| Programming note: Money Stuff is on a brief hiatus for personal reasons. I'm fine, thanks for asking, and I hope that regular programming will resume soon, maybe in about a week. But in the meantime I am not made of stone, amazing things are happening, so here is a Very Special Emergency Money Stuff. Hertz, so good! One theory is that the stock market is a way for people to invest money in companies. Companies want to raise money to do stuff, so they offer partial ownership of themselves to investors in exchange for money. The companies have projects that they want to fund, the investors want to fund projects, and the stock market is a way of allocating the most money to the best projects. In its simplest form this theory is not especially true. Most public companies do not fund themselves by selling stock; mostly they fund themselves internally, or with debt, and the main thing that they do with their stock is buy it back. If you buy stock, you are buying it from someone else, who bought it from someone else, who bought it from someone else; way back in the distant past someone bought it from the company, but what does that have to do with you? Still some version of this theory is probably right. The stock market works as if people were investing money in companies; some indirect mechanism ties the secondary trading of stock to the allocation of capital.[1] And of course in the limit companies can raise money by selling stock. So buying stock is like investing money in a company in exchange for partial ownership of its projects, and the amount you should pay for a stock is basically the discounted present value of the company's cash flows from its business. The mechanisms of the market tie the price of the stock to the underlying value of the company. But there is another theory. This theory is that the stock market is a fun casino, and you should buy stocks because they will go up and down in exciting fashion and might make you rich quick. This is a very old theory, and I suspect that for much of the history of financial markets it was considerably more popular and better supported than the discounted-present-value-of-cash-flows thing. A modern variant is the Dave Portnoy Stocks Theory: Dave Portnoy, founder of the popular website Barstool Sports, has turned to day trading, sharing regular proclamations to his 1.5 million Twitter followers as he scans his portfolio. "Stocks only go up, this is the easiest game I've been part of!" he said in a video on June 4, with Dire Straits tunes in the background. ... "It took me a while to figure out that the stock market isn't connected to the economy," he said. "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 exactly want to endorse this theory. Not because it isn't true—well, the "stocks only go up" part obviously isn't, but "the stock market is a fun casino" may be true depending on your view of fun—but because it doesn't really have any content. "Buy stocks, it's fun," doesn't tell you which stocks to buy, or how much to pay for them. Without a rigorous quantitative model of fun, this theory makes no useful predictions. Still it is extremely popular, and we have talked about it a lot recently. I call it, or something like it, the "boredom markets hypothesis": People got bored in their coronavirus-related lockdowns, and they couldn't bet on sports because sports were canceled, so they turned to betting on stocks as a form of entertainment, not investment or financial analysis. The stock market is a casino that happens to still be open. Again, without a rigorous quantitative model of fun, this theory does not produce a well defined value for any stock; it doesn't tell you precisely how much you should pay for a stock in order to have fun.[2] Still the imprecise subjective values it produces should, at least sometimes, be different from those produced by normal, boring, finance-y theories about owning companies' cash flows. Some (most?) companies are exactly as fun as their cash flows; if you want a sound investment, you should pay $X for them, and if you want to have a good time you should also pay $X for them. (Because their cash flows will pay for an amount of fun with a present value of $X, etc.) Other companies are less fun than their cash flows, and you should demand a discount to invest in them. And some companies are much more fun than their cash flows, and people will buy their stock for entertainment without worrying too much about conventional valuation. Naturally if you are a smart boring finance-y person trying to make money, and you own those stocks, you should sell them to the fun people, because they will overpay you for them. You can sell a $100 cash flow for $200 because someone else likes a good story and a crazy gamble.[3] There is some limit to this: Eventually, all the boring finance people will sell their stock to fun people, so only the fun people will own the stock, so there'll be no one left to do this trade. Tesla Inc. is the paradigmatic fun stock: It is run by a cartoony billionaire who sends rockets into space and messes around with flamethrowers, it has a huge and volatile valuation that often seems disconnected from its financial results, it is beloved by message-board day-traders. It is also regularly one of the most shorted stocks in the market. One way to interpret that is that people who care about valuation sold all their stock to people who love fun, and then had to go and borrow more stock to sell to the fun people because the demand for fun was so insatiable.