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LHT Consultants

241 Kings Highway East , First Floor

Haddonfield, NJ 08033

kevinroche@lhtconsultants.com

609 • 314 • 0397

Bagholders

November 8, 2019

 

 

In U.S. financial slang, a bagholder is a shareholder left holding shares of worthless stocks.  It can also refer to the holder of any financial instruments that become worthless, such as the junior bonds of a defaulted company or the coins of a failed cryptocurrency. The word is derived by combining shareholder with the expression "left holding the bag."

 

 

Bagholder.  It is a label no shareholder wants to have.  Those who bought shares in WeWork (and other recent high-flying unicorns) during later funding rounds are in many cases under water and as such, they are left potentially holding the bag.  WeWork has been the most glaring example of the condemnation that public equity holders have se.  nt to these unicorns.  Its collapse has been incredible: a pre-IPO valuation was nearly $50B and within weeks following the filing of its S-1, its valuation dropped precipitously.  What followed was a comical attempt by WeWork’s bankers to give private shareholders a final chance to avoid having their stakes severely diluted through a $5 billion financing package; investors again wisely passed putting the company at the doors of insolvency.  WeWork’s largest investor, SoftBank, in an effort to avoid bankruptcy, took control of the embattled work space company through a $9.5 billion alternative rescue plan

 

The fallout from the WeWork saga is enormous.  All of this is consequence from a feverish investment bubble that was born through private markets that fund start-ups. These “savvy” investors, with seemingly unlimited capital, fueled by record low interest rates and a healthy dose of a fear of missing out on the next transformational tech company, flooded the market.  Unfortunately, we are in an environment today where the selling of dreams has passed, and the selling of earnings is once again required.  No one wants to be left holding the bag.

 

During the month, financial markets welcomed signs of easing geopolitical tensions in October, with risk assets generally outperforming traditional safe havens. The US and Chinese authorities moved closer to a partial deal on trade, while the UK once again edged back from the precipice of a no-deal Brexit. Global central banks reiterated their dovish stances and the US Federal Reserve cut interest rates for the third time this year.

 

 

October was a good month for equity markets, with emerging markets returning 4.2% compared to 2.6% from developed markets. The S&P 500 gained a further 2.2% and made new all-time highs at the end of the month. The pound rallied against the dollar and euro respectively, as markets perceived that the risk of a no-deal Brexit had diminished.  In fixed income, credit markets outperformed government bonds, with global investment grade returning 1.2%, while global government bonds gained 0.5%.

 

Markets started October lower, dragged by very weak economic data from the US and from Europe, before rallying throughout the month, mainly driven by the tentative truce in the US-China trade war, global central bank easing, a possible Brexit deal and a better than expected earnings season. As markets pushed higher, bond yields edged higher while curves steepened, September’s trends continued with Cyclicals and Value extending gains while Defensives and Growth lagged.  US-China trade negotiations improved after they agreed on the outline of a mini trade deal on Oct 11, with the “phase one” of the deal likely to be signed in November. In Brexit, the situation significantly improved after a deal was agreed between the UK and the EU.

 

 

 

Data overall continued to point to weakening growth.  In the Eurozone, all surveys for October stabilized but continued to come out at a pretty weak level. In the US, following very poor September surveys, data held up slightly better with PMI for October edging higher from 51.1 to 51.5. The US consumer market also gave a softening picture after September retail sales and Nonfarm payrolls disappointed but remained strong as unemployment rate in the country ticked lower to 3.5% - a 50yr low. In China, Q3 GDP eased to 6.0% year over year and Chinese October PMIs disappointed, nonetheless September monthly numbers remained robust and highlighted some pick-up in economic activity toward the end of the Q3.  Earnings thus far from Q3 have been supportive as investors look toward year end and company’s guidance going into 2020.

 

Dovish Central Banks continued to respond to softening data with the Fed cutting rates for the third time this year. The FOMC signaled an intention to take a pause in the easing cycle while keeping the door open for another cut at the December meeting, although Powell added it would take “a material reassessment” to change that view. The BoJ stayed on hold but changed its forward guidance to keep the market expectations for future easing. Finally, Mario Draghi’s last meeting failed to provide any real forward-looking guidance and instead turned into a bit of a non-event but soft numbers and inflation in the Eurozone kept the door open for further stimulus under Christine Lagarde’s mandate.

 

The FOMC cut the fed funds rate target range 25bp, as expected, but also signaled an intention to take a pause in the easing cycle. Whereas previously they had pledged to “act as appropriate to sustain the expansion,” they dialed that back to say that they will “assess the appropriate path” of the funds rate. In effect, the September statement conveyed an easing bias, whereas this month’s statement signals a bias to remain on hold. The hawkish tilt in the statement was underscored by Chairman Powell’s prepared remarks at the press conference: today “monetary policy is in a good place,” and is “likely remain appropriate”. Powell added that it would take a “material reassessment” to change that view. The status quo bias is much stronger this month than in Powell’s September press conference.

 

Even with the economy running along, investors remain cautiously optimistic.  Earnings remain in full swing and a number of companies are being challenged with their outlooks and need to justify their valuation.  The collective thought running through the markets is that if things seem to be too good to be true, they probably are!  As was stated, no one wants to be left holding the bag, especially  one with a big hole in it! 

 

 

 

 

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