Saturday, May 23, 2020

In the Driver's Seat

Hertz declares bankruptcy.   This isn't like 2008.

Back in 2009, I recounted before how I made a lot of money on Avis stock - there were rumors that the company was going bankrupt, and the stock sank to 74 cents a share.   I bought 1,000 shares and it went up a few thousand percent in value and I made a few thousand dollars on a few hundred dollars' investment - in a fairly short period of time.   I got lucky.   I gambled and won - and the gains on Avis offset my losses on GM and Fannie Mae - two other gambles that didn't pay off.  Never confuse getting lucky with being brilliant.

I wrote about Hertz before - how they sell used rental cars, and how I concluded that they are not a real bargain - the prices are basically retail prices, and each car comes with a scarlet letter "R" for "Rental" on its CarFax report - making it harder to sell later on.  Oddly enough, Hertz sells most of its cars through auctions, where they are sold for advantageous prices  - prices not offered to the general public.  If only...... nah!

Only last week, I got a Spam e-mail from Hertz encouraging me to "rent-to-buy" a used rental car. But sadly, I have two fairly new cars in my garage that look and drive like brand-new, are paid for, and have less than 40,000 miles on each (the Hamster only 20k!).  I need a new or used car like I need a hole in my head.  And realistically, the cars I already own have less wear-and-tear on them than a used Hertz rental.   And they are fully loaded, too - something that most rental cars are not. Usually a rental car is optioned up to the mid-level trim, which isn't bad - you get the usual power everything, but maybe not the killer sound, system panoramic sunroof, and heated and cooled massage seats.   But I digress.

Last time around, we had a nice healthy ordinary recession, triggered by irrational behavior by humans, which is to say, normal behavior by humans, who decided that houses were made of gold (a notion that still carries weight today, which shortly will be proved wrong once again).   But this time around, it's different.  Last time around, air traffic declined - we were buying tickets from Washington Reagan to Ft. Lauderdale-Hollywood on Spirit for $30 and upgrading to first class for another $30 - free drinks!  Whoo-hoo!   This time around, all air traffic has pretty much stopped entirely for two months.  We're talking no flights and no car rentals for a substantial portion of the year (and yes, I know there are a few flights here and there, and it is starting to pick up again).

But you can't run an airline with a huge cash-flow nut with no income.   Lease rates on airplanes can be a million dollars a month. That's like $1,000 an hour just for the plane.  Add in fuel, salaries, landing slots, insurance, terminal costs, landing fees, and overhead, and you've got quite a monkey on your back.  You keep the planes flying all the time, and full, and maybe you make money - as airlines did in the last few years.  Historically, it was a boom-or-bust business, and when an airline executive said, a couple of years ago, that "losses were a thing of the past!" I sold my airline stocks and my Boeing stock.  And pretty much since then, I have been slowly selling off all my stocks and mutual funds, being all in cash by December of 2019.   I haven't learned much over the last few decades except how to spot irrational exuberance.  That, and I needed the money to live on, now.

The car rental business isn't much better.  You have to buy cars from manufacturers, which you get at a good price, but you have to borrow money to buy those cars.  When you are done using the cars, you sell them - either directly to the public for about what you paid for them, or at auction for less. You count on business travelers on expense accounts who will pay top dollar for high-end cars as your bread-and-butter.  Vacation travelers who want to rent an economy car are just a bonus.  But again, you have a fleet of cars which you are paying interest on, and then airport ticket counters, the car lots, the salaries, the maintenance, and so on and so forth.  It is a money machine that makes money for you, provided you feed it money.  And with no rental income and no way to sell off the used cars, your money train grinds to a rapid halt.

