a proven coronavirus vaccine, even if that’s a year or more from now.
  • 35% expect to attend/go to a shopping mall when there is a proven coronavirus vaccine, even if that’s a year or more from now.
  • Experiences are still important to consumers. More consumers (30%) miss entertainment including movie theaters, more so than going to shopping malls (27%).
  • If the government restrictions were lifted, only 24% are likely to attend a sporting game or event in person right now.
  • 79% of consumers are concerned that they or someone they know will be infected with the coronavirus, and are personally concerned about the spread of the coronavirus/COVID-19.
  • When it comes to COVID-19, consumers are most fearful for their family members’ health and well-being (34%), followed by worries about continued economic disruption leading to a recession (17%).
  • Over 50% of respondents have indicated that the amount of news coverage on COVID-19 has caused them to feel that it is getting worse.
Small-Business Loans Left Behind Many of America’s Neediest Firms The federal government’s Paycheck Protection Program failed to take into account the widely varying needs and limitations of small businesses caught in Covid-19 lockdowns.
Target to Raise Minimum Wage to $15 an Hour as Virus Accelerates Plans Target in 2017 said it would gradually move starting wages for hourly workers to $15 by the end of this year. Before the pandemic, Target paid hourly workers at least $13 an hour.

(…) Two years ago, Amazon.com Inc. raised its starting wage for hourly workers to $15, while cutting some bonuses. Costco Wholesale Corp. moved starting wages to $15 last year. Walmart Inc., the country’s largest retailer by revenue, starts hourly workers at $11, as it has since 2018. (…)

Target said Wednesday the company would spend $1 billion more this year than last on worker-related expenses, including wages, paid leave and safety equipment such as masks. In addition to the wage increases, Target will give hourly workers a one-time bonus in July of $200, the company said.

Some retailers have continued to extend temporary wage increases, including Dollar Tree Inc., which earlier this month said it would keep paying hourly workers an extra $2 an hour through June 27. Walmart has offered a series of one-time bonuses to hourly workers in recent months.

U.S. Housing Starts Crept Upward in May 

New residential housing starts increased 4.3% during May (-23.2% y/y) to 974,000 (SAAR) from 934,000 in April, revised from 891,000. Total starts remain 38.6% below their January peak.

Starts of single-family homes were little-changed last month (-17.8% y/y) at 675,000 following a 23.4% April weakening. It stayed near a five-year low. Multi-family starts improved 15.0% (-33.1% y/y) to 299,000, following three consecutive sharp monthly declines.

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U.S. Mortgage Loan Applications Increase The Mortgage Bankers Association reported that its total Mortgage Applications Index rose 8.0% (65.5% y/y) during the week ending June 12. Applications to purchase a home increased 3.5% (20.1% y/y) while refinance activity jumped 10.3% (106.0% y/y).
The Economy Is in Disarray. But Borrowers Aren’t Getting Home-Equity Lines. New home-equity lines of credit dropped after the coronavirus pandemic struck the U.S., with many lenders tightening their standards.
CHINA WATCH

Some China growth indicators are in positive territory from a low base. The consumer sector is still negative YoY after reaching -20% earlier this year. U.S. retail sales were also down 19.9% in April and recovered some to -6.1% in May although still 7.9% lower than in February 2020..

China Monthly Economic Indicators

European Car Makers Face Glut of Unsold Vehicles Production is well below levels before the coronavirus pandemic, but with comatose demand even this reduced output is creating an oversupply.

(…) As of June 16, car manufacturers and their suppliers had raised $21.7 billion in extra long-term debt as a result of the Covid shutdowns, according to calculations by consulting firm AlixPartners. That further increases the total industry debt load to at least $1.1 trillion or 3.4 times earnings before interest, taxes, depreciation and amortization. At the end of last year the leverage multiple stood at 3.0 times. (…) Ford is the most widely held stock on the Robinhood stock-trading platform. (…)

Inflation Falls Further in Canada After Retailers Drop Prices

The consumer price index dropped 0.4% from the same month a year earlier, Statistics Canada reported Wednesday from Ottawa. That compares with a 0.2% drop in April. Inflation was running at 2.2% as recently as February. From April, prices climbed 0.3%, compared with a forecast of 0.7%. (…)

Core inflation readings, often seen as a better measure of underlying price pressure, declined to 1.67% in May, the lowest since December 2017, down from 1.8% in the prior month. (…)

