Written by 10:09 am WTF is going on with the Economy?!

What happens when bored sports fans bet on stocks?

bet-hertz-donut

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In early March, the games stopped. 

Sports, like practically everything else, went on hiatus.

For many of us, it was yet another part of life upended. 

For sports gamblers, it represented an opportunity to shift their attention to the stock market. 

And shift it they did. Over three months, amateur gamblers contributed not only to historic stock market volatility. They changed the fate of a bankrupt car rental company. 

Here’s how they did it. 

FinTech, Boredom and Fee-Free trading

Over the past few years, financial technology or “fintech” companies disrupted the stock brokerage business. Before the arrival of startups like Robinhood, investors would pay hefty trading fees for the privilege of buying and selling stocks over clunky web interfaces. 

Starting about six years ago, these fintech firms put stock trading at people’s fingertips via well-designed mobile apps. This new generation of brokers set their trading fees to zero to attract investors, undercutting the established players in the process. 

Young Wall Street types (and their wannabe followers) quickly flocked to these platforms, taking gutsy bets, building an irreverent community, and sometimes making money. However successful the Fintech brokers were, their popularity remained limited to their niche market. 

When the lockdowns started, and the sports stopped, that all changed. Millions of casual sports gamblers abruptly had nothing to gamble on. Bored while confined at home and searching for a thrill, people who knew diddly squat about trading securities found a new gambling venue: the volatile stock market.

Suddenly, and in the face of unprecedented market conditions, millions of thrill-seeking sports gamblers began betting on the market. They followed their peers, their gut, and hunches. In the best of times, these actions do little other than making the person on the other side of the trade more money. Today, in the face of historic market conditions, these acts only added fuel to an explosive situation.

The gamblers’ bets were as lucrative as they were random. Acting on trends, they would bet either for (as what we call bulls) or against (as bears) either individual stocks or entire markets. They would seemingly jump from share to share, with little to no regard nor research on the underlying company. As we’ll see, this frenzy created some unintended consequences – ones that altered the trajectory of a company in peril.  

That delicious Hertz Donut…

Hertz Rent-a-car is one of the oldest and biggest car rental companies in existence. 

Despite their longevity, their recent history has been trying, to say the least. In 2012, Hertz acquired one of its biggest competitors. While growing their market share, the deal for Dollar Thrifty, forced Hertz to borrow billions of dollars. This debt soon ballooned as they went on a car-buying spree. By the end of 2019, the company was hanging on by a thread.

Then, the lockdowns came. The demand for travel, and, more importantly, for Hertz, the secondhand car market, went dormant overnight. 

This hibernation was the final blow to the company. As it turns out, Hertz’s primary revenue source wasn’t directly from car rentals or even selling accident insurance. Instead, the lion’s share of their income arises from buying cars in bulk for a discount, renting them for a short period, then selling them at a profit.  

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With both the demand for rentals and secondhand automobiles non-existent, the jig was up. On May 22, Hertz filed for bankruptcy, hoping to rid themselves of excess debt and emerge as a new, leaner company. 

Usually, when public companies file for bankruptcy, their outstanding shares become worthless. As a rule, shareholders are the last to get paid during these reorganizations, with creditors getting first dibs on the remaining company’s assets (if any). The stock gets canceled, and investors wind up with nothing. This process happens all the time, and with little fanfare. 

But 2020 isn’t usual – far from it (but you already figured that one out).

…That sports gamblers can’t get enough of.

Shortly after filing for bankruptcy, the sports gamblers-turned Wall Street gurus honed in on Hertz. For whatever reason (no one in the investment industry has yet to figure this one out), amateur traders began buying up near-worthless Hertz shares

In a little over a week, the company’s share price increased by over 400%, going from under a dollar each to just shy of five. Baffled by this development, Hertz eagerly issued a half-billion dollars-worth of new shares. For them, it was a great opportunity.  

Hertz owes its creditors many multiples of that amount. When they complete the bankruptcy process, they will likely declare their existing shares as worthless. If there are a bunch of gambling junkies willing to throw free money at them despite the risk, then why not take it?

What deprived sports betting tells us about the economy

Aside from bailing out an over-indebted rental car company, the Hertz story gives us yet another clue as to what’s happening with stock markets. 

Ever since the lockdowns started, stock markets around the world have been one giant roller coaster.  

Despite their flaws, stock indexes like the S&P 500, FTSE 100, and Stoxx 600 are the most discussed economic indicators in the news. When we hear that ‘the markets are up,’ we tend to associate it with positive developments in the economy. 

In a deep crisis like the one we face today, strong markets should give us hope. After all, the idea is that investors buy shares of companies because they believe the direction of the economy is positive. If things are looking up, then the business environment should be improving in the long run.

Yet, it’s beyond clear that stock markets are not reflecting our current economic reality. Lockdowns are still in place in many parts of the world while the virus continues to spread. There is no clear way out yet, and we’re only now beginning to sniff out that path.

Instead, most of the high gains and deep losses we see on the market come not from a belief in the strong fundamentals of the economy but from bored sports gamblers devoid of sports.  

Right now, most big professional investors agree. As it stands, these giants are sitting on the sidelines with a 5 trillion dollar pile of cash. 

We’ll know that the economy is looking better when they come back to play. Until then, the stock markets are just another game.

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