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Wednesday, 18 October 2017

On thankful returns and bottom fishing

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Anthony Peters is back to mull the markets and Warren Buffett’s latest big bet…

I’m back; well, I’m sort of back. Having suffered what is generally regarded as a “life changing experience”, I return as a slightly, though not significantly different person. The most obvious change is that, having burnt my face quite significantly and having given myself something similar to a “burn-peel” for which some women pay thousands of pounds, I have no more wrinkles on my forehead and hence I look ten years younger. As far as other parts of me are concerned, the outcome isn’t quite as satisfying but most of that will remain hidden from public view. I have a huge amount for which to thank the servicemen and women who suffered severe injuries in Afghanistan for it is in times of war that medical science makes its greatest advances and burns treatment has been one of the foremost beneficiaries.

For a while to come, I will be to-ing and fro-ing for follow-up treatment so although I will continue to call my column my “daily”, it might not, initially at least, be quite as daily as readers are accustomed to. For this I beg you to indulge me. 

During the past five weeks – that appears to be not at all long for those who saw me immediately after the accident while wired up in intensive care – I have only paid scant attention to markets and it appears that the key themes remain more or less the same: a Greek situation which everybody knows has not been resolved as the country remains in the wrong currency, a Chinese economy which isn’t doing at all well but of which nobody has a clue what the real figures look like, and a Fed which is cranking up for a tightening move but which is trying not to freak markets out that the end of the interest rate super-cycle is about to spell the greatest repricing of assets since America bought 1,518,800km-squared of Alaska off the Russians for US$7,200,000 or 2 cents per acre.

My grasp of some of the micro-details of day to day trading is obviously a bit rusty but it should not take long to catch up on that front. There’s no wizardry involved, even though we do like to be paid as though there were.

So, right in at the deep-end with Friday’s US labour statistics for July which more or less hit expectations. The increase in the Nonfarm Payrolls was 215,000, just slightly behind the consensus forecast of 225,000 but the revision of the June number from 223,000 to 231,000 made up for that. Any fears that the recovery in the jobs market was about to hit the buffers proved to be unfounded although there are still many outstanding questions as to the quality of many of the jobs which are being created.

Summer sees lots of school leavers join the workforce and despite the creation of well over 200,000 jobs, both the unemployment rate and the participation rate remained unchanged at 5.3% and 62.6%, respectively. That reminds us that the US economy needs to create that sort of number of jobs on a monthly basis in order to stand still. This has of course given those looking for the first tightening move on September 17 a boost which might explain the muted response by US equity markets, the key ones of which fell by around ¼%.

That should change on the open today, backed up by the news that Warren Buffett’s Berkshire Hathaway is in talks to acquire Precision Castparts, an aerospace components manufacturer for around US$30 billion. That would represent something in the area of half of Berkshires currently unproductive cash-pile. PCP is not exactly an old-fashioned metal basher but it is about as close as one can get. Buffett has always liked companies which make things - Goldman Sachs excepted unless one includes the process of making millionaires – and that is what PCP does. The aerospace sector is bombed out thanks to the significant reduction in Western defence spending but Buffet has always said that one should be buying when everyone else is selling and selling when everyone else is buying. This looks like a typical case of good, old-fashioned bottom fishing.

Part of Buffett’s magic touch has always been to be able to separate the performance of markets from that of the economy. He is not infallible but lesser mortals in the world of M&A will be digging deep into the financials of engineering companies, looking for the next trade.

With this, Buffett has, all of a sudden, stopped Berkshire from being rated as a reinsurance group and put it back where it belongs as a strategic investor. That’s still a category not recognised in the sliced and diced world of CFA thinking but as our Warren isn’t a charter holder himself, does he care?

Elsewhere, the Chinese indices leapt by something in the region of 4½-5% in today’s trading which demonstrates just how sound their equity pricing models are. Perhaps, though, it is simply the response to the weak trade figures – exports in July dropped by 8.9% (consensus -0.3%) and imports by 8.6% (6.6%) which revives the hope and/or expectation that the PBOC will once again ease to stimulate.

So there we are; back in the saddle and once again many thanks to all of those who have, over the past few weeks, popped up and wished me well. Special greetings to “The Archbishop” who simply said that he needed me back for his morning read.

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