What does it mean when a bankrupt company’s stock goes up 800%?
It means there’s more trouble ahead for the market.
So why did the shares close June 8 at over $5.50 each, a market capitalization of $787 million? To some it’s a mystery, but it seems to me the solution is obvious.
The Federal Reserve is responsible.
The Warren Buffett Clue
There’s a big clue here staring everyone in the face. Warren Buffett is the dog that has not barked.
Buffett is a value investor always hungry for opportunity. Yet there he sits, atop a cash pile of over $100 billion. I have suggested Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), the insurance conglomerate he oversees, may need that cash to pay pandemic-related losses.
But here is another theory. There are no bargains. The March injection of cash into the market by the Federal Reserve bailed out investors and boardrooms. It told people with money that they couldn’t lose.
Maybe, the speculators think, Hertz is systemic enough to get a bailout.
Hertz is a huge domino that’s about to fall on the whole car business. Hertz bought 400,000 cars on credit. These must be liquidated to repay the loans. That will take out sales of new cars for Ford (NYSE:F), General Motors (NYSE:GM) and Fiat Chrysler (NYSE:FCAU). It will hit new car dealers like Lithia Motors (NYSE:LAD), Group 1 Automotive (NYSE:GPI) and Sonic Automotive (NYSE:SAH).
It will also hit the bond market, increasing risk premiums for low-grade corporate issues.
The Market Danger
But there’s a bigger danger signal.
If speculators are gambling on worthless stock, it means there’s a lot of stupid money around. With cases of Covid-19 still rising in many states, isn’t someone going to notice? When hospitals are overwhelmed, many with uninsured patients, can stocks like HCA Healthcare (NYSE:HCA), Tenet Healthcare (NYSE:THC) and Community Health Systems (NYSE:CYH) keep rising?
The economy has been in recession since February. The depths have yet to be plumbed. Speculators, especially those buying HTZ stock today, are betting on a V-shaped recovery that could easily be interrupted.
When that happens, do you really think investors will be bailed out again? It makes sense that shares of Avis Budget Group (NASDAQ:CAR) might rise in the wake of the Hertz bankruptcy. This could even be good news for Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), whose drivers might now find bargains.
But despite what speculators are doing, HTZ stock is worthless.
The Bottom Line on HTZ Stock
I think the problem here extends to the entire market.
The S&P 500 is trading at 23 times earnings. Before the 21st century, this meant it was due for a fall. That’s also 23 times last year’s earnings. When second-quarter numbers start coming out in July, either that ratio goes up or the market falls, by a lot.
Stocks are worth only what someone is willing to pay for a few shares today, multiplied by the number of shares. A fool and his money were lucky to get together in the first place.
The action on Hertz is a warning.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.