Blain's Morning Porridge - Nov 14th 2017: What does the humiliation of GE warn us of?

Blain’s Morning Porridge – November 14th 2017

“Either there is a civil strife in heaven, or else the World, too saucy with the gods, incenses them to send destruction.…”

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…

As yet, I have not been confronted by a ravening lion strolling around Canary Wharf, nor have I heard an owl hoot at midday, but there are many strange and scary portents in the skies, signalling at last things are happening to roil the markets….. (Sadly, what promised to be a fantastic sight of the Venus/Jupiter conjunction was compromised by clouds this morning..)

It’s easy to be distracted by the noise.

Apparent wobbles in the Japanese stock markets threatening sentiment elsewhere. London house prices apparently tumbling. The US tax reform agenda looking less and less likely. Or, it might be BitCoin bouncing up and down a couple of trillion points per session, then figuring out what the emergence of BitCoin Cash might mean. (I admit I don’t have a clue. The fracturing/splintering markets for cryptocurrencies says it all in terms of their meaningless as investment instruments – Gambling yes. Investment no.)

Or, it might be worrying about Brexit cacophony, and the apparent panic about where sterling goes next? That I do understand – most investors simply don’t care. They simply assume a worst case political scenario, discount it, and figure out the likelihood the UK is not going to vanish overnight. They look at how a weaker pound and separation from Europe will benefit the economy – and place their bets accordingly. (My main concern here is we’ve become so accustomed to Theresa MaybeMight’s political incompetence, perhaps we’re underestimating how damaging her ineptitude may be? And perhaps the UK economy is not best structured to benefit from lower sterling as many commentators assume it to be?)

Or it might be more sensible stuff like wondering about how thick the ice is over the stock market skating pond? Although stock markets continue to make record tops, you can’t help but feel some of the momentum is seeping out the game. I read more and more analyst noise about a possible correction?

I think I heard the ice crack and splinter ominously yesterday.

GE was not only a core US stock, but for long the once Aaa issuer was the corporate bond market. It was easier to meet a working British Miner or the Emperor of China than to penetrate the GE treasurer’s inner sanctum to present a clever bond idea – only to be told GE didn’t care about strategy or tactics, just about price. The head of the funding team once told a conference the success or failure of any particular bond was of no consequence: as “the market has no memory”, so the next deal will still get the tightest pricing because of the quality of the GECC name….

How the mighty fall… GE is a husk of what it once was… Its got a massive pensions shortfall that will cost its rating to sort – even in cheap markets. Its still a single A rated issuer, but yesterday’s announced divestments, the following stock price tumble, highlights nothing lasts forever.

What’s happening to GE is just a symptom - a raised pustule oozing yellow gunge upon a generally unhealthy and bloated bond market - and a reminder any stock is only as good as the management decisions that underlie it.

Another symptom is the general rise in global rates. It would be difficult to miss 10-yr US bonds rising 40bp back to 2.40% since September (and wider again this week), but its happening across the board. Rates are rising. Look at China govies – up from 2.65% in Aug 2015 to 4% today, or India up to 7% from 6.4% in the summer?

Meanwhile, are there wobbles across the credit markets? Hi-yield spreads have widened, although I’m told there isn’t yet any major selling pressure. At some stage the Great Bond Decompression is going to hit, causing Investment Grade corporates to widen, a reassessment where banks trade, and general pain and misery across bonds.

Our general outlook for next year is be concerned about bond markets. Rates are rising. And inflation is very much on the return – which may hammer some of the cosy assumptions many folk are tied to in their belief about the “new normal”.

I was a little concerned by one conversation with an insurance fund manager y’day – who told me she discounted all my arguments about a liquidity trap if bonds start to crater. They bought bonds for buy and hold, “not to speculate.”. Er… good luck....

Meanwhile, an article in the Torygraph (I do sort of read it, just to know what the enemy is thinking!) says “Italy risks storm as QE ends and politics go haywire, HSBC warns”. Strong stuff… Among the points HSBC is making is the still very high Italian debt/GDP level, a massive refinancing calendar in coming years even as the ECB dials down QE, and the curious assumption among Italian politicians the EU will agree to defacto debt mutualisation to keep Italy in the fold. Basically it’s the same old theme – political nightmare coming up with Italian Elections next year, Beppo Grillo (a real clown) vs Silvio Berlusconi (A REAL CLOWN) and all the rest.

One of the real issues for Italy is the fact its banks remain essentially unfixed – largely due to the massive outstanding problems created by NPLs. That is finally being addressed as we’ve seen buyers lift blocks of distressed assets out some of the banks. Our distressed team is actively involved, and if you have cares in Italy NPLs – let me hook you up to them.

Right – back to the day job..

Bill Blain