tisdag 9 augusti 2011

Tröstens ord från Redburn. Det här är 1987, inte 2008

Jag har "lånat" kommentaren från Redburn, men klippt bort deras grafer och gulmarkerat vissa delar. Texten är läsvärd i vilket fall som helst. Om man är lång.




This is 1987, not 2008.  Illiquidity is the 100lb ghost, not the 100lb gorilla.   


As an enthusiast for equities, this has blown up in my face. This is a very hard environment for our clients, and I appreciate that many have seen major hits to performance and AUM.  A full mea culpa is required for being enthusiastic and we scribblers have to tread carefully - but we must tell it how we see it.  The  '' bear market in governments '', as one client expresses it, has de-railed the post credit crisis ''bull market''  in corporate opportunity that was amplified with attractive valuations.  Looking back at my 25 year career in equities,  the price action has clear echoes of  previous episodes of stress -  the 1990's recession collapsing to the Q3 low in 1992;  the 1998 emerging markets crisis;  the unwinding of the tech boom in 2001-2003; and the unwinding of Easy Al's disgraceful profligacy in the credit crunch of 2008/9.   


There is however one market phenomenon  - the 1987 crash - that I think is most analagous to this move.  I hate to say this after a 25 year career in equities, and we should be most respectful of markets, but I think on this occasion the market has just got it plain wrong, which it clearly did in 1987.  Buying then was the right thing to do.  Similarily I think that we buy in to this fall.  Easy to type, hard to enact, but it is what I think.


Journalists like Gillian Tett, who was a very good commentator on the whole during the 2008 crisis, encapsulated the market's fears eloquently in the FT last week.  She makes the point that the 'playbook' is very similar to 2008 with piecemeal policy initiatives having to be superseded by wholesale  interventions , and the 100lb ghost (rather than gorilla) of 2008:   'illiquidity'.  She argues that the de facto debasement of sovereign guarantee, which has underwritten so much banking funding,  means an inexorable next move in the playbook  to 'illiquidity' , or credit crunch .  It is clear that there is muscle memory, scar tissue at work:  but is this  'playbook' concept really justified? And how much has been discounted?  


Illiquidity is what did the real damage last time around  - it was a challenge to the very essence of capitalism. As to its causes, to read, in retrospect, that financial institutions like Northern Rock were carrying only 5 days liquidity seems like rank insanity today.  Barclays in 2007 was running at 20 days liquidity - that is, the number of days before they had to turn to an abruptly unwilling wholesale market for the wherewithall to carry on their trade.  The absence of adequate provision for illiquidity, the wholesale duration mismatch, coupled with the invisible hand of CDO squared, led to the seizing up of wholesale markets and the turning off the liquidity essential for economic enterprise.  Is there an IKB, Kaupthing  or Lehman  lurking out there now ?  I am sure some will be caught on the hop again, but for the system as a whole I simply don't believe it. 


Things are very different now:  if we look , for example, at the benighted Lloyds, laden down with the 'legacy' of 'that deal' (as Eric Daniels has found, there is nothing faster than the rolling up of the red carpet), they now sit on some 13-15 months of 'liquidity', before having to raise a single drop from wholesale markets, shareholders or whoever.  The same applies with many (but alas, not all) of the banking sector.  Yes, capital may not be sufficient to cope with the vicissitudes of Irish or Greek 'assets', but that is an issue for shareholders, for earnings, not  for the liquidity essential for a functioning  banking system, and as such NOT an issue that redounds with the same materiality on to the real economy  as in 2009 . 


For companies, the spectre of someone like Nestle being unable to process their payroll (as was the case allegedly in Q1 2009), of inventory clear out to conserve precious cash in the face of collapsing demand and credit lines and so on are just not relevant.   The levels of  gross cash that companies have maintained to ensure that they are never again at the mercy of the ineptitude of the banking system is at very high levels historically .  There was an instructive comment in Barclays recent report:


''Together, resolution of the developed world sovereign debt crisis and a speedy of the bank regulatory reform agenda will give businesses the confidence that many curerntly lack to invest and grow.  We note the actions of our clients:  for example, the current account balances of our UK small business customers have grown 41% since the start of the year as many retain cash rather than invest''.


