Blain’s Morning Porridge – Happy New Year, Jan 3rd 2019

Blain’s Morning Porridge – Happy New Year, Jan 3rd 2019



Blain’s Morning Porridge – January 3rd 2019
“Waiter, there is a worm in my Apple!”

I decided to hold off from writing a Porridge y’day to see how the first day of the New-Year market went. If you were looking for the New Year to resolve the current geopolitical and personality based uncertainties, the fragile balance between short-sellers vs holders, or to illuminate likely returns;NOTHING HAS CHANGED except the numerical label to the year.

Welcome to the same old, same old…

The trick is to understand the likely consequences of events, what the market is doing, and how participants react… According to George Soros, it’s about separating the objective from the subjective…. My gut says we need to be aware of the past before making any bets on the future. Why? Because the market has no collective memory, and keeps doing the same things wrong because it over-reacts. Repeatedly. (OK – doing the same things wrong, differently, but the same things nonetheless…)

Bear in mind 2019 was always going to be a difficult transition year: the unwind of QE and (likely) rising interest rates, mid-term politics, ructions in oil prices and fragile global trade… well, it was never going to be easy. Let’s start with three stories from Jan 2nd that could set the continuing tone for the year:
Italian banking – the tumble into ECB resolution of Banca Carige over the last few days should hardly be a surprise. Yet another Italian financial riddled with fraud/NPLs fails with a dodgy looking financial structure. The bank was unable to refinance itself with new debt capital – a $400mm sub deal failed to find buyers. Late last year, leading Italian bank Unicredito had to pay a staggering 420bp over swaps for senior (bail-in-able) debt! That tells us Italian banks are distressed. Confidence in them is zero.

The key take-away isn’t that a minor Italian institution has stumbled or even the (ir)-resolvability of the Italian financial system, or the Italian state, but maybe what that means now for Italy and Europe as a whole. The potential political knock-on effects could be enormous ahead of May’s European elections!Lesson: Watch Italy. 

Yesterday’s big news was the Apple profit warning. It isn’t selling phones, pads or other bright-shiny-stuff in China. Again, hardly a surprise. I’ll go with the view it’s more a illustration of the World dividing into China and US tech camps, but others will say it demonstrates how much China is hurting from trade ructions. Interesting that Apple dumped its unit-sales metric just a few months ago… now all we know is they expect to make 6% less due to China wriggles.

The fact Apple will take a spanking is going to make the pundits predicting Apple shares were set to rally kind of stupid. Their call was broadly on the basis the last time Apple stock fell by 33% it then rallied 75% before falling another 33% last year… therefore… It must be about to rally another 75%. Or maybe the market is forgetting its just a maker of pricey consumer tech that hasn’t launched an innovative new product in years… Just saying… (Worth noting at 2% dividend and 14 times earnings, the numbers aint so stupid…)

With news that Tesla has missed production targets (quel surprise), the Apple news should have everyone thinking about fair value..Lesson: Stock worries aren’t over yet! Its about fundamentals!

And then there is Trump. I’m sure everyone else read the brilliant piece in the FT about the collapse of process within the White House, and has been following Mitt Romney’s attacks on the Presidency. Whether Romney is the right man for the Republicans to rally around the restore their honour is neither here nor there… the objective facts are the US Government is closed because of political gridlock, while the subjective reality is the market fears massive Trump driven policy mistakes as confidence wanes.

Politics is going to be a major major theme this year. From Trump, Xi, Brexit and European elections, you can’t but worry how high the populist tide will rise?Lesson: The capacity of politics to shock markets is very high. 

Over the holidays I read some fascinating stuff. There was a brilliant examination of how inefficient the world has become because a quarter of the global market is now effectively subject to monopolies where one (or a very small number) of suppliers control a product or service. Another article predicted the wake up moment for cash-flow based investments – ie buy dull, boring, predictable cash-flow returns, and sell the stuff that promises stratospheric future returns based on tactical bankruptcy spending today. Other comments bigged up potential crisis for China, the rise of India, the emergence of an economic paradise in Latin America, and the stellar outlook for Africa.

To keep retail investors hopeful, the wire services carry a host of interviews with market pundits saying stuff like: “market looks better priced in terms of more realistic valuations”, “expect January rally”, “FAANGs set for massive upside to correct overcorrection”, Blabbity Blah Blah… Let’s wait and see what actually happens…

In terms of my focus for the year – now, more than ever, its about alternatives: get out the still distorted listed markets and look for cash flow based investments with strong fundamentals. Should be out with a very exciting new deal in this space shortly!

Meanwhile, She-who-is-now-Mrs-Blain and I are looking for a new bank. We run credit-positive business and personal accounts through our current bank, but they turned down her successful IT-digital consultancy for an overdraft facility on the basis of insufficient business! Without any further discussion, the bank referred her to some crowd of loan sharks called “Funding Options” who have been calling since 8 am with “unmissable” double-digit lending offers. I’m sure we will shortly discover its trashed our credit score. No doubt some algo-driven programme made the decision based on the fact we don’t miss payments, pay our credit cards in full, and no longer have a mortgage with the bank. So any ideas for a new bank that gives a f**k about customers, please share…

And, a Guid and Prosperous New Year to us all….