The bursting of the bankruptcy bubble; Individuals Roll the Dice on Stocks as Veterans Fret; 'Floating petri dishes' – why I'm bearish on the cruise lines

By Whitney Tilson

Thursday, June 11, 2020

1) In Tuesday’s e-mail, I wrote:

The bubble over the past week in bankrupt (or near-bankrupt) stocks may be the craziest thing I’ve seen since the Internet bubble.

Take a look at the gains in these stocks yesterday:

• Extraction Oil & Gas (XOG): 248%
• Chesapeake Energy (CHK): 182%
• Noble (NE): 161%
• Whiting Petroleum (WLL): 152%
• Valaris (VAL): 135%
• Hertz Global (HTZ): 115%
• J. C. Penney (JCPNQ): 96%
• RTW Retailwinds (RTW): 74%

Every one of these stocks isn’t just likely to decline… they’re all ZEROS!

This insanity is being driven by individual investors day trading and speculating like crazy…

It saddens me to see this because while this bubble, so far anyway, remains microscopic in size, it’s still a few billion dollars that these investors are sure to lose – and, I suspect, these are losses these folks can’t afford during these tough times…

This bubble is bursting as quickly as it inflated, as these stocks are down an average of 49% over the past two days (and are mostly down big again today):

  • Extraction Oil & Gas (XOG): -49%
  • Chesapeake Energy (CHK): -76%
  • Noble (NE): -44%
  • Whiting Petroleum (WLL): -52%
  • Valaris (VAL): -46%
  • Hertz Global (HTZ): -54%
  • J. C. Penney (JCPNQ): -52%
  • RTW Retailwinds (RTW): -21%

Don’t be tempted to bottom-fish here – as I wrote on Tuesday, these stocks are all ZEROS!

2) To better understand what’s going on here, see this story from the front page of yesterday’s Wall Street Journal: Individuals Roll the Dice on Stocks as Veterans Fret. Excerpt:

Individual investors, some new to the market, are showing a sudden appetite for risk. If shares keep rising, the newbies and others will be rewarded. However, the recent action reminds some veterans of past speculative frenzies, some of which ended badly, especially for investors who climbed on board late.

“The environment is dangerous,” said Michael O’Rourke, chief market strategist at JonesTrading. “Little to no due diligence is being performed and the general public expects the Federal Reserve to support every market pullback with policy accommodation.”

Online brokers are being flooded with new customers…

The brokers are reporting more trading as well. TD Ameritrade is averaging 3.5 million client trades a day so far in June, for example, more than four times as many as in June 2019…

Some of the buying seems to be coming from bored individuals, some of whom hadn’t previously had much interest in trading but now have few sports, gambling or other activities to keep them occupied as the nation continues to deal with the coronavirus pandemic.

Dave Portnoy, founder of the popular website Barstool Sports, has turned to day trading, sharing regular proclamations to his 1.5 million Twitter followers as he scans his portfolio.

“Stocks only go up, this is the easiest game I’ve been part of!” he said in a video on June 4, with Dire Straits tunes in the background.

In an interview, Mr. Portnoy said in early June, when investor Warren Buffett said he sold his airline shares, Mr. Portnoy bought those stocks, a move that has led to big profits.

“It took me a while to figure out that the stock market isn’t connected to the economy,” he said. “I tell people there are two rules to investing: Stocks only go up, and if you have any problems, see rule No. 1.”

Don’t get sucked into this foolishness! Remember: the surest way to get poor quickly is to try to get rich quickly…

3) I think Las Vegas will definitely recover from the coronavirus crisis, and movie theaters probably as well.

But I’m not so sure about cruise ship operators like Carnival (CCL), Royal Caribbean Cruises (RCL), and Norwegian Cruise Line (NCLH), whose mega-ships make up 70% of the industry’s total.

Cruises have been hit hard by numerous investigations, lawsuits, and stories like this one in the Washington Post: The pandemic at sea. Excerpt:

The cruise industry’s decision to keep sailing for weeks after the coronavirus was first detected on a ship helped carry the virus around the globe and contributed to the mounting toll, health experts and passengers say.

A Post review of cruise line statements, government announcements and media reports found that the coronavirus infected passengers and crew on at least 55 ships that sailed in the waters off nearly every continent, about a fifth of the total global fleet.

The industry’s decision to keep sailing for weeks after the coronavirus was first detected in early February on a cruise ship off the coast of Japan, despite the efforts by top U.S. health officials to curtail voyages, was among a number of decisions that health experts and passengers say contributed to the mounting toll.

At least 65 people who traveled or worked on the ships have since died, according to the Post tally, although the full scope of deaths is unknown.

This story in yesterday’s Financial Times captures the situation today: ‘Floating Petri dishes’: The 2020s were meant to be a boom decade for cruises – then COVID-19 hit them like a tidal wave. Excerpt:

It has survived norovirus, SARS and MERS, as well as regular outbreaks of gastroenteritis and legionnaires’ disease. But coronavirus has dealt the cruise ship industry what looks like a crippling blow.

The 338 ships that make up the industry’s fleet are docked. Carnival Corp., the world’s largest cruise company, is hemorrhaging $1 billion a month to maintain its fleet. Governments have issued “no sail” edicts and the majority of the 32 million passengers that the Cruise Lines International Association projected would sail this year are stuck at home.

The halt on operations is due to last until at least August with ghostly ships marooned in harbors in what is known as “warm lay-up”, where systems are kept running to make sure that none seize up.

The industry – which says bookings for 2021 are almost at the same level as they were this time last year – is now looking to rebuild public trust with new health and sanitation measures. But Martin Luen, a banker specializing in travel at Baird, an investment bank, warns that it will be a slow return to growth: “Sectors at the scene of the car crash are rarely the first ones to recover.”

Travel and tourism businesses are under immense pressure ahead of the crucial summer season in the Northern hemisphere. And even though the cruise ship companies have an unusually loyal customer base, eager to travel again, the risks of catching coronavirus and the added impact of social distancing rules at sea place an unusual burden on operators…

The industry not only faces the maintenance costs of keeping ships in good shape for when holidays can restart but also significant cash outflows as customers claim refunds for canceled trips. Norwegian said that as of May 11 just over half of the customers with canceled trips had requested cash refunds instead of vouchers offering 125% of their original holiday value. At the end of March it had $1.8 billion of customer deposits on its books.

And unlike peers in the hotel and restaurant sectors, cruise lines – which are mostly registered in tax havens such as Panama and the Bahamas – are ineligible for the U.S. government’s $3 trillion aid program.

The stocks of the big three might look cheap because they’re still down more than 50% from the pre-pandemic highs. But they’ve roughly tripled from their lows and, in light of the many unknowns, I’d avoid them here…

Best regards,


Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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