September 9, 2019 BARRON’S 7
The Big Risk in Bonds
T
HE BACKDROP FOR STOCKS IMPROVED MARGINALLY
inthepastweek,andmajorindexesrespondedas
theS&P500indexrosealmost2%,to2978,finish-
ing on Friday at its highest level since late July.
TheU.S.andChinaagreedtonewtradetalksinOctober
inasignofcoolingtradetensions.Augustemploymentdata
reportedonFridayofferedmoreevidenceofaresilientU.S.
economy,withpayrollsgrowingby130,000inthemonthand
the jobless rate holding at 3.7%.
Investors are taking comfort from the ex-
pectationthattheFederalReservewillremain
accommodative and cut short-term interest
rateslaterthismonthbyaquarter-percentage
point from the current range of 2% to 2.25%.
“The market is making several assump-
tions,”saysBlackstoneGroupstrategistByron
Wien.“Therewillbesomesortofatradedeal
with China in the next six to nine months. In-
terest rates and inflation will remain low, and
thestockmarketisattractive,withstocksyieldingmorethan
bonds.”
The S&P 500 dividend yield is nearly 2%, while the 10-
yearTreasuryyields1.55%,markingararetimewhenstocks
yieldmorethangovernmentbonds.TheS&Pisvaluedat
timesprojected2019profitsforanearningsyield—theinverse
oftheprice/earningsratio—of5.5%.Thatstacksupwellver-
sustheentirebondmarket:Treasuries,municipals,mortgage
securities, and corporate bonds.
TheriskinTreasuriesisnowgreaterthaninstocks,and
theupsidepotentialingovernmentbondslooksmorelimited.
The30-yearTreasury,nowyieldingabout2%,nearitsrecent
recordlowyield,wouldfall20%inpriceifyieldsriseto3%.
Theflounderingprospects foraninitialpublicoffering
of the We Co., parent of WeWork, shouldn’t come as a sur-
prise. The company is exhibit A for the ills of the unicorn
market—privatebusinesseswith$1billion-plusvaluations—at
atimewhenpublic-marketinvestorsaresouringonseveral
ofthem. UberTechnologies (ticker:UBER)isdownnearly
30%fromitsIPOpriceafterhittinganewlowthispastweek.
Wehasbigoperatinglosses($1.4billionon$1.5billionin
revenueinthefirsthalfof2019),opaquefinancials,andgran-
diose ambitions. “Our mission is to elevate the world’s con-
sciousness,” according to the prospectus.
Ithasadangerousbusinessmodel,withlong-termleases
withlandlordsandshort-termrentalagreements,andanex-
tremeprivate-marketvaluationof$47billion.Recentreports
havesaidWemaybeseekingtocutthatvaluationtoaslow
as $20 billion in an IPO—or put off the deal entirely.
AnattractiveandundervaluedalternativetoWeisapair
ofleadingrealestateinvestmenttrustsfocusedontheMan-
hattanofficemarket: SLGreenRealty (SLG)and Vornado
Realty Trust (VNO).
Despite all the fuss about Google and Facebook (FB)
snapping up space in the city, Manhattan is
viewed as the nation’s weakest major office
market. As a result, SL Green and Vornado
havebadlytrailedpeersandtheroaringREIT
marketthisyear.SLGreen,at$81,isup2%in
2019, and Vornado, at $63, has risen just 1%,
against a 25% gain in the broad Vanguard
Real Estate exchange-traded fund (VNQ).
BothSLGreenandVornadoyieldabout4%.
ThecombinedmarketvalueofthetwoREITs
is$19billion,lessthanthereportedlow-endWe
valuation of $20 billion.
Investorsareworriedaboutseveralfactors:newsupplyin
theHudsonYardsonthefarWestSide,thehighcostofreno-
vating old Manhattan towers, and a retrenchment in the fi-
nancial-servicesindustry.Thesearelegitimateconcerns,but
they seem amply reflected in the depressed stock prices.
SandlerO’Neill+PartnersanalystAlexanderGoldfarbis
partialtoSLGreen.“Managementhasbeendoingeverything
thatyouwouldwantthemto—sellingassetsandbuyingback
stock at a 30% discount to net asset value and generating
growth in the portfolio,” he says.
Unlike WeWork, both SL Green and Vornado are asset
richandvaluedatadiscounttoprivate-markettransactions
in Manhattan.
ThelargerVornadohasthebetterbalancesheetandcould
sit on $3 billion in cash following the sales of condos at a
buildingon“Billionaires’Row”nearCentralParkandfrom
ajointventureinvolvingitsstreet-levelretailspaceinMan-
hattan.VornadoisheadedbyfounderSteveRoth,77,whohas
broughtaprivate-company,long-termorientationtoVornado
forfourdecades.Thereisuncertaintyaboutthecompany’sdi-
rectioninthepost-Rothera.ItispossiblethatVornadocould
be sold—private real estate funds are bursting with money.
Morethan20yearsago ,Wien,thenthechiefdomestic
strategistatMorganStanley,wrotethatEuropewasindan-
ger of becoming a “vast open-air museum.”
WeWork’sparent
hasbiglossesand
grandioseambitionsto
“elevatetheworld’s
consciousness.”
Up & Down Wall Street
By Andrew Bary