Brian Bollen's Blog

Central Banks Disappoint: ING IM

Willem Verhagen, chief economist at ING Investment Management in response to the Bank of England’s base rate decision.

In the central banking space we were a little disappointed with the outcomes of the Bank of England (BoE) and European Central Bank meetings this week. Even though it was not our base case we thought there was a decent chance of additional easing by the BoE this week, especially in view of the fact that three Monetary Policy Committee (MPC) members voted for more easing last month.

This easing could come in the form of quantitative easing but also via more credit easing measures aimed to get more credit flowing to SMEs, because the latter implies more risks to the BoE balance sheet and (in the view of the MPC) involves a political decision about the allocation of capital, the MPC strongly feels that such measures should be coordinated with financial regulators and the Treasury.

There seems to be something wrong with our bl**dy ships today…

Mint – Bill Blain’s Morning Porridge  -   March 8 2013

There seems to be something wrong with our bl**dy ships today…

This morning: US jobs number, central bank easing, Cyprus again, don’t mention Italy elections and best not to talk about the OMT, UCFM alert, and a minor rant about the military industrial complex…

Today's big event will be the US Non-Farm payrolls. The consensus is it will be  strong. What happens next is the issue. How much, if at all, will debt sequestration hit the economy? Should we be worried about the potential of US Government shutdown in March? Markets are split on that one - even though it doesn't seem to be holding back the US stock market which continues to rise. We say… damn the torpedoes (oh, they can’t afford them anyway), and full speed ahead!

Some critical moments for markets yesterday. Last comments from BOJ governor Shirakawa who says no to further monetary stimulus - he's only 10 days to go, and already the yen is weakening and the Nikkei on fire in expectation that his successor's policies will be more Abe-centric.

As euro growth expectations tumble to -0.5%, Draghi at the ECB says he will maintain easy (?) monetary stance as "long as needed" (winning another award for semantical doublethink as the only economy (well block) not really easing) by holding rates unchanged. The Bank of England's increasingly pre-departure minded King confirms no more QE (watch that space). The Fed will keep doing what the Fed will do to keep US rates low.

In the news we got Cyprus – all kinds of potential shenaginans in prospect as depositors flee, Russians circle some of the troubled banks (making it so much more difficult for Europe to bail out the banks), and still no agreement on what happens. A classic do nothing and everything will happen approach to making a problem into a crisis. Run away is our considered advice. (On the other hand, Greek assets look very money good...who else is a buyer?)

Markets are taking it all in their stride though. Europe took a boost from the fact the ECB at least discussed easing – although it hid behind the “employment is not our concern” blind eye approach to the economic good of its population. Portugal put on stable outlook by S&P put a bid on PGBS – although we have serious doubts how much longer its siege economy can hold out without some real economic relief – more about that next week. Decent Spain auctions. All kind of confirms the unreality of the situation that a not a single one of the blogs I get bombarded with each morning even mentioned Italy.

And why worry about Italy..? No reason till there is clear division or a spat between Italy and rest of EU. Till that happens...move along folks, nothing to see…move along.. 

            Couple of blogs this morning talking about OMT. Careful. Best not to mention it. The OMT is like heaven…No proof it actually exists. As long as you believe in it, it’s great. Problem is...some folk are wondering if it's real, and if sinner European economies really will be rescued by unlimited buying. Heresy...burn the heretics.

The ECB’s very own L Ron Hubbard, Mario Draghi, burst a teardrop or two when he reminded us his OMT religion has “rules” and will only promise salvation to countries already saved in terms of being able to issue debt. Er, I haven’t seen the rules...apparently they will be different for each country, involving complete subservience to the ECB and its minions. And there won’t be post-sign up indulgences for countries like Ireland and Portugal that already paid the former ECB high-priest’s rules! I suspect M Draghi-Hubbard is making the rules up as he goes along…

Meanwhile the new issue market continues to thunder out a run of new issues, but investors I’m talking to are increasingly jaded and less willing to participate. Perhaps it's an important sign, but a Bloomberg journalist send me a comment yesterday that S&P has given a B rating to Ukrainian Chicken Farm company. All readers should be familiar with the Blain/St-Johnston UCFM theory of Primary Market collapse. 

