Blain's Morning Porridge - Summer slowdown coming, but the market still buying the dips...
Blain’s Morning Porridge – May 22nd 2017
“The most dangerous four little words for a prime minister: “Doesn’t she look tired?””
Sorry for the extreme lateness of today's Porridge, but I was out doing some Media “stuff”. Was there anything worth talking about you ask? Lots, although I do admit sometimes it feels like trying to write a novel about life on the inside of ping-pong ball..
Last week was dominated by Trump news flow. What initially felt like a major market wobble quickly reversed itself and we ended the week basically unchanged.. or "Unched" as the Facebook generation now like to say...
Fundamentals triumphed over the political shenanigans. What does that really tell us? The market was overly nervous, the bearish doomsayers are wrong.. or is the bulls are too certain of themselves? Are stocks really so undervalued they justify further upside? Lots of people obviously think so and are ready to buy the dips.. And that is basically the core of the current market.
What's on the menu this week?
Sadly, activity is going to be thin this side of the pond - Ascension Day on Thursday means Europe is on a three day week, and mid-term school holidays in the UK mean lots of empty desks over the next two weeks. Next month we're into June, meaning the summer slowdown will be upon us.
While summer is coming and the cotton is getting high, I don't expect the pace of market angst will slow. One of my market contacts at a large investment bank told me they think this is "phoney war". They're reporting the same things we feel... many investment managers ignoring the physics of financial gravity and the laws of mean reversion.
Why worry? There will be a slew of data out this week - and it will likely to confirm strengthening growth in Europe and a heating up US. The ECB's talking heads will manage expectations so nobody gets too concerned about the coming Euro Taper.
Many fund managers will look at the numbers, conclude there is nothing to worry about, macro fundamentals are strong and sustainable.. and keep buying. Summer is traditionally the time for asset allocation decisions - and I'm hearing a number of funds, including some monster SWFs, are planning shifts from bonds into stocks. (Clue - a 5% shift from bonds into stocks on a $1 trillion fund = a very significant amount of new cash supporting stocks through the summer..)
But.... Catch a falling knife, why don't you...
I shall spend the summer wondering just how long the Stock Market games continue. When, not if.
At the moment, my prediction is October 12th. Around that day its going to get horribly interesting..
Why that particular day?
Gut feel and knowing how the Bowl of Petunias felt in Hitchhikers. ("Not again.")
There are just too many contradictory currents out there. The unsustainability of burgeoning consumer debt, unfeasibly tight credit spreads, the sandcastle foundations of student loans, autos, housing and the CLO market, China, Trump, politics.. worries about what follows Brazil in the EM market, and whatever... The risks of a massive consumer sentiment dump..
And bear in mind we haven't seen a significant correction to the stock market since 2011! And how sustainable are fundamentals - Goldman Sachs noted at 8-yrs, the current economic recovery is the third longest since 1854. I’ve said before it looks “tired”.
My high priest of stock picking; Steve Previs, was making some incantations to the Elliot deity along the lines of: "we're approaching the end of the 5th wave.. 5th waves are always followed by a correction.." No idea what it means, but Steve is usually right about these things.. after all he's been trading stocks since they used to mark up prices on the cave wall.. In those days a bear pit was exactly what it said it was...
Interesting world we live in.
The Media and the Elites tell us what should be, but that ain't the way people actually think. Trump is the classic example - every single little thing he says or does is guaranteed to throw the political classes into turmoil and generate enormous waves of market angst – witness last week. Yet, the American heartland voters still love him. California might tumble into the sea, but the Rockies will crumble before Red-Neck America loses faith in the Donald. Sure someone will have to pay the price for his non-delivery - and I suspect that will be the Republican Party.
Back in Blighty, and The Theresa May Party might just have shot itself in the foot over the Dementia Tax. What I read in the press over the weekend about surging grassroots support for Jeremy Corbyn, perhaps my 5000/1 double on Corbyn IN / Trump OUT wasn't such an outrageous play after all.. ?
Back to my day-job in broker land, I'm working on a bank capital trade that makes loads of sense - cheap discounted Perps that are likely to be redeemed at par. Seasoned FIG specialists will know exactly what I mean - I'm a seller, so form an orderly queue please.
And finally; to add to sheer bloody woe and misery of the Middle Classes – this morning I read Olive Oil prices are set to rocket. After the Iceberg Lettuce famine, killer avocados and the looming dearth of Brazil Nuts is it really worth it anymore? I wonder..
Fastnet Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain