Brian Bollen's Blog

Correction To Come For S&P 500? Coutts Considers

James Butterfill, Equity Strategist at Coutts, considers S&P 500 passing all-time high

The US has now surpassed the mother of all psychological barriers, the all-time-high. This begs the question, will we now see a substantial correction as investors take profits having risen a whopping 9.9% year-to-date?

To put this in perspective, if the S&P500 was to continue to rise at the rate seen this year's rate, the index would close 2013 at year-end, a total YoY rise of 41%. Historically, when equities have hit all-time-highs after a long doldrum periods, they tend to continue to rise for the following six months.

The index also recently pushed past our full-year fair value of 1555, this target is based on our assumptions for macro economics, most notably purchasing managers' buying intentions, money supply, leading economic indicators and the USD.

Cyprus Banking ‘Theft’ - A Cry For Help

Echoing my own Cyprus theft theme of the other day (http://www.brianbollen.com/bbb_brian_bollens_blog/2013/03/civil-war-in-cyprus.html) it seems a number of foreign businessmen and UK-based businesses with interests in Cypriot banks have approached leading UK Human Rights lawyers Howe & Co for legal help in the face of what they view as ‘theft’ of their money from Cypriot banks. 

Howe & Co is famed for its role in successfully fighting for Gurkha rights alongside the gorgeous, impossibly graceful and mellifluous Joanna Lumley.

Partner Martin Howe said, ‘An international  businessman with millions of dollars at stake was among the first to approach us. He had a significant deposit in the UK branch of a Cyprus based bank and it has, in his words, been ‘plundered’. This shocking development in international Banking is a serious threat to every business and citizen in the EU. It undermines the basic concept of fairness and infringes Human Rights. If anyone else were to remove funds from a business account it would be viewed as theft. The criteria about who is losing what seem arbitrary and potentially unfair. No previous EU ‘rescue’ has involved depositors being treated in this way. We are building a legal challenge to this situation’.

Howe & Co is the main backer of a new campaign (soon to be launched) to fight for a better deal for banking customers. The campaign FairBankingUK (www.fairbankinguk.com) was originally to be launched in early April. However, the news of its imminent launch is being brought forward due to the Cyprus crisis.

In these shoes? I doubt you’d survive… Honey… Let’s do it…

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

There is so much I simply don’t understand about markets… Like why investors pile into things like corporate hybrids or bank knockout CoCo bonds. Because the yields are so attractive isn’t a good answer. They are likely to prove volatility squared – that’s why investment banks love em! When the markets turn, they could prove toxic.

Timing on Barclays’ new CoCo is extraordinary in the wake of the “new template” Cyprus wipe-out bail-in, and the Bank of England telling UK banks they need a further £25bn capital*. I’m sure the deal will go extraordinarily well, but I’m really struggling to understand why. I suppose yield overcomes rationality. Meanwhile, European headlines once more dominate the mood and threaten to derail April markets.

I spent yesterday running round London seeing clients and such...and doing some fun TV stuff. It struck me how absolutely convinced everyone I met in London was about the imminent collapse of the euro. Cyprus, Italian elections, German voters, French misery, Slovenia spreads… you name it and Europe looks messy, horrible and ripe for collapse…. Reading some of europhobic vitriol in the press it’s easy to see why the euro is a hopeless cause.

BUT BUT AND BUT… That’s all from an ANGLO-SAXON PERSPECTIVE.

Japan: Trade or Trend?

by Dr Daniel Murray, chief economist, EFG Asset Management

A change of government and a new central bank governor has led to a new found sense of optimism with regard to Japanese equities. Is this the start of a new trend in Japanese equities, or just another bump in Japan’s long-running downward slope? 

●        The Liberal Democratic Party’s return to power was assured through Prime Minister Shinzou Abe’s insistence on a more aggressive approach to mending the Japanese economy.

●        Abe has followed through with aggressive legislation and the appointment of Haruhiko Kuroda as central bank governor, who has indicated a need to increase the Bank of Japan’s influence on the Japanese economy.

Is It A Bird? Is It A Train?

Is it a bird? Is it a train? No, it's the Universities Superannuation Scheme Limited, one of the largest pension schemes in the United Kingdom, announcing that its USS Axle Pty subsidiary, has successfully completed the acquisition of the Brisbane Airtrain.

The transaction was arranged by USS Investment Management, USS’s principal investment manager and adviser which will manage the investment on its behalf.

Following a period of exclusivity in December, Airtrain Holdings Limited entered into a binding agreement with USS Axle for the sale of the company for approximately A$110 million in cash on December 21 2012. 

