TODAY’S FAYRE to markets to stress tests to Facebook to Yahoo!

TODAY’S FAYRE – Wednesday, 2nd December 2015

 

“Some say love’s a little boy,

And some say it’s a bird,

Some say it makes the world go round,

Some say that’s absurd,

And when I asked the man next door,

Who looked as if he knew,

His wife got very cross indeed,

And said it wouldn’t do.

 

Does it look like a pair of pyjamas,

Or the ham in a temperance hotel?

Does its odour remind one of llamas,

Or has it a comforting smell?

Is it prickly to touch as a hedge is,

Or soft as eiderdown fluff?

Is it sharp or quite smooth at the edges?

O tell me the truth about love.

 

Our history books refer to it

In cryptic little notes,

It’s quite a common topic on

The Transatlantic boats;

I’ve found the subject mentioned in

Accounts of suicides,

And even seen it scribbled on

The backs of railway guides.

 

Does it howl like a hungry Alsatian,

Or boom like a military band?

Could one give a first-rate imitation

On a saw or a Steinway Grand?

Is its singing at parties a riot?

Does it only like Classical stuff?

Will it stop when one wants to be quiet?

O tell me the truth about love.”

 

WH Auden – poet – 1907-1973

 

Extraordinary to hear Tiger Woods say he has so little to look forward to or live for, after his recent physical problems? He must be in a very dark place and that being the case I am sad for him. With his opulence and life style the world should be his oyster. He needs help.

Someone who currently does not need help is Eoin Morgan, England’s ODI and T-20 captain – He is absolutely flying post a 3-0 win over Pakistan. What has become clear is that his team just love playing and performing for him! It is great to watch. They just don’t know when they are beaten. If they are, they just dust themselves down and head back to the fray!

 

Six months ago Spain’s PM Rajoya looked an electoral disaster zone – Dead and buried politically with such massive youth unemployment. I am not so sure that he cannot snatch victory from the jaws of defeat, such has been the improvement in the economy – not epic, but measurable.

 

Though US equity bourses and the FTSE 100 (0.62%) performed with some aplomb yesterday, unattractive economic data kept appearing above the parapet, starting in the UK where manufacturing data saw activity slip sharply in factories from a 16 month high 55.2 to 52.7, though the market was massaged that conditions had improved since that data was posted. In the US ISM manufacturing had an absolute ‘shocker’ yesterday, slipping by 1.5 points to 48.6. Perhaps that news will not prevent a rise in the FED rate on 15/16th December, but it might put the hawks back in their box in terms of cracking on with further rate increases. Anyway equity geeks seemed ambivalent about this news and the DOW added 0.95%, with the S&P 500 refusing to be left behind eclipsed that rally in adding 1.07% and the NASDAQ upped its game by 0.93%.

 

Consumer durables, banks and technology led the charge, with an unlikely ‘Santa’ rally gathering momentum for reasons best known to itself. Two pieces of news caught the eye. After the birth of their daughter, Mark & Priscilla Zuckerberg were the subject of a breath-taking generous level of anthropology by giving 99% of their stake in Facebook valued at circa $45 billion to educational and health charitable causes. However left with $450 million I doubt they will suffer the ‘slings and arrows of outrageous financial fortune!’ After hours Yahoo!’s shares rallied by 7% on news that CEO Marissa Mayer and her board are considering the sale of key assets – its stake in Alibaba worth $30 billion or their core search internet business including Yahoo Japan, which amounts to about 40% of the total business. Needless to say a tax efficient sale is a prerequisite; so the sale of Alibaba seems unlikely. Yahoo!’s shares have fallen from $50 to $33.10 since January – down 33%! M/S Mayer is clearly vulnerable.

 

Car sales in the US were buoyant in November – up 1.4% to 1.32 million on last year. The total for the year is 18.19 million. GM was up 1.5%, Ford by 0.4%, though some of their ‘pick-up’ truck sales were up 10%. Cheap gas was a contributing factor to these encouraging numbers. For VW, luck was not on their side with US car sales falling 24.7% last month – 23882 vehicles. VW still has a fan club but needs reassurance that the misdemeanours are behind them. We await news from the VW meeting today as to progress. VW’S credit rating was dropped to BBB+.

 

Yesterday the BOE Prudential banking committee more or less gave the banking sector a relatively clean bill of health on the stress tests. RBS and Standard Chartered have work in progress to meet tier one capital requirements. However there are still imponderables, which concern Mark Carney, set out below by Simon French, Panmure’s Chief economists. Mr Carney marked our cards but offered little in the way of remedy.

 

There are some substantive steers on future UK macro/micro prudential policymaking in today’s FSR – even if the FPC stopped short of actually introducing anything of substance. A summary of these is provided below. Happy to expand if anything in this summary triggers your interest.

 

  1. Buy To Let:The FPC stopped short of standardising leverage ratios with those of the Homebuyer mortgages. Despite the Chancellor indicating (at last month’s TSC) that he had granted powers of direction, it appears the FPC is still expecting a government consultation. Overall it seems the crackdown (Stamp Duty, MITR) in the last two fiscal events has left the FPC content to wait and see whether the pips squeak. You know my view that the material way that government will spread home ownership is not by home building (this just about keeps up with population growth) but by encouraging stock out of the B2L sector into the first time buyer subsector.

 

  1. Commercial Real Estate:This is coming up on the rails in recent FSRs as a risk to financial stability with the FPC worrying about redemptions from UK funds from EM investors. The story of debt-financed CRE (the 2008 problem) has morphed into one where the FPC worries about stressed investors withdrawing equity from the sector should macro conditions deteriorate. I would describe the FPC as putting the sector on notice- absent of any appetite to cap flows in and out of the sector.

 

  1. Investment Funds: There is a whole section devoted to Investment Trusts and the concerns over very low liquidity premia may not reflect the risks faced by investors in a procyclical race for the door. The bank estimates that “a 10% fall in market prices of sterling bonds (broadly equivalent to a 170 basis point increase in yields) could be associated with a reduction in net purchases of over £4 billion, which is greater than 30% of estimated monthly market turnover. Sales of this scale exceed the amount that asset managers estimate their funds could liquidate within a month”. The FPC once again are sounding the warning bell without taking any definitive action. There are stress tests promised in 2016 for asset managers and plenty of support for “liquidity awareness” campaigns by the FCA. Generally they seem less worried about the lack of liquidity but more that a race to the door (as we saw with the SNB decision, Treasuries flash crash, August sell-off) can become self-fulfilling. I think this ends with more and more constraints being put on OEIC redemptions in periods of market stress.

 

  1. Countercyclical capital buffer:FPC are promising a good look (in March) at the requirements to hold additional capital as UK lending picks up. The good news is that across the sector Tier 1 capital is at 13% (11% requirement) so the sector can absorb at the aggregate without new capital raises – absent of a deterioration in macro. The BoE will consult in January on how to introduce a buffer for domestic ring-fenced banks and building societies.

 

  1. General Macro Outlook:The crowded position of worrying about EM debt burdens is the principal concern for the FPC – with UK banks having exposure of 340% of Tier 1 capital (fourth globally behind Netherlands, Portugal and strangely Austria with 1100% of Tier 1 capital exposure!!!). The other big area they warn about is about overstretched asset prices should yields begin to rise. Looks a lot like Yellen’s warnings from earlier in the year so nothing really new here. For me this is the compelling reason why rates will US/UK will rise extraordinarily slowly – households and businesses are still too leveraged to enable rates to go up quickly and this would be amplified if debt servicing costs rise and wealth-driven consumption falls.  I have been arguing for some time that Central Banks have been “captured” and the breaking point (where asset prices collapse and policy tightens comes not from the macro cycle but when a policy mistake comes from government (think Corbyn, Trump, Le Pen) or a big supply side shock (OPEC, Terrorism, Volcanoes, Pandemic) hits the economy. This is my best guess on when I will turn bear on equities.

 

 

     Asian equities were not inspired by the indifferent US economic data. The ASX closed down 0.24% and the NIKKEI down 0.37%. The Shanghai Composite was up over 2% at lunch on thoughts that more stimulus packages would be offered to help the property market. The Hang Seng was 0.76% to the good at the same time. In London banks shares responded to the positive results from stress tests. Drax grabbed the ‘yellow jersey’ – up nearly 12% on news that the EU had agreed to transformation of some coal plants. BT may be forced to break with Openreach, thanks to insufficient investment. Topps Tiles posted record revenues. It looks like ‘sayonara’ to Morrison, G4S and Meggitt and ‘hello to Worldpay, Provident Financial and DCC to the FTSE 100. This morning Greene King will please its acolytes and Sage and Zoopla will not have irritated them.

UK companies posting results –  Wednesday – BREWIN DOLPHIN, ZOOPLA, GREENE KING, SAGE, Thursday – GW PHARMACEUTICAL, DS SMITH, Friday – BERKELEY GROUP, EASYJET (TS) US companies posting interim results –  Wednesday – AMERICAN EAGLE, AEROPOSTALE, Thursday – KROGER, DOLLAR GENERAL, BARNES & NOBLE, Friday – BIG LOTS

Economic – Wednesday – US Beige Book, UK Construction, Thursday – ECB meeting, Friday – US balance of trade. Non-Farm Payrolls.

 

David Buik

 

Market Commentator – Panmure Gordon & Co

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