This isn't like 2008.   Back then, airline travel slowed down, but it didn't effectively come to a halt. Yes, things will turn around in the next few months, but it will be a long, slow slog, just as getting this virus thing back to normal will be a long, slow slog.   What is troubling is that people's behaviors may have changed, maybe permanently or maybe just for a long while.  I was watching a YouTube video (have a lot of time to do that, these days!) about the demise and resurrection of Toys 'R' Us, which opened two new flagship stores in upscale malls (there are few left of the other kind) in New Jersey and Houston in late 2019.  The new business model is to get away from "big box" retailing and instead provide a "experience" where kids can come play with samples of the toys and mill about in a much smaller store.

Sounds like a plan, right?  Little snot-nosed disease-bag kids putting their gummy hands all over toys that maybe 200 other kids have touched and sneezed on and wiped their boogers on.  Little kids running around in close proximity to one another, while their parents are standing in the middle. Maybe pre-virus this was a rational business plan (I doubt it - people will still buy toys online or at the big-box store for less - price IS king in the market!).  But post-virus?  Just put a fork in it, it's done.  That sort of idea - if it had any merit at all - is just dead, dead, dead.

This time around, it is different.   Sure, we had an economic recession coming to us - they come with regularity, as human beings, being irrational and exuberant, over-value commodities, stocks, bonds, minerals, and real estate - eventually there has to be a "correction."  We all over-borrow and then realize what a pickle we are in, and then pull back.   Everyone buys cars all at once, and then stops.  It happens, time and time again.   In 1954-1956, for example, people bought record numbers of cars - financing it all on time.  They went out and bought a new television, again, financed on consumer credit.   Cars were getting fancier and fancier and even the "low-price three" were pushing luxury features. 

Then it all came crashing down in 1957-1961. It wasn't any one thing that caused that recession, only that when everyone is tapped out, they stop buying.   It is the herd instinct that drives us off a cliff.  In the mid-1950's, you saw your neighbor buy a '55 Fairlane or '56 Chevy - with those new overhead valve V-8s, and automatic transmission, power steering and power brakes, no less!   Seemed like a big upgrade from your flathead Ford, or your stovebolt-six Chevy with three-on-the tree and manual steering.  so you went out and bought a new car, too.  Once everyone had one, though, they stopped buying.

We had that coming, anyone could see that.  Car sales went nuts in the last five years or so, and even Bill Ford warned us that these new long-term car loans would bite us on the ass - locking people into cars longer and longer, and thus reducing the number of trade-ins and slowing sales - eventually.  When a typical car is a $70,000 SUV or pickup truck, people get tapped out pretty quickly.

People don't get this - yet.  We go through this with most recessions.  Back in 2008, the price of oil spiked (which is an interesting story in and of itself) and overnight, gasoline went from like $2 a gallon to $5.  The housing market collapsed and George Bush signed the bailout agreement (not Obama, Bush!).   But it wasn't until March of 2019 that the stock market hit rock bottom - more than six months later - and GM and Chrysler went belly-up.   And if you look at every recession or even the great depression, the effect is the same.  Even in 1929, after the "crash" the real crash didn't occur until months later, as stocks deflated like old party balloons.

1930 Stock Chart Analysis
The market didn't bottom out until 1932 and didn't recover until after the war.  Note the false rebound shortly after the crash.   Is this where we are today?

Will we see a depression as great as the 1930's?  Not quite.   We were due for a recession, and this virus thing was like throwing gasoline on it - an accelerant that engulfed us in flames, but may burn out rather quickly.   I think this virus thing merely compressed a lot of the pain of the recession into a shorter period - forcing zombie companies that have been teetering on the brink of collapse since the last recession to finally keel over and die - or be reborn as something else, preferably not an interactive play-experience, though.

