Move over Bitcoin (BTC) and Tesla (TSLA), there’s a new kid on the “momo” block.
Or, rather, an old one.
Like the mythological Phoenix, the Eastman Kodak Company (KODK) has seemingly risen from the ashes. And amid a trading year that’s already seen its fair share of strange behavior, action in Kodak last week may take the 2020 cake.
At one point during the week of July 27, Eastman Kodak, which emerged from bankruptcy in 2013, was up over 2,700%. By the week’s end, the stock had cooled somewhat and closed its five-day run up only 900%.
Based on that type of weekly return, one might think Kodak had announced a successful acquisition of the red-hot TikTok app. But no, that potential acquisition has actually been tied to Microsoft (MSFT).
In reality, it turns out the spike in Kodak’s stock was linked to an announcement that should bolster its transition from legacy camera/imaging company to pharmaceutical behemoth. As of July 28, that transition will now be assisted by a huge loan from the U.S. government, compliments of the White House via the Defense Production Act (DPA).
Created by Congress at the start of the Korean War in 1950, the Defense Production Act was initially modeled after the War Powers Acts (1941,1942)—the latter of which gave President Franklin D. Roosevelt broad authority to influence the economy amid World War II.
The DPA has been continuously reauthorized by Congress since that time, albeit in slightly varied forms, and was most recently extended as the John S. McCain National Defense Authorization Act of 2019 (set to expire in 2025).
The DPA allows the President of the United States, largely through executive order, to direct private companies to prioritize orders from the federal government in times of crisis. The president may also allocate national resources for national defense purposes and offer loans or loan guarantees to bolster domestic production of key products and services.
The DPA loan to Kodak was made under the pretense that the legacy camera/imaging company will play a key role in supplying ingredients for generic drugs in the pharmaceutical industry for years to come.
The need for local sourcing of pharmaceuticals, many of which are currently manufactured abroad, was made clear at the start of the coronavirus pandemic, when concerns were raised that shutdowns of foreign economies could put a critical strain on drug supplies in the United States.
In sum, the above means that a company with a total market capitalization of roughly $100 million two weeks ago (Kodak) has now been awarded a DPA loan worth nearly $800 million. It should be noted that the loan is subject to the appropriation of funds by Congress.
The outsized value of the loan, relative to the recent market capitalization of Kodak, certainly raised a few eyebrows in the financial markets. Critics of the decision wondered why the loan wasn’t given to a more established pharmaceutical company with deeper experience in the field, and the ability to ramp up operations more quickly.
Trading activity in Kodak stock, leading up to the announcement of the DPA loan, is also under investigation. On July 27, the day before the DPA news was released to the public, Kodak stock rose 25%. On the 29th, Kodak was the highest-volume stock traded on the New York Stock Exchange.
Beyond that, it appears the CEO of Kodak received a huge windfall of Kodak stock options one day before the DPA loan was announced. The value of those options ballooned by about $50 million within 48 hours of their existence.
With so many questions swirling, it’s no shock that Kodak shares have traded with an insanely high level of volatility since the announcement. After touching $60/share last Wednesday, the stock has plunged all the way back to $14.94/share as of Aug. 3. But the latter price still represents an appreciation of 600% since July 24, when the stock closed the trading day at $2.10/share.
Until some of the outstanding questions are answered, it’s almost certain the volatility will continue. It will also be interesting to see whether any government officials were involved in Kodak stock purchases prior to the publication of the DPA loan announcement.
As many will recall, it was discovered early in the current pandemic that several members of Congress had liquidated equity positions after attending closed-door meetings on the potential impact of COVID-19.
When it comes to personal trading accounts, members of Congress are not held to the same ethics and disclosure requirements as the executive branch, but they must abide by the 2012 STOCK Act, which prohibits trading on nonpublic information that is accessed in the course of official duties.
Sen. Richard Burr, of North Carolina, made headlines in February when he liquidated between $628,000 and $1.72 million in holdings before the stock market corrected. Burr, who led the Senate Intelligence Committee at that time, has insisted those portfolio decisions were made based on publicly available information.
Coincidentally, Burr stepped down as chairman of the Intelligence Committee last week, on July 31. An investigation into Burr’s trading activity by the Justice Department and the Securities and Exchange Commission is still underway, as is a review of his conduct by the Senate Ethics committee.
Whether the questionable trading in Kodak last week ensnares another government official, or anyone else, is yet to be determined.
In the meantime, investors and traders may want to monitor whether any other companies will be receiving DPA loans in the near future. Smaller capitalized public companies receiving such funding could be subject to big moves, much like Kodak.
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“Sage Anderson” is a pseudonym for a contributor who has traded equity derivatives and managed volatility-based portfolios as a prop trading firm employee. He is not an employee of Luckbox, tastytrade or any affiliated company. Readers may direct questions about this blog post, or any other trading-related subject, to email@example.com.