I hate my computer
May 17, 2017

Mint - Blain's Morning Porridge

Argg! This feels like a bad start to my working day: after doing a radio programme first thing, I then spent over an hour writing a very sharp, witty and informative Morning Porridge, before my WORD on the computer announced it had "failed" and I lost everything.

So apologies if it feels rushed this morning, and for it being so late.

Talking to accounts yesterday I was struck by a sense of resignation: stocks seem determined to go stratospheric despite the fact many people think a correction/reset is coming. Bond spreads are at all-time tights – and everyone seems to be chasing them down. Investors are frustrated they aren't catching the returns, and it's human nature to find reasons to talk these gains down.

For instance, I'm told stock market gains are due to "passive" investments like indices and exchange-traded funds rather than active management, and tight yields are unsustainable as and when central banks normalize and interest rates climb higher. (Actually, I think rising interest rates are further away than many think!)

But, the bottom line is financial asset prices continue to rise despite our disbelief! Should you buy into the story at this stage in the game? The rule remains – don't join the last 5 percent of a rally just so you can catch the first 25 percent of the subsequent crash!

There are other games to play – and that's to look for real value opportunities out there. There are many stories – some of which are risk and obvious, some of which require a little more imagination.

For instance, financials have become a real "catch a falling knife" sector in recent years. Everyone is very aware of capital risk – the risk a central bank or regulator might decide a bank's capital position is unsustainable and bail-in debt investors across the curve. It's only happened with a number of basket case olive oil belt banks thus far.

Banco Popular is an interesting one – back in the pre-crisis days it was one of my top European bank stocks. It had a superb cost/income ratio, stuck to the retail businesses it knew well, had management focused on the bottom line and even a AAA rating for a long while. Now it's in serious trouble with a massive EUR 37 billion non-performing loans book – mainly from real estate. Its Capital CoCo Perpetuals are trading around 18 percent-plus. Is it a buy?

It's put itself on the block to sell, sell assets or restructure. The stories are Bankia, Santander and BBVA are all keen to look, but we also know Sabadell and Caixa already decided it's a "no-way José" story. The price is likely to remain highly volatile on any news – like another bank pulling out or rumours of a European Central Bank capital discussion.

And, also in banking, hats off to Lloyds – the last of the UK government's stake will be sold today, netting us taxpayers a modest £900 million profit. Lloyds was a superb bank before the Global Financial Crisis (again sticking to its knitting and never pretending to be what it patently was not), but got hoisted on the petard of buying the toxic HBOS.

Put Lloyds in the context of the Royal Bank of Scotland bailout. The government put £46 billion into a bank that has subsequently managed to lose a further £56 billion, and is still essentially unfixed and unresolved. I must giggle at a chum of mine working there who thinks changing the name of their investment bank to NatWest will somehow make them more palatable…

Or how about Scotland? As the risk of Indyrep2 reduces, how do you fancy buying Scottish debt at a considerable spread over gilts, when the risk is exactly the same.. (unless of course Scotland ever does get itself chucked out the UK!)

Away from banking and Scotland, another name to look at is the very troubled commodities trader Noble Group. The share price is one-third of book, the bonds have crashed to junkety-junk-junk, while the ratings agencies say it will struggle to meet repayments – it's got $1.2 billion of cashflow available to repay some $2.1 billion of debt this year. Yet, it's brought on a restructuring specialist and is clearly open to sale. Our high-yield team is all over the name like a nasty rash.

Out of time, and back to the day job!

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

Argg! This feels like a bad start to my working day: after doing a radio programme first thing, I then spent over an hour writing a very sharp, witty and informative Morning Porridge, before my WORD on the computer announced it had "failed" and I lost everything.

So apologies if it feels rushed this morning, and for it being so late.

Talking to accounts yesterday I was struck by a sense of resignation: stocks seem determined to go stratospheric despite the fact many people think a correction/reset is coming. Bond spreads are at all-time tights – and everyone seems to be chasing them down. Investors are frustrated they aren't catching the returns, and it's human nature to find reasons to talk these gains down.

For instance, I'm told stock market gains are due to "passive" investments like indices and exchange-traded funds rather than active management, and tight yields are unsustainable as and when central banks normalize and interest rates climb higher. (Actually, I think rising interest rates are further away than many think!)

But, the bottom line is financial asset prices continue to rise despite our disbelief! Should you buy into the story at this stage in the game? The rule remains – don't join the last 5 percent of a rally just so you can catch the first 25 percent of the subsequent crash!

There are other games to play – and that's to look for real value opportunities out there. There are many stories – some of which are risk and obvious, some of which require a little more imagination.

For instance, financials have become a real "catch a falling knife" sector in recent years. Everyone is very aware of capital risk – the risk a central bank or regulator might decide a bank's capital position is unsustainable and bail-in debt investors across the curve. It's only happened with a number of basket case olive oil belt banks thus far.

Banco Popular is an interesting one – back in the pre-crisis days it was one of my top European bank stocks. It had a superb cost/income ratio, stuck to the retail businesses it knew well, had management focused on the bottom line and even a AAA rating for a long while. Now it's in serious trouble with a massive EUR 37 billion non-performing loans book – mainly from real estate. Its Capital CoCo Perpetuals are trading around 18 percent-plus. Is it a buy?

It's put itself on the block to sell, sell assets or restructure. The stories are Bankia, Santander and BBVA are all keen to look, but we also know Sabadell and Caixa already decided it's a "no-way José" story. The price is likely to remain highly volatile on any news – like another bank pulling out or rumours of a European Central Bank capital discussion.

And, also in banking, hats off to Lloyds – the last of the UK government's stake will be sold today, netting us taxpayers a modest £900 million profit. Lloyds was a superb bank before the Global Financial Crisis (again sticking to its knitting and never pretending to be what it patently was not), but got hoisted on the petard of buying the toxic HBOS.

Put Lloyds in the context of the Royal Bank of Scotland bailout. The government put £46 billion into a bank that has subsequently managed to lose a further £56 billion, and is still essentially unfixed and unresolved. I must giggle at a chum of mine working there who thinks changing the name of their investment bank to NatWest will somehow make them more palatable…

Or how about Scotland? As the risk of Indyrep2 reduces, how do you fancy buying Scottish debt at a considerable spread over gilts, when the risk is exactly the same.. (unless of course Scotland ever does get itself chucked out the UK!)

Away from banking and Scotland, another name to look at is the very troubled commodities trader Noble Group. The share price is one-third of book, the bonds have crashed to junkety-junk-junk, while the ratings agencies say it will struggle to meet repayments – it's got $1.2 billion of cashflow available to repay some $2.1 billion of debt this year. Yet, it's brought on a restructuring specialist and is clearly open to sale. Our high-yield team is all over the name like a nasty rash.

Out of time, and back to the day job!

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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