Putting aside the self-serving point  from Barclays about regulatory reform, the point is that the companies are also subject to muscle memory and scar tissue, but in a ''good way '', that we similarily scarred investors should note.  This is important because inventories in many basic industries are running at much lower levels than prior to the collapse in capacity utilisation associated with the termination of credit. Companies have reduced inventory to conserve working capital and free up liquidity -  in essence coupled with running high levels of gross cash they have basically deleveraged.  You can see, for example, that US steel inventory is running some 30% lower than in the heady days of 2007 , and that we are at a very low level in inventory in German auto and chemicals inventory - instrumental in the hit to P&L in 2009  


On the basis that a combination of bank and corporate liquidity is genuinely that - liquidity - it is plain wrong to cite the 2008 playbook, as  Gillian Tett many are doing.  The curtailment of credit that catalysed the drop in demand, capacity utilisation, and ballooned inventory as a consequence in 2009 is simply not going to happen again to the same degree.  The system has liquidity : it has deleveraged.   It can cope with reduced demand, systemically. It can cope with the impact of peripheral stress, at least in a liquidity sense.


So the real issue is that the markets'  brutal excoriation of the profligacy of selected governments,  exacerbated by the fiction at the heart of the Euro,  and the apparent absence of magic bullets to further pump prime economies, presages economic collapse in the shape of a double dip.   That the US has been downgraded by the rating agencies - who will no doubt do the same for France, the UK - is something that we should not fear.  It is an old market axiom that it is always a very good time to buy a share when the rating agencies downgrade - the same should apply to economies as to companies.  For sure, we should not underestimate the red rag to a bull that the S&P downgrade represents to the US, and on Admiral Yamamoto's adage about 'awakening a slumbering giant', you should have in mind what will happen to markets when the US gets back its AAA rating, which it will.  It is ironic that you pay 38x for the privilege of the UK government's guarantee against the price of any enterprise you care to name - profligacy rewarded, thrift de-rated.  Shome mishtake shurely. 


The vacuum in political leadership on both sides of the Atlantic has exacerbated this situation, and it is unrealistic to expect the instant gratificiation that the market craves.  However there is action that can be taken, and we should not forget that it is history (as Niall Ferguson eloquently puts it), not economics, that is ultimately going to drive Germany to deliver credibility to the European project, whatever that may constitute.  The only solutions are a.  to break up the Euro, which would create mayhem (and unemployment especially in Germany which is politically bad for Merkel), or b.  a full fiscal union whereby the bloc stands behind and guarantees the debts of its members (also politically bad for Merkel, but better than unemployment).  The getting there will be tortured, but it is the intent and the direction of travel that matters.  Some argue that the markets have to go to the brink to deliver the imperative that delivers this solution:  so it will not be a quick fix for markets.  But the point is one can clearly see that the severity of this situation is creating a 'reflexivity' for politicians and economic policymakers as much as for economies.  The crisis is the catalyst to push Europe's population to support a comprehensive solution that safeguards savings, and preserves German jobs - a point Merkel recognises.  A combination of clear direction of travel in Europe, meaning a fiscal rather than chimeric basis to the Euro, and further intervention in the US (possibly initiated with printing of money), will drive markets sharply higher. But it will take time.


All well and good, but what about the other side of reflexivity, that the economies will inexorably slow as financial markets do their worst in the face of political vacillation and process, however well intentioned.  Yes, that is inevitable, but markets are barometers not weathervanes.  If we accept the premise that there is no lliquidity issue this time, then what we have to do is to understand what scale of reflexive slowdown is priced in to equities.  What is clear is that today is that the earnings yield is presaging a major collapse in earnings:


When we look at the IDEAS system we can see a few interesting things:  that the implied taxed ROCE at current share prices is at 2002 levels, and fast approaching 2009 levels.  What I do like is that in 2002 European industrials returned some 8% on sales - in 2009, which saw the largest drop in GDP since the 1950's, industrial enterprises returned ca 10% on sales.  This is the bit we forget in markets like these - the impacts of globalisation, the SAP revolution, the change in the terms of trade with labour, the concentration of industries, the opportunity for the right enterprises in a post crunch economy, the impact of Stern Stewart on industry discipline.  And look at that EV/CE valuation in the third chart - the implied valuation of equities is genuinely very low - we have the long term growth in return on equities implied at -11%.  


