Jun 18, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.” - See who said it and why it matters at the bottom.

1 big thing: After SEC wades in, Hertz pulls back new stock offering

Screengrab of 1978 Hertz commercial featuring OJ Simpson.

"They walked all the way up to the edge — and stopped." That's the verdict of Thomas Gorman, a partner at the law firm Dorsey Whitney and an expert on SEC enforcement, regarding Hertz's attempted sale of $500 million in new equity, Axios' Felix Salmon writes.

Driving the news: Hertz issued its prospectus on Monday, and then followed up on Wednesday with an update essentially saying "eh, never mind" after SEC chairman Jay Clayton made some pointed comments about the offering on CNBC.

Background: Hertz is the 48th most popular stock among Robinhood investors, ranking right between UCO and GUSH, which are both vehicles for making leveraged bets on the oil industry. Because the company is in bankruptcy, its stock will almost certainly end up worthless — but shareholders will see exciting volatility on the way to zero.

What they're saying: Here's just one of the risk factors that Hertz put in its prospectus.

"As previously disclosed, on May 22, 2020, we filed voluntary petitions under Chapter 11 of the Bankruptcy Code... The price of our common stock has been volatile following the commencement of the Chapter 11 Cases and may decrease in value or become worthless.
Accordingly, any trading in our common stock during the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock... There is a significant risk that the holders of our common stock, including purchasers in this offering, will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless."

Between the lines: More than 500 million shares of Hertz traded hands on June 8 alone, when the stock hit an intraday high of $6.25 per share. Given that every trade has a buyer and a seller, it's easy to see why Hertz would want to be the seller in some of these trades.

  • The stock offering promised free no-strings-attached capital for Hertz that would doubtless have been very helpful in terms of getting through bankruptcy.

The bottom line: Clayton has focused on small investors since his arrival at the SEC. It's easy to see why his staff would have had serious problems with this share issuance.

  • While the SEC can't stop stock-market speculators trading the stock to each other on the secondary market, it can — and did — effectively prevent the sophisticated financiers who currently control Hertz from issuing new shares to the gamblers. Hertz might not like it, but even in bankruptcy, it doesn't want to end up afoul of the SEC.
Bonus chart: Robinhood traders' favorite stocks

Data: Robintrack; Table: Axios Visuals

Website Robintrack follows the most widely traded stocks on Robinhood's platform. While stocks favored by institutional investors like Apple, Microsoft and Amazon occupy slots in the top 20, the list is heavily filled by speculative bets like cruise operators and airlines whose share prices are down significantly from their levels at the beginning of the year.

2. Catch up quick

Hilton is cutting nearly 22% of its corporate workforce globally, or around 2,100 people, and similar job losses are expected at hotel chains like Marriott and Hyatt. (WSJ)

Spotify has inked an exclusive deal to distribute Kim Kardashian West's new podcast. (Axios)

The Justice Department announced a legislative proposal that would limit some of the legal protections for online platforms such as Facebook and Twitter. (WSJ)

Top Congressional Democrats are discussing "next steps" based on allegations in former national security adviser John Bolton's book about President Trump's misconduct in his dealings with foreign leaders. (Axios)

3. Where COVID-19 is growing
Adapted from Nephron Research; Chart: Naema Ahmed/Axios

COVID-19 cases are rising in several U.S. states including Oklahoma, Florida, Arizona and California while Texas hospitalizations rose another 11% to a record high and are now up 66% since the end of May.

4. CFPB complaints spike as Americans seek relief

Consumer complaints to the Consumer Financial Protection Bureau rose 31% in the first five months of 2020, compared with the same period last year, with many complaints specifically mentioning the coronavirus pandemic.

  • Through May 31, the CFPB received 142,782 complaints, according to an analysis of the bureau's records by NerdWallet.

What it means: "The CFPB relays consumer complaints about loans, credit cards, bank accounts and other financial products to financial institutions."

  • "Among 2020 complaints explicitly mentioning 'covid' or related terms, 'struggling to pay mortgage' was the top issue."

Why it matters: The study suggests the lower-than-expected number of Americans taking advantage of mortgage forbearance and other financial hardship programs may be due to a lack of knowledge rather than a lack of interest.

Watch this space: Nearly 15 million credit cards and 3 million auto loans were placed in financial hardship programs in April and 8.6% of mortgage holders were in forbearance as of June 15.

  • Those numbers are both much higher than in previous months, but well below the expectations of economists, given the extreme job losses since March.
  • A Fannie Mae national housing survey in May found that only half of mortgage holders and a third of renters were aware of relief programs.
5. Bond traders like the 20-year bond
Data: Investing.com; Chart: Axios Visuals

The newly reissued 20-year U.S. Treasury bond saw strong demand in its second auction of 2020 on Wednesday, selling $17 billion worth of notes for a high yield of 1.31%.

  • That was around two basis points lower than where they had traded before the auction and yields declined further to 1.24% in overnight trading.
  • The market movement suggests a continued appetite for safe-haven U.S. government debt at all maturities.

The big picture: Treasury yields have broadly declined recently. Benchmark 10-year yields have fallen by nearly 30 basis points from 11-week highs reached on June 5 after the release of the May U.S. jobs report.

Flashback: The government saw weak demand for its auction of the 20-year note in May that was the first for that maturity since 1986. It relaunched the bond to help finance the significant increases in spending.

6. Opportunity Zones tax breaks aren't helping low-income communities

Axios' Kim Hart writes: An Urban Institute report finds that the Opportunity Zone (OZ) incentive created by the 2017 Tax Cuts and Jobs Act is falling short of its goals of fostering equitable development and business growth in undercapitalized communities.

The big picture: Researchers found some examples of capital flowing to neighborhoods that otherwise might not attract it, but Opportunity Zone incentives aren't sweet enough to motivate investors to seek out mission-oriented projects that may truly benefit low- and moderate-income communities, such as affordable housing or small businesses.

"This was sold as a business creation, job creation program in the heartland," said Brett Theodos, Urban Institute senior fellow, noting that only 3% of OZ resources are for operating businesses. "It's not a business creation program, it's a real estate subsidy. That may be the most egregious fault of the program."

What to watch: Congress is actively considering changes to the program, including extending the timeline by four years to 2030, Theodos said.

How it works: The program lets investors defer capital gains taxes if they invest in designated areas and, for the maximum tax benefit, keep money in the project for at least 10 years. Opportunity Zones have attracted more than $10 billion in investments.

Yes, but: Investors with the ability to park money in a project for 10 years naturally look for projects with the highest return. So investing in a high-rise condo in an economically distressed part of town will almost always be more attractive than, say, a grocery store.

  • And because eligible investors are wealthy, "people from outside the zones will largely be making investment decisions that affect zone residents," per the report.
  • Interviews with 70 stakeholders revealed that black project organizers have found it difficult to connect with or be taken seriously by investors.
Dion Rabouin

Editor’s note: In yesterday's newsletter, the third item was corrected to show that mortgage purchase applications hit their highest levels in 11 years (not all mortgage applications) and the stat that applications were up for the 11th straight week was deleted.

Quote: "All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood."

Why it matters: On June 18, 1948, the United Nations Commission on Human Rights adopted the International Declaration of Human Rights. Read it in full here.