Brian Bollen's Blog

You can only do so much from behind a Bloomberg Screen

Mint – Bill Blain’s Morning Porridge  January 31 2013

Sometimes you have to laugh. We’ve been generally bullish on the US economy for last few months, and had absolutely nothing positive to say about European economic prospects (except for Germany).

Yet.. yesterday’s numbers suggested the US in decline and surprisingly improved European sentiment pointing towards Yoorp recovery. Nonsense of course. US is going to recover, and the only thing that’s changed about Europe in the past year is that markets are now confident the ECB will back their bond purchases. Economically still pants and austerity a bitter pill. 

But yesterday does show this market can still be surprised by downside shocks - the difference from a year ago is… it’s no longer as vulnerable to them. When US Q4 GDP fell by an unexpected 0.1%, sentiment rallied pretty quickly once the market realised the combination of lower defence spending, declining inventories, and maybe a bit of Hurricane Sandy, underlay the number.

S&P Capital IQ’s QuantHouse Expands In Asia

S&P Capital IQ reports that it is expanding its real-time presence through the establishment of a Singapore office for its QuantHouse operation, which provides global next generation trading solutions. This expansion, we are told, reflects the need for S&P Capital IQ to support its growing client base in the region and to capture the demand for low latency services from a diverse range of businesses, spanning the US, Europe and Asia regions.

Crucifixion? On the left, one cross each…

Mint – Bill Blain’s Morning Porridge  - January 29 2013

Is a sea-change underway in markets? Stock markets still hitting daily records, but the pace is slower. Bunds weaker. Peripheral government yields are a tad higher. Italy bond yields backing up towards mid-Jan levels although they remain flat to bunds. Is it neutral or is a big change underway? Or have markets just paused for a breather? I suspect the latter as there is still a load of money looking for assets…  and a last minute solution to the US debt sequester threats must be just around the corner.. yes?? Surely..?

Some great stuff in the papers this morning, like the French Labour minister admitting yesterday his country is bankrupt. No its not. If you were to take a look at sliding sterling in UK, reflecting the ending of the “thank-god it’s not in the euro” premium, that might raise some concerns.. Let’s see if a weak currency generates any growth in the UK.. I have a sickening feeling it will be limited, and the real cost will be import-inflation..

Brendan Rodgers Losing It?

Liverpool 'manager' Brendan Rodgers is losing it. Discuss.

British Threat To Exit EU Overstated

By Darren Williams, European Economist at AllianceBernstein

In a speech last week, British Prime Minister David Cameron raised the possibility that the UK might push the “nuclear button” and leave the European Union. We think both the threat and consequences of such a move have been exaggerated.

The most striking aspect of Mr Cameron’s much-postponed speech on Europe last week was his promise to hold a referendum on the UK’s membership of the European Union (EU) by the end of 2017.  Such a vote, he said, would follow a “new settlement” to hand powers back to national governments. His preference would be to enshrine these changes in a new EU Treaty. Failing that (and there is little appetite for a new treaty in other EU countries) he would try to negotiate this new settlement on a unilateral basis.

Brief Encounter, Olympic Knight, Inferno

Had a brief but close encounter with this multiple Olympic gold medal winner, Sir Steve Redgrave, on Saturday (January 26 2013) as he moved towards the start gate for this year's Inferno Downhill. I am told he did fantastically well, especially for someone who has apparently only taken up skiing relatively recently.

You can check out any time you like… but you can never leave…

Mint – Bill Blain’s Morning Porridge  - January 28 2013

Welcome to another week, and the focus will be global growth. China - tick. Japan - tick. Asia - tick. Boom, Boom, Boom. Absolutely convinced US will also end up positive - but the “sequester” threats confirm US legislators will remain a major source of distraction this year. (Remember: "Americans will do the right thing, but only after exhausting all other possibilities first.")

On the back of last week’s minor weakness in some European peripherals – like the new Portugal bond failing to set bond buyers alight – the BIG question for the market is how much further the rally continues for bonds. I’ve been reading about more funds piling into Italy, Spain, Brazil et al.. but I really can’t agree with some recent investment bank analysis saying there is still some 100bps of peripheral tightening to go before we get back to historically normal spreads – ie that Italy should trade 120-150 over bunds rather than the current 250 (10-year). What are these people smoking?

Infernal Inferno

I'm off to the annual Inferno Downhill ski race shortly. It's a monster, starting at the Piz Gloria complex at the top of the Schilthorn mountain, Ernst Blofeld's lair in the James Bond film On Her Majesty's Secret Service, and finishing (when weather conditions permit) on the floor of the valley below, in Lauterbrunnen. A total of 1,800 participants launch themselves onto the course, one every 12 seconds. Even the locals say it's dangerous.

If the devil could ski, the race's tag line says, he would ski the Inferno. It would be his race.

