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Friday, 15 December 2017

On Candy Crush and other drugs

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Anthony Peters mulls the bubble-licious state of the asset markets.  Just keep dancing…

Am I allowed to admit that, until last week, I had never heard of Candy Crush, let alone its creator, King Digital Entertainment?

Well I hadn’t but in a quiet moment – we have rather more of those at present than we care to admit – I googled it and had myself a trial game. Good fun… but worth US$7bn? As it floated on the NYSE yesterday, evidently yes.

I regularly struggle with any post-Victorian technology so I am not the one to ask how a computer game - along with King’s many other less profitable properties – can be worth that much money which is equivalent to one tenth of the Ford Motor Company or even one third of Kellogg’s but according to 21st century investment practice it is.

The dial gets turned half a notch at a time and then one day we suddenly wake up with a portfolio full of adjustable rate subprime mortgage-backed CDOs squared.

Either that or we’re in a bubble.

Defining a bubble seems to be about as simple as defining the length of a piece of string, not least of all because it is defined by its parameters on the basis that they are what make the bubble – a bubble has, come to think of it, no content. What astonishes is the variety of debate which is comparing the float of King Digital to some of madder IPOs of the dot.com bubble of 1999-2001.

I am more drawn towards the Teenage Mutant Ninja Turtles and the prices at which the rights to the anthromorphic foursome were traded. There is nothing wrong with jumping on a hot property but think of the lifespan when doing so. It’s not that long ago that Nokia and Motorola owned the world of mobile telephony - the iPhone was only launched in 2007 and the iPad in 2010 - and where are that now? Research in Motion? Anyone?

Hot money and hot potatoes

The problem with hot IPOs, as with hot bond issues though to a lesser extent, is that there are no prizes for not being involved when they go right. That 75% of IPOs which have come this year are trading at a discount is maybe not relevant – I’m not sure why not – because no one has the guts not to get involved with whatever might be the deliverer of the grand retirement ticket. In fact I am more impressed by the number of issues that are trading down than the ones which are trading up. They point to a culture of hot money and hot potatoes. But are we in an asset price bubble or not?

The Federal Reserve’s recent warning about the proliferation of “covenant lite” loans tells us more about the state of the asset market than does the one-off IPO of a hot tech stock. There’s no “ra-ra-ra” in the leveraged loan market like there is in the Tech IPO world but we are back to squeezing extra coupon out of the insidious practice of lowering lender protection and investors are lapping up the assets on offer. The dial gets turned half a notch at a time and then one day we suddenly wake up with a portfolio full of adjustable rate subprime mortgage-backed CDOs squared.

We’ve been there before and we’re very much at risk of going there again, albeit that some of those CDOs will this time most likely be backed by a portfolio of CoCo risk. I don’t work for an investment bank any longer and don’t have true insight, but I’d bet my bottom dollar that there will be first-to-default structures on CoCos somewhere out there, if not already papered and placed.

It’s a long time since Chuck Prince, then CEO of Citibank, gave his famed interview to the FT. As late as July 2007 he said that the party would end at some point but that there was so much liquidity it would not be disrupted by the developing turmoil in the US subprime mortgage market. Good one Chuck! “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Now that’s an epitaph to a career.

There’s no bubble in the London property market, so we’re told, where the Candy brothers – pun clearly intended – can sell you a studio apartment for £2½m. There’s no bubble in the credit market where corporate bonds with coupons of 2% are 10-times oversubscribed and there’s no bubble in an equity market where a games company is worth US$7 bn.

Apparently the Fed sees no bubble. I do hope it is more right than it was when it didn’t see one in 2007 either.

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