I couldn’t have got it more wrong.
Having yesterday suggested on the back of the storming US Treasury 2yr auction results on Tuesday that the three-auction wisdom of one good, one indifferent and one poor might not apply this time, the 5yr sale on Wednesday came back to bite me in the back-side.
Rated as low as 2 out of 5 by the primary dealer community, it was a near failure. The bid-to-cover ratio was 2.56 times, well below average and 41% of the stock was left on dealers’ books.
This might be a reflection of Fed Chair Janet Yellen’s warning yesterday that she wants investors to be prepared for the possibility that the Fed will raise interest rates sooner than is currently priced and it is conventionally the belly of the curve which bears the brunt of early shifts in policy. By the time the 7yr notes are sold today, that part of the curve should have repriced, but it was too late for the 5s.
Meanwhile, US equities evidently didn’t get the message as indices pushed higher. It was another day where US stocks rallied on economic optimism while European ones did the same on economic pessimism and, in consequence, the hope of further ECB easing. I suppose the fall of the euro – it is now below US$1.2800 and down just over 8% from the high in early May – gives some cause for optimism but seeing as the weakness in demand is in the internal market, where the relative strength or weakness in the currency is of no consequence, this appears a bit silly. Moreover, China, which is the great driver of European export growth, is beginning to show fairly distinctive signs of late-cycle torpor.
Don’t get me wrong; there is still considerable growth in the Chinese system compared to Europe or even the UK and US, but if one removes one’s rose-tinted spectacles, the more disappointing releases are outstripping the more encouraging ones.
Best one continues to keep one’s finger firmly on the pulse of the construction sector, but the news flash yesterday that iron ore prices have fallen below US$80.00/ton for the first time since September 2009 speaks volumes.
Though not as yet significant, the Baltic Capesize Index has also fallen back below US$2,000 but until it drops below US$1,200 there is little to worry about. It is just coming off a monster rally in August but it might just be worth keeping an eye on that one too.
There are currently lots of moving parts which are clearly not moving in synch. I’m not sure that we have all yet learnt how to deal with an equation with four variables – the fourth being China added to the US, Europe and Japan – and how to gauge their interaction in terms of growth and any slow-down.
Maybe equity markets are ahead of the curve and are trading to some generally unknown new economic paradigm. Maybe they are behind and haven’t yet clocked that there are undercurrents which can’t be masked by a surprise up-tick in French employment (August saw jobseekers decline by 11,100 as opposed to the consensus forecast of an increase of 16,500).
Germany’s September IFO Index looked shabby, especially with the Expectations component undershooting forecasts and falling below 100 to 99.3. And yet the DAX closed up 0.7% at 9,661.97 points and the CAC 1.25% higher at 4,413.72 points.
What really is a foreign company?
In another development, Barry O’Bama is back in the news and I’m not referring to his rousing speech at the United Nations where he called upon the world to get off its back-side and to face up to the Islamic States. I am thinking more of his programme to stop the rush by US companies to find ways of moving their headquarters out of US tax jurisdiction by means of the so-called inversion.
Here’s the recipe: take an overly complicated, high taxation structure and make it even more complicated. Outcome: tax lawyers and tax accountants get richer while revenues fall further. The idea is to redefine what constitutes a foreign company. If over 80% of the shares are in the hands of US domiciled shareholders or in vehicles controlled from the US, then the inversion doesn’t work and repatriated profits will continue to be taxed at the differential between US corporation tax rates and those of the lower rated off-shore domicile.
Yippee! Let’s make a fortune finding loopholes in the definitions and then challenging them in the courts! Even Bill Clinton thinks he’s barking up the wrong tree (or maybe he’s just plain barking) and that the solution is to lower taxes closer to OECD norms. The administrative savings alone would surely run into billions. Watch for an open discussion on the subject in the run-up to the mid-term elections on November 4th.
Syndicates and Synthos
Finally, and a bit closer to home, I had the moans and groans of a client yesterday over loose practices in credit syndicate behaviour. The body in question was the 7yr issue for Synthos, the Polish bulk chemical company. When announced, he asked one of the leads what size of issue the company was envisaging, only to be told that the size was not yet known. Next up he is informed that the deal is oversubscribed. How, he wondered, could a deal of unknown size be oversubscribed?
Eventually messages went out informing the world that a benchmark issue had been called which, in anybody’s language is supposed to mean €500m. In the event, so he finally found out, the deal was pegged at €350m and the final book was €500m.
This is poor information which could, in some circles at least, be deemed to be downright misleading. If bond markets are supposed to behave like equity markets, then please be kind enough to announce the size of the deal and the size of the green-shoe upfront and stop playing hide and seek with the investor community.
The cult of drip-feeding information had gone far enough. Power corrupts and absolute power corrupts absolutely. It is time for practices to be cleaned up and for investors not to be treated as though they were a bunch of six year olds in the M&M store on Leicester Square.
