Brian Bollen's Blog

Porridge Lite

Mint – Bill Blain’s Morning Porridge Lite October 23 2012

Porridge lite this morning I’m afraid… 

Thought for the day: “It’s all about arbitraging the politics. Till it isn’t. At which moment the butcher’s dog is off down the street with your dangly bits..”

That was one of the quietest days I remember in months. In credit markets all the flows seemed to be meandering in the same directionless manner. Markets all in a dither about US earnings, the debt cliff threat and what next. Europe dull and listless as it keeps kicking that can down the road. News from Spain continues to amaze and fascinate: Moody’s downgrading a clutch of regions (ahead of redemption) and banks having to restate land value losses.

Questions for the day/week/month

When will Spain accept the inevitable and sign up for OMT?

NI's Largest Pension Scheme Appoints HSS

HSBC Securities Services confirms that following a formal tender process completed in July 2012, it has secured agreement with NILGOSC to continue to provide global custody services. It says the scheme is Northern Ireland’s largest pension scheme, valued at over £4bn.

Pat Sharman, head of relationship management pensions within the HSS Fund Services Business said: “NILGOSC is a highly valued client of HSS and one with whom we enjoy a successful and longstanding relationship and we are delighted to have been re- selected.”

Nicola Todd, deputy secretary at NILGOSC said: “Asset safety is our primary concern and we are very pleased to have reappointed HSBC as our global custodian. We look forward to receiving the excellent client service we have come to expect from HSBC.”

If you want a picture of the future...

Mint – Bill Blain’s Morning Porridge October 22 2012

If you want a picture of the future, imagine a boot stomping on a human face – forever…

"Markets are like a herd of meerkats, heads up and wondering what the hell happens next," said the astute Mr Jacks on Radio 4 this morning. Not a bad summation - what happens next being the absolute trillion billion dollar/Euro/Sterling question. After been taken to task last week by a regular porridge reader for not being forward-looking and predictive enough, let's try figure what happens next.

This week will likely see further gains for Europe. Although market has been “corrective” last few days, the fact we’ve got a decent debt redemption from France this week means investors have to use that cash – which favours replacing like with like. (Next week it’s a big redemption in Spain!) We’ve got new bunds and gilts, and its auction week in the US, where the market is spooked by poor Q3 earnings and the looming debt cliff. A clear case of American collywobbles.

Sleeping On The Job Boosts Productivity

Break out more pillows! Fit blackout curtains to the office windows!! At last, someone with some authority has confirmed what I’ve believed ever since I was sitting in primary seven struggling badly to stay awake in the afternoon.


Encouraging workers to take an afternoon nap could dramatically improve economic fortunes across the western hemisphere, according to leadership and business experts, Professors Nada and Andrew Kakabadse.

Professor Kakabadse explains:
"Having assessed employee performance and health studies recently conducted across the UK, US and Western Europe, we believe offering workers the opportunity for a brief nap provides significant benefits in employee concentration, health and productivity.

Sailor. Boat. Captain. Leg. Mad. Sail.

Mint – Bill Blain’s Morning Porridge October 19 2012

Sailor. Boat. Captain. Leg. Mad. Sail. Find. Whale. Chase. Smash. Sink. Float.

Go pick the bones out of last night’s Brussels overnight gabfest – and the real immediate effect on markets will probably be minimal. Forget the tensions twixt Hollande and Merkel (oh so visible in the body language). The key thing is that a year ago the failure of the EU to make hard decisions would have triggered a sell-off. Today, the ability of the EU not to take hard decisions should keep markets on track.

 If you want deeper analysis of what the failure to agree a banking police state or free up billions to potentially rescue flolloping European banks, then look in a dictionary under “angels; head of a pin”. Spain didn’t ask for bailout. Hollande said it should be given without conditionality. Merkel shook her head. Sadly.

On the other hand, failure to agree immediate banking union and pushing it down the “go think about it legally and operationally safe” path, should change our thinking on why Europe’s bad banks are safe. It might delay my “Too embarrassing to let fail” codicil. Merkel made clear banking supervision must be operational before direct recaps! End of. Get over it Francois!

Without the implicit bank debt mutualisation Hollande’s been angling for, then, it’s still a question of how much individual European states prop up their banks from their own pockets. So, perhaps some of the recent gains by Spanish names (just a random pick) are overdone? If things in Spain continue to “deteriorate” then Spain may be forced to take OMT (therefore it doesn’t matter), but will still be on the hook to support its banks rather than pretend they’re another problem for Germany! And note how Spanish bad lending at over 10%  looks awful close to the worst case scenarios in the recent Oliver Wyman stress testing. Perhaps Angela is very wise to delay signing any bank debt mutualisation treaty till the bad banks have gone bust?