The transaction was implemented by way of a scheme of arrangement under which USS Axle has acquired the entire issued share capital of Airtrain Holdings Limited, the parent company of Brisbane Airtrain.  CP2 Limited has co-invested 1% of the total consideration and will be retained by USS in an asset management role.

Low Interest Rates Deflate Derivatives

With interest rates at or near historic lows and central bankers clear in their commitment to maintaining stimulative policies for the foreseeable future, hedging interest rate risk is not high on the list of priorities for companies around the world. These conditions have slowed activity in interest rate derivatives trading to a crawl despite the continued strong flow of new corporate bond issues that serve as the traditional drivers of activity in this market.

A report, Central Bank Policies Deflate Interest Rate Derivatives Market,  released today by Greenwich Associates shows that notional trading volume in interest rate derivatives declined 8.5% last year.

Better Off With Better Beta

Smart beta is an ideal way for investors to access the best aspects of market diversity at modest cost and governance, according to an article in Towers Watson’s annual Global Investment Matters publication. The company suggests that diversity through smart beta can help to manage risk, while implementation of the ideas behind it allows investors to exploit competitive advantages. In addition, it asserts that many institutional investors will have to hold risky assets for longer than expected in order to generate required returns and that smart beta would be a good way to reduce dependency on equities while doing this.   

My Mail Seems To Have Been Hijacked

Dear All,

My Mac mail programme seems to have been hijacked by someone running a false invoice scam targetted at Italian speakers. Should you receive a message purporting to come from my email address, asking you to hand over money for an invoice that isn't bona fide, you can safely ignore it.

Any suggestions on how to prevent this happening again would be gratefully appreciated.

Brian

You never know what worse luck your bad luck has saved you from...

Mint – Bill Blain’s Morning Porridge  - March 26 2013

You never know what worse luck your bad luck has saved you from...

Before I launch into yesterday’s “interesting” day in the markets, and what it all meant, just a moment of reflection as Q1 2013 wends towards a weary close. We’ve seen spectacular gains, but also much to be nervous about as growth signals remain fractured. The euro remains critical. In the face of such a strong Q1, I’m thinking slower start next week to the Q2 markets. Let’s see what’s through the round window...(a reference to a BBC children's TV show, Play School, one of whose presenters was a chap called Brian Cant)...back to Yoorp! 

Contradictory bluster or a moment of genius?

Dutch finance minister and Eurogroup leader Jeroen Dijsselbloem shocked markets with his "this is the template for future crisis" comments. He didn't pull any punches making clear sovereigns and depositors bear the costs from here on in. He has since attempted to mellow his comments with a twitter retraction, but whether he intended it or not, they could become a moment of blinding clarity in the muddled history of the euro sovereign crisis.

European banks took a hammering from France across Spain to Italy. Even names like

Civil War In Cyprus?

I'm not a betting man, but I wonder, out of idle curiosity, what the odds might be on civil war breaking out in Cyprus.

What would YOU do if you woke up one morning to find that unelected bureaucrats in the EU had decided to steal a large portion of your earnings (over and above the theft that normal taxation involves)?

Would you sit quietly and accept the decision? Or would you take to the streets to protest, and stay on the streets as the protest escalates into a riot? And as the riot is quelled by police and soldiers?

Would you stay on the streets as the police and army find they can't control the rioting, and send for reinforcements? And if those reinforcements come from Berlin, in heavy armour, and start shooting? What then?

I'm usually labelled a doom-monger for voicing my concerns, but if you cannot see that this might happen, I lament your lack of imagination. And if it can happen in Cyprus, it can happen anywhere in the European Union. Not just the eurozone. I wonder when the EU and its unelected despots will demand that British bank accounts be plundered to help save a currency that no sane person in Britain ever wanted the country to join.

Monetary union without fiscal and political union is not sustainable. Cry havoc, and prepare to let loose the dogs of war!!!

Cyprus Averts Disaster, But The Price Is High

By Darren Williams, European Economist, AllianceBernstein


The European Union’s last-minute deal with Cyprus has headed off bankruptcy for now, but comes at a heavy price for uninsured bank depositors. Meanwhile, the move to impose losses on private creditors and growing complacency among policymakers could be storing up trouble for the future.

After a week of frantic negotiations, Cyprus and the Eurogroup have reached agreement on the basic structure of a €10bn bailout package. Laiki, Cyprus’s second-largest bank, will be liquidated by splitting it into a “bad” bank and a “good” bank. The bad bank will be run down over time and the good bank will be folded into the Bank of Cyprus. The latter will then be recapitalised by wiping out equity and bondholders and by bailing-in uninsured depositors. What this means is big losses for uninsured depositors at Laiki and Bank of Cyprus, but full protection for insured depositors both there and at Cyprus’s other banks.

