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Tuesday, 24 October 2017

The primary grabathon

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Anthony Peters on the scramble for new paper and a lack of secondary sellers.

Anthony Peters

Anthony Peters SwissInvest strategist

In the 1970 comic war film (yes, that exists), Kelly’s Heroes, the character of Oddball, played by a very young Donald Sutherland, wanders through the battlefields with the line “Don’t gimme ‘dem negative vibes…” while an equally young Clint Eastwood’s Kelly is busily planning and executing the biggest gold heist in history.

In the markets there are plenty of Oddballs to be found who will be in fine voice today following the Dow closing for the first time above 16,000 points. Rich or cheap, a bubble ready to burst or an asset class still undervalued?

As in most things market, if you ask two people you end up with a minimum of three opinions and in the case of stock valuations probably more. The reason for this is simple – there are dozens of ways to value stocks, all of which prove to be valid when the market happens to be moving in their direction.

The paucity of supply in the secondary market and the risk of not being allocated bonds in new issues keeps them strapped to their positions.

US corporate earnings are rising. I must concede that the argument that these are only doing so because of cost controls and not because of notable top line growth are beginning to wear a bit thin. On the other hand, any valuation which contains a discount factor has to look dodgy simply because the rates which are being discounted over are so close to zero.

In the end, it’s a simple equation. Are there more buyers than sellers? At the moment there are.

Fair value

Moving seamlessly to credit markets, I was on the phone to a friend of mine who acts as credit strategist for an Antipodean outfit. He told me of the conversations he was having with some of his firm’s larger clients in which they discussed value in the market. According to him, many of them are reluctantly long. They don’t like credit priced where it is even though the iTraxx Main, wrapped around 80bp, is still a scad cheaper than it was at 20bp at the peak of the credit boom in June 2007. The long-term average price of the index is around 100bp but this includes the credit crisis and the sovereign credit crisis of 2008 and 2011 respectively. Discount these out and high-grade credit has to be fairly priced.

However, according to my strategist chappy, some of his clients would happily like to take some chips off the table before year end but dare not for fear of not being able to get long again. The paucity of supply in the secondary market and the risk of not being allocated bonds in new issues keeps them strapped to their positions. More to the point, this technical short underpins spreads and makes the risk of shorting the market even greater. Not just more buyers than sellers – no sellers at all.

People need to make a living and market strategists are people. Therefore they have to find reasons for what is going on and they need to forecast what will happen next and why. I was sent document by one of my little spies issued by a bank – which shall be nameless – and which sketched out its asset allocation strategy for 2014. The nonsense written in it would give the Monty Python crew plenty of material for their grand reunion performance next year but I shall desist from forwarding it on to them.

My little spy, in this case one of the City’s more seasoned and recognisable strategists himself, added the comment “Teenage scribbler musings”. In defence of the bunch who put this strategy paper together I must add that writing “Stay long because everyone else is too” isn’t going to satisfy their paymasters and bonus calculators. Maybe they get paid by the word or by the graph…

Meanwhile, the new issue “grabathon” continues and I feel tempted to suggest that Thanksgiving next Thursday will not bring about the close-down of markets as it traditionally has done. Activity will most likely remain quite brisk until mid-December. Meanwhile I can confirm that anything of value which appears on the secondary radar doesn’t gather moss either. Blink and you’ve missed it. The market remains one way so, as Oddball would have had it, don’t gimme dem negative vibes….

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Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. I see the first Christmas lights appearing in the streets of London – the shopping centres seem to have had them out since Easter – and am reminded that it is 33 days until Christmas. I shall be placing the order for my turkey tomorrow in the happy knowledge that it will be trussed and stuffed, not me, and that despite the high demand, I will not get scaled back or zeroed when it comes to allocation time.           

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