But rather than dwell on what didn’t happen last night.. let’s go figure what’s going to happen in the next few weeks. I’m thinking the Game in Spain remains mainly Pain, but it’s probably approaching resolution of sorts. Which sets me thinking about Italy!

If Spain takes the OMT deal, is Italy in better shape? Or does Italy weaken on expectation it will be forced to take an OMT deal as well? Markets love pain, so if Spain is less painful does Italy become the bursting pustule of European agony? Italy may have successfully diversified its funding base with yesterday’s €18bn BTPi deal – but is stuffing retail investors any balm when it remains Europe’s most heavily indebted country plus the rest?

Interesting chart we constructed yesterday looking at historical spreads between Spain and Italy. In “normal” conditions we’d expect the two to trade closely – Spain tighter! So if we are into the new normalcy… then perhaps time for some mean reversion and focus back on Italy fundamentals. Mwhah ha ha….

All of which leads into a number of recent conversations we’ve been having with clients about what next.

One view is the outperformance of the European periphery in this “new normalcy” of a wobbly yet unbroken Europe means the next stage is for peripherals to stabilise, but for core Europe to gap wider! Think about it. Peripheral bonds are back to average yield around 4.2% across the curve- where they were last December, when core bonds were around 2.5%. Now core bonds (UK, Germany & US, 2,5,10s) yield a miserly 1.4% average - so they still have their Safe-Haven Status still priced in despite Spain and Italy being apparently less risky!! (Of course the fact Germany is still so tight might equally reflect deep seated market fears!)

Another view debunked my expectations Spain may tighten further as more and more players are “forced” into the capitulation trade. Instead, Spain and Italy tightening is largely technical and domestically seated. The dramatic gains are more about the volatility engendered by a relatively small number of international players and speculators making noise to move prices. (One very smart PM pointed out their decision not to get involved in Spain or Italy (and others) hadn’t stopped the fund posting relatively healthy returns this year.. good on them!)

A third perspective is to stop worrying about 2012, and worry what happens next year. The massive capital appreciation trade has happened and yields have sunk to micro levels. Negative real yields are fact. The rally won’t repeat next year – so get used to bond returns measured with a micrometer.

On the other hand, perhaps we might see a massive collapse in the cosy Euro consensus in coming days, and then get to play another long-scale rally next year? What might it take to trigger that? Who can say..

In summary, here a number of potential market top down views:

1)      New Normalcy Risk On leads to mean-reversion of core bond yields higher…

2)      New Normalcy Risk Off leads to mean reversion of core bond yields lower/stay where they are…

3)      New Reality of long term low yields

4)      Ongoing reality of Risk On/Risk Off volatilty from Peripheral Europe. 

Interesting stuff? Perhaps… I’d love to hear from more readers on what they think the next two months/14 months will hold for us.. Anyone for the last few choc ices?

Have a great weekend.

BB

0207 786 3877

[email protected]

[email protected]

 

 

China Weaker, But Signs Of Strength: Schroders

James Bilson, Economist at Schroders gives his view on Chinese growth for Q3 2012

“Chinese authorities today announced a third quarter growth rate of 7.4% year-on-year, the slowest since the second quarter of 2009 but in line with market expectations.

“Though this data confirms the Chinese slowdown, it is very much consistent with a soft-landing. We expected Q3 to be the weakest period of 2012, and forecast an upturn in the Q4 ensuring China’s growth remains above 7.5% for the year.

“September’s monthly data was better across the board, with factors such as exports, industrial production, and retail sales all rebounding and beating consensus estimates. Additionally, manufacturing data has stabilised, with leading components such as the new orders/inventory ratio rebounding strongly. We believe this heralds the much awaited turnaround in Chinese activity.

S&P Capital IQ – Two-Thirds of Global Equities Fund Managers Defy Europe Fears

Two-thirds of global equities fund managers are overweight Europe ex UK, despite well-documented fears of recession, unemployment, government defaults and a potential eurozone break-up, says S&P Capital IQ in its latest sector trends paper, available at www.marketscope.com.

Despite the apparent anomaly, most portfolios held European-domiciled large-caps with notable emerging markets exposure rather than domestically exposed stocks – such as Nestlé and Unilever. This continues a trend S&P Capital IQ observed in 2011.

