Photo Credits: Michael Gray & Brian Turner || And thanks to Pine Tools for concatenating the images
When I was in Eighth Grade, I wasn’t very popular, and in World History class, I sat behind a guy who was even less popular than me, and he was usually quite shy. Still it was my policy not to look down on anyone because I knew what it was like to be lonely, so occasionally I tried to be friendly to him.
Well, one day he came up to me and said: “Have you heard of Hertz Rent-a-Car?”
DM: “Of course.”
Guy: “Have you ever heard of a Hertz Donut?”
DM: “What’s a Hertz Donut?”
He gives me a big hit to my shoulder and exclaims “Hertz Donut?!” [To non-English speakers, the joke is that he was saying “Hurts, Don’t it?!”]
Well, as was common for many jokes with 14-year old boys, there is more energy than brains, so it was less than a week before the joke traveled around the junior high school, running out of victims, and long since bereft of humor, if there was any to start with. What surprises me now is that there is now actually a real meaning to the phrase Hertz Donut — it describes the stock of Hertz in the near future.
The stock of Hertz will, with high likelihood, go out at zero.
Start with this: the firm has filed for bankruptcy. Stockholders mostly get nothing in bankruptcy. Sometimes they might get a little new stock or some warrants to help them save face, because they are delaying the reorganization, but this is usually a trivial amount of money, and implies a big loss to the stockholders.
Second, the bond market is almost always smarter than the stock market, because it reflects the actions of institutional investors who are generally good at assessing risk. There are a large number of distressed debt investors out there, estimating what a reorganized Hertz will be worth. The senior unsecured debt is trading at $38 per $100 of principal. There is no preferred stock, and a minimal amount of second lien debt.
I don’t know all of the complexities of the asset-backed securities that they have issued, but the main physical asset of Hertz is their cars, and the cars secure most of the borrowing of Hertz, via asset-backed securities [ABS]. That means that the hard assets (cars) of Hertz are likely not available to unsecured claimants.
With the senior unsecured trading at such a large discount to par value, it seems impossible that the current stockholders would get much if anything out of a reorganization. Most of their assets are encumbered via ABS. The senior unsecured bondholders are the class of security holders that will receive partial payment, and as such, will likely be the controlling class of securities that will receive the equity in the new Hertz, while the old common stock is either cancelled, or receives some nominal allocation of securities in the new Hertz.
Thus I say to those who hold Hertz equity, sell your shares. Because of mindless speculation, the price is overly high. Take your opportunity, and sell to those who are less wise.
Now, some might ask… what are my motives in writing this? They are purely intellectual. I don’t short stock. It’s a very hard way to make money, and even if you are right, you could get caught in a severe short squeeze, and give up before the stock goes out at zero.
It is really tough to short a stock to zero. It is a “picking up nickels in front of a steamroller” type of play.
So, no, I am not long or short Hertz. Gun to the head, I would short it, rather than go long, but I would size any position to reflect the possibilities of a short squeeze. I.e., I wouldn’t short much.
Full disclosure: no positions in anything mentioned in this article
David, back in December or January (It feels like it’s been years, but) another commenter asked you to talk about whether the CFA membership still makes sense. If I remember correctly, he/she asked whether CFA Institute represented members fairly? You promised to do a post soon.
This hertz nonsense is along the same lines. I have a friend who is an award winning institutional rates trading strategist. I told him it was short sighted to encourage the Fed’s zero interest rate behavior, because no one needs a rate strategist if rates will be decided and manipulated by political committee. He is now out of work, along with several of his peers. Banks don’t need to pay someone to say zero rates forever.
The same applies to CFA membership. Who cares about hertz fundamentals? Who cares about Tesla’s sales or amazon or Netflix or any of the long list of money losing unicorns.
It’s all about the Fed acting like Zimbabwe.
The FOMC needs to grow up, and every investor — institutional and retail — needs to stop encouraging the infants in the Eccles building.
David isn’t going to write anything bad about CFA Institute. His real name is on the blog, most of us are using pseudo-names.
Follow the lead of a growing number of long term CFA members and just quietly stop paying dues. AIMR was never advertised and was never supposed to be a perpetual bureaucracy. Having the designation early in your career can be a big leg up, but after that it really doesn’t matter.
Former CFA Institute president John Rogers had to resign when his wife learned that john’s mistress was on the non-profit’s payroll. Members do not have to uphold this central bureaucracy idea of ethics.
Treat your customers well. If you are able, donate your member dues to a food bank or soup kitchen. There may be legal issues to saying you currently hold the designation (expensive for them to enforce)… but you can always write that you passed the CFA exams and were a member for x years. No need and no advantage to supportIng Charlottesville.
I gathered all the information, and I am going to write on it. I’ve just been busy as anything. You might be surprised by what I say. I suspect that it will annoy some people.
I am curious to read your thoughts on keeping CFA membership… but my point remains that the world has no need for CFA’s if the Fed is going to print currency like Zimbabwe. It doesn’t matter that hertz is bankrupt, just print currency and lend like it doesn’t matter.
The big bank where my interest rate strategist friend used to work replaced him with a 20-something not long out of business school (MUCH cheaper) because it takes no talent and no experience to regurgitate “near zero interest rates forever!” A high school kid can do the job if fed policy is Zero rates forever.
And while we are upsetting the apple cart, there is no need for the army of PhD economists working at the Fed. The answer to every question is lower rates. What’s for lunch? Lower rates. What time is it? Lower rates. What is Bernanke / Yellen / Powell’s IQ? Lower rates. The Fed cannot justify paying buildings full of economists when any cardboard cut out can say “lower rates”. Being a fed economist in the era of zero rates requires less skill than a Starbucks barista.
Does this anger the useless fed economists? The better question is how much they deserve ridicule for neglecting their purpose.
