Mint – Blain’s Morning Porridge
Would you like to go’n shoot the mountain masses, for here you stand no taller than the grass sees.
Today’s US jobs number will be worth watching.
Unfortunately, I’m likely to miss most of next week. I’m on Jury Service, something I’ve put off too long. Not sure how many days it will last...but I’ll be back when I’m back. And emails will still work.
First up this morning, let’s ponder banks. I’m always surprised there are some readers who actually file and keep the Morning Porridge – I wish I did; they might have made a thinnish market memoir one day. Occasionally, readers hit me with the stupid things I write. Like the chap yesterday who reminded me of the classic Blain line: “CoCos are an inspired investment choice if your objective is to own all the downside, no upside and less return than equity with much greater risk.”
Among all the European banks, HSBC would probably be the one you might be a voluntary owner of. Two years ago they issued a 5.625% CoCo which I slated – asking why you’d buy a downside instrument yielding less than their dividend yield. My reader pointed out HSBC stock is now 30% lower while the Coco is only 4% down!
In fact, if you applied the same analysis across the European banking sector, stocks have vastly underperformed CoCos. (But CoCos have massively underperformed credit!) If the ratings are right, there is only a 10%-(ish) chance Lloyds will default on its CoCos over the next 10 years, but they are yielding 8%-plus. Same thing with even the struggling and questionable names in the Euro-banco-sphere.
Does this mean we should be buying CoCos for their unfeasibly attractive yields?
Take Unicredit’s 8% CoCo. Trading in mid-70s to yield near enough 13%. It’s a critical bank in Italy, Germany and Austria. Should you buy? That’s where it becomes speculative.
There is the specific Italy angle: I happen to think there is a very high chance Italy will be forced to at least bail in subordinated debt as part of a deal with Europe to save its banks. Others disagree – it looks more likely the current Italian deal will be watered down to only address Monte dei Paschi di Siena, and this may be the time to buy on the basis Unicredit is too big to fail and too important to crush bond investors.
But there is also a banking angle. European banks are still essentially unfixed following the crisis. That’s due to the slowness of the European authorities to get their collective act together (understandable). On a compare and contrast basis.. European banks versus UK banks? Who would you rather own? Caveat emptor (as a former colleague of mine was reminded recently when he rashly bought a low-price car - that had spent eight years exposed to Scottish winter conditions - from an old pal with a short MoT, and no warranty, only to find out when it went in for its mandatory annual test of roadworthiness that its bottom was suffering from 'excessive corrosion' and literally falling out, rendering it exceedingly dangerous to drive and economically unrepairable. Everyone involved thought the deal was too good to be true. And of course so it proved. He readily concedes he has only himself to blame).
What about the UK banks? Commercial property exposures top £65bn. But, of course, despite the current noise surrounding flollopping property funds, the UK banks have assiduously managed their property risk. A 20% hit on property in the medium term and subsequent recoveries is survivable in terms of capital charges the banks will have to take. The Royal Bank of Scotland is the most exposed to commercial real estate, but Santander (ex-Abbey) could have the biggest capital hit.
Changing the topic a little… Japan and how to kick start global growth. Who would have thought Japan would suffer so much from the Brexit vote? The 20% currency gains this year have crushed the Nikkei (down 20% since December.) It’s time for desperate measures – an emergency budget? Fiscal spending?
Good to hear Sajid Javid – the UK Business Secretary – calling for a £100bn investment plan to put the UK back on course. Guess what? We can do that.. Let's just figure out how we make the gilts currently held on the Bank of England’s quantitative easing book.. vanish.. (cos, we can..)
Finally, as the UK wobbles on the edge of the precipice of death and the Tories get ready for handbags at dawn between the contenders, maybe it’s time I did my bit for Blighty...and stepped up to lead.
I’m thinking I should apply my unparalleled experience of the global financial markets as the ideal candidate for leadership of the ruling UK Conservative Party.
Even Andrea Leadsom’s CV can’t compare with my days as President of the National Union of Students (well, a small Uni at the unfashionable end of Edinburgh), head trader of absolutely everything at Morgan Stanley in the 1980s (anyone who remembers me as a humble settlements clerk punching 01 and 02 tickets is clearly mistaken), head of investment banking at Bear Stearns through the 1990s (perish the thought I was just a junior on the syndicate desk who got lucky because no one else could be bothered to cover banks), and Chairman of HSBC in the 2000s (Sir John, step aside.. it was me… all me), before I restored market liquidity by inventing bond broking in the 2010s. If I put down I also invented eurobonds and ran PIMCO as co-CIO, I don’t suppose anyone would even question it. On top of that, I once worked with someone who solved the debt crises of the 1980s by inventing the Brady bond.
Yep, that should get me past the vetting committee.. If not.. I will simply declare I am Margaret Thatcher reincarnated, as that also seems to work.
Now I can’t argue I know much about parliamentary procedure, but Ms Leadsom’s only been in Westminster a few years, so I could quickly catch up. If there is anything I’m missing, let me know..
Pardon the cynicism, but if a Member of Parliament can invent a fabricated past and stand on the basis of zero real credentials, then why can’t I?
Have a great weekend and stop worrying about stuff you’re going to have to worry about on Monday all over again.
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