There seem to be more banks in Germany
March 20, 2019

Bill Blain's Morning Porridge

"There seem to be more banks in Germany than bicycles in Beijing…" 

Unfortunately, a number of readers responded to yesterday's not-terribly-serious Morning Porridge by asking what I really think is going to happen re Brexit.

UNFAIR QUESTION!

I don't have a clue. It has developed an entirely new spatial dimension all of its own. Extension looks inevitable – which is going to leave the Brexiteers apoplectic. A second referendum looks unlikely – which leaves the Remoaners groaning and moaning.

In the current furious mood it's difficult to see any agreement coalescing to cobble together a compromise with best elements of the May deal, Norway, Canada or trade zone factions. Twelve months more of this and "No Brexit" is unsurprisingly the very real backstop as we plead for it to stop!

Meanwhile, the big issues of the modern age carry on around us. Reading between headlines of an imminent China-US trade agreement, it sounds like they really remain miles apart on intellectual property and withdrawal of tariffs – expect some volatility on the back of no news.

China is visiting France and Italy this week – and Italy looks likely to sign up to their co-prosperity sphere – the Belt and Road. The issues about engagement with China's economic might, and the risks of linking to an economy that sees no inherent risks in total economic surveillance of its populace, need serious consideration – which begs the question: who is actually calling the play in Italy and who has done the analysis to open the door to China risk?  

It's another example of European fracture – there is no single vision thang! The other big example of fracture this week being the supposed Deutsche Bank/Commerzbank merger to create a German too-big-to-fail financial giant – (albeit one handicapped by "what's in Commerzbank's cupboards?" in terms of dodgy assets.) National champion banks just don't ever play out well.. especially in Germany which might make decent cars, but has never been much cop at banking.

The big issues for markets remain the "what-ifs" and "no see ems". I've been thinking about risk recently, trying to fathom out what is most likely to trigger not just the major market moves, (so often its politics), but also the idiosyncratic tremblors that move individual stocks and bonds. It occurs to me there are a couple of new risk methodologies we have to add to the threat board. 

Fake News Risk is one of the new categories. We're now all familiar with Trump screaming "Fake News! Fake News!" every time he's caught with his proverbial finger in a new pie. We've also seen how our initial horror at Trump Twitter storms is now diluted to "really?" Yet, Fake News has become a major corporate risk on two levels: overestimating its impact, yet becoming overly complacent about news because so much of the news is now distrusted and gets discounted as verbiage, opinion and speculation dressed up as fact. 

Take the case of Boeing over the last 10 days and the crash of the Air Ethiopia flight. There are few real facts - until the investigation of the black boxes in Paris is completed next month we can't say with any degree of certainty what really happened.

Yet the market moved dramatically on the crash, and subsequently on stories about "satellite data" confirming the plane's erratic climb, statements from unnamed pilots about "bucking bronco 737 Max aircraft", articles on the failure of the FAA, and speculative articles in mainstream "respected" media about how Boeing skimped the design, documentation and training processes to get airlines to buy the new plane.

The fact the crash so resembles the Lion Air disaster adds to the mood of imminent corporate apocalypse - despite Boeing's quickly identifying the problem immediately after the first disaster with advice on broken sensors and issuing warning notices on the problem and how pilots should respond. 

Yet, since the crash and the negative news, Boeing stock has responded pretty well to the mounting wall of negative news – trading down from US$430, but now in a stable $365-380 band. I'm actively encouraged by how analysts aren't being sucked into the panic.

In terms of aviation finance - one the core sectors where I see most alternative value opportunities - there are many MAX aircraft in aviation portfolios giving fleet leasing managers concern, but the likelihood is i) other aircraft become more valuable as they fill the gaps, and ii) MAX aircraft will quickly be fixed.  

The fake news risk is like a smoulder suddenly becoming a wild fire – it's entirely possible the market will overreact when the investigation details are published. Trying to reach a judgement now on whether the stock looks underpriced requires a decision on the most likely long-term outcomes.

Go back to the basics: The problem will be fixed – although it may be a substantial cost. The order book isn't going anywhere else. Reputational damage will hit sentiment – but could be contained.

Long term the pressure mounts on Boeing to build something completely new – a regional single aisle B-XXX aimed at economy and capacity – which will be expensive. (But, it might be a smart announcement while Airbus is still consumed and self-absorbed by the political failings of the A380 programme). When making that call on Boeing stock, focus on what's real and what's fake. I think it remains a buy! 

Another risk at the fore is our old favourite - good old-fashioned corporate stupidity. The most famous example here in the UK was Jeweller Ratner's - the CEO doomed the company by famously describing their cheap earrings in a speech at the 1991 Institute of Directors annual gathering at the Royal Albert Hall on April 23 1991, as having a shorter shelf-life than a supermarket sandwich, specifically a Marks and Spencer prawn sandwich.

This morning's headlines about VW fall into the corporate stupid bracket: who would believe the CEO would take words from the gates of Auschwitz to describe his corporate strategy? The Financial Times carries interviews with "shocked" investors, all agreeing the guy has to go. 

Yet, corporate stupidity – like levering up zombie companies with debt while it's cheap – is often missed because it's so blindingly obvious. It's often tied up with governance risk – how can companies fail to solve internal flaws and breaches? Because they are internally blind to it.

Take Metro bank – in the news because its long-serving board of non-exec stuffees became immune to the flaws. Equally, don't expect others to blow the whistle on corporate stupidity – look at the failure of auditors to spot bogus accounting at Patisserie Valerie?

I could go on, but a flat laptop battery and points failure at Clapham means I'm already very late and I've got the day job to do..

