Blain's Morning Porridge - Jan 9th 2018. So many improbable things in this market - how long can

Blain’s Morning Porridge – January 9th 2018

“If you don’t know where you are going, any road can take you there….”

The Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment research.

Oh, I have missed this market so much during the holiday season. I’m just catching up on the infinite jest, hypocrisy, comedy and pathos it throws our way every day! Today is no exception – there is just so much nonsense out there in the global markets…. How many improbable impossible things did you spot before breakfast this morning?

I’m surprised Donald Trump didn’t feel it necessary to tweet about the inequity of Greek 2 year bonds now yielding considerably less than US 2-year Treasuries… What does that tell us about the respective might of Europe’s fast-growing economic recovery miracle vs the debt ridden, inflation-addled, and politically rudderless US of A? Hah.. (US Readers: Sarcasm Alert). Fake News Fake News!

Meanwhile, as we all struggle with the intricacies of MiFID 2, I idly wonder if the ECB dumped its holding in Steinhoff bonds before Europe’s new regulatory dictum went live on Jan 3rd.

Maybe not… there was a 5 cent price collapse on Friday’s. Wonder why? Not that I’m inferring anything underhand or wrong about Europe’s central bank dumping a ton of corporate coprolites on a market struggling to come to terms with the declining credit. (Extra points if you know what a coprolite is.) Not at all. Who would even suggest such a thing? After all.. the ECB’s corporate bond buying programme wasn’t set up with market stability in mind… was it?

While other investors follow their investment guildlines and polices, and hold the bonds because to dump them might look like panic, and they remain in the indicies, the ECB justifies dumping them on the basis they no longer met their credit criteria. Nice. It’s as good a reason to run for the hills as any other. And in thin holiday markets, who would notice? No wonder no one wants to underwrite bonds any more.

Bear in mind the ECB holds about €132 bln of corporate debt – about 18% of the total outstanding amount in the 1064 corporate bonds it holds. Who could possibly think their actions might have any influence on price or sentiment? Clue: in markets struggling with real liquidity and a sinking feeling that transparency has been imposed by regulatory fiat, rather than real (who said that!) markets… what possible harm can an unstable holder possibly do markets?

Markets fret about what will happen to corporate bond spreads when the ECB cuts it buying programme to €30 bln and then zero. A little less distortion might be a good thing. On the other hand, smart traders will be pricking their bond lists and noting “Wobbly Unstable Holder” on the bonds the ECB holds… any negative news, wait for the market to tumble on fears the ECB will wobble, and buy ‘em cheap.

Nothing is impossible in bond markets. Remember Blain’s Market Mantra No 3 – The Market Has No Memory. To illustrate that let me refer you to a great story from one my favourite market journalists, Marcus Ashworth of Bloomberg: https://www.bloomberg.com/news/articles/2018-01-08/monte-paschi-sells-bonds-what-could-possibly-go-wrong

This is the surprising tale of how Monte Dei Paschi (the world’s oldest bank, and incidently the first bank I ever did a deal for way back in the mid-80s), bailed-in its junior investors just last year, yet has successfully launched and sold new subordinated debt in the first week of the new year. Wowser! Apparently, January is a good time, because that’s when people are most susceptible to taking impronbable risk! Despite all the government talk about banks no longer being too big fail, the Italian corollary of that rule is “banks are not too big to fail, unless they are Italian when other rules apply…”

A good number of Financial Institution Investors tell me they are buyers because they are arbitraging the likelihood Italian authorities will do anything to avoid the “embarrassment” of another bail-in by ensuring the bank “avoids” further problems. No wonder other European countries’ financial authorities are rolling their eyes heavenwards at the prospect of being embroiled in a banking union that includes Italy, and is certainly going to involve more Italian banking crisis.

And then there is the Melt-Up – expression of the year thus far – in Emerging Markets. Index records have been breached as everyone buys into the story they are this year’s hot performing sector. Buy ‘em now before you miss the chance. Anyone for some Angola?

And lets not forget stocks. With Japan now everyone’s favourite stock market, I was a tad surprised to hear someone joke; “The Nikkei – Japan’s answer to Bitcoin”. Of course, they were only joking.. weren’t they?

One thing that does have me very nervous is the massive number of articles now saying further stock market gains are inevitable. Nobody seems to worry there might be downside or even a modest correction. Instead I read this boom is not even close in terms of day count to previous winning streaks, and the coming earnings season will simply confirm the buy signals. Everyone is fully invested in the Global Synchronised Growth “Melt-Up” story.

I must admit I am feeling a tad humiliated by stock market performance. Last year I fully subscribed to the Growth Story, but reckoned stocks had moved to fast. I expected a correction – so I parked cash in liquid fund and waited for the inevitable 7-10% correction. It didn’t happen. I’ve missed 10% upside. I feel a fool…

I shall comfort myself by reminding readers of Blain’s No I Mantra: “The Market has but one objective: to inflict the maximum amount of pain on the maximum amount of participants.”

Out of time, and back to the day job. Have a good day.. (I shall not.. dentist later this morning…)