Blain's Morning Porridge - April 6th 2018: TTTs, Markets, Conviction trades vs I Believe trades,

Blain’s Morning Porridge – 6th April 2018

“There are some things I cannot do now: skydiving, marathon running, calculus. I can proudly say, however, that I couldn’t do them in my 20s, either, so no big loss.”

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

Really not sure what to say about markets this morning. They’re on fire – except for the fact they aren’t really. Strip out the noise.. and range bound would be a better description. Sure, we’ve seen dramatic ups and downs – much of it related to Triple T (Trump Tariffs and Twitter), but basically it still feels like we’re still playing through the February Correction phase. There is not so much complacency as there was, but folk still expect upside over the down. Next week will give more signals; lots of players are still on holiday and volumes are thin.

The big events today will be Powell speaking about the US economy and the US jobs number; (185k consensus), another snapshot of a full-employment economy where most folk aren’t earning enough and a few folk just don’t know what to do with all their oodles of money.. Great piece in the WSJ focused on a US unemployment hotspot and how its now struggling to find workers: https://www.wsj.com/articles/the-future-of-americas-economy-looks-a-lot-like-elkhart-indiana-1522942393 I can’t help but thinking it’s setting up for a bit of a Klondike scenario: boom followed by an ultimate bust.

As I said earlier this week (and delighted so many folk spotted it as a Bob Dylan quote): “something is happening and we don’t what it is”. Its not the global economy - which seems pretty solid, its not inflation – which remains embedded in financial asset valuations, its not oil – which looks supported in the new $70s range, its not in tech stocks – which seem to be shrugging off the regulatory revaluation threats. So where is it? There are hints – and I think they lie in the continuing drift to populist politics. Long-term, income inequality is not going to work… but we live in the now. But, for the meanwhile, it’s a risk on market!

There are some spectacular stories out there. In markets like this investors can get lucky playing hunches when everyone else is wrong. Conviction trades can win or lose massively. Sometimes flukey markets confound logic.

For instance, I’m delighted to see Boeing react very strongly to the China tariff threat and rise. Makes perfect sense to me – their plane technology is superb, new models are more efficient (and an oil shock is the major threat to airlines), so even if China puts on Tariffs, they will keep selling. Global demand for aircraft is way ahead of what the oligopoly suppliers Boeing and Airbus can supply. Buy. It’s a conviction common sense trade.

But as for Tesla? Its up 21%, back to $300, this week. I’m in a state of shock! One of the smartest analysts I know has been a Tesla Bull throughout this period of doubt – sticking to his guns that despite it producing a fraction of the global car market today, it’s the leader tomorrow because it’s the leader today in Electric Vehicles – EV.

I still don’t get it – Tesla looks, smells and tastes like its bust, but because my chum is so persuasive, I’ve still got a position in the name.. but I just can’t see why its such a screaming buy when its literally just a car company that happens to be a leader in a small sector that will become a larger sector everyone is looking to play in. And.. it needs lots more money and I’m not convinced it will get it. And.. and…and..

Meanwhile, I’ve been reading about hydrogen (H) as the green fuel of the future rather than EV. H is way more efficient that EV and getting cheaper than Petrol, and simpler to distribute. H makes more energy sense than E and could be long-term Carbon neutral. An EV truck will weigh literally tonnes more just carry its battery while a H Truck will weigh less than a conventional Internal Combustion Engine (ICE) one. A H car will take moments to fill up and beat the range of a ICE while EV requires a lengthy time charge (ok coffees rather than hours). Go figure, but H > EV > ICE.

Why am I still holding Tesla? Because… because… its complex..

The question remains – where is this market going? Although its coping today – it won’t cope forever. Something has to give.

This modern world is extremely complex. It becomes more and more difficult to understand day by day. Yet most of us make the mistake of assuming someone else knows, is doing the needful, understands the risks and is managing them. Sadly, that’s not ever the case. Markets repeatedly remind us of the old adage – no one is as smart as others might they are. That’s why things blow up, crash in flames, and generally shock and surprise us when they go spectacularly wrong. Same thing every time.. something pretty fundamental was broken, hopelessly compromising the whole caboodle.

So collateralised mortgage obligations were a great idea right up to the moment we realised they were stuffed with hopeless sub-prime. Corporate debt is mouth-wateringly attractive to fund managers who don’t understand how to read a balance sheet right up to the moment rates rise and the company’s debt sinks it. Funding long and borrowing short improves the margin right up till the moment it doesn’t. “Till the moment it doesn’t work” sums up lots of things about the modern age…

A fascinating article on Bloomberg highlighted many of the concerns yesterday in relation to Facebook: leading Scandy bank/investment firm Nordea has slapped a blanket ban on the name because of questions on how Facebook manages its relationships with third parties.

“We realised [when Cambridge Analytica happened] that this is a case more of less like Pandora’s box,” said the CIO of the fund. He went on to add you simply can’t predict what’s going to happen down the line given the “company is lacking a lot of the underlying systems to manage this.”

Thus far, there are two approaches to understanding what’s gone wrong at Facebook. There is the shocked and horrified school of thought that is scandalised Facebook was leaking all this data and expect it to be regulated into submission. The other school is asking the simple question: “C’mon.. what did you think they were doing with all that data?”

Maybe there is a third approach – that Facebook (and by extension all the other terribly bright dot.com trillionaire companies) just wasn’t that smart, didn’t actually realise what they’d created or what the consequences were likely to be. History is littered with things that turned out not to be what they were meant to be – Radar is a great example: it was conceived as a death-ray to bring down enemy aircraft, and ended up becoming the most effective way to track them. Or Gunpowder, which made pretty fireworks until someone figured out another use…

On that unhappy note – the weather’s looking good and my boat beckons. Have a great weekend.

Bill Blain