Blain’s Morning Porridge – March 20th 2019

Blain’s Morning Porridge – March 20th 2019

“There seem to be more banks in Germany than bicycles in Beijing…”

In the headlines this morning:

Unfortunately, a number of readers responded to yesterdays not-terribly-serious Morning Porridge by asking what I really think is going to happen re Brexit.


I don’t have a clue. It’s developed an entirely new spacial dimension all of its own. Extension looks inevitable – which is going to leave the Brexiteers apoplectic. A second referendum looks unlikely – which leaves the Remoaners groaning and moaning. In the current furious mood it’s difficult to see any agreement coalescing to cobble out a compromise with best elements of the May deal, Norway, Canada or trade zone factions. 12 months more of this crap and “No Brexit” is unsurprisingly the very real backstop as we plead for it to stop!

Meanwhile, the big issues of the modern age carry on around us. Reading between headlines of imminent China US trade agreement, it sounds like they really remain miles apart on IP and withdrawal of tariffs – expect some vol on the back of no news. China is visiting France and Italy this week – and Italy look’s likely to sign up to their co-prosperity sphere – the Belt and Road. The issues about engagement with China’s economic might, and the risks of linking to an economy that sees no inherent risks in total economic surveillance of its populace needs serious consideration – which begs the question: who is actually calling the play in Italy and has done the analysis to open the door to China risk?

It’s another example of European Fracture – there is no single vision thang! The other big example of fracture this week being the Deutsche Bank/Commerz merger to create a German too-big-to-fail financial giant – (albeit one handicapped by “what’s in Commerzbank’s cupboards” in terms of dodgy assets.) National champion banks just don’t ever play out well.. especially in Germany which might make decent cars, but has never been much cop at banking.

The big issues for markets remain the “what-ifs” and “no see ems”…

I’ve been thinking about risk recently – trying to fathom what is most likely to trigger not just the major market moves, (so often its politics), but also the idiosyncratic tremblors that move individual stocks and bonds. It occurs to me there are a couple of new risk methodologies we have to add to the threat board.

Fake News Risk is one of the new categories. We’re now all familiar with Trump screaming “Fake News! Fake News!” every time he’s caught with his proverbial finger in a new pie. We’ve also we’ve seen how our initial horror at Trump twitter storms is now diluted to “really?” Yet, Fake News has become a major corporate risk on two levels: overestimating its impact, yet becoming overly complacent about news because so much of the news is now distrusted and gets discounted as verbiage, opinion and speculation dressed up as fact.

Take the case of Boeing over the last 10 days and the crash of the Air Ethiopia flight. There are few real facts – until the investigation of the black boxes in Paris is completed next month we can’t say with any degree of certainty what really happened. Yet the market moved dramatically on the crash, and subsequently on stories about “satellite data” confirming the planes erratic climb, statements from unnamed pilots about “bucking bronco 737 Max aircraft”, articles on the failure of the FAA, and speculative articles in mainstream “respected” media about how Boeing skimped the design, documentation and training processes to get airlines to buy the new plane. The fact the crash so resembles the Lion Air disaster adds to mood of imminent corporate apocalypse – despite Boeing quickly identifying the problem immediately after the first disaster with advice on broken sensors and issuing warning notices on the problem and how pilots should respond.

Yet, since the crash and the negative news, Boeing stock has responded pretty well to the mounting wall of negative news – trading down from $430, but now in a stable $365-380 band. I’m actively encouraged by how analysts aren’t being sucked into the panic. In terms of aviation finance – one the core sectors where I see most alternative value opportunities – there are many MAX aircraft in aviation portfolios giving fleet leasing managers concern, but they likelihood is i) other aircraft become more valuable as they fill the gaps, and ii) MAX aircraft will quickly be fixed.

The fake news risk is like a smoulder suddenly becoming a wild-fire – its entirely possible the market will over-react when the investigation details are published. Trying to reach a judgement now on whether the stock looks underpriced requires a decision on the most likely long-term outcomes. Go back to the basics: The problem will be fixed – although it may be a substantial cost. The order book isn’t going anywhere else. Reputational damage will hit sentiment – but could be contained. Long-term the pressure mounts on Boeing to build something completely new – a regional single aisle B-XXX aimed at economy and capacity – which will be expensive. (But, it might be a smart announcement while Airbus is still consumed and self-absorbed by the political failings of the A380 programme, but it canabilises their own 737 programme). When making that call on Boeing stock, focus on what’s real and what’s fake. I think it remains a buy!

Another risk at the fore is our old favourite – good old-fashioned Corporate stupidity.

The most famous example here in the UK was Jeweller Ratner’s – the chairman doomed the company by famously describing their cheap ear-rings as having a shorter shelf-life than a supermarket sandwich. This morning’s headlines about VW fall into the corporate stupid bracket: who would believe the CEO would take the words from the gates of Auschwitz to describe his corporate strategy. The FT carries interviews with “shocked” investors, all agreeing the guy has to go.

Yet, corporate stupidity – like levering up Zombie companies with debt while its cheap – is often missed because its so blindingly obvious. Its often tied up with Governance risk – how can companies fail to solve internal flaws and breaches? Because there are internally blind to it. Take Metro bank – in the news because its long-serving board of Non-Exec stuffees became immune to the flaws. Equally, don’t expect others to blow the whistle on corporate stupidity – look at the failure of auditors to spot bogus accounting at Patisserie Valerie?

I could go on, but a flat Laptop battery and points failure at Clapham means I’m already very late and I’ve got the day job to do..

Bill Blain

Shard Capital

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