Blain’s Morning Porridge – January 28th 2020
“We are a plague on the Earth.”
(Reader Comments are now enabled on the Morning Porridge on the Website. Feel free to be as rude as you like – some Americans already have been.)
Coronavirus isn’t the issue. It’s an unexpected event – a No-see-Um that caught the market by surprise. It’s its effect that matters. It’s refocusing markets on to the things they do know. It’s bound to have some rebalancing effects on stocks directly impacted, and on policy. The reaction in terms of the dip and increased VIX vol is what we expected on unknowable news.
Strip it out, and the critical factor for general prices remains the absolute disconnect between high stock prices relative to corporate earnings (lacklustre), oil prices (tumbling), commodity prices (low) and growth (anaemic). The IMF may have raised its global GDP expectations to “still breathing”, but its only central banks remaining accommodative, and the market relying on them to keep juicing the party – that’s been keeping this market where it is.
How much longer will the Central Banks play along? They will be watching the virus for signs of “economic drag”. But, soon to be ex-BOE Governor Mark Carney could throw a completely unnecessary ease in the UK as a final Remainer pout. The market reckons the US Fed will remain on hold till Q3, if not longer.
Even the ECB may be waking up to the reality – a Luxemblurg member noting with typical clarity how Europe’s Central Bank might just have contributed to “very elevated” asset prices. Oops. “These unusual times call for heightened vigilance regarding the financial-stability consequences of our monetary policy actions.” Congratulations the Yves Mersch who gets a gold star for stating the downright blinking obvious. Heaven help us if the ECB’s promised policy review actually acknowledges just how they’ve progressed the Japanification of Europe through zero rates, austerity, QE and pig-headedness (particularly in acknowledging the weakness of European banking and achieving little to alleviate it). But the ECB is a story for another day – and after Friday’s divorce is finalised I don’t suppose we Brits will ever hear from Yoorp again….
If even the ECB knows the current market levels are built on a sand of loose policy and inflated financial asset prices.. who doesn’t?
Going back to the Coronavirus – it’s having real damaging effects on the regional and global economy. The immediate losers include the airlines, luxury good makers and miners. But it’s interesting how Tech stocks have also wobbled. The government mandated policy responses have triggered real and significant effect. If they set the world a wondering about how the specific virus damage to stocks has morphed into a knee-jerk falls in indexes – does it mean it’s time to take cover, or look for buying opportunities.
If its so clear stocks are overvalued, then could this be sell-off moment? Is it time to dump stocks? Don’t be silly!
Its time to get selective – keep the diamonds, and dump the dross while the market remains this frothy and overpriced.
Why would you sell high dividend stocks to buy bonds at record low yields? Makes much more sense to sell the speculative stuff at current valuations where they aren’t paying returns. (That will trigger a host of comments from the Rude-American’s about how I don’t understand its all about stock prices, not profits!) Although there may still be some upside in bond prices from a further round of global easing if we get renewed weakness – that certainly isn’t nailed on, and it will be limited.
What is far more likely to happen is a refocus on what stocks to own and at what price. Do the Tech giants justify their high valuations? The cornerstone of my own PA portfolio has been Apple and the news sounding increased orders all sounds positive. But do the successful companies like Facebook, Amazon, Google etc justify the high multiples? Why not? Do the questionable multi-unicorns still in expansion mode justify expectations – do the competitive threats to Uber and Netflix justify lower prices. And what about Tesla’s extraordinary valuation? Keep the former, I have doubts on the latter.
This is not a run for the hills moment, nor is it a buy the dip opportunity. But it might be time to make some rational choices on what to keep and spring clean portfolios of over-optimistic crud.
Interesting to see Boeing easily raise a $12 bln 2-year L+100 bank loan to cover the grounding delays in B-737 Max deliveries. Its described in the press as a vote of confidence in the plane-maker. A few weeks ago I almost made a speculative call to buy Boeing, expecting a sudden uptick on the stock on rumours the MAX might get approved for flight. Now Boeing say it will be H2, although the FAA say it might be sooner if Boeing continue to hit milestones.
Now I am beginning to think the bank loan looks… “Courageous”. The odds continue to stack up against Boeing. New orders for the B-787 Dreamliners have dried up and production has been slowed. The new B-777x finally flew last weekend, but is generally considered to the wrong plane, at the wrong time and appeals pretty much exclusively to lead order Emirates. Pilots and passengers are united against the B-737 Max – even if does get back into service it’s going to be interesting to see if orders are cancelled.
All of which leaves nothing on the Boeing production line any airline particularly wants. There is nothing in the development shed like a new super-efficient smaller regional work horse. Instead of a promising new product, Boeing executives can proudly point to the fact they squandered all the 737 revenues on a stock buyback programme that made executives richer through their stock options, and happy shareholders till the B-737 Max started crashing. The stock has performed dismally since. It could get far worse if the expected 737 Max cancellations kick in and its recertification is further delayed. It will get much worse when investors wake up and smell the coffee… and discover where the company value went.
Lesson – stock buybacks don’t create value. Product does.
Five things to read this morning:
Out of time and back to the day job!
Bill Blain, Strategist, Shard Capital