Meanwhile a short rant about sequester, tanks and growth..

A side word on sequestration, government closedown etc. The crisis for spending in the US remains the growing future costs of social care - an urgent debate that has hardly begun in Europe where it is too sacred a cow to even begin to contemplate. That's a political role-of-the-state decision of first egg proportions.

Most of the attention has so far been on the effect of sequestration on US defence - an area ripe for rationalisation. Economic historians can point to defence spending as a prime driver for the US economy, creating booms during WW2, Korea, Vietnam and the Reagan era. Others may say the booms were due to the increased money in workers pockets from inflated military spending - effective jobs policy! For every new tank in the 1950s, the Yanks probably built 50,000 new cars!

But, everyone, (except defence contractors), acknowledges the military spending big-industry dynamic has changed – defence evolves. Just as victory is no longer about the weight of shot in a three-decker's broadside, the amount of armour over a battleships's magazine, or the number of air-wings a carrier task force can carry, now it’s about stealth (until a small boy at an air-show asks, "if that's a stealth bomber daddy, why can I see it?"), computing power and pinpoint strike capacity. You don't need a 70-tonne tank to take out a terrorist 2,000 miles away, and I'm pretty sure the latest radars can see these $2 squizillion B2 bombers.

For a business that is all about shocking and surprising the other side, defence is very conservative. Every army in history has demanded more spears and swords - right up to the moment the new chaps turned up with guns. Oops. The temptation is great. Economies like Rome and the British Empire bust themselves on military spending. Britain exhausted itself building dreadnoughts that we used once (and showed a disturbing tendency to blow up).

The US numbers are huge: $210bn just to keep the US military fuelled and fed, $135bn to pay the troops and pension them, and a mere $95bn buying them new toys - that's p.a. All the attention has been on cutting the “wasteful” new toy programmes, but rationalising the first two is the real issue. I wasn't particularly surprised 1.3m civilians are on the defence payroll - 500k of them mere consultants. Thats about 1.5 civilians for each serviceman.

Daring to question military spending is heretical. Every hatchet-handling Republican desperate to cut government spending, or tree-hugging Democrat singing peace'n'love songs will fight to the last breath to preserve local defence contracts and keep bases open. As a result, even as the US forces prepare for redeployment to the Pacific Rim, the army is still getting new cold war era tanks - which even it admits it hardly needs.

I read the 30\30\30\10 funding split twixt Army, Airforce, Navy and Marines has barely changed since the last war - highlighting how institutionalised the interests of the massive defence lobby have become.

In short - there must be an enormous amount of fat to take out of the institutionalised and indolent US military budget without damaging its abilities. And, as economic history shows, new defence spending has a pretty strong multiplier effect. So stop building tanks and carriers and evolve. Build something even more exciting that will appeal to the little boy in all of us.. (unless you are a girl of course...in which case sorry), while making Johnny Taliban go think again.

All of which is a long-winded way of saying perhaps US sequestration will drive change in the US military-industrial complex and therefore provide a further long-term economic activity boost providing better and more economic defence!

Enough... back to markets.. Have a great weekend

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

(Recommended further reading on the military-industrial complex: How mumbo jumbo conquered the world, by Francis Wheen: the other BB)

 

 

Navigating Regulatory Reform Post-Financial Crisis

I've just received the following invitation to a webcast on navigating regulatory reform after the financial crisis, which the issuers urged me to pass on to anyone I thought might be interested. So here it is.

On behalf of Inside Market Data I would like to invite you to register for our 'Navigating Regulatory Reform After The Financial Crisis' webcast taking place on Wednesday, March 27 at 11:00am New York time / 3:00pm London time.

Register for FREE at:

http://emails.incisivemedia.com/c/1580s58KRa62p8eZqK0RemjrxLI

During the live debate, the following topics will be discussed:

EU Idiocy Plumbing New Depths

What kind of idiot is working at the European Union's compliance authority?

That was the first question that sprang to mind when I read the piece in today's Financial Times (March 7 2013) about Google tipping off the EU that Microsoft was not automatically offering an alternative browser in an updated version of its Windows software.