Cyprus: Disaster Averted, Problems Persist

By Dr Jerry Webman, PhD, CFA, chief economist, OppenheimerFunds

Cyprus struck an 11th hour deal with its European partners and the International Monetary Fund to shrink its banking system in exchange for €10bn ($13bn) in emergency funding.

The deal allows Cyprus, the tiny Mediterranean island with a population on par with Rhode Island and economic output similar to Vermont, to avoid an imminent default and an unprecedented exit from the Eurozone.

The rescue package will include an additional €4.2 billion to be funded by a yet to be determined, but likely very sizeable levy (perhaps as high as 40%), on uninsured bank deposits of over €100,000. In a meaningful reversal from the conditions imposed by the highly contentious bailout plan released last week, deposits of up to €100,000 will be left untouched.

Cyprus Bailout Ups Bank Run Risk

By Willem Verhagen, Chief Economist at ING Investment Management

The main problem of Cyprus is of course its oversized and undercapitalised banking system. As we know all too well by now this poses a threat to sovereign solvency as well. This should be distinguished from the other peripherals such as Spain and Italy, where the main problem is that a liquidity drought can lead to a self-fulfilling solvency crisis via exponentially rising borrowing costs.

In cases where there is such an obvious sovency issue, the Troika invariably opts for a form of private-sector bail-in as part of the solution. In the case of Greece this took the form of a haircut on sovereign debt. For Cyprus, sovereign solvency is only under indirect threat, so last night it was decided to spare sovereign creditors and go to the root cause of the problem. As a result, bank creditors, including large (above €100K) deposit holders are being bailed-in, although only for those banks that are truly insolvent.

This takes the immediate threat to the stabililty of the eurozone away, but it is unlikely to be the end of the story. The fact that depositors below €100K were protected is certainly a positive and should give some reassurance to small deposit holders in other EMU countries. From a long-term perspective, the fact that creditor bail-in is the first port of call rather than a bail-out by taxpayers will improve the stability of the financial system as diminishes moral hazard issues and gives lenders more incentives to exercise due diligence.

Hope for equities as Cyprus agrees bailout deal? Coutts Considers

Last-ditch deal agreed for Cyprus

…while eurozone growth deteriorates further…

…and US confidence surveys send mixed signals

Equities: Treading water as barometer drops 


Cyprus clinched a last-ditch deal with international lenders that will shut down its second-largest bank and inflict heavy losses on uninsured depositors. Endorsed by eurozone finance ministers, the plan will spare the east Mediterranean island a financial meltdown by winding down Popular Bank of Cyprus, known as Laikii, and shifting deposits below €100,000 to the Bank of Cyprus to create a “good bank”.

Deposits above €100,000 in both banks, which are not guaranteed under European Union (EU) law, will be frozen and used to resolve Laiki’s debts and recapitalise the Bank of Cyprus through a deposit/equity conversion. Equities have been treading water waiting to see if the storm in Cyprus will worsen. Now that a deal has been agreed we hope markets can get back to concentrating on what has been generally good news flow in recent weeks.

The world may not be firing on all cylinders, but a combination of good US growth and an increasingly confident Japan should provide a solid backdrop for higher-risk securities to move higher. We reiterate our preference for equities over bonds.

Bonds: An open door for the new BoE governor 


A more flexible Bank of England (BoE) may add to the souring sentiment towards UK gilts. The government, which sets the BoE’s mandate and hasn’t changed it for 10 years, looks set to open the door to more creative policy from incoming BoE Governor Mark Carney.

Consistently weak UK growth seems to be forcing the government into a more flexible monetary policy framework. In last week’s Budget, the Chancellor said the inflation target “applies at all times”, but added that the BoE can move away from it when the economy faces temporary shocks.

The BoE will also have to clearly state the tradeoffs between inflation and growth, like the US Federal Reserve’s dual mandate. The door is open for Carney to become more proactive and creative in attempting to revive the UK economy. If this pushes up inflation expectations without any significant progress on deficit reduction, gilts may suffer.

Property: ‘Help to Buy’ to help lift UK house prices 


We think the UK government’s “Help to Buy” initiative, announced in the 2013 Budget, will get first-time buyers on the property ladder, removing a key drag on UK house prices. With this scheme, our calculation of affordability (house costs as a percentage of income) falls by around 20% to levels last seen in 2003. This is based on current funding costs and a loan-to-value of 75%, and takes into account total costs by incorporating an inferred cost for the deposit.

The Government is offering loans of up to 20% of a home worth £600,000 or less, and allows purchases with as little as a 5% deposit. Previous support was only available for new homes or first-time buyers with incomes below £60,000, but the new scheme will be extended to all individuals and houses both new and old. Helping first-time buyers get on the property ladder removes a key constraint and gives us a more positive view on UK residential property.