As painful as that all sounds, though, pruning a tree or shrub is often the best thing for it.   New growth will occur (provided you don't cut it down to a stump, but even then...) and the result will be a plant that is heartier, healthier, and prettier than before.   Cold comfort to the aging limb about to be lopped off, I know.  But in the past, this has been the case, and there is no reason why it shouldn't in the future.   When the dot-com crash occurred in the 1990's, it left a lot of unused office space, server space, and high-speed internet in its wake.  This primed the pump for the next generation of online companies, which often had better business plans than

But alas, we are still in denial at this point - and that is normal, given how efficient we are as human beings (about 1-3% by my estimation).   People are still listing houses for pretty ridiculous prices - and people are still paying them, in some instances.   We saw this in 2008 - we still sold Duke Street at a pretty high price, even after the market "collapsed".    A year later, the price had declined much further.  Even in a recession - even in the great depression - the majority of people still had jobs, paid their bills, bought houses and cars, and so on and so forth.

My gut reaction is that is where we are right now.  No one wants to believe things are as bad as they are just yet. People are collecting 100% of their paychecks, in many instances, to stay home, whether part of the "Paycheck Protection Program" or the $600-a-week unemployment bonus.  So far, things haven't been too bad for most of us.   For many businesses, however, things are not so hot - small businesses are going under, and the quiet tragedies of individual entrepreneurs who spend their life savings on a new business or franchise are not talked about much in the press.

The big companies going under, well, no one feels sorry for JC Penny - but I have a friend who has (or had) a pension from there. Most of these companies will emerge from bankruptcy, I suspect, shedding their debt, as shareholders are wiped out and bondholders become the new shareholders  These successive bankruptcies, however, will depress the stock market further, and people will panic and sell at the nadir of the market, a few months from now.

That is the conundrum, ain't it?  Like our friend with Pitney Bowes stock, do you bail out now and leave with the tattered remnants of your investment, or hope it bounces back - or ride it all the way down to nothing?   One scenario I did not address in that posting bears mentioning.  If you did sell all of that stock, what would you buy?   If your answer is "Pitney Bowes" then it makes more sense to hang on.  This happened to me with Bank of America stock.  It was in the tank, mostly because as part of the government bailout, they could only pay a penny-per-share in dividends.  I sold the stock - at a loss - and not long afterwords, Bank of America paid back its bailout loans and started paying dividends again - the share price went up and I bought my shares back for more than I sold them for - d'oh!   There is a happy ending there, though, as the shares continued to go up in value, and between that and dividends, I did OK before selling.

Now you see why I say stock-picking is for chumps - and why I am out of the game.   Just too nerve-wracking at this stage in my life.  It is tempting to dump stocks when they tank (fear) and buy them as they rise (greed).  Buy high, sell low - the path to bankruptcy.   But I digress.

The problem with Hertz goes beyond Hertz, though. The car companies keep their assembly lines running by selling off as much as 10% of their output to rental car companies.  So if you have a slow-selling model, you can pawn it off on the rental car companies, which is what kept the Impala, Malibu, Taurus, and Chrysler Sebring Convertible in production as long as they were.  Hertz has stopped buying cars, and I suspect Avis and others have as well.   This doesn't bode well for the car makers, who have lost their "flywheel" in production planning (Chrysler uses a "sales bank" to absorb excess cars, simply by parking them.  Today, ours is full of Chrysler minivans).

Eventually, when things recover, these rental car companies will have a lot of old, low-mileage cars to unload, which they will do, but at rock-bottom prices.   This will mean even more losses and will upset their business model, at least temporarily.   Like I said, it was a money-train, and when those stop, you lose all momentum, and it takes a long time to get them started again.

The economy will recover, just like our pruned Ligustrum re-grew, when we cut them back from 30-foot-high trees to 5-foot shrubs.   Not as big as before, but better - and of course, different.   But now they no longer block the light from the Azaleas, which blossom once again.  It was painful, but necessary.

Expect more bad news in the weeks to come.  But don't be alarmed, this is to be expected.   There may be some bargains to be had down the road - months from now, maybe years - in terms of stocks, bonds, real estate, and whatnot.  As I noted before, we were buying foreclosure properties nearly a decade after the crash of 1989.   I think the same thing will happen again, here.