So what to do?   Most experienced fund managers are of the view that it will get worse before it gets better.   For sure, the market dynamic is that we see a similar rush to reduce equity exposure to that experienced in spring 2003, and this can go on much longer than logic would determine.  2003, of course, ended up being a great buying opportunity - ''ended up'' being the key words, as with 1987.  The key question is the scale of  fall in earnings the market is discounting, as a thermometer to ascertain whether the level of communal thinking is at such a high level that a contrarian response is required.   The rule of thumb is simple -  the fall in US GDP in 2009 was equivalent in magnitude (actually slightly greater) to that experienced in 1980 and the double dip in to 1982, incredibly stressed outcomes - but much worse than that seen in 1990/1.  So apply a 2009 type reduction in top line, and look at the earnings yield.   If you have an earnings yield of 5% of more - i.e. 20x or less earnings cast off the 2009 scenario GDP drop - then you have, absolutely a cheap investment.  We currently sit at a PE for EU industrials of 8.9x.  If we assume that earnings in aggregate fall 50%, then we sit at an earnings yield of 5.6% against say the bunds which trade at, er, 2.28%.  However the aggregate fall in industrials EpS in 2009 was 28%, not 50%:  so the earnings yield would be 8.1% in that scenario, or nearly 3.5x the return on risk free at the nadir of the cycle.  We have analysts here at Redburn especially in the cyclical areas running their models on 2009 top line drops - for example, we have Cap Gemini trading at a 7.7% earnings yield on trough earnings, Rexel at 5.5%, BMW at 6.6% (this latter assumes no scrappage, China -5%, Brazil -7%), BASF at 6.3% etc etc.  I can't even tell you how cheap VW is!!  There are other ways to skin this cat (e.g. companies with net cash at say 25% of market or more - Infineon for example at 40%) but this all says that markets are absolutely cheap.


I shall report back on more detailed work by company,  but the real message is that the market is already pricing an outcome that is similar to that engendered by the near death experience of capitalism in 2009.  The 100lb gorilla  - illiquidity - is in reality a 100lb ghost.  The point here is I do not think we shall have another near death experience - a slowdown for sure, maybe quite a tough one, but shares are pricing in something much worse.  The answer is that there are two constituencies who are scarred by the experiences of 2008/9.  The companies and financial institutions, who have hoarded liquidity and deleveraged their business models to never again experience 2009 again or be in a position of reliance upon wholesale markets for funding;  and investors, who clearly are behaving as if there will be an inevitable repetition of 2009, and driving down values to reflect this out-turn.  That is a major point of conflict.  The only constituency who appear not to have been scarred in their behaviour are the politicians but that moment rapidly approaches - the markets will see to that.  The alignment of all three constituencies is, in my view, inevitable, and at that point the value of equities will out.  There is no rush in these types of liquidity driven markets, but we have to be ready to buy, not sell.  The wholesale shift in to defensives  - and notably the 'lazy defenaives' as one colleague puts it -  is eloquent of other alternatives for investment.  My preference if for high ROCE businesses with a cyclical element. 




ps  As a final point, don't forget that there is some good news out there :  ''Japanese July machine tool orders out at 7am still showing robust year on year increase of 34.6%, up 21.7% domestically and 41.5% export. AT Y113.2bn, both domestic (Y35.6bn) and export (Y77.6bn) were at 3rd highest levels so far this year.''

5 kommentarer:

Tyler sa...

Market Maelstrom is classic capitulation, säger Mike Pringle (once you pop...) på Citibank.

"Buy the dip" är slutsatsen, vilket passar bra till chips.

Anonym sa...

Verkar mena att tyskarna mellan pest och kolare förmodligen väljar att ställa upp för de andra men att ordentlig kris krävs innan.

Håller med, men vad händer om saker blir så illa snabbt i Italien att det framstår som vansinne att garantera. Och om Tyskland upplever negativ tillväxt så har dom nog inte lika mycket att förlora på "pesten". Fast ändå förmodligen tillräckligt mycket. Men sen har vi ju alla potentiella misstag (Lehman?) som politiker/väljare kan begå.

För att inte nämna alla besparingar som sannolikt väntar. Och sedan kraftiga obalanser med handelsunderskott och skulder på ena sidan.

