Just a quick reminder, if you haven’t already done so, you can book tickets to my next event – the Dividends Debate – online now. Tickets are going fats but they are free and available at: http://www.etfstream.com/events/the-big-call-dividends-debate.
SocGen’s wonderfully acerbic and gloomy Albert Edwards boasts a real gem this week in his reporting on a recent note from Michael Lewitt’s, author of The Credit Strategist. According to Edwards, Lewitt has” been around for a long while and a familiar echo to those with long memories is the nomenclature-nonsense that occurs at the peak of a bubble as companies seek to justify excessive valuations.”
An outfit called WeWork – a hugely fashionable shared office developer – is the subject of both Edwards and Lewitt’s biting analysis. The US business recently issued $700bn of B rated junk bonds and in the prospectus included a wondrous new concept termed “community-based EBITDA” in its valuation metrics.
At this point, I have to say that I am also a massive WeWork cynic.
Like many, I was at first intoxicated by the WeWork experience which I’d sum up as follows:
- Great design for a coco-working space, full of
- Beautiful young people, most of whom seem to work in tech and who seem to enjoy
- The free beer and refreshements (great coffee I am told)
- The atmosphere is friendly and very pro networking, helped along by an abundance of lovable
- Pets brought in by co workers.
Now for the down side.
I think We Work is expensive. The offices are noisy and resemble gold fish bowls. And frankly, sounding a bit curmudgeonly I admit, it’s all a bit too much fun. More practically every single real estate person I have talked is shocked at the money WeWork is throwing at their expansion. They also can’t understand the margins and think that, come the next recession, more than 50% of their end clients will go bust.
So, after a year or so, we (AltFi) moved out of WeWork and I can’t say I’ve regretted it one moment. Good old Regus, eh!
Anyway, back to Edwards report on Lewitt. I think its fair to say that they are even more bearish than I am, which is saying something.
“The company defines “community-based EBITDA” in a painfully long footnote, but in plain English, it is earnings before interest, taxes, depreciation and amortization (i.e. conventionally defined EBITDA) but also before other normal operating expenses such as marketing, general and administrative expenses, development and design costs. This is, not to put too fine a point on it, a joke. It is a disgrace that underwriters allow this type of nonsense to be included in a prospectus.” Well, he’s a man who says what he thinks! Since Michael wrote the above, Zero Hedge has posted an update on how poorly the WeWork (re-christened WeCrash) bond has fared since launch. Maybe this is a sign that we have reached a moment, like 2000, where investors wake-up abruptly from their liquidity-induced slumber and realise they have inadvertently sleep-walked to the edge of an investment precipice. It was market indigestion such as this, with examples of the March 2000 flotation of lastminute.com, that marked the start of the tech crash. Maybe investors will wake up and reappraise the grotesque corporate debt that has accumulated over the past decade and the corporate bond spreads shown on the front page chart will begin their long widening journey.”
Maybe we got it wrong.
Perhaps its not the FAANGs that will give us the signal for the next sell off and recession.
Maybe it’s the WeWork Bubble that we should watch carefully. Peak coworking office, peak liquidity, peak valuations.