Axios Markets

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Friday. We made it. Matt here ... Kate Marino's starting us off with a glimpse of the restructuring drama surrounding Revlon and the bizarre fact that its shares have become the new hot plaything for the meme stock crowd.

Today's newsletter is 819 words, 3.5 minutes.

1 big thing: Revlon's meme bankruptcy

Animated illustration of a tube of lipstick rolling up to reveal a hundred dollar bill.
Illustration: Aïda Amer/Axios

Meme stock traders have a new favorite stock — zombie cosmetics company Revlon, which filed for bankruptcy protection last week, Kate writes.

  • Its shares — which face the very real prospect of being wiped out in bankruptcy proceedings — have caught fire. They're up 615% since their low point last week.

Why it matters: This isn't typically the market reaction after a company acknowledges it's insolvent and files for Chapter 11 protection.

How it works: In bankruptcy court, companies without enough money to pay everyone are allowed time to figure out who will get paid what. Creditors — like bondholders and lenders — would have to get their money back in full before the shareholders see a dime.

  • If there’s nothing left for shareholders, they take a zero. This happens all the time in bankruptcy court.

Flashback: Hertz became an O.G. meme stock after its 2020 bankruptcy when a Robinhood-fueled rally catapulted its shares, which Wall Street pros had deemed virtually worthless.

  • Retail investors proved the haters wrong when shareholders recouped a tidy payout as part of Hertz’s bankruptcy plan.

Yes, but: Retail traders who want to replicate the Hertz win with Revlon could be in for a rude awakening.

  • Hertz filed for bankruptcy at a unique moment in time — May 2020, basically the economic nadir of the pandemic. Its business had ground to a halt thanks to COVID-19 lockdowns, ultimately triggering what amounted to a freak margin call in its intricate stack of asset-backed debt.
  • A few months later, with the economy awash in fiscal and monetary stimulus, summer weather beckoned lockdown-grizzled America out onto the road. Hertz actually had a business again.

But while Hertz was an indebted company that couldn't make its payments because of a once-in-a-lifetime pandemic, Revlon has been a poorly performing debt zombie for years. It previously completed distressed debt exchanges in an attempt to put off the inevitable.

  • And, zooming out, back when Hertz filed the market was headed into an upswing — good for valuations — while now, we're barreling through bear territory.

These differences make it less obvious that there's a temporary, Hertz-like valuation discount for Revlon shareholders to take advantage of or a catalyst for a quick bounceback in the business.

What the bond market says: Some of Revlon’s bonds — which, again, are supposed to get paid back in full before any money goes to equity holders — are trading at just 5 cents on the dollar, according to BondTicker.

  • Translation: The savviest bankruptcy investors on Wall Street — who, by the way, are salivating for investment opportunities after two years of artificial Fed support propping up zombie companies — don’t think Revlon’s bonds are going to eek much more than pennies on the dollar out of a bankruptcy plan.

The bottom line: Of course, Wall Street's savviest could be wrong. They were wrong in Hertz, after all.

Go deeper.

2. Charted: Birth of a meme

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

3. Catch up quick

📉 Germany warns Russia’s gas cuts could cause energy markets to collapse. (Bloomberg)

🚬 Juul decision triggers broader tobacco fight. (Axios)

🌽 Price of gas-additive ethanol outpaces crude oil. (WSJ)

4. Farewell to the pre-COVID supply chain

Illustration of shipping containers sacked like Jenga blocks with a hand removing one
Illustration: Sarah Grillo/Axios

More than two years since the onset of the pandemic first threw a wrench in supply chains, long-lasting changes to the way businesses operate are taking shape, according to a new McKinsey survey of global supply chain leaders, Kate writes.

The big picture: These are the first steps in the long-term, systemic shifts that will happen over the course of the next decade, Dan Swan, co-lead of McKinsey’s global operations practice, tells Axios.

Details: 44% of the supply chain execs said that they increased regionalization in their supply chains in 2021, nearly double the share that did so in 2020.

  • 81% implemented dual-sourcing — or using two suppliers instead of one for a given item — last year, up from 55% the year before.
  • And 80% increased their inventories, compared to 61% in 2020 (68% plan to make long-term revisions to their inventory management strategies).

The bottom line: Spurred by events like the pandemic and Russia’s war in Ukraine that have upended globalization as we know it, these changes mark a commitment to a departure from the pre-COVID ways of doing business.

5. 💬 Quoted: "It's going to drive prices up"

“These two ideas that the government has, either to ban crude oil exports or to have a gasoline holiday, actually are going to make the market tighter, not, you know, more constructive for consumers. It's going to drive prices up, not drive them down.”
John B. Hess, CEO of energy exploration and production company Hess, at an investment conference yesterday. He talked about some of the Biden administration's proposed reactions to nosebleed gasoline prices.

Why it matters: The Biden administration has been scrambling recently to find some solution to surging gas prices, which have driven a sour mood among the electorate ahead of the midterm elections.

Yes, but: As our colleagues at Axios Macro noted, some of the policies seem to be a bit incoherent.

📖 1 thing Matt loves: “An Engine, not a Camera,” which might be the single best book on finance I’ve ever come across.

In it, sociologist Donald MacKenzie lays out something I’ve always suspected — that abstruse finance theories don’t so much tell you how the markets work, but determine the way markets work.

The heart of the book explores how the Black-Scholes model, developed by academics in the late 1960s to price options, was actually a pretty poor predictor of prices at first but grew more accurate as traders came to rely on it.

In other words, the theory became part of the conventional wisdom on Wall Street. The more people relied on it because they thought it worked, the more it worked. Until it suddenly didn’t. (See the stock market crash of 1987.)