Blain's Morning Porridge, submitted by Bill Blain of Shard Capital
“Johnny Turk he was ready, he primed himself well. He rained us with bullets and showered us with shell. In five minutes flat he’d blown us all to hell. . ”
Last week stock markets staged a spectacular rally off the back of the “improved” trade outlook. Bonds have reversed. But despite equities sitting at all-time highs, it’s time to step back and focus on where this goes next. Next few days will see the US impeachment hearings ratchet up – raising the prospect of market dislocation. I’ve been reading missives from Republican and Democrat supporting chums and the issue of either getting behind Trump (no matter how bad he is) to keep the Democrats out, or TINA to getting rid of Trump. Its look as polarising as Brexit has become in the UK. The threat of politics overtaking reality is worrying – and the market doesn’t seem that bothered about the implications for The US’ credibility, the Fed and the dollar. Are we bothered? Slightly.
Political instability remains the name of the game from the US, Hong Kong, The UK, and this morning, Spain. (And, add Italy and Germany to the list.)
One of the key factors driving stocks higher in the wake of a trade “accommodation” rather than a peace treaty is momentum – markets want to go higher, anticipating growth. But the market is equally driven by the volume of cash ready to be thrown at it. There is no shortage of ready liquidity - in this sense of too much easy money chasing too few assets, rather than liquidity: “who wants to buy this” conundrum. When there is too much cash around the market can remain irrational for longer…
Following the WeWork fiasco, and reality the Aramco IPO will be a fraught box-of-frogs, and all the other distractions, there is a stack of research and the media commentary about the need for investors to focus away from disruptive tech unicorns, away from regulatory risks, stay shy of IPOs, and focus back on fundamental value stocks. Sound advice indeed – but what is a value stock?
Interestingly, one article pitching value stocks is accompanied by a photo of HSBC’s logo. I’m intrigued – by what stretch of the imagination could the world’s most complex yet least adequately managed financial institution be considered a fundamental core investment? I suppose there is the argument that no matter how many times politicians and central bankers say banks are not too big to fail, some remain will so.
HSBC might qualify, but on what grounds? HSBC probably lacks the imagination to go spectacularly bust, but its very dullness and dunderheadedness ensures it will continue to stumble from disappointment to disappointment. The dividend yield at 6.9% might be a good enough reason to keep buying – but I want to invest in good companies, not ones that get rich because of a very small niche. In HSBC’s case, it’s Hong Kong – which might yet be a trigger for a reassessment of the its many problems – the dismal quality of its customer offering, its second division investment bank, and its failure to leverage off its corporate base – but it’s more likely it will just dwaddle along. It’s down 26% since Jan 2019 – while the FTSE is down a mere 6% while the S&P is up 16% - but there is not much in the HSBC action to suggest any volatility from the rising tensions in Hong Kong, despite the former territory being the foundation of its fortunes.
Even more interesting is Boeing – I’ve been bearish on them since well before the series of crashes that led to the grounding of the entire B-737 Max series: the final iteration of a 50-year old-plane the company was milking and expected to make bazillions from. I guarantee Boeing’s failure to innovate a replacement plane will be the subject of multiple MBA case-studies. The planemaker faces mounting problems – its safety reputation has been compromised, its executive leadership is beleaguered, its new aviation project – the B777x is losing orders and timing on its introduction looks to have stalled, plus it’s got build problems across the fleet. It looks like a cataclysm of cascading failures. The Stock Crash 20% in the wake of the second crash, but it’s been range trading since then – suggesting nothing particularly wrong… (for the largest stock in the Dow.)
If HSBC is a banking behemoth too big to fail, then Boeing is safe because it’s part of an impenetrable duopoly. There are only 2 global plane makers: Boeing and Airbus. There is little chance anyone will be able to design, build and sell a 2000 new regional aircraft in the next 10-years that any airline would really want to buy. Logistically it’s impossible. The Chinese and the Russians both claim to have domestic aircraft ready, but if you want to fly on something Russian, that’s your call. The Chinese plane is decades behind modern designs.
Airlines want two things: aircraft that are efficient, and aircraft with safety records passengers will be happy to fly – which is going to be a massive ask for Boeing – IF they ever get the B-737 Max back in the air. But even more than these two factors – they need aircraft. Which keeps Boeing in the frame.
Boeing and HSBC are just two stocks that illustrate some of the alternatives to tech unicorns maybe aint that great either. HSBC was once my top stock pick – but now it just annoys me. Boeing because there probably should be some executives in jail for not only putting personal rewards over safety, but for abysmal decision making – they should have built a new plane.
There are other stocks we should be asking questions about – Apple; how much can it spend in streaming wars and acquiring customers? It’s made a bet that consumers will remain loyal to its iPhones, Macbooks, and the rest of the Apple ecosystem. Does it matter they don’t seem to have anything bright shiny and new in the development process? Probably not – its evolved. Microsoft? Well, that’s dull, boring and predictable. Lets buy it.
The thing that interests me most is competition. I expect the TV streaming market to get really messy because of competition and new entrants. Just like competition in ride-hailing hides any additional value-added Lyft and Uber might have had. I suppose the secret is the one the Railway Barrons of the 1860s discovered: move early, ride the upside and get out before the inevitable crash.
The Spanish election result should have surprised no one. The populist pendulum has swung to the right. The socialist government lost seats and will be forced into a compromise alliance. No matter. Spain won’t break the Euro. That’s what Italy is for….
However, it does raise a new issue to be concerned about: Christine Lagarde’s chance of success. The received wisdom is Lagarde is a highly experienced political operative who is going to sweep in and elevate the ECB into something new – a coordinated, responsive European central bank with a united front on improving the Eurozone economy. The theory holds the ECB can do without a qualified central banker and unite around her leadership to agree fiscal union and new policies. That’s the vision…
What’s the reality?
She faces almost certain Political push back. Populism across Europe has not been the shock we thought it might earlier this decade. Left-wing parties rose, failed to deliver, and slid again. Now, it’s the right wing that seems on the ascendancy. They tend to strike a more nationalistic tone, wanting to take control – which means demanding a say within the Euro. Heaven Forbid!
Calls for the ECB to actually hold named votes on policy are a push back from the Draghi era. But the push by some nations for the ECB to be seen as accountable, and not to Brussels, but to their countries is not going to help. It’s not a recipe for swift-decision making. It will play to both right-wing parties and to delayers – like the Germans, the Dutch and others keen not to bankroll fiscal profligacy in Southern Europe. The bottom line is Lagarde is going to be herding cats at her first ECB meetings.