These are not the droids you are looking for…

Mint – Blain’s Morning Porridge October 18 2012

These are not the droids you are looking for…

The big-Euro-short is proving very expensive. Unfortunately, markets usually do what hurts most – so if you a Euro-short you hurt today. Yesterday was a Grabathon/Gapathon as Spain soared 35 bp higher on the back of Moody’s not junking them.

Anyone who started 2012 after a carefully considered analysis of the debt and economic data, the likely political outcomes, made scenario calls based on the previous performance of the Euro Elites through the crisis, and came to the conclusion the Euro was pants - has had a miserable year. Over the summer – since the Draghi “I’ll do anything” moment, we’ve seen  a 200 bp gain – and I have to credit my learned colleague Martin Malone for telling us it would happen. He sat Cassandra-like for a while, but we’re listening now!

Instead, Europe looks binary – it’s tightening and looks likely to stay together! Sorted! (Let’s see how the summit goes.. the news contradictions between Germany and France, the uncertainties over how much and when for Spain and Greece look substantial.. The new ECB banking supervision may be “illegal” sounds like a clear attempt to slow the banking union process… but enough about all the usual Euro bad news..)

Scotland Football Team: Rock Bottom

New experiences are always fun, or at least interesting, aren't they? The short answer to this rhetorical question is an emphatic No. I began actively following the Scotland football team in 1965, when England won a thrilling game at Hampden by the odd goal in seven, Jimmy Johnstone scoring two of Scotland's three, if I recall correctly.

There have been highs and lows in the years since, some of the highs being very high (murdering Brazil 0-0 in Germany in 1974), and some of the lows very low (losing 0-1 to Costa Rica at Italia 90. But none has been as low as today. Until now, I have never seen Scotland sitting at the bottom of a qualifying group for a major football competition. The incumbent manager, Craig Levein, has the haunted desperate look of a man who is out of his depth, and hasn't a clue what to do about it. He insists we are making progress, and I have to agree. We are moving backwards at an accelerating pace.

Will the last person to leave Scottish football please switch out the lights???

All the ducks are swimming on the water

Mint – Bill Blain’s Morning Porridge October 17 2012

All the ducks are swimming on the water… tra la la la la la…

As if to demonstrate the truism there is nothing as short-term as markets, Asian markets rose on Moody’s not downgrading Spain to Junk. The agency said the possibility of OMT rescue raised the game, but Spain’s still on negative watch. It triggered momentary excitement in the office this morning.  Martin “fill yer boots with Spain” Malone was shouted down by everyone else countering: “it buys a little more time.” Guess what? Spain bonds higher this morning… but what does Martin know??? (Lots actually.) Italy and Spain yields are at their lowest since April! Whole bond market is on a desperate hunt for yield.

Although last night’s Presidential Town-hall was even, Romney’s looking more and more a possibility – and all the positives that entails for US markets. What fiscal cliff? Just means we have more to worry about when Obama wins and partisan US politics grind down the prospects of compromise. Perhaps worth thinking about each-way outcomes and how a close election exacerbates the pressure?

Markit Launches New Short Sentiment Factors Suite

Markit reports the launch of a new Short Sentiment Factors Suite at its Forum, descring it as an enhancement to its Analytics & Research group’s Factor product.

It describes the analytics platform as a fully-integrated research and signal management platform which allows seamless custom model building and strategy deployment for equity and fixed income. It is used by investment professionals (especially quants) to evaluate signals to aid their investment decisions and mange risk.

Renminbi Offshore Services UP: Citi

Building on the recent successful launch of its Renminbi (RMB) cash management and trade solution in the UK, Citi says it has shown a significant growth of RMB transactions generated out of London and has expanded its offshore RMB offering into Nigeria, South Africa, Kenya, Cameroon and Zambia.

Citi’s offshore RMB solution includes RMB accounts, payments and collections capabilities, trade services and financing, FX transactions, hedging solutions as well as custody services.

Bank of England Still Targeting Wrong Type of Inflation

By Darren Williams, Senior European Economist, AllianceBernstein

The Bank of England hopes that a combination of inflation targeting and bank regulation will help guard against future boom-bust cycles. But the focus is still on symptoms rather than causes. Crucially, the Bank continues to ignore the central role that money and credit play in the inflation process.

We believe that the Bank of England needs to move away from a framework that focused too heavily on a narrow measure of inflation - consumer prices - and adopt a broader approach. An expansion in money and credit is inflation in its primary form and that the subsequent increase in prices - consumer, commodity or asset - is the way in which that inflation manifests itself.

Since the Bank of England was made independent in 1997, the consumer price index in the UK has risen by 37%, or 2.1% per annum. Using consumer prices as a benchmark—and accepting the current definition of price stability (an increase in prices of 2.0% per annum)—it is possible to argue that the Bank of England has, indeed, preserved the value of money in the UK.

