It appears there are a lot of investors who do not know that stock prices get wiped out in bankruptcy. Robinhood is a new app that allows investors to buy and sell stocks like a video game. Although they found they could not sell during the market crash – a minor issue being the last one out.
Robinhood is used more by young retail investors. And it seems these investors look at rock bottom pricing as a really good deal. And it appears they do not read the news, because all of these companies are about to declare bankruptcy which will wipe their stocks out.
The first one is Hertz rental cars. Everyone has heard of Hertz and bankruptcy does not mean Hertz is going away necessarily, but their stock is definitely going away. Meanwhile, 43,000 Robinhood investors have piled in as the stock has plunged. The first ones losing the most.
Then there are two cruise lines which Robinhood investors are bottom feeding on. That is 400,000 “investors” in Carnival and 350,000 in Norwegian Cruise Line.
The hope is after the virus, they will bounce back. And maybe cruises will but since they need to declare bankruptcy to continue ops, their stocks are going to zero.
Lessons for US
For TSP investors or any index fund investor, it is important to understand that record debt levels in the corporate companies you invest in is going to require many bankruptcies and many jobs are not coming back even if these companies restructure the balance sheet.
Hertz did another bond offering just a couple of months ago. And guess what, they have already defaulted on payments. The bond is trading 80 cents on the dollar in a couple of months – criminal to issue the bonds to some suckers. But our whole financial system is like that today.
And a lot of this going on with the help of the central bank. The Fed stepped in to stop the markets from seizing and this allowed zombie corporations to issue more debt to do who knows what with. But the Fed is telling those who listen (and few do), they can not make insolvent companies whole or profitable again.
Fed Chairman Powell only bought a little time for real action. It is up to Congress to provide much more fiscal support to the PEOPLE (aka. consumers, demand-side of the economy), but they do not get it. Happy talk about re-opening and vaccines makes the stock market jump but not the economy. And the economy is what matters in the long run.
Invest safe is now,
And always, invest smart.
TSP & Vanguard Smart Investor serves serious and reluctant investors
Categories: Perspectives