Bright White Shiny Things Make It All Better…

Newedge – Blain’s Morning Porridge – January 25 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: Bill.Blain@newedge.com

Record Apple results – Bright White Shiny Things Make It All Better…

There were times yesterday when the bond rally seemed to be running out of steam, not so much on anything changing – but just getting tired. Greece? Who knows what happens – but I suspect messy. Lots of noise about agreement being reached…but nothing tangible. More of the same European mumble-swerve about will they/won’t they ramp up firewalls, fiscal rules and discipline, although Italy bonds continued to ratchet tighter – demonstrating the market isn’t listening to the politics, but buying what the ECB’s done.

The IMF calling the end of the world: “even lower global growth and escalating risks in Europe” registered, but not much effect. Today’s German 30-year auction should get out the stocks – but we aren’t expecting a blow out. All very ho-hum and wait and see…

But then…the stock market thrummed back into life on Apple’s quarterly revenues of $46.3bn, and a realisation the global economy might not be so mired after all. If 37m people can shell out for an I-Phone 4 with a new logo saying it’s an I-Phone 4s pasted to it…well…anything might be possible. Ah. The triumph of marketing and consumerism.

Apple and the boost it gave to US stocks should be making you think what happens next. Let’s assume the recent positive signals from the US economy continue  - like strong Richmond Fed Survey yesterday – to suggest the US is much further down the recovery curve than debt-mired Europe than we thought. Less economic pessimism. At what point does the big asset allocation shift from bonds into equities happen? At what point do interest rates rise?

That moment is always when the big money is made. So when the FOMC today confirms the FED members don’t expect US rates to be hiked till 2013, the bond buying masses may already have decided rates are too low, and to invest in stocks instead. What happens to bonds? Prices tumble? Does reduced demand for US Treasuries accelerate other problems – and accelerate rising rates? I rather suspect the cosy Fed expectations the market will blithely accept long-term flat yields is somewhat theoretically misjudged.

But that is all in the future. In the immediate present is Greece and what effect that might have in terms of contagion – seems likely to be limited. That Portugal is going the same way as Greece seems nailed on, although it’s far less guilty than Greece of the systemic abuse that characterises the Bubble problem.

There does seem to be a developing spat between the IMF and the ECB about the ECB taking a hit on its Greek bonds. One imagines the ECB trying to be a holdout on however many Bubble 3/12s it holds has hardly impressed the PSI investors or the IMF. Hey ho.

We reckon the Greek talks drag on and on and on and on. Sudden stop. The important moment to watch for will be the IMF going home accompanied by Germany. Not a single pfenning more seems to be the mantra.

Meanwhile, a positive surpise in Bank land where Unicredito is tendering for €3bn across 10 T2/T1 issues at a 10 point premium – great news for holders…and it includes some bonds we were trying to sell yesterday…oops. Missed that opportunity.

Sadly Jim and I will be out the office from mid-morning for a memorial service for Steve Kamil, the K in KNG. Steve was a mentor and market character/legend. If you knew him, smile at his memory!  

Today is also Burns Night in Scotland…a glass of Llagavulin will be taken later in memory of Robert Burns and Steve.