The EU needs to be tipped off about the contents of a widely spread public product? Dear me. No wonder Europe's foodstuffs seem to consist mostly of horse, hedgehog, rat and heaven knows what else, if that's the kind of external assistance they rely on to do their job.

Then again, Microsoft blames the 'lapse' on a technical fault. No-one at one of the world's largest companies spotted such an obvious, glaring error? What kind of idiot works there? is the first question that springs to mind. But my long-time golfing buddy would most likely kill me...

A Gordon For RBC I&T

RBC Investor & Treasury Services says it has appointed Andrew Gordon as head, investor services, Hong Kong & North Asia. 

Gordon joins RBC Investor & Treasury Services with over 18 years experience in Hong Kong and Tokyo, most recently at BNY Mellon where he was an executive vice president and head of alternative and broker dealer services (note to press release compilers: please ease up on the use of capital letters for common nouns), Asia Pacific. 

Underperforming But Overweight: ING IM

ING Investment Management says listed real estate is likely to underperform equity markets in the current environment of rising long-term rates. However, it says this doesn’t necessarily make the asset class unattractive and it remains overweight in it. This is because it believes dividend yields remain attractive versus bond yields and are above those in equity markets.

Also, from a historical perspective, it says a buffer of extra yield from listed real estate versus corporate bond yields has been built-up, thereby mitigating rising returns from the latter.

DC Schemes Too Samey: Schroders

Schroders report reveals lack of diversity in FTSE company DC scheme

Schroders is today announcing the findings of its recent DC Default research, a project undertaken over the past three months which has focussed on the DC pension arrangements of a selection of FTSE 100* and FTSE 250* companies and specifically the DC default they offer their employees. The research was undertaken to look at what currently constitutes best practice in DC investment design at the asset class level and whether asset class diversification really does represent the ‘new normal’ in practice.

The research identified that the typical portfolio allocation of both the FTSE 100 and FTSE 250 funds surveyed had more than three quarters (79%) of the average asset allocation in equities.  Global (including European) had the highest allocation of all the equity classes with 46% rather than domestic (UK) equities at 33%.  On average, just 2.9% is invested in emerging markets specifically.

Luxembourg Fiduciary Launch For Ogier

Ogier, the international legal and fiduciary firm, reports the launch of a new fiduciary office in Luxembourg, further expanding its global network. This follows the opening of a legal office in the country last year.  The new office, it says, will focus initially on providing private equity and real estate managers with outsourced corporate domiciliation and fund administration services, meeting local demand in these areas.

Ogier Fiduciary Services in Luxembourg is headed up by Paul Lawrence (who joins from Ogier’s Jersey office where he leads the Ogier Real Estate Services team) and Michel Thill who has over 25 years’ fund administration experience, most recently as Managing Director of a leading European private equity house in Luxembourg.  

Wall Of Worry

Joanna Shatney, head of US large cap equities at Schroders shares her view on the recent sequestration in the US

“We are now in the first week of sequestration - sequestration refers to the mandatory cuts in spending that went into effect March 1 in the US, directly impacting defence and Medicare spending (part of the Budget Control Act of August 2011).  While some of these cuts are already partially reflected in Wall Street estimates, there are likely to be some downward revisions to GDP by Street economists - there is probably another 50bps downward revision risk.  We are watchful of these cuts, but we remain optimistic that growth prospects for corporate earnings will be stronger than consensus expects and that government cuts will not translate into a significant headwind.  While US fiscal worries linger, we see the cuts as manageable and expect the multiplier effects to be muted.  As long as risks remain, there will continue to be a ‘wall of worry’ for investors to climb, which means the market can still upside surprise.

“There are other dates to watch including the Continuing Resolution (March 27), which threatens a government shutdown; we think this is likely avoided but don't expect to see any budget resolution until later in the calendar year.  We see this as a manageable risk as long as the confidence level of corporations and consumers is not significantly impacted.”

Giving aid to a bad bank is the surest way of preventing the establishment of a good bank

Mint – Bill Blain’s Morning Porridge  -   March 7 2013

Giving aid to a bad bank is the surest way of preventing the establishment of a good bank

This morning: US numbers and economy look encouraging, Europe wakes up to Tobin Tax, and what’s really going on within banks...

