Blain's Morning Porridge - Lots of stuff that's risky buy yieldy! Caveat emptor!
Blain’s Morning Porridge – May 17th 2017
“I hate my computer. I am going to murder it..”
Argg! This feels like a bad start to my working day: after doing a radio programme first thing, I then spent over an hour writing a very sharp, witty and informative Morning Porridge, before my WORD on the computer announced it had “failed” and I lost everything.
So apologies if it feels rushed this morning, and for it being so late.
Talking to accounts yesterday I was struck by a sense of resignation: stocks seem determined to go stratospheric despite the fact many people think a correction/reset is coming. Bond spreads are at all time tights – and everyone seems to be chasing them down. Investors are frustrated they aren’t catching the returns, and its human nature to find reasons to talk these gains down.
For instance, I’m told stock market gains are due to “passive” investments like indices and ETFs rather than active management, and tight yields are unsustainable as and when Central Banks normalise and interest rates climb higher. (Actually, I think rising interest rates are further away than many think!)
But, the bottom line is financial asset prices continue to rise despite our disbelief! Should you buy into the story at this stage in the game? The rule remains – don’t join the last 5% of a rally just so you can catch the first 25% of the subsequent crash!
There are other games to play – and thats to look for real value opportunities out there. There are many stories – some of which are risk and obvious, some of which require a little more imagination.
For instance, financials have become a real “catch a falling knife” sector in recent years. Everyone is very aware of capital risk – the risk a central bank or regulator might decide a bank’s capital position is unsustainable and bail-in debt investors across the curve. Its only happed with a number of basket case Olive-belt banks thus far.
Banco Popular is an interesting one – back in the pre-crisis days it was one of my top European bank stocks. It had a superb cost/income ratio, stuck to the retail businesses it knew well, had management focused on the bottom line and even a AAA rating for a long while. Now its in serious trouble with a massive Euro 37 bln NPL book – mainly from real estate. Its Capital COCO Perps are trading around 18% plus. Is it a buy?
Its put itself on the block to sell, sell assets or restructure. The stories are Bankia, Santander and BBVA are all keen to look, but we also know Sabadell and Caixa already decided it’s a “no-way Jose” story. The price is likely to remain highly volatile on any news – like another bank pulling out or rumours of an ECB capital discussion.
I’d be interested in any client views on POPSM.
And, also in banking, hats off to Lloyds – the last of the UK governments stake will be sold today, netting us taxpayers a modest £900 mm profit. Lloyds was a superb bank before the Global Financial Crisis (again sticking to its knitting and never pretending to be what it patently was not), but got hoisted on the petard of buying the toxic HBOS.
Put Lloyds in context of the RBOS bailout. The government put $46 bln into a bank that has subsequently managed to lose a further £56 bln, and is still essentially unfixed and unresolved. I must giggle at a chum of mine working there who thinks changing the name of their investment bank to Natwest will somehow make them more palatable…
Or how about Scotland? As the risk of Indyrep2 reduces, how do fancy buying Scottish debt at a considerable spread over gilts, when the risk is exactly the same.. (unless of course Scotland ever does get itself chucked out the UK!)
Away from banking and Scotland, another name to look at is the very troubled commodities trader Noble Group. Their share price is 1/3 of book, the bonds have crashed to junkety-junk-junk, while the ratings agencies say it will struggle to meet repayments – its got $1.2bln of cashflow available to repay some $2.1 bln of debt this year. Yet, its brought on a restructuring specialist and is clearly open to sale. Out hi-yield team is all over the name like a nasty rash, and if you fancy a talk through the opportunity its worth a call.
Or how about something more alternative?
Regular readers will know the Shipping market fascinates me. On the surface its absolutely hat-stand. How can any industry or sector lose so much money and scrap almost brand new assets? But on closer examination – sure shipping is complex, but there is rhyme and reason underneath the madness. I’m looking at a new fund raise for a very well known and successful alternative fund manager which should return high double digits in their second shipping fund – call if you want to learn more. Got lots of info to share.
Or what about something safer and uncorrelated to the coming madness when the global stock markets go pop later this year? (Ive put my cash on October – its always October!)
Aircraft notes yielding 7% backed by a diversified pool of new regional jets around the globe. While a global slowdown may follow a stock market crash, the effect is mitigated by diversification. Aviation lease earnings are nicely uncorrelated by the mayhem coming to stock and bond markets near you in coming months!
Anyway, out of time, and back to day job!
Fastnet Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain