Blain's Morning Porridge from Bill Blain

Gamma Ray Bursts, El-Erian on market disruption, Tech Stocks and Italy Bonds.

“I’ve always admired Capital Mainwaring.” [I don’t!]

I must stop reading newspapers. They are scary. Why worry about stocks and bonds when we’ve apparently got a pinwheel Nebula spinning at 12mm km/hour, named after the Egyptian God of Chaos (Apep), about to go Nova and its practically right next door – only 8000 light years away! That’s like the desk next to me in galactic terms! If a Gamma Ray Burst from such an event hit we are all literally toast. Global Crash or Supernova? You choose. (https://www.thetimes.co.uk/article/dying-star-could-be-a-time-bomb-rgrw2mvkq)

Rather puts things in perspective….

But, let’s assume a Supernova is not going to happen before I collect my pension.. so back to the day job.

Another bad day in stocks and still it’s the Tech companies that are leading the downside. Oil is taking a spanking, and if there was anything positive to say about the bond markets, bless me, but I can’t find it.

The papers today are full of fear… “buy-the-dip no longer working”, “short-sellers squeezed”, or “Tech Skid Becoming a Full-Blown Crash”. The extraordinarily cold weather in the US, and the threat it raises to the masses going Black Friday shopping, is being touted as yet another nail in the stock-market coffin.

However, relax. It all makes sense. Kind of.

In the FT there is a rather good article by Mo-the-Tash (sorry if anyone is offended by the nickname we’ve given Mohammed El-Arian – but its affectionate!) Let me give you a random sprinkling of phrases from his article “Risks rise for investors as developed economies falter”

Market choppiness, technical dislocations, behavioural biases, repressed volatility, market vulnerabilities, tighter liquidity, Fed balance sheet contraction, delicate economic conditions, drivers of growth – business investment, household consumption and government stimulus, economies losing momentum, instability and dislocation, danger of passive investing, technical fragility, asymmetrical responses, rollercoasters and volatility, loss-aversion biases, and “tail-events”

i’d put it top of your reading list this morning. Breathe deep, relax and sip a coffee.

Breathe out, savour the taste, and consider what’s fundamentally changed?

Figure out what it means for solid stocks as they become more investible at more realistic prices. The Age of Financial Realism is upon us!

I have my reservations about some of the FAANG names, but after I dared to present heretical thoughts that maybe US Tech stocks have had their day, I got a very sharp email from a chum of mine who evangelises the divine truth that US Tech Stocks are going to rule the world.

He points out the FAANGs – Facebook, Amazon, Apple, Netflix and Google – have become  effective monopolies and unregulated utilities. Monopolies are about access – and that’s just one way Amazon gets paid. My chum even suggests “Amazon, Facebook and Google paid good money for GDPR; a finer moat around their monopolies cannot be imagined!” He calls the recent stock price moves.. “noise”.

In the US 13% of retail sales are e-commerce. In the UK its 18%, and every penny you spend on the net is another penny you didn’t spent at John Lewis.

There is certainly some regulatory danger around the FAANGs – as Apple’s CEO has acknowledged – but even that spells opportunities. The breakup of Standard Oil last century and the telephone companies more recently spurred a feeding frenzy of M&A.

There is noise around the stock prices of the FAANGs at present, but don’t let that distract you from the underlying trend!

* * *

Meanwhile, in a galaxy far far away, an interesting question from ECB governor Nowotny: “Who will purchase the roughly Euro 275 bln of debt Italy expects to issue in 2019?”

I suspect Italian banks will be “encouraged” to take that bet.

I suspect they already are – the street word is the big foreign buyers of BTPs just happen to be Italian banks in London. Here’s what I expect will happen, and wonder if it’s a trade worth following:

The Italians and others will make a judgement call the ECB and Italy will be complicit partners in a “anything-it-takes Euro” fudge. Even as the ECB and EU rant at Italy about budget deficits and demands it sticks to the rules while Italy blusters about leaving the Euro or running a parallel dimension currency, the ECB or one of the resolution vehicles will quietly offer the banks unlimited Long-term Repo facilities at effective zero rates on their BTP positions, because if they don’t then the Italian banking system will disappear in a puff of logic – thus precipitating the end of everything. And, assuming Italy gets downgraded to junk? Assume the ECB will fudge that as well….

If it doesn’t happen.. well that’s a whole new game completely…