Tomorrow’s pre-sequester US non-farm payrolls number could be an upside shocker after the 198k add in US private sector jobs revealed yesterday. On the other hand, the papers are warning the sequester is already costing jobs – the FT carrying the sad tale of a defence contractor forced to close its doors. Doomsters claim low US rates will remain in place for three more years to balance the sequester effects. We remain more positive on the US on the basis the underlying economy is stronger – and the sequestration will be felt on a peripheral sector basis on firms along the line of the government/military industrial complex.

India’s Giveaway Budget Postpones Pain

India’s giveaway budget postpones the pain, says Jupiter’s Avinash Vazirani

With an eye firmly on national elections in 2014, the Indian government has delivered a populist budget aimed at securing the support of its core rural voters, while putting off more radical structural reform until later, says Avinash Vazirani, manager of the Jupiter India Fund and the Jupiter India Select Fund (Sicav).

Avinash is celebrating his fifth anniversary as manager of the £240mn Jupiter India Fund1. Over those five years, the Fund has delivered returns of 35.6% against just 4.7% for the benchmark MSCI India [Total Return] Index.2 The composition of the Fund reflects a manager investment strategy rooted in a medium-to-long term approach to stock selection: five of the top ten biggest holdings in the Fund in March 2008 continue to be held today.
 
“The budget was a missed opportunity. We saw large increases in funding for rural development projects and a rise in the farm budget3 but measures aimed at boosting domestic and international investment in the country were few and far between,” says Avinash.

Japan As Role Model

By Ad van Tiggelen, senior investment specialist at ING Investment Management

For many investors, the mere thought of Japan as being a role model is ridiculous. Yet, a study of the impact of Japanese demographics and policy on its financial markets would have provided valuable insights for European investors. After all, Europe is the next region in line where the effects of an ageing population will be felt. What can we learn from the Japanese experience?

Almost a year ago I also wrote a column on this subject. At the time I noted that the fast ageing population and relatively restrained central bank policy of both Japan and the eurozone were likely to keep bond yields in these regions low for long. I also concluded that in both regions equities of globally diversified companies with a defensive business model would likely perform better than domestically focussed companies.

Bandiera Rosa La Trionfera…etc etc...

Mint – Blain’s Morning Porridge  -   March 6 2013

Bandiera Rosa La Trionfera…etc etc...

This morning: Stock markets hit new highs for all the right or wrong reasons, what does it mean for bond markets, and what next for Spanish banks... 

Markets feel constructive this morning. The joint forces of perceived US economic growth and the Fed's keeping interest rates unattractively low pushed the Dow Jones to a new record high yesterday. Other stock markets, including the UK representative FTSE 250 are also at highs. (Although an interesting fact from Bloomberg - across the 45 largest markets, the average equity benchmark is still 27% below pre-crisis highs.)

Moreover, a good friend from Switzerland pointed out a doubling of stock markets over four years is nothing special. In fact, I'm told: "the average bull market has gained 102.85% over 887 calendar days, or about 2-1/2 years!"

Does the fact stock losses since 2007 have (largely) been reversed mean the global financial crisis is over? Or have we simply created a new equity asset\bubble?

This Jag Is 16 Years Old: It Doesn't Look It

This Jaguar XJ6 executive Auto was first registered in 1997. It has just been valeted by Silverstone Car Sourcing (http://www.silverstonecarsourcing.co.uk) and returned to me in better condition than when I bought it in April 2005.

If you need a car valeting, contact Gareth and Ian. If you're looking to upgrade your current second-hand car, or buy one for a 17-year-old about to pass his/her driving test, make an appointment to see their modest but well picked and superbly presented stock.

Tel: 0845 625 1825. Viewing by appointment only at: Unit 4, Millfield Business Park, Banbury Lane, Pattishall NN12 8FB.

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Stop The World, I Want To Get Off

Any faint chance that I might watch the Manchester United versus Real Madrid game tonight has been killed off by the ridiculous hype surrounding it. In particular, the ludicrous assertion by José Mourinho that the world will stop to watch it.

