January 13, 2018
Lost amid our justifiably obsessive focus on such matters a 0.1% outlay for border security, the frantic search for someone – anyone – willing to host the Oscars, and other matters of vital importance, was a one-two punch, which, depending upon how it plays itself out, could make or break us. Early this past week, Softbank Inc. announced a slight revision to its funding plans for new-age commercial real estate venture We Work Inc. Oh, it still intends to invest, but at a lower magnitude. $16B has morphed into $2B. Apparently, according to published reports, a couple of players in the deal backed out, compelling Softbank to go it alone. And it decided, in so going, that it wasn’t going to go big.
In this, the world’s most powerful and prosperous nation, where government agencies spend $8T a year and where total unfunded liabilities (including such trivialities as Social Security and Medicare) exceed
$120T, we might need a larger unit of account to measure these metrics. So, if a southern border wall is said to cost $5B, let’s just say that the We Work raise came in light by about 3 Walls. There’s the elegance of logic in this. After all, what would We Work be if not for its access to Walls?
For the uninitiated, We Work, over the last several years, has joined the ranks of millennial iconoclasm by
– get this – securing huge swaths of urban commercial real estate, and leasing the space to business enterprises. And if this concept fails to sufficiently blow your mind, consider this. We Work doesn’t simply provide workspaces and office accessories, it actually offers a feel-good sensibility to these realms. No doubt the feng shui of each unit is meticulously calibrated, but there’s more – much more. Each office features such work/life balance essentials as ping pong tables, nerf guns, well-stocked beer taps and bean bag chairs. Thus, WW lessees are not just renting space, they’re investing in a business ethos – one that is almost guaranteed to facilitate their success.
Unfortunately, however, they have yet to solve one intractable challenge of commercial real estate – when you use debt to secure large commercial spaces and seek to amortize these obligations through short term revenue streams, you create what is known in the banking biz as a gap funding challenge. Even nerf marksmen with the deadliest aim might flake off – particularly during periods of economic difficulty, but your bankers will expect you to meet your repayment schedules with unfailing precision.
I’d long been wondering about how the Company would get around this, and will admit, in the wake of the previously announced $16B Softbank deal, to thinking that these guys and gals may just have mad skills that elude my cognitive capacities, honed, as they have been, over nearly six decades.
And this remains a possibility, because just when I thought that an 82.5% downsizing of a critical funding round might be problematic, Team WW pulled off a coup of which they perhaps alone are capable. On the heels of the Softbank doink, they announced that they are rebranding and expanding. What was once We Works is now The We Company, with plans to extend its feel-good vibe beyond the grubby world of office space, and into banking, hotels, residential real estate, social media, and the Big Enchilada: Yacht Charter (the last of these under the sublime moniker of We Sail).
What on earth could go wrong?
I think it’s time to give these guys their props, and expand their concept to the entire capital economy, which, for the purposes of this argument, I will rechristen The We Market.
Here in the We Market, financial conditions, business prospects and matters of supply and demand don’t much matter; it’s the lifestyle, people, don’t you get it? It’s time to unshackle ourselves from the oppressive restrictions of valuation, solvency and growth. After all, we only walk this earth for a short time, and if we can’t recognize that markets are nothing more than another way to connect people with people, then we’ve lost the opportunity of turning our daily struggles into something more meaningful.
I do have a hunch that rather than having created this concept, I am merely reflecting what has already transpired. The WM has started to form, having begun with the extension of a V-Bottom upon which I threw shade, but which has nonetheless managed to sustain itself through the first 7 trading days of 2019:
SPX, NDX, RTY, JNK: V’s Abound… … Even in Junk
Connecting the dots for the pattern-recognition impaired, a V is a half of a W, so, from a certain perspective, we’re 1/4th of the way through the formation of the WM construct, and who’s to say we won’t complete the sequence?
In fact, I’m more than optimistic that the next leg is coming to a theater near you. Unfortunately, however, in order to turn a V into a W, one is next required to travel a few flights on the down escalator. And, as I see it, over the next several weeks, there’s every opportunity for such a downward movement to transpire. At the conclusion of that wretched Christmas Eve half-session, the Gallant 500 resided at a putrid, almost unthinkable, 2351. We’ve since rallied more than 10% -- nearly 250 handles, but get this – we haven’t even recovered half of the cumulative losses from September’s all-time highs. We still have a weary ~335 index points to scale to reach those lofty elevations, and this through treacherous terrain filled with enemy combatants behind every rock and tree.
