The Spin
A Park City Family Office Brief
Welcome to The Spin, a brief designed to shed light on financial topics and to render my view, my spin, on each. I hope you find it useful. I do. Writing it helps me think things through. Who am I? Rich Gluck, Chief Investment Strategist for Park City Family Office . PCFO is in Park City, Utah. I am in New York. More on that below.
June 9, 2020
Hertz Stock has bounced. Why on earth?
Hertz 6 3/4% 10/15/2022
  • Hertz (HTZ), the superstar of rent-a-car, filed for bankruptcy on May 22nd, the Friday leading into Memorial Day Weekend. Ironic, because that should have been the start of summer driving season. On the following Tuesday, HTZ fell to 0.56, versus its 2.84 close the previous Friday. Yesterday, HTZ rose from the dead to close at 5.53, a price it had not seen since April. April was a time when HTZ, if not exactly hale, was a going concern.
  • HTZ bonds followed a similar, yet quicker, path to their lows and bounced along with the stock. Bond people tend to be a be less pollyannaish about the securities they hold. Bonds and equities both trade on the basis of four letter words. Stocks trade on hope. Bonds trade on fear.
  • My Spin: Bankruptcy is where those things you learned about capital structure in business school or law school are actually applied. Bonds are a fixed claim on cash flows. You get what the contract says, no more, no less. Equities are a residual, an option on the firm after fixed claims are paid off. And you thought the stock market was a casino full of colorful characters telling stories on CNBC. You're not wrong. You just have to shift your frame. The bonds are now the stock. The stock is likely worthless. Why do I say this? The bonds last traded close to 40 and they no longer accrue or pay interest. If I buy distressed bonds, I need to make a return. Distressed investing is risky. Let's target 20%. If bankruptcy takes two years to navigate, the bond price needs to be 57.6 end year two for me to make 20%. If the bonds are worth 57.6 or even 90 in two years, that means the equity has no value. The bonds have to pay off in full, including interest, for the stock to be worth anything. I don't know the details here, but I don't need to. The bonds are telling me that the run up in HTZ makes zero sense.
Source: Bureau of Labor Statistics
  • Unemployment fell in May. That was not expected. Stocks rallied. Bonds sold off.
  • The number of unemployed fell from about 23 million to just under 21 million. This makes sense even if it was unexpected. States began opening up in May. Despite the good news a huge number of people are still unemployed.
  • My Spin: I'm glad more people are working. We are still a long way from the employment levels of just a few months ago. US stocks are back in the black. The stock market is OK. Interest rates are low and many businesses are and will continue to be challenged by this economy. Growth stocks like the FAANGs offer just that, growth that's likely to continue. It doesn't mean they aren't expensive. Maybe that doesn't matter, at least for now. Meanwhile, many people and many businesses are far from OK. And even with the economy reopening, many people with be nervous about living as socially as they did. The stock market looks to the future; this economy is what we have in the present. Don't be surprised if the disconnect continues.
Everyone on the news has Civil War books on their shelves.
Is there subliminal messaging going on?
That's it for today. If you would like to talk with me about investing or other financial matters you can reach me here. If you are, as I am, in the Greater New York area, we can meet in person...someday. Some background: I was an institutional portfolio manager for over twenty years. I have also been the Chief Fixed Income Strategist for a large private bank, a market maker, a prop trader and an economic researcher at the NY Fed. If you like The Spin, check out my blog: The Market Cyclist
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