Blain's Morning Porridge - May 8th 2018. Range bound markets impervious to politics or the signa
Blain’s Morning Porridge – May 8th 2018
“He spoke of lands not far, for lands they were in his mind, of fusion captured high, where reason captured his time..“
The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.
If Carlsberg did weekends - that was probably the best Spring Bank Holiday in the history of the World. I spent the weekend moored up in the pretty little Isle of Wight harbour of Bembridge – and I look like a ripe tomato. This morning its back to the markets... and still wondering what to say about direction..
The short-term action in US stocks – while London was closed – was fascinating. Bouncing off MDAs and hinting either at a recovery to come, or perhaps further correction… which is about as helpful as a stocks might go up or they might go down comment. The reality is stock markets are range bound - with apparently limited entropy to move higher, but sustained by buyers who believe the global growth scenario is so buoyant they are still likely to move higher at some point.
They point to political uncertainty about Iran, Korea, China trade wars, as factors holding the markets back. Trump is a yawn, but he keeps the markets nervous. What’s going to happen in France, Germany or elsewhere – for instance possible new Italian elections will keep us short-term worried. But they don’t really change much. The market bulls counter ephermal political threats with the massive pools of money looking to be invested, the strong earnings season, and the fact yields in the bond markets may be rising, but still look way below normal making stocks look attractive to those who have got comfortable with yield tourism.
Others look at the way the market has matured. My comments about Apple becoming a dull, boring, predictable company (which will therefore make it even more loved by investment professionals) struck a chord with many readers. The fact Warren Buffet is the third largest holder is another. Others predict Amazon will become the first one trillion market revenues firm, propelling it over the $1T market cap. Others point the tech data revolution has only just begun and the upside for firms like Facebook is only dimly understood.
On the other hand, the more we understand about data mining, the outlook for disruptive car makers, or how the world’s leading smartphone supplier has built its sustainable business, some of the sky-high valuations are going to look questionable. Once we understand the magic, its no longer so magical - and even a slight correction is expectations and valuations in the Tech Secfor will trigger a substantial fall in prices, which will inevitably pull down rest of market. That has been true of every single stock market sector darling since the railways..
Meanwhile, JPM’s Jamie Dimon warning of a surprise 4% in bonds has got a number of folk nervous. Actually, 4% will still be well below the pre-crash 10-yr average of 5%! However, the fact the leveraged loan market and its covenant-lite product now tops $1 bln, hi-yield still trades at a gnat’s crotchet from investment grade, trillions of BBB debt could tumble from investment grade into junk on a yield shock, and investors are now mounting legal challenges on bank capital (see: Hedge Fund raises complaint about Unicredit capital in FT - https://www.ft.com/content/99dc6d20-520b-11e8-b3ee-41e0209208ec), is worth a read!
The big questions is always where do we go from here, and if this seasons superb US earnings represent a peak, if we’re back into a rising oil price world, and the bond market is about to get a slapping, then this cycle is looking toppy. All of which explains why markets are going nowhere at present.
More tomorrow, back to the day job for now…
Bill Blain