It was interesting watching my chum, Bill Blain of Mint Partners, on the TV this morning. I had to take my hat off to him for when asked for a one word answer as to whether Greece would or would not make it, he elegantly answered – in one word – “Maybe”.
What struck me more was when he was asked for a similarly binary response as to whether Chinese stock markets were overvalued.
The presenter framed her question with the answer she might have been looking for by suggesting that many analysts were finding valuations not to be at all stretched and were arguing that all the Chinese markets were doing was playing a huge game of catch-up. Bill was having nothing of it. He was quite clear that there is a big old bubble inflating and, in referring to a piece I had seen and highlighted myself last week, added that if Chinese car dealerships were struggling to shift up-market product as local punters were happier to buy the cheaper car and open a brokerage account with the balance.
This prompted me to take another look at how European stocks are faring in light of the Greek crisis. The DAX is currently trading at around 11,000 points, its lowest since mid-February. On April 14, it made its high for the year at 12,390.75. This is a long way away from being a worrying level although I did pick up on 10,500 points as being where there is an unfilled gap which opened in the rally between January 22 and January 23. It’s not a big gap – less than 50 points – but technical analysts will look at this as being very dangerous territory.
Open up-days and open down-days - those are days when markets open at higher or lower levels than they had traded at before and then continue to trade in a range which does not cross any previously trade prices - leaving gaps which are prices which have effectively never traded. Technicians don’t like these gaps and insist that they will have to be “filled” at some point. This normally happens in the following days. Even the Shenzhen Index, with all its silliness, has only one small open gap from May and that is no bigger than the one in the Dax chart.
The Frankfurt index broke into entirely new territory in mid-January, having finally cracked the 10,000 point mark which had proven to be such a tough hurdle. A correction in the index back to 10,000 points from the current 11,000 points looks unlikely although I would, nevertheless, very much like to file that statement in the “Never Say Never” folder. A longer-dated chart would clearly have fair value much closer to 10,000 points.
Stock markets are strange animals – as are practitioners of the dark arts of equity investing – which have an uncanny ability to convince themselves that they are a screaming buy. Bill is old enough to remember the heady days of 1989 when the Nikkei was at 39,000 and when we were all being told by breathless enthusiasts it was still fairly valued and that it could never go down again because of the wall of money which Mrs Watanabe – it was the wife who traditionally managed the savings and investments while the husband spent 15 hours, either in the office or in the Pachinko parlour – would continue pouring into it.
The Shanghai Composite is, despite the recent sell-down, still up by 52% year-to-date and the Shenzhen is over 110% in the black after less than 6 months. How do I hear echoes of the assurances of the “New Economic Paradigm” ringing in my ears….
Bonds bode poorly
This morning, European bond markets are opening with an air of panic as the Spanish 10-year traded above 2.50% for the first time since August last year. Italy is doing a bit, but not a lot, better and even French bonds are widening to Bunds as German bonds are, at the time of writing, the only ones which are trading better than they closed last night. I’m not sure they will hold.
Bonds are evidently not giving the great reassurances that all will be well too much credence. President Francois “Qui? Moi?” Hollande is up front beating the “Greece will stay in the euro” drum but, as the late Mandy Rice-Davies would have had it, he would, wouldn’t he? The Athens “Spliterati” still seem to be of the opinion that it is up to the creditors to back down and, to some extent they are right. Fact remains that if they do give in, they will have sold down the river all the rules of the club and, so history has shown, without rules there is no club. Very scary stuff and hence no great surprise to report that Monday’s markets, volume-wise, never showed up.
Preparing for the worst
I was in touch yesterday with a senior analyst at one of the more powerful houses on the street. She made it quite clear that unless volumes pick up quite considerably, some pretty drastic measures will have to be undertaken on the cost front before the summer is out. To me that sounded like another potential wave of redundancies. We can’t continue to live on what we have. Whether the expected Fed hike will feed some energy back into the torturous waiting game isn’t all that certain.
An article in Bloomberg did the rounds yesterday in which the CEO of Aberdeen Asset management, Martin Gilbert, is reported to have stated that the firm has arranged US$500 million in credit lines in order to meet flash redemptions, were things to get hairy. This is a clear acknowledgement that the Street won’t be there in order to take stock off their hands, should they need to cash out in a hurry.
Just sit back for a moment and ruminate on the horrible thought that investment funds might need to borrow money from the banks so that they can meet withdrawals because the can’t sell bonds in the market. Multiply that in your head by all the big bond funds, then please be so kind as to call your local MP and ask him to explain to you how, why and where exactly transparency creates liquidity.