[4] But you know who has a lot of stock to sell? Companies. Companies can just print more of their own shares. It is not usual, exactly, because most big public companies do not mostly fund themselves by selling stock. But it is the deep background fact of the stock market, the thing that allows it all to work: The point of stock trading, in some vague notional sense, is that it allows companies to raise money by selling partial ownership of themselves. And so when Tesla was the most shorted stock in America as its stock was soaring and fun, Tesla quite sensibly decided to sell $2 billion worth of stock. If you are that desperate to buy Tesla stock, sure, Tesla will sell you some. Better for Tesla to take your money than a short seller. Tesla at least can use it to make Teslas. It is … an arbitrage? A synergy? A beautiful trade in which everyone is made better off? Cheating? A company wants money to fund its projects. Investors want a fun gamble that will amuse their friends on Reddit. The company has projects that are worth $X. Investors will pay $2X for fun. The company taps cheap financing. The investors have fun. Everyone wins. But there are rumblings of complaint. It's fine for other investors to sell their overpriced stock to people who want fun, but it is a little unseemly when the company does it. The company has fiduciary duties to its shareholders; selling them stock for more than it's worth seems wrong. One defense is, how can anyone know how much the stock is "really" worth? This stuff about cash flows sounds scientific but isn't; no one really knows what the company's future cash flows will be, and if the investors are optimistic you can't prove that they're wrong. Another defense is, well, it's worth that much to them, since they get pleasure out of gambling. That one seems somehow inadmissible. Fiduciaries aren't really supposed to go around enabling gambling. Here's one of the wildest bankruptcy motions ever: On May 26, 2020, the first trading day after the Debtors commenced the above-captioned cases, the common stock of the Debtors' holding company, Hertz Global Holdings, Inc. ("Hertz"), closed at a price of $0.56 per share. Over the next two weeks, Hertz's stock price rose significantly, closing at a price of $5.53 on June 8—a nearly tenfold increase. Although the trading price of Hertz' common stock has declined since then, closing at $2.52 on June 10, 2020, the common stock continues to actively trade. Given these developments, the Debtors now seek emergency relief from this Court to allow the Debtors to capture the potential value of unissued Hertz shares for the benefit of the Debtors' estates. By this Motion, the Debtors seek an order pursuant to sections 105(a) and 363(b) of the Bankruptcy Code authorizing, but not requiring, the Debtors to (i) enter into a sale agreement with Jefferies, and (2) issue up to and including 246,775,008 shares of common stock through at-the-market transactions under Hertz's existing shelf registration statement on Form S3 (File No. 333-231878) previously filed by Hertz with the U.S. Securities and Exchange Commission and declared effective on June 12, 2019. The recent market prices of and the trading volumes in Hertz's common stock potentially present a unique opportunity for the Debtors to raise capital on terms that are far superior to any debtor-in-possession financing. If successful, Hertz could potentially offer up to and including an aggregate of $1.0 billion of common stock, the net proceeds of which would be available for general working capital purposes. Unlike typical debtor-in-possession financing, the common stock issuance would not impose restrictive covenants on the Debtors and would not impair any of the creditors of the Debtors. Moreover, the stock issuance would carry no repayment obligations, and the Debtors would not pay any interest or fees to those who provide the funding by buying shares at the market. Hertz would include disclosure in any prospectus used to offer common stock highlighting that an investment in Hertz's common stock entails significant risks, including the risk that the common stock could ultimately be worthless. I mean. Hertz filed for bankruptcy on May 22. It has about 142 million shares outstanding; at its $5.53 post-bankruptcy high, the total market value of its stock was about $785 million. "Hertz's roughly $3 billion in corporate bonds were trading earlier this week at around 40 cents on the dollar," suggesting that the value of Hertz's stock is at best about negative $1.8 billion.[5] Of course stock can't really have negative value; if Hertz is actually $1.8 billion in the hole to its creditors, it can't go out and demand that its shareholders come up with the money. But it can … ask them to? It can just say to shareholders—and potential new shareholders!