UK Pension Funds Risk 30-year Gilt Wait

On current trends it will be around 2040 before UK private-sector defined benefit (DB) pension schemes can fully de-risk unless they consider alternative strategies, according to global professional services company Towers Watson.

Alasdair MacDonald, head of investment strategy at Towers Watson, said: “Our research suggests that it will be nearly 30 years before there are enough index-linked gilts (ILGs) to fully satisfy UK pension fund demand. Currently, the average UK pension fund is targeting a very low-risk investment strategy on a 20-year time horizon, which means that many of them will not meet this objective.”

Towers Watson adds that its research is based on the projected availability of low-risk assets - with the supply of index-linked gilts considered the most important constraint in the UK – rather than pension funds’ projected ability to buy them, factoring in equity return assumptions and contributions.

Real Investors Look To Hedge Funds

Gamma Finance, an independent specialist provider of advisory services to the alternative investment sector, has been awarded advisory mandates of $500m by clients seeking to optimise exits from a diverse range of lower-liquidity assets, including real estate and private equity positions.

Placement agents and research companies are reporting that real asset and private equity investors are currently looking to raise additional capital and may deploy up to $200bn prior to the end of 2013. According to Gamma Finance, some of the beneficiaries of this increased activity may indirectly be the investors in hedge funds that have experienced low liquidity in the post-crisis years.

Mongo only pawn in game of life

Mint – Blain’s Morning Porridge October 16th 2012

(Sorry for no comment yesterday -  system problems!  There seems to be a problem with my email – if you don’t get a reply or non-delivery notification please send message to [email protected] )

Great story on Bloomberg this morning arguing Rajoy is waiting for conditions to get worse so he can garner easier terms for a Spanish Bailout. I get that, but the FT suggests a compromise whereby he can take a rescue with honor intact has been found. Oh so many things I simply don’t understand creating confusion. Like why the European Union won the Nobel peace prize? Please! Or how the Euro Elites are apparently going to fudge a third Greek bailout (plus Cyprus and Spain) into a single ask when the Germans are apparently still saying no to anything (publically)? Although the EU says it’s in a “final stage of negotiation” on an Greek extension, well placed sources in Greece say a haircut of all debt to 20% has already been agreed in principal – hm.. that’ll impress Angela.

So, lots of stuff for the European leadership to contemplate as they head to Brussels for their latest Gabfest Thursday/Friday. What’s the betting on a late night Friday? Don’t worry about Europe - I’m sure they will reach a series of acceptable fudges.

I’m far more intrigued as to what markets will make of last week’s IMF admission austerity doesn’t work, and what scenarios may result. I suspect the world may be moving forward faster than we think – and as always, it’s all about politics! Although it didn’t take Sherlock Holmes to figure government spending multipliers are far larger than previously believed  - will admitting it trigger a whole new wave of angst across Europe? Don't bet against it! If austerity doesn’t work, will something replace it? If so what? And what are the likely effects on bond and stock markets?

For economies tied to government patronage in a global recession, austerity was unlikely to work. But, because of the moral hazard / electoral trade off at the core of Europe, austerity was the only politically acceptable treatment the EU could prescribe. Countries that spent themselves into crisis have to be seen to be suffering while "unspending" themselves out! As the crisis has deepened, that simple dynamic has become increasingly complex.

Even though the IMF now admits austerity may be deepening the economic woes of struggling states, it's not a given Germany et al will agree to anything else - especially as Election year looms. For the Eu/IMF/ECB troika to step back and agree alternative economic treatments is going to remain long-term and potentially troublesome in terms of Northern European approval. So - don't expect anything sudden to replace austerity – it remains the only option today, but the debate has begun.

This is where it gets interesting. Enforced austerity is a lid on the pressure cooker, and some point it has to come off. For instance, have you noticed how the stressed Eurozone countries in the olive oil belt have become increasingly aligned - anti-austerity could further unite them. The political trick for southern Europe is about how far they can push Germany and the North. Under any scenario that pits France, Italy and Spain against Germany, you have to factor in the clear advantages Germany gains from within the Euro, versus the domestic strains if it becomes increasingly sidelined and the enormous potential costs of exit on the third axis!

That German dynamic is constantly moving as it becomes increasingly entangled in Europe (just look at the rising internal bop Target 2 balances owed to Germany!). At some stage it will lead to austerity being replaced. With what? Growth policies? In a Eurozone so diverse in terms of employment, productivity, and competiveness, growth policies have to be country specific. If the Euro has conclusively proved one thing it's that "one size fits all" monetary policies don't work for a union as unsimilar as the Eurozone. But entrusting Eurozone countries to repair themselves is utterly heretical to core Europe, raising the prospect of uncontrolled spending. Yet more airports in Spain anyone? Unlikely.

