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Robinhood and its Merry Traders

In recent weeks, the news centered around reopening the economy and the expectation a vaccine may come as soon as the end of this year. This week, those hopes were dashed by new reports indicating the number of confirmed COVID-19 cases may be on the rise in as many as twelve states and a statement from the head of the Federal Reserve, that an economic recovery will be a slow process with unemployment potentially remaining high for longer than previously thought. As in weeks prior where news drove the markets considerably higher, this week the news drove the markets lower. The bottom line is that despite our hopes for a quick recovery, we’re not out of the woods yet.

One factor I’ve seen mentioned as an explanation for the quick rise in the markets is a shift from investing to speculating. We’ve seen tremendous volatility in industries such as the airline, cruise ship, and restaurant industries. On any given day, companies such as Delta Airlines, Hertz, JC Penny, and Carnival may be up or down 10% or more. While many professional investors are taking a more cautious approach, we’re finding that retail investors have been on the move. Two separate stories have come out in the past couple weeks indicating the number of new retail accounts have skyrocketed at custodians like E-Trade and Robinhood, which cater to smaller accounts and younger investors. One analyst went so far as to say, “Day trading has replaced sports betting as a form of entertainment.” So, when you see large moves higher or lower in companies that have been particularly hard hit by the pandemic, realize this is more akin to gambling than investing.

While we’re on the subject of speculative trading, one company which is currently in bankruptcy is trying to capitalize on this atmosphere. Last month Hertz filed for bankruptcy amidst the sharp decline in travel and car rentals. Typically, in a restructuring, shareholders are wiped out and bond holders take a sharp haircut. However, for the first time I can recall, Hertz is issuing more common stock while in bankruptcy. The company hopes to raise $1 billion by this new share issuance. To say this is uncommon is an understatement. But it does highlight the fact that, to a large extent, retail investors are willing to take huge bets in this environment, hoping for a big payday.

The good news is that the Federal Reserve again this week reiterated it stands as a backstop. As expected, the Fed kept rates unchanged at 0%-0.25% but added it doesn’t expect to raise rates until 2022 at the earliest. In its statement it will keep rates low, “until it’s confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Instead of reassuring investors, the underlying message is that the economy, while improving, remains substantially weakened. Highlighting this is White House Economic Adviser, Kevin Hassett, who reiterated, “the odds of a phase four stimulus package are very, very high.” We anticipate the next round of stimulus to occur after the current extended unemployment benefits expire, which will put pressure on lawmakers to act further.

In closing, we turn to a story about supply and demand. I read this week that there is a hairdresser in New York City that is charging $1,000 for a haircut. Thinking this sounded outrageous, I found the article and it seems Julien Farel, who admittedly was expensive to begin with, has a waiting list of over 1,000 customers. In a quip, the hairstylist added, “85% of blondes have disappeared during the pandemic.” It just goes to show the length to which people will go to look good during a pandemic. Now you know.

Bruce J. Mason, MBA