Canada yearly inflation continues into negative territory

Europe’s Wage Subsidies May Not Prevent 9 Million Job Losses One in five furloughed workers in Europe might lose their jobs despite generous support measures designed to prevent that

Close to a third of Europe’s workforce — or 45 million jobs in the five largest economies alone — are benefiting from state support schemes that compensate the lost pay of workers on reduced hours. While these programs are often credited with preventing the sort of short-term mass unemployment seen in the U.S., economists led by Katharina Utermoehl say about 9 million of them could lose their jobs once support measures run their course. (…)

Industries including accommodation, food services, entertainment and retail will likely not recover to pre-crisis activity levels until late 2021, the researchers said. (…)

EQUITY VALUATION

In yesterday’s post THE PROS AND THE CONS:

The glass-half-full vision embeds profit estimates of $164 in 2021 (they were $162.93 in 2019) and $187 (+14%) in 2022. The S&P 500 Index is already at 19.2 and 16.8 times 2021 and 2022 estimates respectively. Valuation history remains unfavorable using conventional P/E ratios.

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Goldman has this MSCI World chart on 2-year forward EPS:

Valuation - MSCI World PE

From Fortune’s Alan Murray:

How quickly will business recover from the business lockdown? We’ve got new data from a Fortune survey of CEOs, done last week in collaboration with Deloitte, that sheds light on the question. Half of the CEOs believe their revenues will have returned to, or exceeded, pre-crisis levels by January. And more than half–58%–say their employment levels will have returned to, or exceeded, pre-crisis levels by January. Not bad.

Of course, that still leaves almost half of the CEOs who expect their recovery to take longer. Another 20% of CEOs expect revenues to recover by June of 2021, and an additional 15% see revenue recovery by January of 2022. By June of 2022, all but 4% believe their revenues will have recovered, while all but 14% believe their employment levels will have recovered. So it’s not exactly a V–maybe more of a “square root” recovery.

The survey also provides compelling evidence that this economic downturn has been unique in modern times in that it 1) prompted an increase in investment, and 2) accelerated technological innovation. Some 77% of CEOs say that their company’s “digital transformation was accelerated during the crisis.” And a roughly equal percentage said the pandemic “created significant new opportunities for our company.” Moreover, significant percentages said they increased investment in workplace safety (50%), IT infrastructure (40%), innovation (36%) and consumer/end-user experience (35%). Only 16% said they didn’t increase investment in any area.
You can read more on the survey here.

Confused smile Hertz pulls potentially worthless share offering

(…) Earlier Wednesday, SEC Chairman Jay Clayton told CNBC the regulator had issues with Hertz’s plan to sell potentially worthless stock, and that it had let Hertz know it had “comments” on the company’s disclosure. In most cases companies would then halt their efforts until the issues were resolved, Clayton said.

A bankruptcy judge late Friday ruled in favor of Hertz’s proposal, surprising many investors. In the Monday’s share-offering prospectus, Hertz repeatedly warned potential investors its shares could end up being “worthless” amid the bankruptcy proceedings.

The filing, studded with other dire warnings, was also notable for what it didn’t have: Any details about a reorganization plan and what would happen with Hertz assets, many of which are tied to securities.

Shares of Hertz shot higher after the halt,which came in midday trading. They pared some gains as the session drew to a close, however.

I am getting confused: what’s the difference between known unknowns, known knowns and unknown knowns? Must be age.

Anyhow, The SEC’s Clayton was smart enough to know what needs to be known: small investors were being taken to the cleaner by Hertz creditors.

Nerd smile I occasionally include charts on insider trading. Theses guys know more about their company than anybody else so their behavior is informative, especially when they buy.

Here’s one unusual insider buying via the Globe and Mail’s Report on Business, FYI:

Fairfax Financial Holdings Ltd. (FFH-T)

Between June 10-15, founder, chariman and chief executive officer Prem Watsa acquired a total of 482,600 shares at an average cost per share of approximately US$308.61 for an account in which he has indirect ownership (12002574 Canada Inc.), initiating a position in this particular account. The cost of these purchases exceeded U.S. $148-million.

PANDEMONIUM

Mnuchin Declares Global Corporate-Tax Talks at an Impasse More than 100 countries have worked for years to reshape rules for multinationals; dispute over taxing tech companies divides U.S., Europe

Treasury Secretary Steven Mnuchin declared an impasse in international talks on how countries tax multinational corporations, increasing the odds of an escalating trade and tariff dispute in the midst of a global downturn.

