The Walking Dead: Zombie Companies Eating the Market Alive

I love a good zombie movie… honestly, I kind of even like the bad ones.

Growing up a somewhat nerdy kid in the shadow of Pittsburgh, George Romero’s horror classic Night of the Living Dead was mandatory viewing.

Kids in my hometown would incredulously ask each other “did you know the sequel to NOTLD, Dawn of the Dead, was filmed at the Monroeville Mall?!?” frequently enough that over time, it became a joke of sorts.

Apparently we weren’t the only ones, as zombie-themed movies and TV shows exploded over the past decade and have become ingrained in mainstream pop culture.

So while art often sets out to imitate life, it’s always been way more interesting to me when life turns the tables on that cliché… and that’s sure been happening a lot these last few months.

A few weeks ago, I wrote about one of the strangest days of my professional career, where crude oil prices went significantly negative over the course of a single trading session.

Well, yesterday’s session gave April 20, 2020 a run for its money, as not one, but two financially distraught companies I follow…

… each rose by more than 100% in a single day.

Source: Google Finance

It was truly insane – a situation where global rental car stalwart Hertz Global Holdings (NYSE: HTZ), who had filed for bankruptcy on May 22nd – rose 112% and also showed the largest daily increase in ownership on free trading site Robinhood.

Source: Robintrack.net

Not to be outdone, shale pioneer and professional debt accumulators Chesapeake Energy (NYSE: CHK) – who holds a total of US$9.5 billion in corporate debt versus just US$82 million in the bank and negative US$121 million in quarterly cash flow – was up over 180%.

Source: Bloomberg, Company Filings

Zombie companies walking amongst us… what a great time to be alive.

Now, an increase in equity price after filing for Chapter 11 isn’t actually all that odd. In the case of Hertz, it had been one of the most heavily shorted stocks on the market over the previous couple of months.

In general, when you have a short thesis that comes true, professionals will cover that short – meaning they go into the market to buy the stock back at a lower price – making the stock price rise to a certain extent.

But Hertz stock ran up from a low of 40 cents to a high of US$6.25 – a 1,562% gain – after they filed for Chapter 11… and on heavy volume, too.

Source: Bloomberg

Chesapeake’s chart looks similar – a period of inactivity followed by some extremely heavy volume pushing that price run.

Source: Bloomberg

In horror movie terms, these stocks are clearly the fast-moving, athletic zombies from 28 Days Later as opposed to the slow, lumbering plodders depicted in AMC’s The Walking Dead.

Now clearly this is unsustainable price behavior – HTZ is down 25% as of this writing, and has already been halted, while CHK hasn’t traded yet following last night’s report that they are readying their own bankruptcy filing.

But the frothiness and rampant retail speculation is eerily similar to the end of the dot-com bubble, and the resulting risk-on trade has pulled money flow out of US dollars and back into a market sitting at all-time highs.

The resulting downward pressure on the US Dollar has pushed the DXY (US Dollar Index) all the way down to its end-2019 support level.

Source: Bloomberg

At Venture Society, we’ve discussed the importance of the US Dollar before –so we know how vital this currency is to global markets.

We also know it’s in short supply.

As such, this seems like a good opportunity to establish a foothold. I like to use the Invesco DB US Dollar Index Bullish Fund (NYSEArca: UUP) for this purpose, as it tracks the dollar’s movement really well.

Source: Bloomberg

As per usual, I prefer to split up entry into stages, so no more than ¼ of any intended stake should be deployed here. It also opens up an opportunity to pick up the next ¼ stake in ProShares UltraShort Euro (NYSEArca: EUO), which is also setting up support at recent lows.

Source: Bloomberg

The reasoning here is simple. Whenever short-term investors rotate out of this risk-on trade – and they will – that essentially creates demand for dollars.

In turn, that supports the dollar’s relative price… and clobbers other currencies in the process.

And if there’s anything at all we’ve learned anything from horror movies, it’s that when you’re being chased by zombies… you at least want to be holding a baseball bat.

All the best,

Matt Warder