Blain’s Morning Porridge – Jan 4th 2019

Blain’s Morning Porridge – 4th Jan 2019“And he rubbed pot roast all over his chest.. Excitable boy they all said..”

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So much for Global Recovery.

Y’day’s ISM number screamed slowdown. The markets are pricing in Fed rate cuts. Apple has scared the bejesus out the stock market. Yesterday cost Warren Buffet $4 bin. Ouch. The economy has peaked and is slowing. Sentiment is battered. Investors are fearful. Confidence is dripping away. Markets are confused: is a strong US payrolls number later today good (on the basis it shows economic strength), or bad on the basis it might mean the Fed will stick to rate tightening. Talk on the screens about policy errors and time for the Fed (and other central banks) to start printing money again via QE. (!)

Great quote on Bloomberg:“The true colour of today’s market is the hue of the pompadour atop the head of President Donald Trump.. This has become Trump’s Stock Market….. the bull market rally was reasonably called the Trump Bump. The decline.. since the start of December, is the Trump Slump.”

Things are so resolutely awful… that… It might just be time to get your buying boots ready. “If, you can…” blah blah blabitty blah blah… (you all know the Kipling quote..)
While we aren’t quite at a risk-on-moment – I have a sense there is probably more pain and bad news to come – slumps are inevitably followed by a recovery.

My favourite stock-market chartist, ex-colleague Steve Previs says there are buy-signals out there. He quotes the abysmal headlines, the sense of fear, but notes the technicals now point to oversold and reminds us of the old adage of what to look for:“when the market is cheap, hated and beginning an uptrend.” Has the uptrend begun?

If the US economy is slowing from 3-4% then why the mortal fear? The kind of growth we’ve seen last few years was hardly sustainable – 2% is more normal. There are signs to be concerned about – such as the weakness in housing, the over-leverage in the corporate sector, stock market correction, political uncertainty and trade woes… but its not all so bad? Is it?

Time to:

i) Look for fundamental value – Undervalued and defensive stocks? Cashflow stocks? Strong credits?
ii) Think about Rates – there is absolutely no sign of inflation or significant/meaningful long-term interest rate rises on there horizon.

This is the time to be thinking about buying the stuff others are not touching… whether it be distressed, unpopular or simply unfashionable. But, it’s time to be selective – deep dive assets rather than glance at them.

Apple is a good case: Its easy for me to write excitable comments about how we’ve passed peak-Apple and how it, and a host of other names, will suffer from the well deserved investor punchback. However, Apple retains a $160bln cash pile, has annuity type earnings from services and as other blogs note… IOS is sticky. If you want to know whether to buy/hold/sell analyse it pragmatically and forensically. (But also bear in mind Apple is effectively generation 1 Tech – the next thing is probably alreasy in sight!)

Apple is proving a proxy for all stocks in terms of the searching questions we need to be asking – is it struggling because the Chinese economy is weakening, or because Chinese consumers are treating it as a commodity and buying domestic smart-phones (that are as functional and half-the-price) instead. I suspect the later, although I’ve already been told in no-uncertain terms that Apple is a screaming buy at these levels.

Let’s see what happens next.

In terms of rates, it’s difficult to get excited about the current rally in government debt (unless its to wonder how so much of it will find homes post QE). If you get shown a cashflow backed, secured solid deal yielding 7% plus, then hit it harder and faster than the proverbial red-headed step child. On the other hand, if someone shows you and Italian bank yielding 8%, run away. Very fast.

More on that next week!

Have a great weekend…