You should cease asking scary questions…

Mint – Blain’s Morning Porridge  - April 24 2014

If my answer frightens you, then you should cease asking scary questions…

I had one of my main market contacts tell me: “Unless you are playing the new issue markets, you might as well stay in bed.” Someone else described yesterday as “directional write-off”. Fortunately, we’ve got plenty to be getting on with – a good number of private placement deals in the works – across a range of sectors from property, renewables, distressed EM, retail and tech.

Plus, I’m thinking some sectors of the bond markets look “interesting”. Despite my antipathy to European banks, I’m even thinking a few cautious steps into CoCos and covered bonds might be in order.

But otherwise, there is not much for investors to get excited by. The fact the RAF scrambled jets to chase Russian bombers out of Scottish airspace has been magnified into all-out sabre-rattling, but it’s apparently a pretty common event. The RAF likes any excuse to justify the cost of its new multi-trillion fighter jets (that were designed to fight the last war), while tired Russian pilots like to keep their flights in cold-war era string’n’sealing-wax bombers as short as possible by taking short-cuts.

In terms of potential market drivers, nothing from the Tokyo meetings between Abe and Obama.  We’d been hoping/expecting they’d pull a rabbit out the hat with TPP agreement. It might still happen. Negotiations continue. It could significantly change the positive growth dynamic adding to global GDP, giving a 30 bp plus macro-push to markets. Instead.. without the boost, “range bound” remains the current outlook.

I got a number of comments back on yesterday’s porridge meanderings on where stock markets might go. Readers who enlightened me that William Shakespeare did not write either “Kiss me Kate” or “Star Wars” get NSS awards. But, folk questioning our bullish growth-based stock view on the basis of multiples being too high, or quoting Seth Klarman aversion to stocks, get proper points (but few of them). Klarman, while undoubtedly a genius, is also a specialist story investor in specific assets he likes – such as structured, commercial property or distressed. He’s not an equity guru per se with around 15% of fund in stocks.

Others raised the point markets look frothy and bubblesque. Again we disagree. The reality today is entirely different from 2007. In terms of US corporate profits – which crashed nearly 50% from $1.3 trillion in 2007 and then market cap of $8 trillion (15 times), we are now up to $2 trillion and an equity cap of $23 trillion (11 times). More to the point, this is an after tax number – suggesting the real recovery performance of the US is even stronger on the basis of how much US corporates pay and use the accounting professions smoke’n’mirrors to keep profits down!

What does worry me about the current range driven markets is the potential for complacency – one of my colleagues points out falling implied volatilities fuel complacency and more and more folk get sucked into silly bets. That’s a big risk facing lacklustre directionless markets – silly trends develop and borrowed money gets spanked. Remember Blain’s rule of markets No 1. The market delights in inflicting the maximum amount of pain on the maximum amount of players and will wait for that moment to strike!

And since the Ruskies are apparently going to attack Scotland, perhaps it's time to talk about imminent English independence again?

Why is everyone worrying about North of the Border? Yesterday it was S&P opining the only difference between and independent Scotland and Iceland will be three letters and eight years. (Actually four letters..) Frankly who cares what the Scots do – an independent Scotland will be slightly less relevant than Ireland in the global scale of things…

What really matters is what happens in England..

Don’t think England’s credit rating won’t suffer on the expectation the UK’s dodgy banks are going to be hived off to Embra and successful Scots investment firms will take the high road to London. Nope.. England will (perversely) get to keep the Royal Bank of Scotland and Lloyds. They will also find their world role diminished.

What chance England without Scotland? True story, but a Scotsman, Irishman, Welshman and Englishman were washed up on a tropical paradise. After the one year, the Scotsman was president and running the national bank providing the wherewithal for the Welshman to build two churches (so he wouldn’t have to go to one of them) and train a Male Voice Choir, and finance for the Irishman to open a brewery. Meanwhile the Englishman was sitting on the beach waiting to be introduced. True… 

Meanwhile, did you know Berwick-on-Tweed, the town that’s a bit Scots and a bit English, never signed a peace treaty with Russia after the Crimean War? Yep.. I’d be concerned..

And on that note.. time to do some work..

 

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

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