Blain: "The Market Mood Has Changed For Two Reasons"

Submitted by Bill Blain of Mint Partners

"Things without all remedy should be without regard: what’s done is done..”

That was the coldest, wettest and most miserable Easter I can remember. When I was a child we went up into the Pentland Hills above Edinburgh for sunlit Easter picnics and rolled our hand painted eggs down the hill. This year they had snow. I spent the holiday freezing cold and sodden wet on a bouncy race committee boat in the Solent - more fun you really can’t imagine...   This morning opened up miserable, so I put my winter hat back on! (I think this is the first time since the winter of 1947 The Blain has worn a winter hat in April!), and guess what? The moment I got into the office the sun came out!

But, I digress... back to markets.

Stocks are crumbling. Bond yields are falling. Yield curves are flattening. Sentiment is wobbling. Trump is jawing. The Chinese are - no doubt - smiling. Add another couple of hundred items to the retaliatory tariff list, but not yet serious stuff. Keep markets nervous. Occidental marketplace economies might be about to get their shreddies shredded....? Nope, I suspect, this is more likely to prove a Selective Correction moment… meaning it will probably still test new lows (despite y’day’s late bounce and hopeful Asian action this morning.

Do we continue to believe the fundamentals of strong global synchronized growth justified higher stocks and monetary tightening? There are very solid reasons to think so.

Or should we be increasingly concerned about the fractious market mood triggering a stock crisis, a slide in global sentiment and the flat yield curve proving right about slowing economic activity? A global recession? That would hurt...  But, its unlikely. I guess we will see signs on Friday with the payroll data confirming the US economic miracle continues.

However the mood has changed. Two major factors:

  1. Political fears are proving highly volatile. The possibility the China/Trump spat turns serious is a valid concern. Politics can be like a simple scratch that turns septic - a minor irritant like Trump causes such pain and rawness that other bruises, nicks and cuts turn dangerous. So concerns about Russia vs Europe/US, Turkey, the Middle East, Europe and Brexit are all proving raw spots of market pain – jangling already hurting nerves. Donald Trump’s insistence on tying his success to the stock market might just have been a mistake!
  2. Suddenly the massive expectations driven bubble valuations on New Economy / Tech Revolution stocks looks like it might have popped. Facebook looks certain to garner a massive regulatory fine. Amazon may have built itself into a monopolistic internet shop, but does that justify its stock price? Well... perhaps. But Tesla? At the end of the day its a car company that’s not making many cars - and the ones it does aren’t all they are cracked up to be.. (I can’t tell you how many of my chums over the weekend we’re regurgitating all the Tesla propaganda about its tech genius, game changing capacitance IP, and solar revolution. Stop - its a niche car maker. Nothing more. Nothing less.

(On the other hand, the fact Trump is tweeting furiously about Amazon sums up all the reasons for buying it. I’m indebted to my chum Pat Duke for pointing out Trump Tweets:  “Amazon is putting thousands of retailers out of business”, and “The Trump Administration will not tolerate monopolies”, as great reasons to own the stock!)

More broadly, however, there is a push back on Data and Tech Stocks. Where a company trades on a multiple of 138x just because we’ve bought the narrative about their bright/great/disruptive future, and then it slips back to a more realistic low/mid double digit - that infers a significant price shock.  

If you look back 10 years, the degree of change and refocus becomes apparent. Pre the Global Financial Crisis, in 2007 Microsoft was the only “Tech” stock in the top 10 corporates by market capitalisation. The rest of the list included names like Exxon, GE, Citigroup, AT&T, Shell, BOA, ICBC and HSBC.

Today; Apple, Google, Microsoft, Amazon, and Tencent take the top 5 places. Berkshire Hathaway is next then Alibaba and Facebook with JP Morgan and J&J rounding it up. Tech is nearly 80% of the top ten market cap, up from 10% in 10 years!!!

So, back to the day job, and thinking about when to step back into stocks. Meanwhile, the slight pick up in bonds looks a good selling opportunity. If anyone wants to lighten up on their corporate low grade books… we’re all ears..