—"hey would you like to kick in a billion dollars to pay back our debts?" Doesn't hurt to ask! Why would they say yes? Well, it's fun? I don't know: Jared Ellias, a law professor at the University of California Hastings College of Law, said he has studied hundreds of bankruptcies and never seen a company try to fund a case with an equity offering at the start of chapter 11. "Hertz looks at the market and sees there is a group of irrational traders who are buying the stock, and the response to that is to seek to sell stock to these people in hopes of raising some amounts of money to fund their restructuring," Mr. Elias said. And: "It is incredibly creative and they get props for that, but I wouldn't buy those shares," said Nancy Rapoport, a professor at UNLV's William S. Boyd School of Law, who said she has never seen a bankruptcy funded this way. "I guess they're trying to catch whatever the opposite of a falling knife is." A soaring spoon? Hertz is what they call a "debtor in possession"; it is managing itself to maximize value for its creditors. Its obligation is to be ruthlessly focused on recovery, to do everything it can to enhance the value of the bankruptcy estate, the carcass of Hertz that its creditors are going to carve up. Hertz's shareholders, meanwhile, are nuts: Thai Gaon, a 23-year-old salesman in San Francisco, bought 35,000 Hertz shares on June 4 at $1.43, spending a little over $50,000, according to documents viewed by The Wall Street Journal. "It was my entire life savings," he said. "I decided, you know, if I'm gonna do it, I should do it big, and I'll make a play and see what comes out of it." But there are a lot of them: Just in the last week, 96,000 people on the Robinhood investing app opened a position in Hertz Global Holdings Inc. … "Retail has a lot to do with it and I don't think you've seen institutional investors buying those kinds of stocks," said Christopher Grisanti, chief equity strategist at MAI Capital Management. "It's too much risk. I would call it catching a falling knife." According to website Robintrack, which uses Robinhood's data to show trends in positioning but isn't affiliated with it, individual investors on the app have been flocking to bankruptcy-protected companies in droves. We talked about them on Tuesday. "It is … possible," I wrote, "that many of the thousands of brand-new investors on Robinhood have not carefully analyzed the capital structures to find the fulcrum securities?" They seem to be bidding up Hertz's stock because it is fun, because it's trending on Robinhood, because they are gamblers, not because they have a reasoned expectation of recovering anything for their shares in the bankruptcy. They are buying the stock from each other. This does not help Hertz. Hertz needs help. It is tasked with recovering as much money as possible for its creditors. If it could get on the other side of the whee-let's-buy-Hertz-for-fun trade, that would help. On Monday, Hertz's biggest post-bankruptcy day, some $2.4 billion worth of Hertz stock changed hands. Why shouldn't Hertz try to take a piece of that for itself, or rather its creditors? Ahahahaha I mean, I can think of reasons. It does seem … cruel? Hertz is going to try to sell as much as a billion dollars of stock in an "at-the-market" offering, selling it on the stock exchange whenever there's demand, not placing big blocks with institutions in a coordinated bookbuilt offering but just giving everyone on Robinhood whatever Hertz stock they want. And then maybe that will be enough to get it through bankruptcy, and the shareholders will have saved the company and their investment, and they'll all get rich. It is not impossible: Hertz filed for bankruptcy due to, essentially, a margin call on its highly leveraged fleet of cars, but used car prices have already recovered, and maybe if Hertz can raise a little more money to get it through the tough times, everything will be fine. Or maybe the bankruptcy will work out the way bankruptcies usually work out: The company will be reorganized, the unsecured bondholders will become the new owners of the company, and the old equity—the shares it's selling now—will be wiped out. Hertz will raise a billion dollars from Robinhood, hand the money directly to its creditors, and tell its new shareholders "all your money vanished immediately, sorry, better luck next time." Imagine writing the prospectus for this offering. Actually in some ways it is nice and clarifying. Ordinarily if a company is in grave danger of going bankrupt, and it wants to do a stock offering to try to save itself, the bankers underwriting the offering will worry a lot about getting sued if it doesn't work out. They will have to strike a tricky balance between (1) including all the right warnings about how risky the stock is, so that if the company does go bankrupt they have a defense to the inevitable securities-fraud lawsuit, and (2) making the case for the stock so that people might actually buy it and the company can avert bankruptcy. Here neither of those things is a problem! On the one hand, you don't have to give investors lavish scary warnings that Hertz might go bankrupt, because Hertz is bankrupt. "We're in bankruptcy, you dopes, and your stock will probably be worthless"; what more is there to say? The bad thing has already happened; no one who buys this stock can say that they weren't warned. On the other hand, you don't have to give investors a compelling sales pitch for why they should buy the stock, because the whole premise of the offering is that people are irrationally buying the stock already and so they might as well buy it from Hertz. "Hertz: We've got some of that Hertz stock you wanted, if for some reason you still want it," is the entire pitch. It is not a good pitch, if you were not already predisposed