Registered Investment Adviser Caleb Lawrence
The major averages enter the final hour with small gains on little news. Bitcoin hangs on to $9,000 but only just as it has managed to bounce off its recent lows of late.
Mortgage activity fell .2% last week as per the Mortgage Bankers Association or MBA. Refi’s slipped .3% while purchase activity was unchanged. The 30-Year contract rate for a jumbo loan jumped 11-basis points to 4.64%.
One of the hallmarks of bubble finance is of course the utter disregard of fundamentals in the name of “it’s different this time” or words to that affect. This was seen just prior to the Dot-Com crisis and of course with the Great Financial Crisis. Fast forward to the present and we see similar patterns, disregard for valuations for both stocks and real estate and companies like Tesla and Netflix who are analyst darlings despite appalling fundamentals. While I happen to like Netflix personally and subscribe to their service, their business model leaves a lot to be desired. Free cash flow has been negative since 2014 and is growing rapidly hitting 2-Billion last year it is expected to reach 4-Billion in 2018. The latest round of borrowing saw 1.9 Billion in junk rated paper added to the total, which hit 8.4 Billion. An additional 8 billion in liabilities is also held by the company. While it’s debt to equity ratio is quite modest at a little over 10% based on its astronomical share price, ala Tesla. No net profits will push debt higher, in turn pushing credit ratings down and lending costs up exacerbating the negative cash flow trend. As anyone who has tried to live of credit knows, sooner or later you hit the wall, and this tends to occur quite suddenly and without warning. These companies are no different, something the carnage from the Dot-Com era illustrated in spades.