Vi byggde väl mycket på av uppgången efter 2008 på att kunna halvlåtsas att läget är OK. Amerikanarna fortsatte köpa kinesiska varor. Om vi får ett abrupt slut på det, hur klarar då kineserna omställningen. Redan stark valuta som hjälper dom och så hög inflation som motverkar men att finstyra detta blir inte lätt.

Och så höga fastighetspriser och förmodade råvarububblor. Lägg sedan till allt elände som finns under yten som vi ännu inte kan se och jag lutar åt att placerarna nu kommit på att vi inte kan "låtsas" oss upp ur svackan med påföljande risk att det blir "självförverkligande". Och så stora förmögenhetsvärden som är bortsopade i spåren av nedgångarna på börsen. Och så svårigheter att uppbåda stimulanser. Visst ser det bra ut på lång sikt, men man kan ju hävda att det såg ljust ut även på 1800-talet. "Bara" att införa lite demokrati och institutioner och så vidare. Men det känns ju för tusan som att hela världen är ett enda stort strukturellt elände!!! Jag tror ekonmin blir volatil åtminstone 20 år framåt.

Om nu inte tyskarna går med på (kontrollerad) inflation förstås, någon chans för det?

Nåväl, New York börsen verkar fått ordentlig fart under galoscherna. Sitter svagt lång (prisfråga samt "försäkring" gör det värt det trots allt), men med försäkringar/warranter som kan blir värda mycket vid fall. Hoppas på uppgång men helst kraftiga ras (allt annat än en svagt sluttande börs).

Något uppmuntrande att säga efter att några av mina "sopa-mattan-med-börsen-illusioner" försvann efter stängningen på börsen idag?

Fortfarande kort? Temporär uppgång enligt plan, eller fortsätter nedgången?

Sist men inte minst. Hur såg det egentligen ut 1987? Hade vi verkligen samma strukturella problem med handelsobalanser och
skulder som idag? Knappast väl?
Och ärligt talat, många av storbolagens storvinster har väl i praktiken betalats av staten (inte minst den kinesiska), med mindre bolag som belönats med rätten att blott överleva. Jag förstår inte hur folk kan vara så positiva!!!

Jag lutade innan slentrinmässigt åt att eftersom alla redan vet om allt elände så har dom förmodligen i vanlig ordning överreagerat så jag tar oddsen på andra sidan. Men nu har jag vaknat upp och tycker mig ana att investerare bara verkar ha drömt vidare efter 2008 och först nu kanske vaknar. Det är ju inte omöjligt att en stor grupp investerare varit vakna hela tiden men stannat i aktier i tron att "alla kan lura alla" och hinna ut först. När så sten efter sten har lagts på konjunkturnedgångens ena våg tills kanske jämviktspunkten så har kanske många tagit konsekvenserna och sålt vilket kanke blir den stenen som fäller avgörandet. Då vi inte på samma sätt kan lite på FED och stimulanser att balansera vågen rätt så borde ju risken öka vansinnigt exponentiellt ju närmare jämviktspunkten vi kommer. Det kan ju bli hyperkritisk den här gången!!!

Anonym sa...

Och för övrigt så finns ju risk för att marknaden överfokuserar på credit-squeeze och missar att det kan bli nåt annt som fäller eknonomin. Föresten även om företagen har mycket pengar så är väl företagen ändå ganska hårt belånade? Jag tycker det ekar ganska tomt i många balansräkningar bland börsbolagen. Jag anser att vi har en unik situation med en enorm komplexitet(förutom det jag nämnde ovan kan vi ju lägga euron i sig med även om tyskarna bailar ut resten) med en båt som kan läcka både här och där och med ovilja/oförmåga att ösa.

Ser jag rätt, finns det verkligen folk som vill låna ut pengar till Frankrike (10 år) till 3%? Är folk tokiga, är den nån som tror att man inte snart angriper Frankrike också?

Tyler sa...

Som sagt är jag numera ca 50% lång "halvlång". Nedgången blev överdriven i augusti så jag är lite mer bullish nu än tidigare och kan ganska lätt föreställa mig 10-15% uppgång härifrån som plan A.

Det räcker som plan tills vidare så lämnar vi vansinne i Italien till andra så länge.

Tyler sa...

På sakfrågan så har börsföretagen rekordmycket nettokassa i genomsnitt och ganska välspritt över olika branscher och ftg.