to find Hertz's stock fun, but thousands of people apparently are! The stock was up this morning! Really I can't decide how to feel about this. On first principles, you should not sell a billion dollars of stock in a bankrupt company to small retail investors who just installed Robinhood on their phones a few months ago. On the other hand, people are definitely doing that anyway; a notable feature of this weird pandemic market is exactly that hundreds of millions of dollars of stock in Hertz, which is bankrupt, are being sold to small retail investors every day. Hertz just wants permission to do some of that selling itself. When Hertz's board of directors decided to file for bankruptcy, one reason they gave was that "the Corporations have made significant efforts to seek access to the capital markets to provide additional liquidity through this challenging economic downturn, but the capital markets are currently unavailable to the Corporations and it is unclear when or if such access may become available." In a sense that's always the reason that any company files for bankruptcy: If you can raise more money, particularly perpetual money that you never have to pay back and that doesn't charge interest, you should do that and pay back your debts. But when you are in dire straits and your creditors are declaring defaults and seizing your cars, no one generally wants to give you money, particularly not for free. Hertz tried to raise money to get it through the tough times, but it couldn't, so it filed for bankruptcy. And then a miracle happened? Then it turned out that people really do want to give Hertz a lot of money, for free. Because they are bored and in lockdown, or because they believe in the Hertz brand, or because there is something exciting about bankruptcy, or because Hertz is trending on Robinhood so it must be good, or because they believe that the present value of its future cash flows significantly exceeds its debt and so there is a lot of equity value. These are not the people Hertz would have contacted when it was "making significant efforts to seek access to the capital markets"; they are small-time retail investors using an app. They are spontaneously volunteering to give Hertz money. I mean that is not exactly right—they are spontaneously buying Hertz stock in the market, from each other, not from Hertz—but deep down those things are equivalent. The stock market is a way for gamblers to have fun, and it is also a way for companies to raise money. Sometimes those two purposes come together beautifully. Things happen Brawls Erupt in U.S. Debt Markets After Borrowers Get Desperate. Goldman Traders Reap $1 Billion in Commodities on Oil Tumult. Is There Really A "Looming Bank Collapse?" Palantir to File IPO in Weeks For Possible Fall Debut. One Trader Yanks $532 Million From TIPS Fund Before Price Data. SEC Charges Microcap Fraud Scheme Participants Attempting to Capitalize on the COVID-19 Pandemic. Crypto exchange Quadriga was a fraud and founder was running Ponzi scheme, OSC report finds. Arm wrestles for control of Chinese joint venture. New Hampshire rapper's poetry book sets world record for alliteration. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] If a company has a high stock price, its employees will be pleased (they are paid in stock), and it can attract new good employees, and it can make good acquisitions (and pay for them in stock), and borrow money cheaply (lenders are reassured by the stock price), etc. Private companies that *do* need money will have an easier time raising it if similar public companies trade at high stock prices, and people thinking about starting companies will try to start the sorts of companies that might end up with high stock prices. That sort of thing. [2] I don't know, arguably it tells you that you should pay a fun number for stocks? Like, if you are going to buy stock, it might be more fun to buy it for $420 than for $417.94. (420 is a marijuana reference.) The stock of famously fun Tesla Inc. recently hit $1,000, which is a pretty fun number I guess, but in 2018 Tesla's famously fun chief executive officer, Elon Musk, famously pretended he was going to take it private for $420 " because he had recently learned about the number's significance in marijuana culture and thought his girlfriend 'would find it funny, which admittedly is not a great reason to pick a price.'" BMH theorists would say, no, it's a great reason. [3] This is obviously a very stylized story and you can never be sure that the cash flows aren't *actually* worth $200; telling the difference is never as easy as I make it out to be in the text. And of course if this is true maybe you should buy the fun stocks so you can sell them later at a higher price, etc., none of this is investing advice. [4] Please don't email me to be like "actually Tesla is a great financial investment," it's fine, we are talking in generalities here, I do not mean to comment on the actual present value of Tesla's expected future earnings. [5] That is, $3 billion of debt at 40 cents on the dollar is $1.2 billion, meaning that those creditors expect to lose $1.8 billion on their $3 billion face amount. The way "absolute priority" works in bankruptcy is that those creditors need to get back 100 cents on the dollar before the shareholders get a penny. | 
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