I hate shorting. The risk-reward relationship is out of whack. It feels crappy. I lost a ton of money shorting the worst highfliers a little too early in late 1999. It’s just nuts to short this market that is even crazier than in late 1999. But this morning, I shared in a comment in our illustrious comment section that I’d just shorted the SPDR S&P 500 ETF [SPY]. My time frame is several months.
I’m sharing this trade so that everyone gets to ridicule me and hail me as a moron and have fun at my expense in the comments for weeks and months every time the market goes up. And I do not recommend shorting this market; it’s nuts. But here’s why I did.
The stock market had just gone through what was termed the “greatest 50-day rally in history.” The S&P 500 index had skyrocketed 47% from the intraday low on March 23 (2,192) to the close on June 8 (3,232). It was a blistering phenomenal rally. Since June 8, the market has gotten off track but not by much. It’s still a phenomenal rally. And it came during the worst economy in my lifetime.
There are now 29.2 million people on state and federal unemployment insurance. There are many more who’ve lost their work who are either ineligible for unemployment insurance or whose state hasn’t processed the claim yet, and when they’re all added up, they amount to over 20% of the labor force. This is horrible.
But stocks just kept surging even as millions of people lost their jobs each week. The more gut-wrenching the unemployment-insurance data, the more stocks soared.
Then there is the desperate plight many companies find themselves in, and not just the airlines — Delta warned of a host of existential issues including that revenues collapsed by 90% in the second quarter — or cruise lines — Carnival just reported a revenue collapse of 85% in Q2, generating a $4.4 billion loss, and it is selling some of its ships to shed the expense of keeping them.
These companies are in sheer survival mode, and they’re raising enormous amounts of money by selling junk bonds and shares so that they have enough cash to burn to get through this crisis.
This crisis hit manufacturers whose plants were shut down. It hit retailers and sent a number of them into bankruptcy court. It crushed clinics and hospitals that specialize in elective procedures. It shut down dental offices. It sent two rental car companies into bankruptcy court — Hertz and Advantage. It has wreaked untold havoc among hotels and restaurants, from large chains to small operations. And yet, stocks kept surging.
The situation has gotten so silly in the stock market that the shares of bankrupt Hertz [HTZ] — which will likely become worthless in the restructuring as creditors will end up getting the company — were skyrocketing from something like $0.40 a share on May 26 to $6.28 intraday on June 8, which may well go down in history as the craziest moment of the crazy rally.
There were stories of a new generation of stuck-at-home day-traders driving up the shares looking for their instant get-rich-quick scheme. And those that could get out at the top made a bundle (but HTZ closed at $1.73 today).
The smart folks at Hertz and their underwriters, Jefferies LLC, saw all these sitting ducks ripe for the taking, and they came up with a heroic plan to sell up to $1 billion in new shares into this crazy market, while informing investors that those new shares would likely become worthless in the bankruptcy proceedings.
The bankruptcy judge — likely shaking head in despair — approved it. As HTZ began plunging, the size of the offering was reduced to $500 million. This would have been like a donation to the company’s creditors, who now run the show.
Hertz would have likely been able to pull off this stunt in this crazy market, but then someone at the SEC woke up and asked some questions, which put the whole escapade on hold. But you can’t blame Hertz. They need money badly, and they’re just going where the easy money is.
Even during the crazy dotcom bubble in late 1999 and early 2000, the day-trader frenzy hadn’t reached these levels. But back in 1999, the economy was strong. Now this is the worst economy of my lifetime.
Source: Tyler Durden | ZeroHedge
No comments:
Post a Comment