“Sign of the Times, or Just Plain Loco”
Consistently throughout 2017, I’ve observed several financial transactions, or some type of valuation, that just doesn’t settle quite right with me. Perhaps near zero interest rates around the globe have permanently changed financial markets.
That’s certainly a possibility. I’ll highlight a number of recent transactions (or values) that caught my attention, and you be the judge.
How did Argentina pull off a 100-year bond sale? – Financial Times
Not only did Argentina sell $2.75 billion in 7.125% debt, the issue was oversubscribed by over 3.5 times. What’s remarkable is Argentina has defaulted on its sovereign debt eight times since 1816, the year the country became independent. As a junk bond analyst friend of mine once said, you can’t predict sovereign defaults, “they just decide not to pay.” One hundred years is a long time, and perhaps Argentina’s credit history is irrelevant in a low interest rate world. But, my instincts tell me that investors are making a highly risky bet in their quest for yield.
Snap Prices I.P.O. at $17 a Share, Valuing Company at $24 Billion – NY Times
Snapchat (ticker SNAP), the image messaging app with revenue of $404 million, while losing $514.6 million in 2016 alone, was valued at $24 billion. The hype associated with SNAP along with the gross overvaluation reminded me of the heady days of the dot-com bubble. Subsequently, SNAP shares have declined by about 70% from its March 2017 peak.
Europe’s Bond Markets Are Only Getting Uglier – Bloomberg News
German 5-year bonds (or bunds), yield -0.27% while inflation is running at 1.8%, providing a negative “real” inflation adjusted yield of -2.07%. Investors are not only paying the German government dearly to hold their monies, but assuming inflation remains dormant.
Junk bonds in Europe, represented by the BofA ML Euro High Yield Index, currently yield 2.33%, nearly identical with the yield of a US 10-year Treasury bond at 2.35%. The current disregard to credit quality is likely setting up European bond markets for a significant bout of volatility. Keep in mind, during the 2008-2009 financial crisis, European junk debt was yielding about 25%. Caveat emptor…
I could go on and highlight the rush into cryptocurrencies, the FAANG stocks, housing prices and rents in tech centers such as the Bay Area, Tesla, while the list goes on. There is one catalyst though, interest rates, having been driven to near zero by central banks around the world which have induced valuations in many markets to what may seem a sign of the times, or just plain loco.
As famed investor Warren Buffet once said, “Price is what you pay, value is what you get,” implying that price and value are not always one and the same. So, keeping this quote squarely in mind is a reminder to move forward with added caution in our current environment.
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Copyright © 2017 by Robert Okada
Written By Robert Okada, CFA