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Saturday, 21 October 2017

Lunch isn't for wimps

Oh, friends in high places! Yesterday, while markets were falling to pieces I was enjoying a very jolly luncheon with two great proponents of the noble but highly underrated art of lunching, namely Matthew Davies and Keith Mullin, editor and editor at large respectively of the IFR. We had a hearty moan about how much better things used to be – before American investment banks introduced still and sparkling water to replace Chardonnay and Claret – and how a cosy culture of “there was enough in the trough for everyone to make a decent living” was replaced by a dog-eat-dog environment which was no better for most and worse for all.

Alas, at some point they both looked at me and asked the question which everyone is asking everyone else: “So, where do we go from here?”

Anthony Peters, SwissInvest Strategist

Anthony Peters, SwissInvest Strategist

All the while, Italian financial assets were being taken to the woodshed. The MIB took a near 4% hit and the Italian 10-year bond closed 41 1/2bps higher at 5.68%. To put that in context, it was at 4.91% at last Monday’s close and 4.79% a month ago.

However, I really do think that the market has got this one wrong. It would seem that the warfare within the political leadership in Rome is what markets are focusing on. But this is Italy chaps! If there is one thing that the Roman Empire brought all of us, it is the understanding that a stable bureaucracy is more important than stable government. Italy didn’t used to do stable government: I recall the mad ’60s and ’70s where Italy was changing governments faster than it was changing shirts. The civil service kept the place together. The “stability” which Silvio Berlusconi has brought the country doesn’t seem to have done it much good but as authority at the top seems to be disintegrating, the civil service can take control again and it is there that the austerity programmes are being made and implemented.   Although Italy is one of the PIIGS, it enjoys a strong non-political civil service and a very high savings ratio.

During the banking crisis, the markets didn’t give a toss who was good and who was bad; it simply attacked whoever strayed in front of the cross-hairs. We must be prepared to accept that what is occurring here is the sovereign equivalent of the dark days of March 2009 when Barclays 4 3/4 perps were trading at 14.50 (although Tier I bonds are hurting in this current mess, they’re still around 75.00).

One must be brave in assessing the situation and price in that markets are nothing more than discombobulated. Looking back to 2008/09, we would all have to agree that the best long term performance was probably achieved by those who did not panic and who rode out the storm. Sure, there were assets one would have done best to dump – Lehman bonds for one – but the world did not come to an end and it will not do so now either.

Italy has a strong economy, a high savings ratio and the ability to implement significant austerity measures. It did not suffer from a property bubble and its society is not over-leveraged. It might not be Germany or Holland but it is not Greece, Ireland or Portugal either. The markets’ attack on Italy might prove to be a bridge too far; this might prove to be the high water mark of the sovereign crisis.

However, that does not let the European political class off the hook. The persistent inability of the Eurocrats to draw a line in the sand without drawing another one a few days later and another one a few days after that has caused no end of damage to the credibility of the so-called leadership (so called because it has failed to lead). This has opened the field to all comers to take pot-shots at them. When the boat was found to be holed, instead of agreeing on why it was leaking and on how to fix it they have argued over whose fault it was, how wet the water might be and whether, if everyone sat on the same side of the boat, one might be able to get the hole above the water-line. Procrastination would rule okay, if only we could get around to it.

Aluminium Can

Meanwhile, the US corporate reporting season for Q2 kicked off with a mixed bag from the traditional curtain-opener, Alcoa Inc. Net income doubled to 28 cents from 13 cents a year ago but still disappointed as early calls had been for a figure in the low 30s. Both the chief executive, Klaus Kleinfeld, and the CFO, Chuck McLane, gave very upbeat assessments of the immediate future but as Mandy Rice-Davies would have put it, they would do, wouldn’t they? The overall price trend in aluminium and in aluminates is positive with the LME contract still trading in its longer term rising channel. The pre-crisis high was at $3,300 per tonne and, although off recent highs of US$2,800, at yesterday’s closing price of US$2,478 one must agree that there is still upside in the price. As a US company, Alcoa is not exposed to the dollar fluctuation; if it were accounting in Euros it would not be looking half as good. But it is in dollars and there you are.

We really get cracking on Thursday with both Google and J.P.Morgan. Until then, watch the panic, marvel at what a CFA does for you and keep your powder dry.                   

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