Class of 2020

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 09 2020

Dear time-poor investor: the bull market of 2020 has created a whole new generation of enthusiastic share market participants

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Class of 2020

By Rudi Filapek-Vandyck, Editor FNArena

There are two key characteristics embedded in the share market and human investors are not well-suited to deal with either of the two; randomness and irrationality.

Most investors look at daily price moves and try to make sense of it through the framework of an intelligent, well-considered, structured, long-term investment strategy.

This then leads to oft used expressions such as the market is telling us but such approach belies the fact not every participant in the share market fits in that same mould.

As a matter of fact, it is very well plausible there are times when, and specific places in the market where, rational decisions with a focus beyond the immediate are not at all front of mind among those buying and selling stocks.

Most of you, I assume, have by now heard about the recent inexplicable rise in popularity of US listed companies that are but one step away from corporate failure, with failing car rental company Hertz Global Holdings the poster boy for this new market craze.

Under US legislation, companies in deep trouble (usually burdened by too much debt) can seek court-approved Chapter 11 protection, which allows business operations to continue while trying to find a solution to the financial problems.

Such a solution regularly involves wiping out shareholders and starting anew. A scenario investors in Australia can relate to as this is how Virgin Australia is being saved from the corporate graveyard.

One would think, logically, that anyone with a sense for risk would draw a long bow around such companies, but thats not what happened recently.

After shares in Hertz staged an eye-catching rally despite the company being all but broke and in deep debt, money started pouring into stocks of similarly hard hit, bankrupt companies including JC Penney, Whiting Petroleum, Pier 1 Imports, Chesapeake Energy and GNC Holdings.

All the while, corporate debt linked to these companies continues to trade at a discount, indicating bondholders, who rank above equity owners, dont expect they will receive all the money they are due.

****

Australia had its own eye-catchers last week with shares in Etherstack PLC ((ETH)) and Alterity Therapeutics ((ATH)), stocks virtually nobody had ever heard about up until that point, rising by more than 1000% in one day.

Yes, thats right. Up 1000% between the open and close of June 30th.

Etherstack is not going bankrupt, at least not here and now. The company develops radio technologies for wireless equipment manufacturers and network operators.

The share price surge occurred after it announced having teamed up with Samsung to jointly develop and market Samsungs advanced network solutions, with Etherstacks digital land mobile radio (LMR) softswitching technologies embedded.

In summary: Etherstack will receive some income from Samsungs marketing efforts, at some point, but we dont know how much or when, and neither do we know any other details that might impact on the companys future growth or viability.

But the share price went up by 1000%-plus. And there are times when that is all market participants need/want to know.

Etherstack, from its part, is using the unexpected opportunity by exercising conversion options for the convertible bonds it issued in August last year.

Gotta make hay while the sun shines.

Shares in Alterity Therapeutics jumped on the announcement the company had met with the US FDA to agree upon requirements for a phase II trial of its ATH434 product, a potential treatment of a specific Parkinsonian disorder.

Had anyone of last weeks buyers considered that phase II has yet to be organised, and there will still be a phase III if proven successful?

The Alterity Therapeutics share price is almost back to where it was pre-June 30th.

****

For good measure, nothing of what you just read is new or unusual for the share market locally or elsewhere.

Most investors like to think of the share market as a public forum where intelligence and insights meet experience, in-depth research, sophisticated tools and a bit of luck, but some participants are not the slightest interested in any of that.

They simply want to make money. End of discussion. And through as many short cuts as possible (Were all human, nest-ce pas?).

The share market has always been a hodgepodge of different strategies and time horizons, not to mention the differences in experience and skills, but anecdotal evidence suggests this year in particular has seen two identifiable groups join the market:

-older investors who had become wary amidst a lot of talk about inflated share prices are preferring to sit on large amounts in cash instead of risking it in the market;

-a younger generation of enthusiastic stock market newbies who have now quickly discovered a lot of money can be made, and quickly too, when markets are cheap and on the rise.

The latter has already been dubbed the Robinhood traders, after a popular, rapidly growing, commission-free trading platform in the US and the UK, on a mission to democratize finance for all.

According to media reports, some 160,000 Robinhood accounts have been trading shares in bankrupt Hertz, pumping up the share price by more than 1000%.

Probably the most telling quote I came across was: While the New York Stock Exchange has already moved to de-list Hertz to better protect investors, Robinhood continues to support trade for the companys shares.

Shares in Etherstack are by now responding to gravity, having givenup more than -50% of that tremendous one-day rally.


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