We’ve overused the word extraordinary in these missives but the last fortnight has seen extreme price actions. The rally that began in mid-May took an extra charge into the first week and a half in June, with spreads retracing back to 490bps and taking fund returns into the -2% ytd return territory before a reversal in the last few days leaving us at 552bps and most of our strategies -3% ytd.
Why have we retraced? What are the arguments for valuations currently? Well we will get to that, first some highlights of the last two weeks:
- The ‘Robin hood’ rally or short squeeze extraordinaire? We’ve seen Hertz issue $1bn in equity instead of a senior loan to fund its bankruptcy. A first for a company about to restructure its debt (and wipe out most of its equity) as its equity rallied 500% over the last few weeks. Incidentally we saw distressed equities rally remarkably in a number of names that face imminent default. It’s not something we have ever seen before and makes little sense as Hertz and others are already on the route to restructuring through a bankruptcy process but it is good for creditors (its bonds rallied by 13 points to 50 cents on the news). What it also shows is that retail investors can be incredibly powerful and given Ford is now in our index and has 900,000 retail shareholders (up 300% ytd) we wonder if this is a whole new deleveraging route!