Dip Dip, Dip

Azad Zangana, European Economist at Schroders, comments on today's UK GDP figures

"The ONS’ preliminary estimate of Q4 2012 GDP showed the economy had contracted by -0.3% - the fourth quarterly contraction in the last five quarters – and worse than city consensus expectations (-0.1%). Year on year growth remains at zero.

"Within the details, the construction sector made the biggest positive contribution by growing 0.3%. However, this was not enough to offset the fall in industrial production of 1.8%. Meanwhile, service sector activity was flat on the quarter.

"Part of the negative hit to growth was caused by an Olympics hangover, where the boost seen in the third quarter disappeared. This should be seen as a one-off hit to the economy. However, now that a negative GDP figure has been recorded, there is a significant risk that the UK economy suffers a triple-dip recession. Weak underlying economic activity coupled with the disruption of recent poor weather could cause GDP to fall in the first quarter of 2013.

"The external environment is not helping either. The latest leading indicators from France suggest the recession there is set to deepen, while similar data from Spain and Italy also suggest more downside risks.

"As for monetary policy, the Bank of England seems to be waiting for more evidence on the effectiveness of the Funding for Lending Scheme. The scheme has helped lower the cost of borrowing for both corporates and households, and has increased the number of higher loan-to-value products on offer. However, demand for borrowing from credit worthy individuals and firms remains low. We expect the Bank of England to restart its quantitative easing programme in the spring as the economy continues to disappoint. Meanwhile, the sovereign rating agencies are circling. Disappointing growth and recent poor public finance numbers suggest the UK will lose its AAA rating in the near future." 

 

High-Yield Won’t Bubble Over

By Gershon Distenfeld, director of high-yield debt at AllianceBernstein

It’s easy to spot a bubble after it bursts. Just follow the carnage—significant, and sometimes complete, losses for investors. It’s not so easy to pinpoint a bubble beforehand, but many are convinced that there’s too much air rushing into high-yield bonds today.

High yield may be a bit pricey these days, but we don’t see a bubble building. In fact, we think the structural characteristics of bonds and the behaviour of bond investors make a bubble nearly impossible.

What makes a bubble? Greed is a big factor in creating financial bubbles. Dutch tulip buyers who bought at the height were wiped out when tulip mania collapsed in 1637. Owners of high-flying tech stocks lost a lot of money in 2000 (displays, below). And US housing prices show that purchasers lost tremendous value when that bubble popped. The damage is made worse because many buyers borrow money in the hopes of profiting even more in tulips or tech stock or property.

The Deil cam fiddling thro’ the town...

Mint – Bill Blain’s Morning Porridge  - Burns’ Night January 25 2013

The Deil cam fiddling thro’ the town, and danc’d awa wi’ th’ Exciseman

If you only bother reading one Morning Porridge this year, this may be one.

Why? As many of us suspect, it feels like the big fixed income turn might already be underway. Since The Porridge first warned of "Positive Upside" risks of economic recovery last year, the critical importance of Japanese reflation, the need to watch central bank policy like hawks, stronger US growth prospects, the rotation into equity, and the possibility of gapping core bond yields – it’s all beginning to happen.

According to spell-check, I first referenced 1994 (the last big bond bear phase) last October.  Even the largest banks and their somnambulant market scribblers have woken up and taken notice markets have changed. 

Early this morning, a client emailed an article from the Torygraph (a paper I only read for the excellent Alex cartoon and "to know what the enemy is thinking"). I was staggered by how wrong it was: "Bank of America issues "Bond Crash" alert on Fed Tightening Fears." Hang on.... it’s not the Fed that decides rates, it’s the market that sets the price of bonds and in recent weeks we've seen considerable widening in US Treasuries despite a billion helicopters dropping three trillion dollars on the economy to try and influence bond yields down in the hope pushing on wet wool will create jobs (three trillion is the size of the Fed’s balance sheet following QE bond buying!).

The BoA research suggests the resulting bond crash could be "comparable to 1994" and unleash a similar cataclysm like the one that sank Robert Citroen at Orange County (I think that was the name of the delusional derivatives sucker who was the county treasurer), and triggered the Tequila Crisis sinking Mexico bonds.

Across the media we've a host of similar "change commentary" stories. Investors telling us they aren't buying more high-yield corporate bonds because yields are now too tight, or risk\reward no longer favours further peripheral exposure. The BIS is warning RMBS and Junk may be too tight for the risk they present. We're also seeing increasing signals the new issue deluge has saturated the market - some new deals seeing declines and pricing no longer at the tight end of expectations. Perhaps a Portugal energy co bond was an ask too much?

Now we've got a number of folk looking to sell some of their more esoteric and less liquid bonds before the market tops.

