Langton Capital – 2016-02-09 – Daily Wrap: A bit economics-heavy today, trading & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
So what should we be afraid of, what’s the next big thing?
• It’s often said that we end up well-prepared to fight the last war.
• And the same may be true in financial markets where CDSs are likely to become artificially expensive courtesy of demand prompted by the film The Big Short and no-body expects the banks to go on the same sort of global spending spree that they embarked upon in 2003-08.
• However, some things do repeat themselves.
• Securitised bonds have been at the root of a number of problems and we’re keeping a sharp eye (see yesterday’s wrap) on corporate bond spreads.
• Here it would appear that markets are tightening.
• This means that some deals may struggle to complete through lack of funding. We would hope the likes of SBRY and AB InBev (let alone Shell) have secured their funding long since.
Asset prices (London):
• As lending tightens, asset prices should come under downward pressure.
• International cash flows (e.g. China, Greece, Middle East etc.) into London may obscure this as cash buyers will remain active.
• However, as cash buyers find that their would-be leveraged competitors are unable to secure leverage, prices should still fall.
• This could leave some recent purchasers exposed as the option of flipping their properties may disappear.
• Lower asset prices should lead to lower rents.
• However, as some trophy buyers seem to have been willing to take 1% or 2% yields (presumably with a view to jacking rents up), the upward pressure already in the system (in London at least) may take some time to dissipate.
• And, given that upward only rents, reversionary obligations etc. make rents extremely sticky on the downside, they may not dissipate at all.
Interest rate rises. Yeah, right…
• So looking at an extremely red screen, it’s beginning to appear as though one tiny interest rate rise in the US has crushed the world.
• We’re sure it’s more complicated than that but try telling that to the equity markets.
• The US move has served as a lesson – both to the US and to the rest of the world.
• There is unlikely to be a rush to put rates up for a second time in the US and the Bank of England and the European Central Bank don’t look as though they’re going to do anything this side of Christmas.
• At time of writing, the market is down by 51pts.
• There may be buying opportunities out there but, as is usual at this stage in a sell-off, those on the side-lines are not minded to invest and those minded to invest are not on the side-lines.
• In fact bulls may well have committed themselves 1,000pts above current levels.
Meanwhile, in the real economy…
• The January BRC-KPMG Retail Sales numbers were better than had been expected.
• Sales in January were up by 2.6% LfL with non-food the star. See Nick Bubb this morning. Non-food could have been up by 6.5%.
• Within non-food, big-ticket items seem to have sold well – see earlier emails for comments on big-ticket vs small-ticket spending.
• Furniture was the best performing sub-sector.
• At some point spending should move onto smaller ticket items but, as the news is likely to be full of negative stories re China and global stock markets, it may be that consumers will be disinclined to spend.
Back to what we should be afraid of…
• Fat-tail risks. By definition, these are rare. So rare, in fact that they don’t tend to be in the track record (which is typically short) but, as with LTCM which made its money snatching nickels from the path of a steamroller), when they occur, they can be pretty mind-blowing. The typical response in the wake of a disaster is ‘we should have known…’
• The US dollar. This is a reserve currency & it is globally ‘over-held’. Should the dollar be threatened by the Renminbi or some other basket of currencies, holders of US $s globally will ‘rebalance’ their holdings. Rebalance means sell dollars. The US$ would fall as a result & international creditors would be disadvantaged. This has the potential, in certain lights, to be seen as the biggest ‘theft’ in history.
• Pensions. Whose idea was it to offer final salary, index linked pensions to 100s of millions of workers worldwide? Who asked the permission of the countless millions of still-employed workers if they would be happy to graft to make their now-leisured predecessors better off then they themselves are?
• We have about another dozen issues that we’d like to address but this email is already late in going out & there’s only so much depressing news that Langton can handle in one go.
Random information, hopefully not all of it useless:
• Asia very weak overnight, carried through to the UK.
• Today was another day when the markets tried to rally but then fell.
• Banks now taking the brunt.
• S&P trading at 22mth lows. Japan off 5% overnight. Yen now at a 15mth high vs US$.
• But that’s nothing. Athens market at 25yr lows. Lower than it was during the Greek crisis. Banks in Greece off as much as 26% yesterday alone.
• Gold, silver etc. now rallying for real as the sell-off gets serious.
• Despite recent strength, price of gold still down around 3% over the last year.
• Soft commodities generally weak. This will be doubly helpful given that the US$ has been weakening recently.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. TUI Q1:Has seen ‘good underlying performance in Q1 with 7.2 % improvement in underlying EBITA in spite of impact from geopolitical events’
a. TUI sees ‘€10m of merger synergies in relation to corporate streamlining and Destination Services delivered in Q1’
b. TUI reports the disposal process for Hotelbeds is on track and says that current trading is ‘in line with our expectations’
c. TUI Q1: Says in line trading is after ‘taking into account the geopolitical backdrop’
d. TUI reiterates earnings guidance of at least 10 % growth in underlying EBITA in the current financial year
e. TUI sales in Q1 €3.7bn (+5.4%), EBITA loss of €101.7m (3% lower) but EBITA loss at constant currencies €97.3m (7.2% lower)
f. TUI says ‘it is evident that there has been a significant shift in demand away from Turkey, with Summer 2016 bookings…down c40%.’
g. TUI says it has been able to ‘remix capacity to alternative, profitable-destinations.’ Turkey down, Canaries up.
h. TUI Q1: Current trading is ‘in line with our expectations’. Says winter is 82% sold with selling prices +3% & volumes flat
2. Barclaycard reports ‘shoppers splash out in the January sales but economic uncertainty hits consumer confidence’
a. Barclaycard says consumer spending rose 3.8 per cent in January, continuing the strong run of growth in 2015’.
b. Barclaycard says there has been a ‘marked drop recorded in consumer confidence levels since December’.
c. Barclaycard reported specifically that spend in restaurants rose by 13.5% whilst in pubs, spending was some 12.5% higher.
d. Barclaycard reports spending in travel agents up 3% y-o-y. Volume will be higher with unit prices less buoyant
3. Britvic announces Bob Ivell will step down from the Board on 29 Feb.
4. Adnams is to hold its beer prices in ‘a bid to support the pub industry’. Says it knows times are hard.
5. Councils are to be given the power to remove Sunday trading restrictions, perhaps just in certain areas, from this Autumn.
6. Shop vacancies have fallen to a 6yr low reports the Local Data Company.
7. Safe destinations see boost to demand. Travel Weekly says bookings to Spain are running up by some 27% with Portugal +32%
8. Air France-KLM saw airline passenger numbers +2.4% y-o-y in January as the Fri 13 Nov terrorism impact faded
9. World markets: All sharply lower in Monday trading, Far East down in Tuesday trade. Oils weak, ditto most other sectors