Blain’s Morning Porridge, 9th May 2022: Markets Uncertain – More pain to come?
“Careful living and training aided me a great deal, but punching straight was the trick.”
This Morning – Markets look distinctly soft, and vulnerable to further downside pressure. The gaps between value, hype and narrative are becoming clearer – spelling opportunity, but also raising the risk of a crash.
U2 Plays Kyiv… Haven’t they suffered enough? (The music is great, but Bono pontificating… not so much..)
Another fascinating week’s play in prospect here in the Global Financial Markets… In the Red Corner we have China, Russian Energy, Covid, Rising Rates, Central Banks and Supply Chains. In the Blue Corner it’s Inflation, Food, Geopolitics, Regulation and Recessionary Threats.
We’ve got it all to look forward to; Pathos, Tragedy and Comedy as bonds sag, stocks crumble and Cathie Wood smiles manically while spinning us her book is set to triple. Place your bets, and let’s spin the wheel…. throw the dice, deal the cards or buy crypto.. Choose your poison.
After last week’s unconvincing market roller-coaster the price action from Thursday definitively felt more negative. I’ve a gut-feel it’s only going to get worse for selective financial assets – like the ones the press are now commenting in terms of massive value collapses from Amazon to the real woofers like Pelaton and Netflix. All these stocks relied on a narrative of a rapidly changing world only they could benefit from… wrong. Some have been spanked as the pandemic ends and consumers return to previous ways of inter-reacting. Others are seeing their narrative halos contract.
It all shows the World remains conservative and is still mean-reverting.. nothing really changes, hence the big secular shift back to focus on fundamentals and returns.
I came across a great infographic from Visual Capitalist last week: Why Value Stocks Have Outperformed. It’s well worth a look as a reminder of some of the basics underlying fundamental value investing vs growth stock speculation. If there is one factor it misses, it’s the effect of monetary distortion driving frenetic tech stocks over the last 12 years. There is nothing on it you won’t know already, but…
It made me think – stock markets are just a voting machine weighing up the market participants’ meled perspective. Their vote depends on how sentiment, belief, the narrative, facts and perceptions of the outlook, plus whatever else all interreact. The reason disruptive tech growth stocks are struggling is the new outbreak of fundamentalist reality leaves them negative on most of these factors… Belief in profits tomorrow has given way to the reality of returns today.
Yet, there is still one stock that remains resolutely immune to the laws of financial gravity that have pulled down the other Tech names – It’s Tesla.
It may be 30% down from its’ high in 2021, but the mythos around Tesla’s vastly inflated value remains solid. Still trading on a PE of 117 – when the average auto PE is around 5 – and worth more than the 12 biggest automakers combined yet making a fraction of their profits. I’ve been predicting the Tesla bubble will burst for the last 4 years and been ABSOLUTELY wrong.. but maybe this time.
Its mortality might be triggered by the effect of Shanghai lockdowns, or maybe it will be the surging price of lithium making EVs increasingly less affordable. Maybe it will be the increasing competition in the EV space as established car makers enter the fray (we’re trying to arrange a test drive on the 300 mile range Polestar from Volvo.) Maybe it will the endless promises of fully-autonomous self-driving tomorrow. Or maybe it will be the growing disillusionment with disruptive stocks, or the death of the meme-stock trader. Nope.. these are mere details…
Who knows…? Of course, the real value of Tesla is none of these things. It’s the intangible value of Elon Musk himself – the man who invested autos, electricity and the future.. even though he joined Tesla 4 years after it was founded.. but hey-ho, Histories are written by the victors. I suspect Tesla and Musk will thrive or unravel together. Which goes first…
But I digress…
Even strong companies will be hit by a financial value storm – the crash many analysts think is out there. Tesla unravelling could be a trigger or a consequence. A market crash is certainly a risk, although it all feels like a very slow-motion violent correction is underway.
My theme this week will therefore be about diversification … Financial Assets are paying the price of 12 years of QE distortion, so what’s out there in the Real World that makes sense from an investment perspective? I’ve got some ideas I’m working on for later this week.
In terms of positioning portfolios… I’ve never subscribed to the nonsense of the English financial establishment’s “Sell in May and stay away till St Leger’s Day” (September) mantra. In terms of market sentiment, we’re not quite at the Dance Band on the Titanic stage yet, but its certainly worth thinking about where this market is going… and preparing accordingly: Defensive, defensive and shoot anyone who says the best form of defence is offence. they’ve obviously never owned Monte Dei Paschi bonds in a tumbling market. (I have… (Blain’s eye’s cloud over… it was hell…)
In contrast, She-who-is-Mrs-Blain and I spent the weekend Combat Gardening – a necessary freneticism of horticultural shock, awe and extreme secateur violence to do all the jobs left undone since the autumn over the course of two days. Combat gardening is a metaphor for taking a long-hard look at investment portfolios and getting realistic about positions founded on hopes rather than reality. Cut, prune, slash and burn!
My financial scythe has been bloodied…. has yours? Time for portfolio weeding…
Last Friday’s 428k US Jobs number on Friday was a mixed moment. What was it actually telling us? Strong growth creation in hospitality jobs, but that’s the very part of the economy likely to suffer first as inflation and the looming recession hit consumer spending. A recurring theme is the number of workers that have apparently just vanished from the workforce – apparently over 3 million Americans are still shielding from the Virus – distorting the demand for workers, yet wages remain stubbornly sub-inflation.
This week we will see new inflation data – some analysts think it’s set to abate, while others think we’re only at the start of a volatile escalator higher. As inflation rises around the global markets, it’s benefiting the dollar most – when the rising inflationary storm surge pushes all boats higher it confirms the greenback is seen as the safe-haven.
The Dollar’s ongoing strength will not be missed in Beijing, or on Putin as he views today’s Great Patriotic War parade in Moscow. These dings and holes in his new Armata tanks might buff out with some T-Cut. He’ll be hoping to further divide Europe on oil and gas.
Lots to think about this week…
But first – reader advice please: We got rid of our trusty DeLonghi beans to coffee machine last week (12 years old, and the manufacturer is no longer servicing them.) Apparently they aren’t so good now. We bought a new all singing and dancing Swiss brand and for two days it made superb coffee. Then it went bloop, water poured out the base, the grinder smoked ominously, and it stopped working.
I am looking for reader recommendations on the best coffee machine or combo? I like strong coffee to wake up (flat white style) and a couple of macchiato shots through the morning… and the option to make decaf in the afternoon.
Life without coffee is not.. so I am likely to be very grumpy today..
Five Things to Read This Morning
Out of time and back to the day job…
Strategist – Shard Capital