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Blackstone's Tony James Says Debt, Equity Markets Overvalued

Tuesday, 09 September 2014 03:40 PM

Blackstone Group LP President Tony James said debt and stock markets in the U.S. are overvalued as the Federal Reserve holds interest rates near zero.

“We clearly have an overvalued debt market,” James said Tuesday at a breakfast hosted by Politico, the Washington-based media company. “We have an equity market that’s well above median value. Equity markets are overvalued by historical standards.”

James joins other top money managers who are warning of excesses due to central bank stimulus and preparing their firms for what may follow recent record highs. Howard Marks, the chairman of distressed-debt investor Oaktree Capital Group LLC, last week compared the U.S. stock market to being in a late inning of a baseball game. Los Angeles-based Oaktree is preparing to raise $10 billion to take advantage of distress opportunities following a market reversal, three people with knowledge of the plans said this month.

The market peaks have made it difficult for private-equity firms to put a record $1.16 trillion in uncalled client commitments to use, according to research firm Preqin Ltd. Dealmaking by financial sponsors has constituted 20 percent of U.S. mergers and acquisitions this year, near the lowest percentage in 20 years, according to a report today by Goldman Sachs Group Inc. Going-private deals, where buyout firms purchase public companies and delist them, have virtually stalled.

Staying Public

“A pullback in the market could be the biggest catalyst to drive LBO activity,” the Goldman Sachs analysts, led by Jessica Binder Graham, said of leveraged buyouts, one form of private- equity dealmaking. “This year, the pace of investing is at the lowest ratio relative to harvesting it has been since 1995.”

To date this year, public-to-private transaction volume has shrunk to $3 billion, compared with $80 billion in all of 2013, the report showed. There were four such deals over $5 billion in 2013 and not a single one thus far in 2014.

Buyout firms held back as more than $1 trillion was added to global stocks last month, sending the value to a record $66.2 trillion as markets soared. The Standard & Poor’s 500 Index of large U.S. companies closed at a record 2,007.71 last week, after the Dow Jones Industrial Average index reached a record close of 17,138.20 on July 16.

Marks, Tepper

“We’re between the bottom of the seventh and the top of the eighth,” Marks said last week. “It’s time for the seventh-inning stretch. You have to have plenty of defense on the field today.”

In the bond market, yields on both high-grade and speculative-grade notes were both within 0.41 percentage point of all-time lows as of yesterday.

The rally in the U.S. bond market may be over after the European Central Bank unexpectedly cut interest rates to spur economic growth on the continent, David Tepper, founder of $20 billion hedge-fund firm Appaloosa Management LP, said last week.

“It’s the beginning of the end of the bond-market rally,” the billionaire said. “We are done.”

Like Oaktree, Leon Black’s Apollo Global Management LLC is preparing to take advantage of an expected increase in corporate defaults. The New York-based alternative-asset manager is marketing a new credit short opportunities fund, Bloomberg News reported last month, after Black and co-founder Marc Rowan in April said they saw signs of a bubble in credit markets thanks to six years of near-zero interest rates.

Danger Signs

“All the danger signs are there of a future crisis,” Rowan said, speaking at the Milken Institute Global Conference in Beverly Hills, California. “We’re back to doing exactly the same things that were done in the credit markets during the crisis.”

James today said the Fed’s decisions regarding timing and speed of raising rates will be driven by the U.S. economy. Corporate earnings growth remains sluggish, he said, so the central bank will need to be “clever” and raise the benchmark rate “softly enough” in order for the policy change to be healthy for the economy.

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Blackstone Group President Tony James said debt and stock markets in the U.S. are overvalued as the Federal Reserve holds interest rates near zero.
Blackstone, Tony James, stocks, bonds
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2014-40-09
Tuesday, 09 September 2014 03:40 PM
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