(If the BoA team have called the market move right, (albeit for the wrong reasons), then good for them. But please remember they are a team of thousands of highly trained chartists, scribblers and economic rune casters - I'm just a single bond broker who writes this commentary on the train to work, and spends the rest of his day pleading with recalcitrant clients to buy or sell bonds!)

If we are moving into a strongly bear fixed income market, we'll see the rotation into equity continue and core sovereign rates back up. The yield compression conveyor belt that's seen corporate bonds tighten will stop. Expect chronic illiquidity. Don't expect the banks that sold you that run of primary single B bonds to post you a bid to buy them back.

Where will be safe?

Two places. Floating rate and, rather ironically (since the Europhobic Telegraph broke this story) I'm thinking Europe.

Bond prices fall (and yields rise) because investors perceive stronger economic activity will fuel inflation thus cause central banks to raise official rates. Doesn't matter if the central bank says it won't raise rates... the economic fundamentals say they will, then rates will rise because that’s what the market then thinks. If the US, China, and even Japan post growth and investors rotate into equity, then bond yields will rise, thus investors lose money on their fixed-rate portfolios.

But Europe ex-Germany is not going to see growth. Aside from Germany posting positive PMI numbers, the rest of Europe is economically miserable (especially and increasingly so France, but that's a story for another day...). So do you put your money in Germany? No. Italy? No - as we warned earlier this week, the Monte dei Paschi scandal is now wrapping itself round the Monti government, and its tendrils now question what kind of a job Draghi was doing at the helm of the Bank of Italy back when MPS was merrily hiding losses.

What about Spain? Perhaps...this morning Goldman Sachs is on the wires - an article says they are recommending Spanish RMBS on the basis Spanish housing is close to bottom. Hmm. I suppose someone churlish might suspect Goldman was long Spain RMBS and wanted to take profits.

Whatever European core (Germany, Holland), mezzanine (by which I mean France, Austria et al) or peripheral government market you decide to play, there will be ECB support. The ECB will step in to contain yields if they start to back up - through Draghi's unlimited bond buying. Believe it.

A Global Tax Code.. that’s a good one..

Meanwhile I’m a bit miffed (again) with David Cameron and his latest pledge to go after Corporate Tax "avoiders" and calls for global tax rules. Forget it.. competitive advantage and all that...

Of course multinationals  (and everyone else) should pay proper taxes. But it should not be beyond the wit of Her Majesty's Revenue Collectors to know what corporates are doing. If a few smart intelligent journalists can work out that Starbucks ain't paying a lot of tax in the UK, or that high-street shops are closing because Amazon pays fractional tax rates, you have to think maybe a few smart tax inspectors might also spot it? 

Apparently not.

Instead the UK Inland Revenue has been directed down the path of government-licensed extortion, encouraged by our leaders to send barely literate tax threats with menaces to hundreds of thousands of self-made tax payers. They target the self-employed, doctors, dentists and anyone associated with finance. They make people scared of success lest the dreaded brown envelope threatening “investigation” tumbles through the letter box.

If Cameron really wants to reform tax, start by reforming his own government’s attitude to wealth creation, the HMRC and the tax-code (time to form a tax-payers' alliance against the tax-collection bandits....?)  

And on that quite angry thought, I’m out of time, and have a great weekend..

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

Apple Still Extraordinarily Strong

Professor Loizos Heracleous says those writing off Apple after its disappointing earnings update are premature.

Professor Heracleous has done extensive research on the company revealing its ‘Quantum Strategy’ in a paper for Organizational Dynamics and though Apple’s results saw $50bn wiped off its market value he doesn’t feel it is the first sign of strategic weakness as some analysts are suggesting.

Apple reported no rise in profits for the final quarter of 2012 and slightly missed revenue estimates, prompting speculation that its period of hyper-growth is coming to an end.

Cracking Buffett's Code

Copy Warren Buffet

Rising Sum, an investment specialist, says it has launched a platform (risingsum.com) that (it says) identifies investment opportunities using the acquisition criteria favoured by Berkshire Hathaway, Warren Buffet's highly successful investment vehicle.

At risingsum.com investors can identify true value investments by either using the platform's standard screening template, or by adjusting the settings to find companies that meet individual investment styles and preferences.

Investors can also enter their stocks into the system and find out if any of their existing holdings would pass the Buffett test, the Berkshire Hathaway acquisition criteria. For a more detailed explanation of how Rising Sum works and a snapshot of a portfolio to go - http://www.risingsum.com/RisingSumExample.pdf

Look upon my works ye mighty, and despair…

Mint – Bill Blain’s Morning Porridge  January 24 2013

Another day of extraordinary new peripheral issuance demonstrating conclusively the Euro crisis is over. (Cough). Madrid opening the way for other Spanish regions by filling its entire yearly funding need with €2bn of new funding. The Portugal €2.5bn 10/17 tap issue was another extraordinary deal with a €12bn book! Everyone filling their boots with peripheral bonds – keep shipping them in! Anyone for a new Greece deal by the end of the quarter? I bet I could find someone to buy that!