Currencies: Strong job market lifts Aussie dollar 


Stronger-than-expected Australian employment data gave the country’s currency a boost, as expectations for an interest rate cut were set back. In February, 71,500 jobs were added to the Australian economy, 10,000 more than forecast and the sharpest monthly gain since 2000. The unemployment rate held at 5.4%.

Expectations for further rate cuts from the Reserve Bank of Australia (RBA) had weighed on the Australian dollar through the start of March. We now expect it to continue strengthening as investors price in unchanged rates from the RBA. However, with RBA Governor Stevens having recently indicated that the Australian dollar was modestly overvalued, scope for further gains appears limited.

Koolaid Electric Company Launch In Japan

Random Noises and Organised Sounds, Koolaid Electric Company's latest album, enjoys its official release in Japan today.

I'm obviously biased, but I'd recommend giving it a listen (http://www.facebook.com/thekoolaidelectriccompany).

Nothing is over till we say it is.

Mint – Bill Blain’s Morning Porridge  - March 25 2013

Nothing is over till we say it is. Was it over when the Germans bombed Pearl Harbour? Hell No!

Last minute Cyprus bailout - joy unconfined. Apparently the country won't default. No surprise to see Cyprus 13 bonds up 12 points this morning. I suspect the threats made about Cyprus leaving the Euro would have proved the proverbial "Grand Futile Gesture".

What does it really mean? European banks are even less safe. The last banking shibboleth has been breached - senior debt is being written off alongside depositors and sub in a state-mandated bank resolution. Should not be a surprise. It should further colour investment thinking about Europe's weaker bank names and domiciles. (Take a look at Moody’s on French banks this morning…)

Oh...the Russians are going to be quite unhappy and unpredictable. They have no-one to blame but themselves if they ever thought their dosh was safe in Cypriot accounts. Interesting to read in the FT how other European banks are now chasing their money.

Heaven bless the Island of Cyprus and our noble general Othello

Mint – Bill Blain’s Morning Porridge  - March 22 2013

Apologies for not publishing this sooner, but I was working hard on other assignments that dictated they be given priority: Brian Bollen

Very short porridge this morning. I was doing a block on CNBC this morning – which was mainly about Cyprus. Yep… the news wires do love to focus on the shlock-horror stuff! Which is something of a shame as Cyprus is really such a small part of the global situation – a pimple of the posterior of the Euro, as I described it this morning. Stuff like Italy election part two in prospect, or new BOJ chief or Fed comments driving growth prospects should be much more of the moment.

But,

Round up the usual suspects…

Mint – Bill Blain’s Morning Porridge  - March 21 2013

This morning… European Auctions, new era for Nikkei and Yen, Cyprus and UK housing market.

It might be the first day of spring, but it’s still as cold as the proverbial witch’s bits waiting for a train. No surprise Cyprus still dominates the blogosphere this morning. They are going to nationalise (ie raid) the state pension pot, securitise gas reserves, tinker with the deposit tax plans and whatever. They appear set on collision course with EU and possibly Russia as well -  negotiating genius it’s not. No-one is coming out of this well. On the other hand, the problems of a small little island at the unfashionable end of the Middle Sea don’t amount to a whole hill of beans.. 

Flash PMIs today so European auctions are going to be significant – while they should go well, it does feel Spain and Italy are settling around current levels (which are still long-term historically tight to spreads over Germany pre-euro). More interesting will be France where the mounting problems for the government – confidence vote and ministerial scandal hint at France becoming a festering sore in months to come. We still expect to see a step-change in the France/German spread.

Osborne's New Slip

Azad Zangana, European economist at Schroders, comments on this year's UK budget

"The Chancellor’s fourth budget was fraught with conflict between trying to provide tax cuts to stimulate growth (and satisfy his party’s backbenchers), but also to bring down the government’s public deficit. Osborne’s unapologetic and almost confrontational budget seeks to provide useful tax breaks for low earners and corporates, but will be paid for by a further squeeze on departmental spending.

"The Office for Budgetary Responsibility (OBR) has once again downgraded its growth forecast, and revised up its inflation predictions for the coming years. The impact of the changes from the OBR’s forecast for growth and inflation were for higher government borrowing than previously expected. In comparison to the OBR’s forecast from only last December, government debt is now set to peak one year later, and is expected to be £103bn higher in 2017/18 – or 7.5% of GDP. This is yet another fiscal slip from the Chancellor, but it highlights his flexibility with regards his own fiscal rules, and the need to support growth.

Why Not Just Reintroduce MIRAS?

The UK Chancellor is announcing an unintelligible extension of the Government's participation in the UK housing market. Why not just reintroduce mortgage interest relief at source (MIRAS)?