Grant's Interest Rate Observer

Euphoria's step-children.  

A bull market in stocks and absurdity.

To paraphrase former President Barack Obama, rising prices have consequences. As stock markets around the world enjoy bull market conditions that distinctly evoke the frenzied days of 1999, increasingly numerous examples of complacency, high risk deals and outright fraud dot the financial landscape.   A trio of recent developments crystallize current conditions:  

The M&A machine was hard at work over the weekend.  U.S.-based investors awoke this morning to a pair of large transaction announcements, both emanating out of Mario Draghi’s Europe.  French pharmaceutical giant Sanofi S.A. declared an agreement to buy Belgian biotech Ablynx N.V. for €3.9 billion ($4.8 billion) in cash, topping a bid from rival Novo Nordisk A/S.  Top the bid, they sure did:  The €45 a share price represents a 48% premium to Novo’s offer back on Jan. 7 and a 112% premium to Ablynx’s pre-M&A closing price on Jan. 5.   For its part, double-A-rated Sanofi expects to fund the deal with debt yielding about 1%, according to company president Elias Zerhouni.

Investors in Dr Pepper Snapple Group, Inc. were also the recipients of a pleasant surprise, as European roll-up extraordinaire JAB Holding Co. announced an $18.7 billion deal for an 87% stake in the soft drink company, sending shares in the target higher by as much as 32% this morning. JAB, which also owns Panera Bread Co. and Keurig Green Mountain, Inc. (which it bought for a 78% premium in December 2015), sports a triple-B-plus rating from S&P (“exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation”). Situated just three notches above junk, JAB should nevertheless have ready access to the ECB’s debt-market manna. The company’s six outstanding issues, maturing between 2021 and 2028, all trade above par, with yields-to-worst ranging from 0.42% (maturing in Nov. 2021) to 1.73% (maturing in May 2028).

On Friday afternoon, Bloomberg reported that lawmakers in fiscally-strapped Illinois, which narrowly averted being the first state to be downgraded to  junk last year, are considering a radical (or predictable, depending on one’s perspective) plan for contending with a debilitating debt load. Bloomberg puts it this way:  “Borrowing $107 billion and letting it ride on the financial markets.”  The State Universities Annuitants Association, which came up with the idea and is scheduled to present the proposal to the Illinois state legislature tomorrow, estimates that the plan will save the state $103 billion by 2045 through lower borrowing costs.

The size of the proposed deal is astronomical.  By comparison, Illinois has $26.3 billion in general obligation bonds currently outstanding as of July, according to Moody’s. Richard Ciccarone, president of Merritt Research Services, told Bloomberg that the deal: “Will not go over well in the bond market.”   The legislature may be more sympathetic to the idea. State representative Robert Martwick, who has yet to offer a position on the proposal, commented that: “When you have the largest pension debt in the world, you have to think big.”  Indeed.

For the main course of our speculative stew, we naturally (re-)turn to crypto-currencies.  Following the runaway success of bitcoin and peers like ethereum and ripple, a wave of imitators have trailed in their stead. Never exactly a bastion of traditional investment value, these initial coin offerings have veered towards the outright comical.

One sharp-eyed ADG reader alerts us to the PoWH coin, (PowH stands for “Proof of Weak Hands”) which markets itself as “The World’s First Autonomous and Self-Sustaining Pyramid Scheme” with a tagline: “Pyramids aren't built in a day. Carry the first bag (strikethrough) brick.”  The bottom of the coin’s website features the disclaimer: “Please Note: This is not an investment or security, any and all tokens sent to the automatic mathematical gambling robot are purely for your own pleasure in participating in this absolutely insane social experiment.”  So far, 572.36 ethereum tokens, equivalent to $672,615 have been “invested” in the “insane social experiment.”  

Yesterday, erstwhile startup Prodeum, which “plan[ned] to bring blockchain to our fruits & vegetables,” made an abrupt exit from the web,  with the proprietors evidently making off with an unknown portion of the $6.5 million they had hoped to raise. As for the coup de grace, we’ll let Bloomberg do the honors:

“Prodeum” is spelled almost the same as “Prodium,” a drug that treats urinary-tract infections, which in hindsight seems like a red flag now that the startup has disappeared with its investors’ money and left just one word on its website (it rhymes with “Venus”).

Meanwhile, today’s Toronto Globe and Mail reports that the Ontario Municipal Employees Retirement System (OMERS) “is pushing further into the rapidly expanding cryptocurrency business through the creation of an Ethereum-focused public company that is planning to raise $50 million.”

It’s a bull market all right. In equities and in absurdity.