Mr. Mnuchin’s move made the already-fragile talks even less likely to reach a conclusion, solidifying a breakdown that had been months in the making. Without a deal, European countries are more likely to press ahead with targeted taxes on digital companies, including U.S. tech giants such as Facebook Inc. and Alphabet Inc. If that happens, the U.S. has threatened to impose retaliatory tariffs. (…)

The U.S. has suggested pausing the negotiations while countries focus on the coronavirus pandemic and economic recovery, the Treasury Department said in a statement late Wednesday. (…)

On Thursday morning, French Finance Minister Bruno Le Maire said that the four countries had sent a joint response to the letter, reiterating their position in favor of an international agreement on “fair taxation of digital giants” as soon as possible. (…)

Pompeo, Top Chinese Envoy Meet Amid Heightened Tensions The meeting in Hawaii is part of an effort by Washington and Beijing to manage a relationship that has deteriorated over issues ranging from the status of Hong Kong and Taiwan to the coronavirus pandemic.

Indians Rage at China After Bloody Border Clash Anti-China protests spread in India as people vented their anger about the death of 20 Indian soldiers in a brawl between Indian and Chinese forces along the countries’ disputed border.

THE PROS AND THE CONS

It has now become clear that the sudden bull that followed the sudden bear was primarily due to retail investors, first buying “cheap stocks”, then buying “momentum stocks”. What we have learned in recent days:

  • Online brokerages have seen a record number of new accounts opened this year, and the big four — E-Trade, TD Ameritrade, Charles Schwab and Interactive Brokers — executed as many trades in March and April as in the whole first half of last year, per public disclosures.
  • About 1.2 million retail clients started new brokerage accounts at Fidelity Investments between March and May, a 77% increase from the same period last year. TD Ameritrade Holding Corp. reported 608,000 new funded accounts in the three-month period ending March 31, a 249% increase from the year-earlier period. In March alone, new and existing retail clients opened 426,000 funded accounts, the company said.
  • TD Ameritrade said it is registering growth in customers younger than 35. Online broker Robinhood Markets Inc., which said the median age of clients is 31, has increased its customer base 30% through the first four months of the year.
  • The brokers are reporting more trading as well. TD Ameritrade is averaging 3.5 million client trades a day so far in June, for example, more than four times as many as in June 2019.
  • Public data from Robinhood has revealed a surge in the total number of positions held in customer accounts — doubling to 30+ million in early May  after the lockdowns began. Meanwhile, Charles Schwab and TD Ameritrade reported a record number of account openings in their latest earnings report. 

Dave Portnoy, founder of the popular website Barstool Sports, found a following doing pizza reviews but, because of the pandemic, flipflopped to day trading, sharing slices of his regular moves to his 1.5 million Twitter followers as he scans his portfolio.

In an interview with the WSJ, Mr. Portnoy said that in early June, when Warren Buffett said he sold his airline shares, Mr. Portnoy, who reportedly called Warren Buffett “an idiot”, bought those stocks, a move that has led to big profits for himself and, likely for some of his followers.

“I’m the new breed. I’m the new generation,” he crowed. “There’s nobody who can argue that Warren Buffett is better at the stock market than I am right now. I’m better than he is. That’s a fact.”

“I tell people there are two rules to investing: Stocks only go up, and if you have any problems, see rule No. 1.” (…)

“I do not necessarily miss sports that much because there are other things that entertain me far more, i.e. the stock market,” he said.

Funny that Mr. Buffett also claims there are only two rules to investing: rule #1: don’t lose money; rule #2, never forget rule #1. Funny also that George Soros once said that “Investing should not be entertaining. Good investing should be boring”.

Younger, inexperienced people seem to have taken this market over, pushing aside too cautious, “have been” billionaire investors as well as most other not so well known pros who have also proven very wrong per numerous surveys which revealed that these people, earning their living managing money, are very pessimistic on the economy, corporate profits and financial markets.

From my lens, only Lowry’s Research saw the trading tsunami coming as it smartly measured the rise in “buying power” in early April against waning supply pressure.

But how did that start? Some clues:

  • Professional investors have largely abandoned the stock market amid the coronavirus pandemic, but sports bettors and bored millennials have jumped into the retail stock trading market with both feet. (Axios)
  • Robinhood, whose easy-to-use app makes the transition between sports betting and trading seamless, boasts a similar customer base to most sportsbooks, notes Marc Rubinstein in his newsletter, Net Interest.
  • “43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that’s the same group that has flocked to Robinhood,” Rubinstein writes.

