Blain's Morning Porridge - Of France, Tech Stocks and Plausible Complacency...
Blain’s Morning Porridge – June 19th 2017
“There is no trophy for the team that sails the most….. ”
What to write about this morning?
First up is France, where, as expected, Macron's political revolution has seized the majority of seats. His new government looks unassailable. The socialist and centre right parties have been crushed. He's a new broom with a clear vision of labour market reform to drive the French economy into a new golden age.
What can possibly go wrong?
Of course, we cynical Brits would like to find cracks in the Macron political edifice. What does the record low turnout tell us? Or the fact he’s immediately gone into traditional mode; demanding government oversight of industry, M&A, and a French-first approach. Should we be surprised? Of course not. The party may be new, he might be young shiny and bright, but what we want to see is the same old, same old French enarchtocracy running the country, while the tiny turnout suggests indifferent voters still aren’t particularly enthused by the electoral choices put in front of them.
Get over it.
There are a number of ways this can play out re France – all of which look positive with minor downside risks: i) He has a reforming mandate, but little direct pull with the French unions. He can talk tough, but let’s see how he fares with the changes he intends to enact. ii) The economy, consumer and business confidence (assisted by coming tax cuts), and state finances are in much better shape than his predecessor Hollande faced – giving him a following wind to build the economy. But, that also means he’s vulnerable to any global slowdown or recession, or further European ructions. iii) There is a real prospect of re-engagement with Germany on the European project, and without these distracting “Rost-bifs” spoiling the equation, Europe could well move onto a firmer footing.
How to play it? I did suggest buying Le Spread between Bunds and OATs pre election. It has already massively corrected back, and European stocks are on the buy lists on the back of relative value vs US and the expectations of coming growth.
Second up are stocks – Friday looked wobbly for a moment, but was rescued as investors plunged back in to buy the Dips. That makes the market look more sustainable – and as we’ve commented a few times, it’s the weight of money available to throw at stock markets that is keeping the rally going. But, there remains that nagging doubt about COMPLACENCY.
Do markets really justify these valuations?
Which brings me on the item 3 – tech stocks and the internet. One of the things we watch carefully is commercial property. It’s fascinating to see how Amazon is grabbing space across the UK and Europe to build massive aircraft-hanger proportion distribution centres. In the states, there is now genuine concern that many smaller cities and towns will die if internet competition causes the local malls to close. And then on Friday we had Amazon buying Whole Food Markets – triggering a knee jerk sell reaction as investors panicked about the whole retail food sector being swallowed up and made obsolete.
I’m wondering about this.
I’m noticing a distinct trend in our busy lives here in London (and the south-coast). My wife and I used to do a big shop each weekend. It took forever. Then we stated getting deliveries – which is quick and convenient, but... Now we’ve reverted to actually going out and doing a local shop on the way home from work… in 5 mins picking up 2 day’s food… choosing it from the shelves. Choosing is the key word. Not being adversely chosen for.
(Part of the same trend is my recent move back from Streamed Music to actually playing LPs. Again.. Choosing what the play and going through a process to do so (rather than just pressing play on Spotify.))
Where will that leave the tech stocks – especially Amazon? My stock-picking colleague Steve Previs made a number of pertinent points about profitability: its well know all internet vendors struggle with the economics of deliveries, returns, and extracting any margin from their transactions. Amazon is only profitable because of Amazon Web Services, but now its cutting prices to compete with the others in the space – eating into the revenue that makes it profitable. Does that model work? He reckons it’s an evolving market, and whatever the noise on Whole Foods, the picture aint clear yet. (Happy to send you his note from this morning!)
Finally, I don't know how many readers have been watching the America's Cup?
We are into the finals, a repeat of 4 years ago, as the Kiwis take on Oracle USA. First team to win 7 races takes home the world's oldest sporting trophy. It’s looking curiously familiar - the Kiwis have a faster boat and are trouncing the slow'n'low Americans. NZ is leading 3 points to nil! (They have actually won 4 races, but it only counts as 3, because, well its complex...)
Folk might remember last time….. the Kiwis were leading 6-0 when the Americans staged a staggering comeback, winning the next 7 races! The UK's Ben Ainslie got some of the credit. But all sorts of dark rumours have been circulating ever since - how did the Yanks go from Zeros to Heros over the course of a short couple of lay-days..
Idly speculating, but I wonder if the Kiwis get to 6 nil up again... will Larry Ellison get a call asking how much its worth? After all, the Kiwi's have shown time and time again they are top sailors, so why not monetise themselves by charging mega-billionaires a couple of billion so they can say they've retained the Auld Mug?
It’s a business model maybe worth considering....
Out of time… Fastnet Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain