Bill Blain: "Something Is Out Of Balance, But Is It Growth, Stocks Or Bonds? Perhaps All Three?"

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From “Blain’s Morning Porridge” by Bill Blain of Mint Partners

“We can work with fear.”

Interesting markets. Again. Tomorrow the Fed will Hike US rates by 25 basis points. The sell-off in Tech continues. The limited reaction to the UK Election howler continues to suggest we’re still short on understanding what it all means. European banks and financials continue to surprise.

All the uncertainty and diversity of thinking means the market is laden with opportunities – it’s just a question of figuring out which are the good ones and which will ultimately lead to chaos.. 

Naturally, the fact the Fed will be hiking rates by 25 basis points tomorrow has triggered a veritable rash of comments about the end of the bond market. Taken in conjunction with stronger growth, rising IMF forecasts, the possibility of the Fed unwinding the balance sheet, and inflation signals from the labour market, something has to change say the analysts. They say bond yields will rise – end of the world!

Not so sure myself. As I’ve written so many times, something is out of balance, but is it growth, stocks or bonds? Perhaps all three.

The Tech crash of the last few days has been a standout moment. Certain analysts have seized on the correction in FANG stocks with schadenfreude-like glee – after all they’ve been predicting it for months/years. But the reality is tech has been the best performing US Sector since 2009. Then Tech and Consumer Discretionary stocks accounted for 26% of market cap – today its 36%. The indices are unchanged (thus far) because the selloff in Tech has been balanced by other sectors still rising – the new gods of Financials and Heathcare being at the fore-front.

What we’ve got is a classic correction in Tech – where the magnitude has been amplified by panicking last-fool investors (those who just got in and have caught what looks like the last 2% of a rally and all the tumble!). However, Goldman are saying the current Goldilocks scenario of healthy growth and low rates can’t continue – and the tech stock correction may be confirmation. They see parallels with the 2000 tech bubble busting. (But they still expect any sell-off will be limited.)

What about European financials? Last week I was writing about why the Banco Popular “Capital” Bail-in event hadn’t triggered contagion across the whole financial sector, but I was still very nervous on Italian banks.

However, a senior Italian banker I know tells me I have nothing to worry about – he is certain the Italians are going to fix their banks one way or another – and without either bail-in or resolution. These events would be disastrous for Italy, possibly precipitating a banking crisis of monumental proportions. (This is a guy who genuinely knows Italy – while, as a Anglo-Celtic-Saxon, I don’t have a breeze what’s really going on under the surface outside Canary Wharf….)

His expectations are simple. In the worst case the Italian Deposit Guarantee fund would need to cover the Euro 11bln retail depositor problem (exacerbated by selling retail investors subordinated debt as savings). That can be avoided by “curing” Banca Populare di Vicenza and Veneto Banca’s capital shortages with a Euro 6.5 bln capital injection. But EU approval would be needed, which is why the Government is herding the major Italian banks into providing yet more capital – a further Euro 1.5 bln – which would allow the Government to put in the remaining Euro 5 bln without the Europeans getting unduly shirty. Go figure what makes sense – bail-out or crisis?

So don’t panic about Italian banks. I’m told things are looking up in Italy. The IMF made a substantial improvement in their growth forecasts, while 5-Star took a hit in the elections over last weekend – reducing the electoral threat. However, some of the banks are hold-outs on further capital contributions, apparently not grasping Euro 11bln losses to the deposit fund could be avoided by the polite fiction a Euro 1.5 bln “capital injection” sorts them! It’s a space to keep watching! (Of course, that’s the kind of money RBOS and Deutsche Bank are fined on a normal day. (RBOS will probably agree a $3.5 bln fine today over Libor!)) Note, I have not mentioned smoke and mirrors at any time.

Meanwhile, one note this morning was focused on opportunities in the Insurance Sector – with insurance companies flush with cash and particularly disinterested in current bond yields, perhaps a better way of deploying capital is into M&A – meaning perhaps it’s time to look at the shallower end of the insurance gene pool for the cheaper names.

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'Nothing Sticks' h/t @SArdire

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