Coincidentally:

Dayanis Valdivieso, who was laid off during the pandemic, is tapping an unlikely source of money for her first foray into stocks: the government’s $1,200 stimulus check. Ms. Valdivieso, a 22-year-old in Louisville, Ky., used a portion of her check to trade stocks, using a Robinhood account.

“It was basically free money, so, you know, I decided to play around with it,” she said. “You might lose some, you might win some. It’s like a gambling game.” (…)

She currently holds positions in United Airlines Holdings Inc. and the ProShares Ultra Bloomberg Crude Oil ETF, a leveraged product that seeks to track twice the daily return of an index of crude-oil futures. (WSJ)

Then there is this 29-year-old electrician in Seattle who, acknowledging Hertz is saddled with debt, faces intense competition and could have its shares delisted, rendering them worthless, figures “the Hertz brand name holds value and the company operates a huge fleet of cars. The stock was cheap enough to roll the dice”.

The trading surge pushed Hertz shares up nearly 500% after billionaire Carl Icahn dumped his stake in the company at 72 cents a share last month. (…)

However, “there can be no assurance that the NYSE will grant the company’s request for continued listing at the hearing and whether there will be equity value in the company’s common stock,” Hertz said. (WSJ)

So, Carl Icahn, who knows a thing or two about bankruptcy and equity valuation, but also fits right in with the “have beens”, bails out of Hertz at $0.72 only to watch illiterate newbies push the stock back to $5.00.

Yes, “the Hertz brand name holds value and the company operates a huge fleet of cars” but the above quoted electrician forgot the negative wire, the $17 billion debt load on its fleet of some 500,000 cars, a $34k average liability per car.

Hertz creditors would rather get more cash than cars, so they saw an opportunity to tap this un-hoped for demand for HTZ shares. From the U.S. Bankruptcy Court petition recently filed in Delaware last week:

The recent market prices of and the trading volumes in Hertz common stock could potentially present a unique opportunity for the Debtors to raise [up to $1 billion in] capital on terms that are far superior to any debtor-in-possession financing. (…) The Debtors bring this motion on an emergency basis given the volatile state of trading in Hertz’s stock and to ensure that the Debtors are in a position to capture the potential value of Hertz’s unissued shares.

Note that the petition comes from the debtors, not the company, the board or its shareholders. In plain English, this translate into a request to transfer speculators’ money directly into Hertz creditors’ bank accounts.

The senior unsecured, 6% notes due 2028 last changed hands at 40.5 cents on the dollar (though up from 15 cents on May 26) for a yield-to-worst of 22.65%, implying that the common stock is worthless. Yesterday, Hertz filed a motion to wiggle out of lease commitments on 144,000 vehicles, claiming that it cannot afford to pay them. 

According to data from Robintrack.net, 166,000 accounts on the Robin Hood trading platform held Hertz shares as of June 10, up from less than 2,000.

These 166,000 folks are obviously not aware of their odds. At around $40, the historical equity return is -85% according to Verdad’s director of credit Greg Obenshain:

Other zombies are benefitting from the free money sent to bored sports bettors and millenials.

  • Whiting Petroleum filed for Chapter 11 on April 1st and the stock price has soared 532% since that time, and reportedly 47,000 Robinhood investors are long.
  • Chesapeake Energy Corp., which said in May that it is considering a bankruptcy filing, rose more than 500% during that time frame.

Ms. Valdivieso, quoted earlier, has turned her attention to an even riskier form of investing: options trading. “You can make a pretty good amount of money in one day,” she told the WSJ.

She apparently has company in the option speculative arena:

Over the past few weeks, we’ve looked at the high and increasing amount of speculative activity among options traders, particularly the smallest of them that transact 10 contracts or less.

As stocks rose 3% or more each week, it was kinda-sorta understandable. But last week, stocks suffered high volatility and a big decline on Thursday, coupled with a mostly-failed rally attempt on Friday. That did not put off speculative traders – in fact, it emboldened them.

Last week, the net speculative activity (calls bought to open minus puts bought to open) of the smallest of traders was more than twice as extreme as it was at the peak in February. (SentimenTrader)

This is a truly amazing chart:

Using relative percentages, small traders spent 52% of their volume on buying call options to open. This is a record high, tied with the most extreme weeks in 2000. (…)

Among all traders, there were approximately 22 million more calls bought to open than puts. This is astounding. (…)

The Options Speculation Index, which is the most comprehensive look at how traders allocated their volume across speculative versus hedging activity, moved to the highest level since a few weeks in the year 2000. (…)

More likely, it’s a hoard of new traders stuck at home who have seen stocks only go up for months on end. This has never ended well and remains a large risk over the short- to medium-term.

