Good evening, I'm William D. Cohan.

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What I’m Thinking… About Bitcoin, Cathie Wood’s Tesla Sale, and Junk Bond Porn

Regarding the most pressing questions on Wall Street and in my inbox.

Bitcoin had its biggest jump since July on Friday after Jay Powell said the U.S. has no plans to ban crypto. Where do senior executives on Wall Street and investors generally stand on the digital currency, in particular, and the crypto market, in general? 

Obviously there are some big names on Wall Street that have been all over Bitcoin for years, such as Mike Novogratz, the hedge fund manager, and Cathie Wood, the money manager (more on her below). There are some, like Anthony Scaramucci, who are 2021 converts and who now think it’s the greatest thing since sliced bread. 

At the big banks, the top executives may not understand it fully, or even partially, but they know their clients and customers are interested in it so they are being prudent by getting into the market for Bitcoin and cryptocurrencies more generally. There are also plenty of venture-capital companies, such as Union Square Ventures, Andreesen Horowitz, and Paradigm that have been all over crypto for years. Both Union Square and Andreesen were early investors in Coinbase, which went public earlier this year and now has a market value of nearly $50 billion. Fred Ehrsam, the founder of Paradigm, was the co-founder of Coinbase, along with Brian Armstrong, the Coinbase C.E.O. 

I think many people on Wall Street think Bitcoin has something to prove. Is it a currency? Is it a store of value? The software that will power a new era of decentralized finance? Or is it a clever and fun way to speculate, as tulip bulbs once were. Until things like that get clarified about Bitcoin and cryptocurrencies more generally, there will still be a lot of scepticism among finance types. Of course, the true crypto believers like it that way, since the narrow-minded thinkers on Wall Street represent the very system they are anxious to change.

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Taxing Thoughts

As the current Moderate v. Progressive Democrat drama plays out in D.C., you might wonder how Congress will pay for a $1.5-$3.5 trillion reconciliation package. On September 23, House Speaker Pelosi, Senate Majority Leader Schumer and Treasury Secretary Yellen announced agreement on a “framework” for revenue raisers (i.e., higher taxes). What was missing from this announcement, and has not appeared since, are specifics. What we do have are the reconciliation bill tax provisions passed by the House Ways & Means Committee in mid-September with significant tax code changes, including higher individual and corporate tax rates and limited deductions. Equally important are missing items: repeal of the 2017 Tax Cuts and Jobs Act limit on SALT deductions and, for Wall Street, “MODA” championed by Senate Finance Committee Chair Wyden. The fate of these proposals and the “winners” will be known when agreement is reached between Democratic factions. Explore the tax proposals.

Ahern Rentals, an equipment rental company, just pulled its junk bond offering after investors demanded more protections and a 10.5 percent yield. Do you see Ahern as an anomaly, given Wall Street’s ongoing mispricing of risk? Or are investors finally beginning to wake up to softening market conditions by pushing up rates?

To me, this is the best news to hit the junk-bond market in the last year-and-a-half. What it means is that investors are finally getting tough with issuers and insisting that they get both the yield and the protections that they want, or else: no deal. What’s so interesting is that for the first time in months, junk-bond investors are demanding to be fully paid for the risks they are taking. 

A yield of 10.5 percent on the failed Ahern bond offering, had it been successful, would have been used by the Las Vegas-based construction-rental company to refinance existing bonds coming due in 2023. Earlier, during the pandemic, the Ahern family took money out of the company in the form of a dividend, irritating some of the company’s existing creditors, especially since the bonds, due 2023, traded as low as 30 cents on the dollar, meaning that the family took money out of the company, causing bondholders to worry about whether they would get repaid. Fortunately, for the bondholders, their bonds have since recovered in price, and now trade nearly at par. These existing bonds carry a coupon of 7.375 percent.

The idea that the company would have to pay more than 300 basis points more for the new bonds in order to pay off the old bonds must have irritated the family, but it is evidence of the dilemma that many companies will begin to face as interest rates continue their upward rise. (Last week alone the average yield on a junk-bond increased to 4.2 percent, from 4 percent.) Companies with less-than-stellar credit, like Ahern, will increasingly find themselves in the distress of not knowing if they can refinance their existing debt, or if they can, how they will react to having to pay investors more and more money to do so. 

Ahern’s not alone, of course. In August, Cooke Omega Investments, a fish-based nutrition company, pulled its high-yield offering because of “tepid” investor demand, according to Bloomberg. This is simply fantastic news all around. For years now, investors have badly mispriced the risks they have been taking when buying junk-bonds. Finally, if Ahern and Omega are the start of a trend, the years of borrowers getting away with financial murder will start to come to an end and investors will finally have the upper hand and begin, to once again, get paid for the risks they have been taking.

Cathie Wood, the ultimate Tesla bull, is unloading millions of shares in her flagship ARK Innovation fund. What’s your read on the situation? 

Don’t even get me started again on Cathie Wood. Not so long ago, she was telling people on national television and in her monthly investor calls that Tesla would be a $3,000 stock and last week she’s selling it? According to Forbes, Wood sold more than $600 million worth of Tesla stock in the last month, and according to Bloomberg, she sold some $270 million of that $600 million in recent days. 

Now, in fairness to Ms. Wood, who is now managing about $50 billion of other peoples’ money, Tesla is still her biggest holding across her E.T.F.s. Even after her sell-off in the last few weeks, she still owns more than $2.75 billion of Tesla stock. Her next biggest holding, Teledoc, is a distant second, with a stake valued at $1.9 billion. A money manager is well within her rights to pare down her position in any stock, especially a position that is as large as ARK’s position in Tesla. The stock has had a decent six months, up 12 percent, so if Ms. Wood wants to take some profits and redeploy that capital elsewhere, I’m all for it. What’s so troubling about her is that she is so outspoken about talking her book. She’s always talking up Tesla, Bitcoin, most everything in her portfolio. So much so that it seems unseemly for her to be talking up her stocks before selling them.

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Merck recently announced that its anti-viral drug has been effective against recent Covid variants. Are we entering a new pharma dawn, as Barrons recently put it? Or will the big drugmakers—Merck, GSK, Bayer—continue to underperform the broader market? 

There’s no question that the big drugmakers have had a dramatic couple of years. The development of the mRNA Covid-19 vaccines were a bit of a miracle and boosted the profiles of companies such as Moderna, Pfizer, J&J, and Astra-Zeneca, who took the lead in developing and manufacturing these vaccines. Merck’s stock was up more than 8 percent on Friday after the company announced it was developing a pill that could become the effective pill against Covid. 

Those companies that aren’t big players in the Covid market have definitely struggled in recent years. GlaxoSmithKline is down 11.5 percent in the past five years. Bayer’s stock has been down 46 percent in the past five years, whereas Pfizer’s stock has increased 35 percent during  the same time period. Moderna’s stock has performed off the charts, up more than 1,700 percent in the past five years. All of which goes to prove that it’s hard to place bets on these big pharma companies since one never knows which drugs they are developing will work or prove popular enough to make them work. In that, it’s sort of like the movie industry or book business, only with exceptional research and development arms. Since you never know which film, book or drug will become a big hit, it’s important to place a lot of bets.

Have a question you’d like answered in the next edition? Email us at fritz@puck.news.

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