“Stocks Only Go Up”

“Stocks Only Go Up” by Jim Rickards for Daily Reckoning

How crazy have markets become lately?

One new investor has said, “Stocks only go up,” while unemployed people are using their stimulus check to trade stocks:

“It was basically free money,” said one of them… “It’s like a gambling game.”

If you want to talk about craziness, just look at Hertz…

Fools Rush In

Hertz filed for bankruptcy on May 22. Then a bizarre thing happened. Some of those newbie investors who had just received their coronavirus stimulus checks opened online retail accounts at brokers like Robinhood and started buying Hertz!

The stock was sure to end up with zero value, but they didn’t care. If you bought it for $1.00 per share and could dump it for $3.00 per share, you tripled your money even if the stock ends up at zero.

That’s crazy enough, but then things got crazier.

Hertz saw its stock price going up and decided to sell $1 billion of stock in a new issue.

Investment bank Jefferies Co. agreed to underwrite the deal. The SEC signed off on the offering document.

Of course, in bankruptcy you have to get approval from the bankruptcy court. Many assumed the judge would put an end to the nonsense, but he didn’t. The judge approved the deal.

Just to be clear, if Hertz raises $1 billion, that money will go straight to creditors. Stockholders will still get zero. That’s why the judge approved the deal, because his job is to help the creditors.

This will be an expensive lesson in bankruptcy law for those who buy the equity, unless they sell to another sucker just in time.

I wish them all well.

Stocks Can Go Down After All

But the frenzied market rally of the past few weeks hit a snag last week. The Dow lost 5.5% on the week, while the S&P gave up 4.7%, making it the worst week since March 20.

I guess stocks go down after all.

The market was down big this morning, extending last week’s losses, before rebounding this afternoon.

But it’s clear that investors are getting nervous about the resurgence in U.S. coronavirus infections, which places the prospects of a V-shaped recovery further in doubt (it wasn’t going to happen anyway).

The Good News

Well, we’ve all lived through the first wave of coronavirus infections (technically the SARS-CoV-2 virus and the COVID-19 disease).

Along with that came an unprecedented economic lockdown that has triggered a global depression.

Even during the Spanish flu pandemic of 1918–19 that killed 100 million people, there was no full-scale lockdown, although many large gatherings, sporting events and concerts were cancelled.

We’re just now starting to come out of our self-quarantines and small businesses are gradually reopening. That’s the good news.

The Bad News

The bad news is we’re hearing a lot about a so-called “second wave” of infections that could bring back another lockdown.

One professor of medicine at the Vanderbilt University School of Medicine has said, for example, “The second wave has begun.”

These concerns are causing market declines and volatility. But I don’t think many people really understand what a true second wave is.

There are new outbreaks of the disease, but these are still part of the first wave. We’re still experiencing the first wave, in other words.

Watch out for the Second Wave

The virus has a predictable pattern in a given locale. That generally means about an eight–10-week course with a peak after five weeks, then a gradual diminution.

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