Jason Zweig in last weekend WSJ:

(…) At the WallStreetBets community on Reddit, the online platform, users are encouraged to “show off a brutal, crushing loss.” When a user claimed to have lost roughly $750,000 trading options in just a few weeks last year, others posted such comments as “Goat” [greatest of all time] and “YOLO” [you only live once].

Jaime Rogozinski, who founded WallStreetBets in 2012, says the group has nearly 1.3 million members, up from 577,000 last June and 314,000 in June 2018.

“They don’t know what they’re doing,” he says, “and they don’t care that they don’t know what they’re doing.”

Where is Allan Greenspan when we really need him?

But don’t think the pros crowd is much more rational. Bank of America Fund Manager Surveys (FMS), a monthly poll of 212 investors managing $598 billion in AUM, reveals that 78% of respondents reckon that the stock market is “overvalued.” This is the most bearish they have been since at least 1998.

And yet, the June FMS cash level precipitously dropped from a high 5.9% in April to the 10-year average of 4.7%.

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The FMS hedge fund net equity exposure jumped to 52% from 34%. FOMO is clearly at play!

At least, the retail investor bets with his own money.

Richard Bernstein, president of Richard Bernstein Advisors LLC, has been one of the most astute investors during the last decade. Richard is a true fundamental investor who constantly ponders the pros and the cons:

We continue to manage our portfolios during this totally unprecedented period based on fundamentals, and not on market momentum or guessing. The US government has so far provided adequate cushioning of the economy, and economic data is starting to improve. As mentioned, this improvement argues for increasing cyclical exposure.

However, the US response to COVID-19 has been woefully inadequate when compared to other major economies’, and the risk of a reacceleration in cases is real. The risks argue portfolios should maintain some defensive exposure. (…)

Cornerstone Macro, a leading independent economic research firm, succinctly described the dilemma investors currently face. The US has led the world in fiscal and monetary stimulus, but it has lagged the world in COVID-19 response. Only some emerging markets now have infection rate trends worse than the US’s. The entire developed world has passed us in recovery trends. Chart 3 (Courtesy of Cornerstone Macro) shows the “curve” of COVID-19 cases in major economies. It is clear the US’s response has been quite poor relative to other G-7 economies.

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(…) As of this writing [June 14], 21 states (up from 14 two weeks ago) have increasing COVID-19 cases. The path to COVID-19 recovery still appears more challenging than is generally thought. The risk of a negative surprise seems meaningful to us. (…)

The extraordinary multi-black swan environment makes it difficult to be an ardent bull or ardent bear. Extreme positions seem based largely on guessing an outcome or market momentum rather than a thoughtful analysis of the fundamentals.

Fundamentals are improving from miserable levels and remain horribly depressed, but they are indeed improving. However, the reality of the US’s inept response to COVID-19 should temper investors’ enthusiasm at least to some degree. (…)

Believe it or not, we are only 5 months away from the U.S. elections. Odds are high that President Trump, whose approval rating has fallen from 47.8% in late January to 40.8% per FiveThirtyEight, will seek to boost the economy as hard as he can. That means strong pressures to re-open as much and as quickly as possible, potentially resisting any negative C-19 trends, right into flu season.

It also means intensified blaming on China and possibly new trade “initiatives”.

New polls from major polling organizations show a healthy 8-point lead average for Biden over Trump in the general election. A new CNN poll shows the biggest lead so far for Biden, with a 14-point lead over Trump, while the Hill/Harris poll shows a 10 percent lead and the IBD/TIPP shows a 3-point lead. (Statista)

But, Both Candidates Are Widely Disliked (Again). This Time, Biden Could Benefit.

It’s a truism of politics: When you’ve got an incumbent on the ballot, the race will be a referendum on her or his leadership — probably more than it’ll be about what the challenger is offering. So with President Trump’s approval rating stuck deep in the red, there’s little doubt that he is facing an uphill battle.

But there’s a wrinkle to this situation: His likely Democratic opponent, Joseph R. Biden Jr., also has a favorability problem. (…)

One key difference between this year and 2016 jumps out: In that election, people who saw both candidates unfavorably broke in favor of Mr. Trump, seeing him as the better of two bad options. This year, Mr. Biden holds an advantage — by a mile — among these ambivalent voters.