With the periphery now able to fund itself, struggling banks able to issue debt (and likely repay some LTRO money next week), the physical manifestations of Euro crisis appear to be past us. But some comments from clients yesterday highlight key issues:

“If you’ve missed the opening weeks of 2013 you’re already behind...”

We've Already HAD A Referendum On Europe

Memo to UK Prime Minister David Cameron: the UK has already HAD a referendum on membership of the entity that is now referred to as the European Union, but was previously the European Economic Community, and started life as the European Coal and Steel Community.

The British people had the opportunity to decide the issue in 1975, and said yes to membership. Can we please stop messing around and work out how to do what is right for the UK within the context of the rules of a club we begged to join, rather than constantly threatening to leave? If the UK were an extremely awkward guest at my party, I'd be showing it the door.

Investing in Food and Agriculture

The investment case is compelling and a balanced portfolio across both sectors is the key to success for risk adjusted returns.

At a seminar in London today, Impax Asset Management looked at the compelling drivers and key issues in investing across the food and agriculture sectors.

Michael Landymore, Investment Manager of the recently launched Impax Food & Agriculture Fund commented: 

“After a prolonged period of under-investment, this industry is now attracting significant new capital globally in order to meet the complex challenges presented by rapid population growth, increasing urbanisation and shift towards an ever greater consumption of water- and grain-intensive foods. The established supply chains are changing, new ones emerging and we are also identifying opportunities in ancillary goods and services.”

Dancing on the Ceiling: Dr Jerry Webman

Dancing on the Ceiling

By Dr Jerry Webman, Ph.D., CFA, chief economist, OppenheimerFunds, Inc.

With positive news trickling in on several fronts, equities in many regions added to their year-to-date gains last week. The Dow Jones Industrial Average actually hit its highest closing level since December 10, 2007. Contributing to investors’ willingness to buy risk assets were generally positive US fourth-quarter earnings results, encouraging economic data from the US and China, and an apparent decision by G.O.P. lawmakers on Friday not to engage in a showdown over raising the debt ceiling and put the US in danger of default.

While equity valuations have risen in the past few months, few major markets appear overvalued by historical standards. Many, particularly in Europe, actually still trade at a steep historical discount. Clearly, however, investor sentiment has turned more bullish, as indicated by surveys and data showing the flow of investment funds into various asset categories. It’s always wise to view the actions of the herd with scepticism (sentiment is often a contrarian indicator), and technical analysis suggests that a market pullback could be in the offing. Fundamentally, however, 
I don’t believe that equity markets have gotten ahead of themselves and would likely be a selective buyer on weakness.

Peter Sands, From Davos, Via Bloomberg TV

Peter Sands, CEO at Standard Chartered Bank, has been talking to Bloomberg Television's The Pulse programme at the World Economic Forum in Davos (http://bloom.bg/UTq6ls). In the transcript provided, which contains an insistence on a mandatory credit to Bloomberg Television, Sands reacts to UK Prime Minister David Cameron's promise of a UK referendum vote on European Union membership.

Sands on the prospect of an EU referendum:


"My feeling is that the UK needs to remain part of the EU. I completely understand why Prime Minister Cameron thought it necessary to offer the people a referendum. Europe is changing, and as the biggest country in Europe outside the euro zone, the UK's relationship with the Eurozone is going to change. So I think it's kind of inevitable that something like this had to happen."

Feeding The Dragon: Why China's Credit System Looks Vulnerable

Feeding the Dragon: Why China’s Credit System Looks Vulnerable Edward Chancellor and Mike Monnelly, members of GMO's Asset Allocation team, write to institutional clients in a new white paper about China's credit boom and outlines some worrying recent developments in its financial system.



In GMO's view, "China’s credit system exhibits a large number of indicators associated with acute financial fragility," including China's debt and real estate bubbles, the belief that the government is underwriting financial risk, the shadow banking system, a proliferation in credit guarantees, among others.



The paper is available from GMO's site at:
Feeding the Dragon: Why China’s Credit System Looks Vulnerable
http://www.gmo.com

PIMCO Launches GIS Income Fund

PIMCO reports that it has launched the PIMCO GIS Income Fund, a global multi-sector bond fund  seeking  to generate a high and sustainable monthly income stream based on a flexible approach of investing in global income-generating bonds.

The PIMCO GIS Income Fund is managed by Dan Ivascyn, managing director and head of the mortgage credit portfolio management team, and Alfred Murata, executive vice president and portfolio manager on the mortgage credit team. PIMCO says it has been successfully managing assets under this strategy since 2007. The firm currently manages $27.6bn across all income-oriented strategies globally, as of September 30 2012.