Blain's Morning Porridge - Jan 17th 2018. Market caution? And US downgraded below Russia? Time t
Blain’s Morning Porridge – January 17th 2018
“The supreme art of war is to subdue the enemy without fighting.”
The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.
What’s really happening in markets? All the signals point to still strong sentiment, a positive macro environment, and “rampant” optimism continuing to drive the upside! Buy! Buy! Buy! scream the headlines about growth opportunities… Yet the underlying market headology and mood in the institutional sectors has definitely become more cautious.
The stock markets look to be trending higher, but yesterday was interesting. The Dow failed to sustain its rise above 26k for very long. The action on the S&P 500 is even more significant – it was a slider. Higher highs and higher lows looked nailed on, but my stock picking colleague Steve Silver Fox Previs says the market has got ahead of itself and some kind of a pullback (like y’day) was inevitable. It should not be a surprise when it happens. He’s figuring on some kind of corrective activity. Steve’s got a great record being ahead of sentiment. The perception of a correction threat is rising.
In the credit fixed income markets it’s equally mixed. The new issue market is flying, but it’s also clear investors are being more selective. They will pay a premium for scarcity, but not for names that have visited markets too frequently during these past years of bond binge behaviour! There is also something of a quality shift as the rampant gambling on high-yield becomes a little bit more considered. Curiously, the number of players looking to enter and play in the distressed names space is rising! The plus side is it’s possible to dig up some liquidity even in the most perilous names – our guys have been very active in Nobel and Steinhoff.
At the back of bond managers’ minds is the possibility of the great bond rout – rates rising more rapidly than expected, triggering decompression across credit sectors. And, let’s not discount a new round of sovereign bond discontent! (Definitely not in Europe where there is nothing to worry about as Grece continues to tighten and what Italian elections? (US readers: Mild Sarcasm Alert.)
This morning I am intrigued to read a Chinese rating agency has cut the USA to BBB+! That should really trigger a Trump Twitter Storm, but probably won’t!
What’s really going on? Is this war by other means? Chinese rating agencies like Dagong are known to reflect government views – begging the question why would one of the largest holders of Treasuries, which spooked markets last week by suggesting they might sell (but has nowhere else to invest), talk down the US – except for strategic reasons. Despite SAFE saying the Treasury strike was “fake news”, its no secret Beijing is actively debating alternatives as part of strategic policy. Hinting the government is over-extended to weaken the economy looks like a war-aim? There is also the tit-for-tat element after the big US agencies cut China last year.
The new Dagong USA rating is in line with Columbia and makes it a worse credit risk than Russia or Botswana. The agency perception and negative outlook on the US government’s ability to repay debt because of the recent tax cuts is flimsy. The government has the keys to printing presses. Governments who can print money don’t technically go bust – although they can utterly demean the currency and create galloping inflation if they are careless about debt loads and policy causing a mass exit of potential investors.
Elsewhere I read investor sentiment in the UK is the lowest across all the G20. Apparently; the political outlook looks miserable, the macro consensus is horrible, investors have never been more bearish, and the UK is about the worst place on the planet to put your money. Excellent time to buy! As a famous French General once said.. “My centre is giving way, my right is retrating, situation excellent, I am attacking”.
My macro Economist Martin Malone – who called Japan upside when everyone else was walking away is positive on UK – pointing out coming improvements in UK productivity as shake out – including Carillion, but also from financial services – takes place. He’s expecting the current positive output gap to further improve. Others quote a rising M&A environment as reasons to get involved.
Finally, how shocked and surprised am I to see Bitcoin trade below $10k. Said it would. In terms of the real world its meaningless. But cryptocurrencies are here to stay… I’m looking for much lower level to get in a buy some of the more interesting iterations..
Out of time..
Bill Blain