The earnings season is now upon us, and it kicks into high gear this coming week, with a lot riding not only on the tellings of beleaguered banks, but also of such We Market-critical components as Netflix, which itself V-bottomed in impressive fashion off of giddiness over the release of something called Bird Box. Its stock is up over 30% in 3 weeks, re-enriching the faithful to the tune of about $50B. At the recaptured $150B capitalization threshold, Team Bird Box is worth twice the value of the entire U.S. Auto industry (Tesla, of course, excluded) and if that isn’t a re-affirmation of the We Market sensibility that has overtaken us, well, then, I just don’t know what.
Nominally, it is also an interesting week for economic data, with scheduled releases of the all-important December Retail Sales being of particular significance. Unfortunately, however, at the point of this correspondence, the odds-on likelihood is that Retail Sales data will not be released this week because the portion of the Federal Government that calculates this data – the Census Bureau – is currently shut down. Moreover, even if it were to magically re-open, the results are likely to be obscured by the diminished participation of the 800,000 poor souls who expected to collect taxpayer-funded checks, but didn’t – at least this week. The shutdown has now extended sufficiently to render this portion of the workforce unemployed by the standards of the Bureau of Labor Statistics, so even when/(if) the Jobs Report drops in a couple of weeks, the numbers will be off.
Did I mention that there’s a government shutdown underway? Well, if I didn’t, shame on me, because as of this weekend, it has entered the pantheon as the longest running incident of its kind since we decided that this was as good a tool as any to resolve legislative impasses, back during the Clinton Administration. I don’t know that we’ve been much harmed by it, but will stick to my long held call that it is illustrative of what I believe will be a full-on showdown over the next several weeks, as to whether or not Trump should be allowed to retain the office to which he was duly elected. I expect a lot of tape bombs on this topic, but if nothing of this sort transpires, we can at least look forward to Attorney Michael Cohen’s testimony on Capitol Hill during the first week of February. Here, it will only be a question of how much mud he can sling at the President, and how much the new Congress and the media can make stick.
But for me, as for everyone else, all roads lead to China. Almost unquestionably, the fortunes of the market (and, for that matter, the We Market) will turn on whether or not we can come to some sort of accommodation with them. There are virtually infinite numbers of outcome possibilities here, but one thing is certain: over the next 5-6 weeks, the two countries must come to some sort of accommodation that removes the threats of an escalating global trade war, and negates any possibility of the contingently scheduled tariff increases taking effect. I sense that if those tariff increases are indeed imposed: a) Trump won’t be living in the White House to see the cherry trees blossom; and b) the down leg of the W will take the markets to excruciatingly low levels.
On the other hand, if, as is entirely plausible, the two sides come to terms, then this here V could travel upwards a fair distance before it even begins to start transforming itself into a W. But we’ve got a lot of wood to chop between then and now, and if earnings disappoint, if the rhetoric between the Chinese and ourselves takes a nasty turn, if Mueller drops a damaging report and/or Trump Jr./Kushner are indicted, then that W will begin to form with a vengeance. I feel that any combination of these is plausible, I don’t think investor risk appetite is sufficient to absorb the blow, and I strongly suggest that the risk sensitive orient their portfolios accordingly.
For what it’s worth, I’m also rooting for the Crude Oil markets here. It’s not that I enjoy paying more at the pump, but given the widely discussed credit tsunami forming on the horizon, and the likelihood that energy company defaults could be the trigger for a game of default dominoes, higher prices strike me as a small price to pay to ensure that the crude cowboys are able to refinance their debt. If not, then the financial oil could spill into other asset classes, and pretty much negate any hopes we may have for P/L.
But there’s more to the markets, The We Markets, than risk-adjusted returns, now isn’t there? There’s the quality of the experience, which of course is more important. I close by advising my friends at the We Company to bear this in mind as they wend their way through the new world they are so heroically creating. They lost $1.2B through the first three quarters of 2018, and that was before the markets started to take in water. Their debt trades at levels currently consistent with a high default expectation, and they will need to borrow/refinance to beat the band if they are to sustain themselves, much less achieve their grand vision. I kind of like the sailing thing, but I’d advise them, as their grandstanding risk manager, to think again about the hospitals, banks and housing concepts. These things cost money, which I think is in shorter supply at The We Company, than, say, good vibes.
In the meantime, for the rest of us, while the WM remains a possibility, we can perhaps take comfort that it is not yet a reality. After all, by the time we finish the M, we’re much worse off than when we started. So forget about the life experience, and in God’s name be careful about your risks. Things are likely to get much tougher somewhere in here, and if you don’t proceed with due caution, those beanbag chairs will collapse, the beer will not quench your thirst, and all the nerf guns in the world will not protect you.
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