Banking giant JPMorgan Chase warns that investors appear to have forgotten that markets don’t go up in a straight line.
In a new CNBC interview, Bill Eigen, JPMorgan Asset Management CIO of absolute return fixed income, says Oracle’s (ORCL) rising credit risk is a warning sign that investors have grown too comfortable in a highly leveraged market.
He highlights that credit default swaps (CDS) for Oracle have skyrocketed in recent months, indicating that traders and investors are rushing in to buy protection in the event the tech giant defaults on its debts.
“Oracle, especially their CDS is blown out from 40 to around 115 to 120. That is tripled.”
When the value of a firm’s CDS soars, it suggests that market participants are worried that its credit risk is getting worse.
Eigen also notes the market ignored credit warnings while rewarding stock gains.
“It was always a mystery to me how you know a company like that took on all this debt, and they added basically $150 billion in market capitalization to their stock while the CDS was starting to blow out.”
He adds that the relationship between valuation and risk is now converging, with losses appearing where leverage is heavy.
“Right now, they are starting to meet now. The market cap is turning down. The CDS keeps going out.”
As of Friday’s close, ORCL is down over 42% from its all-time high of $345.72, which it hit in September.
But Eigen warns that Oracle will not be the last company to see its stock prices get hammered while CDS value climbs.
“So I do not think it is the first of this you will see. I think there is, unfortunately, when you build up this much debt, and like you talked about, this market has been in a straight line up for so long, people forget what it is like to lose money. And that creates an environment of no fear.
And an environment with no fear is one you have to be very, very careful about, particularly when leverage ratios are high and when there is this much debt system.”
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