Bill Blain 

Shard Capital





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Bill Blain's Morning Porridge

"There seem to be more banks in Germany than bicycles in Beijing…" 

Unfortunately, a number of readers responded to yesterday's not-terribly-serious Morning Porridge by asking what I really think is going to happen re Brexit.

UNFAIR QUESTION!

I don't have a clue. It has developed an entirely new spatial dimension all of its own. Extension looks inevitable – which is going to leave the Brexiteers apoplectic. A second referendum looks unlikely – which leaves the Remoaners groaning and moaning.

In the current furious mood it's difficult to see any agreement coalescing to cobble together a compromise with best elements of the May deal, Norway, Canada or trade zone factions. Twelve months more of this and "No Brexit" is unsurprisingly the very real backstop as we plead for it to stop!

Meanwhile, the big issues of the modern age carry on around us. Reading between headlines of an imminent China-US trade agreement, it sounds like they really remain miles apart on intellectual property and withdrawal of tariffs – expect some volatility on the back of no news.

China is visiting France and Italy this week – and Italy looks likely to sign up to their co-prosperity sphere – the Belt and Road. The issues about engagement with China's economic might, and the risks of linking to an economy that sees no inherent risks in total economic surveillance of its populace, need serious consideration – which begs the question: who is actually calling the play in Italy and who has done the analysis to open the door to China risk?  

It's another example of European fracture – there is no single vision thang! The other big example of fracture this week being the supposed Deutsche Bank/Commerzbank merger to create a German too-big-to-fail financial giant – (albeit one handicapped by "what's in Commerzbank's cupboards?" in terms of dodgy assets.) National champion banks just don't ever play out well.. especially in Germany which might make decent cars, but has never been much cop at banking.

The big issues for markets remain the "what-ifs" and "no see ems". I've been thinking about risk recently, trying to fathom out what is most likely to trigger not just the major market moves, (so often its politics), but also the idiosyncratic tremblors that move individual stocks and bonds. It occurs to me there are a couple of new risk methodologies we have to add to the threat board. 

Fake News Risk is one of the new categories. We're now all familiar with Trump screaming "Fake News! Fake News!" every time he's caught with his proverbial finger in a new pie. We've also seen how our initial horror at Trump Twitter storms is now diluted to "really?" Yet, Fake News has become a major corporate risk on two levels: overestimating its impact, yet becoming overly complacent about news because so much of the news is now distrusted and gets discounted as verbiage, opinion and speculation dressed up as fact. 

Take the case of Boeing over the last 10 days and the crash of the Air Ethiopia flight. There are few real facts - until the investigation of the black boxes in Paris is completed next month we can't say with any degree of certainty what really happened.

Yet the market moved dramatically on the crash, and subsequently on stories about "satellite data" confirming the plane's erratic climb, statements from unnamed pilots about "bucking bronco 737 Max aircraft", articles on the failure of the FAA, and speculative articles in mainstream "respected" media about how Boeing skimped the design, documentation and training processes to get airlines to buy the new plane.

The fact the crash so resembles the Lion Air disaster adds to the mood of imminent corporate apocalypse - despite Boeing's quickly identifying the problem immediately after the first disaster with advice on broken sensors and issuing warning notices on the problem and how pilots should respond. 

Yet, since the crash and the negative news, Boeing stock has responded pretty well to the mounting wall of negative news – trading down from US$430, but now in a stable $365-380 band. I'm actively encouraged by how analysts aren't being sucked into the panic.

In terms of aviation finance - one the core sectors where I see most alternative value opportunities - there are many MAX aircraft in aviation portfolios giving fleet leasing managers concern, but the likelihood is i) other aircraft become more valuable as they fill the gaps, and ii) MAX aircraft will quickly be fixed.  

The fake news risk is like a smoulder suddenly becoming a wild fire – it's entirely possible the market will overreact when the investigation details are published. Trying to reach a judgement now on whether the stock looks underpriced requires a decision on the most likely long-term outcomes.

Go back to the basics: The problem will be fixed – although it may be a substantial cost. The order book isn't going anywhere else. Reputational damage will hit sentiment – but could be contained.

Long term the pressure mounts on Boeing to build something completely new – a regional single aisle B-XXX aimed at economy and capacity – which will be expensive. (But, it might be a smart announcement while Airbus is still consumed and self-absorbed by the political failings of the A380 programme). When making that call on Boeing stock, focus on what's real and what's fake. I think it remains a buy! 

Another risk at the fore is our old favourite - good old-fashioned corporate stupidity. The most famous example here in the UK was Jeweller Ratner's - the CEO doomed the company by famously describing their cheap earrings in a speech at the 1991 Institute of Directors annual gathering at the Royal Albert Hall on April 23 1991, as having a shorter shelf-life than a supermarket sandwich, specifically a Marks and Spencer prawn sandwich.

This morning's headlines about VW fall into the corporate stupid bracket: who would believe the CEO would take words from the gates of Auschwitz to describe his corporate strategy? The Financial Times carries interviews with "shocked" investors, all agreeing the guy has to go. 

Yet, corporate stupidity – like levering up zombie companies with debt while it's cheap – is often missed because it's so blindingly obvious. It's often tied up with governance risk – how can companies fail to solve internal flaws and breaches? Because they are internally blind to it.

Take Metro bank – in the news because its long-serving board of non-exec stuffees became immune to the flaws. Equally, don't expect others to blow the whistle on corporate stupidity – look at the failure of auditors to spot bogus accounting at Patisserie Valerie?

I could go on, but a flat laptop battery and points failure at Clapham means I'm already very late and I've got the day job to do..

Bill Blain 

Shard Capital



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