Bankrupt hertz selling stock is bad, but let’s be honest and point out the fed abandoned fundamentals long before hertz did.
David,
What are your thoughts about JP Morgan’s decision to go back and edit old software – from COBOL to FORTRAN – to remove all references to white lists, black lists and other allegedly “racist” verbiage? You probably have a white list of emails that you always let through, and perhaps a black list of known spam addresses… so the poop for brains managers at JPM are going to divert IT resources away from actual business initiatives, away from efforts to expand lending in minority communities, and away from anything on a modern computer. Instead, they will be appeasing woke Marxists by editing software source code.
its the same bank that has trouble recruiting the best IT talent already – as better programmers prefer to work for fintech startups or an actual software company. They get paid more, and they aren’t looked down upon by nitwit management that thinks IT is just data processing — which is what it was when septuagenarians on the board first learned of computers.
Is it time to sell companies run by “managers” and boards who’s thinking and training predates transistors?
I hadn’t heard about this. I guess JP Morgan wants to be “in the black.” 😉 My email does have a set of mail rules, but it is mostly to deal with advertising.
I could give you a discussion of IT expertise, and how it is not always money-driven. One of my son-in-laws is a good example of that. Also, Provident Mutual did not pay stupendously, but the Pension Division got excellent results out of their programmers by: teaching them the business, and treating them as team members, not as specialists.
On another note, all five of my adopted children are black to some degree. None of them have sympathy for BLM to the best of my knowledge. My view is that there is racism in the US, and 80% is individual, 20% is systemic. There still is work to do to create a colorblind society. But the black community needs to be willing to remove the chip from their shoulder (as two African friends of mine said in 1981) and:
1) Integrate in US society like all other ethnic groups have done.
2) Stop having so many broken homes, and train their children to be disciplined (this applies to all ethnic groups). Note: BLM advocates for abolition of the nuclear family, which is a recipe for poverty and national decline.
3) Drop the culture that glorifies violence. (Black on black crime rates are high, as are their abortion rates. If you want black lives to matter, start at home.)
4) Stop complaining, and do what you can do to better your lot before alleging racism.
Many blacks who have emigrated to the US from Africa would agree with this. Having not been the great-great-great grandchildren of race-based slavery (a uniquely horrible American invention), they don’t see the relatively colorblind US society as a horrible place.
I do think our nation has work to do in repenting of racism… but that applies to all races. My goal with all of my children was to teach them to treat all people well. My wife and I were deeply offended when some of our adopted children (as adults) would make “racial stereotype” jokes. They laughed at us saying that it is all in fun. We said that they didn’t know what others suffered in order to get the less racist society that we have today.
“Is it time to sell companies run by “managers” and boards who’s thinking and training predates transistors?”
That would be difficult, as few board members are in their 80s. If they have the money to find the programmers who can still write COBOL or FORTRAN, that’s pretty amazing in its own right. I have worked with both languages in the past, but it is a different way of thinking about programming than modern languages.
That said, the IT professionals can tell JPM that everything is cleaned up, and no one would know the difference. Rather than it being an “age thing,” board members are rarely technical specialists in programming, and they have to accept the opinions of the experts.
David,
(1) the Bloomberg terminal used by finance professionals is coded mostly in FORTRAN. Money center banks still use COBOL running on mainframes for bank accounts. Perhaps you are unaware of how antiquated finance computing is
(2) the percentage of board members who are over the age of 65 is staggering. It’s a substantial majority.
Nancy Pelosi is 80. Biden is 79. McConnel 78. And Trump is 74. It’s ridiculous to suggest the people burying the country in debt will be around to help repay the debts they (not us) are issuing.
The people currently running the country are disproportionately OLD. It’s not just corporate boards or just congress.
(3) BLM founders have gone on TV and stated in no uncertain terms that they are Marxists. They believe in violent revolution.
This is why they have no issue with destroying statues of Presidents Lincoln and Grant (Who ended slavery in the USA). It is why they have no issue destroying a statue of Frederick Douglass. the murder of George Floyd is merely a pretense the Marxists are using to launch their violence.
(4) the USA inherited slavery from the UK before the revolutionary war. A couple decades after the US Civil War, Great Britain fought the boer war in South Africa… England had only pushed slavery off their main island into their colonies – including South Africa.
It is shocking how many US public school grads have no clue who Frederick Douglass was. They don’t know Abe Lincoln or U.S. Grant. They don’t grasp the ongoing debate in the USA between federalism and state autonomy. And they are hopelessly ignorant of the issues behind the Boer War.
England didn’t invent slavery. The Roman Empire had slavery, and they didn’t invent it either.
Of course, the Marxists in antifa and BLM don’t care about history. They want destruction and chaos. That is their goal, just as it was in every other failed Marxist economy.
Imagine the ignorance of US college faculty that they discuss Marxism positively. The reason Marxists are able to foster chaos in the USA is because of the complete collapse of the education system from public schools to colleges. Marxists need a miseducated populace.
The Marxists in Rochester NY stopped defacing the statue of Frederick Douglass, and just tore it down completely.
Douglass, a former slave who escaped, got educated, and was a famous staunch abolitionist.
Pew research said last week that the BLM violence is only 17% blacks. A black rapper pointed out BLM has nothing to do with black lives at all.
BLM and antifa are made up of Marxists that were indoctrinated on campus for tens of thousands of tuition dollars per year. Parents sacrificed to get their kids a college education, and instead they were indoctrinated into a dangerous cult.
Anyone claiming to care about blacks at all would never deface a statue of Frederick Douglass. Period.
PhDs advocating violence, riots and destruction… while cowardly hiding behind tenure. They didn’t even bother to teach their Marxists cult members who Frederick Douglass was. Morons.