By Randall W. Forsyth
The swings in Tesla stock are more akin to bubbles in Bitcoin in recent years or the epic surge and collapse of silver in 1980. Photograph by Spencer Platt/Getty Images
When the gyrations in the financial markets attract the attention of those not normally concerned with such matters, market lore says it’s time for the cognoscenti to beware.
Supposedly, when Joseph Kennedy Sr. started hearing stock tips from his shoeshine boy in 1929, he figured it was time to get out of the market. More recently, celebrities such as Barbra Streisand were angling for allocations of initial public offerings at the peak of the dot-com boom at the end of the past century.
So when our Gen Z son, who’s off at college, texts us to ask what’s going on with the Tesla(ticker: TSLA) stock chart he received on Instagram, alarm bells naturally go off. We had tried to stimulate his interest in investing by pointing to companies whose products fill his closet, for instance contrasting the fortunes of Nike(NKE) and Under Armour(UAA), but with little success. The swings in Tesla were something different, however, as Alex Eule discusses in this week’s Streetwise column, akin more to bubbles such as Bitcoin in recent years or, for graybeards, the epic surge and collapse of silver in 1980.
Arguably even crazier things are happening away from the gaze of apps and cable news. Real, long-term money is being put down, and not just frenetic day-trading dough from erstwhile videogame players who get in and out in a day, maybe even more often. In the junk bond market, some of the riskier behaviors that were thought to have been abandoned since the Great Financial Crisis are making a comeback.
Case in point: the return of particularly speculative paper called payment-in-kind, or PIK, securities. Instead of paying interest in cash, the borrower simply issues more debt to the investor. During the crazy days of the mortgage bubble that led to the financial crisis, home buyers would take on interest-only mortgages to get into houses they couldn’t afford. With PIK securities, corporate issuers don’t even have to pay interest; they just issue more paper, effectively going deeper into hock.
Husky III, a holding company for Husky Injection Molding Systems, a machinery supplier backed by private-equity sponsor Platinum Equity, plans to issue $450 million in five-year PIK bonds. What’s the attraction of the securities, rated CCC by Standard & Poor’s and an equivalent Caa2 by Moody’s Investors? The yield being talked about in the market is 12%, more than twice the 5% or so offered on exchange-traded funds such as iShares iBoxx $ High Yield Corporate Bond(HYG) or SPDR Bloomberg Barclays High Yield(JNK). Proceeds from the financing will pay a dividend to the private-equity backers of Husky, which they purchased in 2018 for $3.9 billion.
Such deals, in which backers extract their equity, weren’t uncommon in 2005-07, before the financial crisis, notes Cliff Noreen, head of global investment strategy at MassMutual. The big insurer is a major investor in corporate credit, with $567 billion under management. The return of PIKs reflects investors’ hunger for yield in today’s low interest-rate environment, which includes negative yields abroad.
“As an investor, I believe these are great for the issuer but not the bond buyer,” he writes in an email. In essence, buyers are getting bondlike returns for private-equity-like risks, he adds.
Adding to the dangers of what Moody’s notes is a highly leveraged transaction: The bonds are issued by a holding company, not the operating company itself, Noreen points out.
All of which would belie the specter of risk seemingly presented by the spread of the coronavirus and its implications for the global economy. Yet despite the headlines, the Dow Jones Industrial Averageand the S&P 500index both rose about 3% on the week, their best weekly showing since the five days of trading ended on June 7, and a sharp reversal from the previous week’s slide. Meanwhile, the Nasdaq Compositeadded over 4%, its best gain since the week ended Nov. 30, 2018.
That was despite some backpedaling on Friday, following January’s employment report, which was less spectacular than the 225,000 increase in nonfarm payrolls would suggest. Relatively warm weather helped construction jobs rise by 44,000, after seasonal adjustment, four times their average gain of the past year, notes TLR on the Economy. The unemployment rate ticked up by 0.1 of a percentage point, to 3.6%, but for the positive reason that more folks entered the labor force.
Markets will probably continue to watch news from both the pandemic and the primary in New Hampshire this coming week. Meanwhile, investors’ risk appetites are high, as reflected in manias for highflying stocks or demand for speculative debt.
0 comments:
Publicar un comentario