If you had any doubts about whether financial markets are bubbling, or starting to overheat, then three separate events in the past week might cause you to think again.
Many commentators reckon there are frothy elements to the market with high valuations, stretched earnings, low interest rates for high risk debt and other products, weak demand and poorly performing economies.
Other analysts say the bubble-like conditions are temporary (if they are there) and a symptom of the huge spending programs of central banks in the US, Japan and the UK and that markets will slowly right themselves once the Fed stops its spending in October.
But two billion dollar examples of fraud and investor cupidity have come to light on both sides of the Atlantic in the past week which raise the question about the extent of this frothiness.
One was a wifi company based in Spain which has turned out to be a billion euro fraud – the other was a mystery American tech stock which could be an even bigger deception.
And then there was the hit to confidence late last week from the trials of Banco Espirito Santo, Portugal’s biggest bank, which has lent over a billion euros to the family holding company of its biggest shareholders, who missed a debt repayment and are struggling.
Normally problems in an obscure bank in Portugal wouldn’t rattle confidence, but the problems at Banco Espirito Santo certainly did.
That triggered a surprisingly violent sell off in markets Thursday night our time, which calmed down after Portugal’s regulators sacked the family dominated management (the family is the Espirito Santos, Portugal’s richest with stakes in banks, an insurance company, tourist assets, hotels, energy and communications).
News of the problems shocked investors across Europe (and pushed bank shares lower around the world) because the Espirito Santo family had been around for 150 years and had a very conservative reputation.
The reason for the problems was an aged old one involving family empires – a shortage of money at the top of the ownership pile which meant the family’s Luxembourg holding company failed to make an interest payment on a loan from the bank.
That triggered fears the whole empire had run out of money and could collapse.
No sooner has the ripples from Banco Espirito started settling than a small US speculative tech stock called Cynk Technology Corp, moved into the spotlight of doubt, following had on the heels of Madrid based Wifi company, Gowex which has now gone into bankruptcy after Jenaro García Martín, the founder and chief executive, confessed to falsifying the company’s accounts for “at least” the past four years.
The admission came after a report by US short seller, Gotham City Research which highlighted apparent management and accounting failures at Gowex. At one stage Gowex was worth 1.2 billion euros.
Now, after a near two month run up in its price that approached a rise of 36,000%, trading in Cynk shares was finally halted in the US on Friday night by the US Securities and Exchange Commission.
What made this even more incredible was that Cynk traded off market in what are called the Pink Sheets – that is the bottom market in the US where highly speculative companies reside, their shares traded with high buy sell spreads as the play things of shonks, rorters and fraudsters – think The Wolf of Wall Street movie type of trading and marketing of penny dreadful stocks with little prospects of ever being a success, except as a possible fraud.
Cynk was one of those – according to Bloomberg and other media reports, it had no apparent revenue, assets profits or products, and with just one employee.
And yet it was marketed (word of mouth and in Pink Sheet tip sheets (which should have been enough of a warning for investors) as a social media stock!
For a company with no prospects, it is therefore amazing that its shares jumped from 6 US cents on May 15 to reach an intra day high of $US21.95 on Thursday (a rise of more than 36,000%, yes, 36,000%, before falling 5.5% to $US13.90 at the close Thursday).
Reuters pointed out that at its peak, the stock had a higher market value than three dozen members of the S&P 500 including Cablevision Systems, Pitney Bowes, Legg Mason and ADT Corp.
That alone should have been reason for regulators to step in earlier. Certainly it should have warned investors against buying the stock, but some did, each day.
The SEC halted trading on Friday because of “concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in CYNK’s common stock,” the SEC said in a statement.
But something must be going on at the company. Bloomberg reported that in Cynk’s last quarterly earnings report, filed with the SEC in November 2013, the company reported a $US1.5 million net loss and no revenue for the first nine months of the year. The bulk of that loss came from stock-based compensation, which was listed under operating expenses.
Another warning for investors was that Cynk said in its most recent filing that its headquarters are in Suite 400 of the Matalon, an office building in Belize. Belize is a small Caribbean country known to be used by rorters and others.
Bloomberg reported: "The Matalon does not have a Suite 400, said Tiffany Techeco, secretary of building. She also said there is no main company with the name Cynk Technology; Introbiz, which is the name of Cynk’s website; or Introbuzz, the company’s former name.
"Cynk’s social network appears to have no members, no revenue, no assets and only one employee. The stock-price chart has been the talk of all manner of business blogs and Twitter pundits,from Business Insider to the Wall Street Journal and Zero Hedge, which has called Cynk’s moves “pure madness," Bloomberg reported.
And bubbling, like the Spanish wifi company and the rich Portuguese establishment family with no money to make an interest payment on money borrowed from part-owned bank – all the hallmarks of too much money sloshing around the wrong corners of the market.