So what about something utterly radical - like simply cancelling government debt?  See Gavyn Davies in the FT yesterday. He wrote: “One radical option which is now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE).”

Recently a very experienced leading sovereign default lawyer explained to me and some colleagues a plan for a similar “European Deleverage Programme” that would see sovereign debt/and bank assets addressed simultaneously – radical and then it sounded very unlikely. But perhaps such a radical cancellation of European debt and monetisation is the only answer (er…I’ve been saying this for five years; I know the formula from the years I spent covering the rescheduling and restructuring of Latin American debt from 1984-89; the other BB).

From a market perspective, it feels like the ground is shifting. What should investors be doing if austerity is becoming less invasive – that certainly keeps the European can kicking further down the proverbial road. That’s market positive!

And, if European governments are even thinking about thinking about something radical like cancelling debt – how will that effect current sovereign investments? Reducing supply should create scarcity, but printing money is an inflationary anathema to the Bundesbank! How will the central bank be recapitalised if it writes off its assets without money printing – why not when inflationary expectations are low? And what would it do to banks?

So lots to think about. Future looks very interesting.

Elsewhere – great Citibank results – backs up what I’ve been saying all year.. buy US banks.. out the woods…

Out of time..

0207 786 3877

[email protected]

[email protected]

 

Allianz Global Investors Appoints Andy Wiggins

Allianz Global Investors Appoints Andy Wiggins Head UK Institutional Business

Allianz Global Investors says it has appointed Andy Wiggins as Head of Institutional Business in the UK. In this newly created role he will assume leadership of the UK institutional business development team and be responsible for the development of AllianzGI‘s Institutional Business in the UK. He will also be a member of the AllianzGI European business development team

Wiggins joins AllianzGI from Threadneedle Investments where he was head of UK institutional client relationships. Prior to that he was director of client relations at AllianceBernstein and also spent eight years as a principal at Mercer. 

 

Who Says Tax Cuts Boost the Economy?

By Sydney Finkelstein

As the US election gets closer, voters are being bombarded with messages about different economic plans to kick-start growth.  While President Obama wants to finish what he started, Gov. Mitt Romney offers a different prescription.  And although Romney has been criticised for not offering many specifics, his intent to lower taxes is clear. 

The supposed logic of cutting taxes goes like this: If you keep more of the marginal dollars you earn, you will work harder to keep those added earnings.  If tax rates are higher, you will have less incentive to work as hard.  This argument is at the heart of the Romney-Ryan economic plan, and has been asserted so many times that most people don’t even think about whether it’s true.  Certainly conservatives don’t.

But there’s a dirty little secret about tax cuts: They generally don’t do what they’re supposed to.  In fact, when you dissect how tax cuts affect individual investment behavior and motivation to work, the message that emerges is very different from the one conservatives have broadcast for years.

Let’s start with the basic question:

Cyclical Challenges: PIMCO

A new European Economic Outlook by Andrew Balls highlights the conclusions from PIMCO’s quarterly Cyclical Forum in September 2012 and how they influence the firm’s European investment strategy.

Key Points include:

·         Faced with significant cyclical and secular challenges, encouraging policy action by the European Central Bank is proving constructive towards achieving longer term regional stability.

·         While the ECB’s engagement as a lender of last resort is crucial, Europe’s big four governments must provide political commitments supportive of ECB policy to counter the lingering threat of a Greek exit, address convertibility risk, and build a more stable union. However, this will require sustained growth.

·         Faced with capital flights from the periphery and lowered credit ratings, the key challenge remains crowding-in private and foreign official investors to buy peripheral sovereign debt.

·         Encouraged by supportive ECB policy and European government actions, Italy and Spain once more offer relatively attractive sources of credit risk; not interest rate risk. Reflecting the extent of execution and inflation risks, we maintain a cautious approach in these markets.

Impax Asset Management Investor of the Year

Impax Asset Management has been named as Impact Investor of the Year by The Asset in Hong Kong. Impax is one of the world’s first managers dedicated to exploiting the investment opportunities created by resource scarcity and demand for cleaner, more efficient products and services through listed and private equity strategies. It says the award highlights increasing interest from institutional investors in the environmental and resource scarcity sector and follows a significant expansion of its business into Asia, with the commitment in 2011 to the opening of an investment office in Hong Hong.