At least one member of the human race has something better to do with his time, than watch one bunch of overpaid foreign mercenaries tackle another bunch of overpaid foreign mercenaries.

Cristiano Ronaldo is undoubtedly one of football's best-ever practitioners, but his arrogance and self-love make it impossible to warm to him. Who else would ever have thought that the first thing on his beloved mother's gift wish list would be a mini-Ronaldo?

Axminster Carpets Take A Beating

If you have tears, prepare to shed them now, as another great British business name goes belly-up.

Axminster Carpet Ltd, one of the world’s largest manufacturers of Axminster, Wilton and Tufted carpet today announces that it has been forced to enter Administration as the carpet sector continues to suffer.

The Board of the company, we learn, has taken the decision to place it into administration following a sharp increase in raw material prices, the closure of a loss making subsidiary and a slight downturn in sales as a result of the continuing economic difficulties facing the UK.

ALFI Goes To Edinburgh

The Association of the Luxembourg Fund Industry, ALFI, has just sent me the following registration details for its ALFI roadshow to Edinburgh: ALFI Roadshow to Edinburgh 10th April 2013 The Caledonian, A Waldorf Astoria Hotel Programme: Click here The event, it notes, takes place amid a watershed moment for the industry, as the long-awaited Alternative Investment Fund Managers Directive (AIFMD) finally comes into force, transforming the way that the global fund industry operates.  AIMFD, which is due to take effect in July, promises to change the landscape for how firms attract and manage their assets, and managers face a number of challenges to succeed in the new environment. An experienced panel of experts at the conference will outline these challenges and demonstrate how they can be turned to the advantage of fund managers. The event will also feature an interactive session on the continuing opportunities provided by UCITS. The UCITS brand is today recognised worldwide, and UCITS are the only truly globally-distributed investment fund products. As a result, more and more asset managers are establishing UCITS funds in order to implement their global distribution strategies.

Citi Leads; UBS and Deutsche Bank Tie

Greenwich Associates Announces 2013 FX Leaders

The results of Greenwich Associates annual Global Foreign Exchange Services Study show Deutsche Bank topping all competitors with a 10.7% market share in global FX trading. Citi, UBS and Barclays are in a statistical tie for second place with market shares of around 10%, followed by HSBC and J.P. Morgan, which are tied at 7.0%. These banks are the 2013 Greenwich Share Leaders<http://www.greenwich.com/media-center/greenwich-award-winners/greenwich-leaders> in Global Top-Tier Foreign Exchange.

 

For who would bear the whips and scorns of time..

Mint – Bill Blain’s Morning Porridge  -   March 5 2013

For who would bear the whips and scorns of time..

This morning: US Stocks approaching a break point, Italy should be fine if Europe pretends there is nothing to worry about, leave off HSBC and banker bashing.

Yesterday was a particularly thin Monday. Markets are watching and waiting for something. Some stocks (like defence) a little down on sequester fears, others up on what the Squid calls "depoliticitisation". But with the Dow just 40 points from an all time high, what happens next?

Italy elections still having only limited "Italy-off" effect - the assumption remains the Euro Elites will sort it. Ugly Spanish PMI is.. well expected. New Issues keep trundling out although premiums are up. Swiss Re deal later today will no doubt be a blowout. But otherwise, very little is actually happening. Folk are sitting twiddling.

Why?

The runaway train went over the hill

Mint – Blain’s Morning Porridge  -   March 4 2013

The runaway train went over the hill and the last we heard she was going still…

Very short and late porridge this morning after nightmare trip in after "vandalism" on the line stopped all the trains. 

What's the outlook for March markets? Although there is a risk-off overlay and theme, markets just don't feel massively vulnerable despite all the negative news flow. The major driver is that folk still have to push lots of cash to work and all that entails about the ongoing hunt for yield and dividend.

The inconclusive Italian election riled markets last week, but failed to trigger any really significant sell off. That the EU blundership is still prevaricating about Cyprus and austerity seems to matter not a jot. The US sequester deadline passed without the world ending, and failed to dent sentiment to any particular effect. Japan remains on course with new BoJ governor making all the right aggressive noises. Even UK assets are catching a bid on the old "less ugly than Europe" play.