Is Market Sanity Around the Corner?

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By Rodney Johnson

I never understood WeWork. The company either purchased or took long-term leases on commercial properties. It dressed them up with Millennial-friendly details like beer taps and cool art, and then re-leased the space in very small increments for a higher price.

Leave out the cosmetics, and you’ve got a traditional commercial leasing company that tries to control space at one price and lease it at a higher price.

WeWork blended in things like a mission to “elevate the world’s consciousness” and have people arrive as individuals but leave as part of a group. That’s nice, but as the old saying goes, the stars might lie but the numbers never do. WeWork counted on some emotional buy-in that would tether people to the leases even when it makes sense to go elsewhere.

Call me skeptical…

A Necessary Correction

WeWork came crashing down just before it went public. It perhaps saved millions of investors from an idiotic investment built on a house of cards. Is this the beginning of sanity returning to the markets?

Peloton, the gym equipment and membership company dressed up as a tech offering, is trading around $22, almost 30% off of its IPO price, and Uber, the no-profit, “don’t-call-us-a-cab” company is crossing the tape at $33.25, more than 25% off of its IPO price. When Amazon reported much lower earnings than expected last week, investors sent the shares down 6%… and that company actually earns money!

It looks like investors are migrating from growth stories to profits, and it’s about time.

Equity markets are facing a number of threats as we close out 2019, including trouble on the political front and problems in the boardroom.

You can love President Trump or hate him, but there’s no question that he’s helped propel equities to record levels. Lower regulations and falling corporate taxes filled corporate coffers, which enriched shareholders. As the impeachment drums beat louder, investors will take note and begin preparing for a regime change. This doesn’t mean it will happen, but we’d be remiss if we didn’t think about how to protect our investments if we see greater regulation, increased taxes, and more pressure on companies to be socially responsible on the horizon.

In the boardroom, companies are spending less to buy back their own stock. Goldman Sachs reports that stock buybacks fell 18% in the second quarter and appeared to dwindle in the third quarter, as well. Overall corporate spending could fall as much as 6% as the cash flood from tax reform recedes.

Declining stock buybacks could hit the equity markets particularly hard because it takes out of the market a buyer who is price insensitive, which makes stocks more vulnerable to selloffs.

Add these risks to the global economic slowdown and domestic economic troubles in China as well as the EU and you get a brewing equity storm.

On the Bright Side

There are a couple of bright spots, even if they’re transitory. The U.S. and China are still reporting progress in trade talks. Any deal should give us a quick boost. And I think shoppers will open their pocketbooks a little wider than expected this year. Unemployment is the variable most negatively correlated to consumer spending, so very low unemployment would mean higher spending.

And there can always be another mania, which Tesla proved when it announced earnings last week.

The company surprised the street by delivering just over 100,000 cars and banking a profit, which sent the company stock up 25% over the next two days. Investors were thrilled that Tesla might deliver 360,000 cars this year.

I consider it a “mania” because the higher stock price values Tesla at $56 billion, which happens to be the same valuation as General Motors, which plunked out 10 million cars last year.

It might be fun to watch Tesla’s stock, but at this point in the markets I wouldn’t want to own it and get taken for a ride.


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