In a Monmouth University poll released last week, roughly one-fifth of voters did not express a positive view of either candidate (Mr. Trump’s net favorability rating was -19 in that poll; Mr. Biden’s was -7). Those voters broke hard for Mr. Biden, 59 percent to 18 percent. (…)

The latest Quinnipiac University poll contains evidence that Mr. Biden has room to grow. Unlike most, that survey offered respondents the option to say they hadn’t heard enough to make up their minds on whether they saw him favorably or unfavorably. Twelve percent of respondents said they needed more information about Mr. Biden before they decided. Just 3 percent said so about Mr. Trump.

Whether they will be voting or not, investors will need to start to focus on mundane things as David Rosenberg recently reminded us:

Here is what is at stake — from the current Biden platform:

  • The top personal income tax rate goes back to 39.6% from 37%
  • Capital gains tax rates go to a 28%-35% range from the current 23.8%
  • The top corporate rate goes to 28% from 20%
  • The tax on foreign income will double
  • The Biden plan calls for the Social Security payroll tax cap to be lifted from 15% of payroll tax to the 39.6% top rate
  • All in, the top marginal rate from all sources of income approaches to 50% — Canadian-style! — on incomes over $300,000

Finally, ponder the pros and the cons of a Democrat sweep.

Democrats are seeing a much better chance of retaking the Senate in 2020

(…) Democrats need to win back at least three seats to reclaim the majority, but they are also defending Sen. Doug Jones in deep-red Alabama — a state where President Donald Trump has a 28-point net approval rating. If Jones loses, that means Democrats need to win four seats and the White House (where their party’s vice president could vote to break ties in the Senate), or net five seats without the White House advantage.

Overall, Senate Republicans are defending more turf. Republicans have 23 seats (mostly in red states) to defend, compared to the 12 Senate Democrats who are up for reelection. (…)

“There’s no denying that the Senate is very much in play, and I think a lot of Republicans are in denial about taking that for granted at this point,” Tim Cameron, a Republican strategist and a former chief digital strategist at the National Republican Senatorial Committee in the 2014 and 2016 cycles, told Vox. (…)

If you don’t care much about fundamentals, you can ride with the many technicians who are bullish because of the “inherent strength” in numerous technical measures. Maybe a problem with many of these indicators is that they are being conned by all these retail speculators and their heavy trading with many pros chasing them to protect their relative performances.

In this tug of war between the people and the virus and between the pros and the cons, I tend to side with science and objective probabilities.

The Rule of 20 P/E is currently 21.3 at 3150 on trailing EPS of $158.70 which are on their way to $140 (23.9 R20 P/E) after Q2 and $125 (26.6) at the end of 2020.

The bullish thesis asserts that the world gets back to “normal” sometimes during the next 12 months so we should value equities based on normalized earnings. Sure thing…if one we can reasonably confidently project normality in 2021 or 2022.

This high-wire exercise involves predictions on crucial factors such as employment and consumer behavior in a deconfined world, corporate costs in a deglobalizing world and personal and corporate taxes in a deeply indebted world. The debates will go on until the fight against the virus ends and we can actually see life the day after (see my May 5 post THE DAY AFTER…).

The glass-half-full vision embeds profit estimates of $164 in 2021 (they were $162.93 in 2019) and $187 (+14%) in 2022. The S&P 500 Index is already at 19.2 and 16.8 times 2021 and 2022 estimates respectively. Valuation history remains unfavorable using conventional P/E ratios.

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Using the Rule of 20 which incorporates inflation in the valuation equation, the R20 P/E is 20.7 with EPS of $164 and inflation at its current 1.4%. Using 2022 “normal world” estimates of $187, the R20 P/E declines to 18.3. Buying currently at this level and assuming that the R20 P/E is at its 20.0 neutral level at the end of 2022 would return 9.3% over the next 30 months or +3.7% per year.

Considering the numerous heroic assumptions required in this likely best case scenario, such return does not strike me as attractive even with a riskless 3Y Treasury yield of 0.22%.

The charts below present the historical returns on the S&P 500 since 1927 at various R20 P/E levels:

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This chart shows the probability of losses 6 and 12 months out:

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In all, both the pros and the cons are scary.

If I have to choose between Dave Portnoy’s two-rules of investing (stocks only go up, and if you have any problems, see rule No. 1) and Warren Buffett’s (rule #1: don’t lose money; rule #2, never forget rule #1), I would go for the has been’s.

Contact: edgeandodds [at] gmail.com