Posts Tagged ‘ Markets ’

Fiscal cliffhanger

I’ve been following, albeit not blogging, this one closely, not least as every market report of the last month or so has had to explain what it is and what it means. I’m going to assume some knowledge and just note a few particular aspects about it. There’s an idea doing the rounds that there isn’t too much to worry about because, as neither Democrats or Republicans want to raise taxes, they’ll let the automatic tax rises happen, then strike a deal, so they can claim credit for “cutting” taxes for the bottom 96 percent rather than raising them on the top 4 percent. As they is the possibility of retroactive application of these measures, then the crisis can be averted after the deadline and still avoid the cliff’s full force. It seems like quite a big fuss to cause for a basically semantic point – sure, incumbent Republican Representatives may have right-wing  primary challengers to fear more than anyone for the next election, but I think most people know the difference between an expired tax-cut and a tax raise. True, Ezra Klein points out that Democrats do actually want to raise some taxes, but then so do Republicans. So it’s a question of which taxes are being raised, and who will bear the brunt, so I think there are still substantive issues to overcome, and the idea that a deal will be straightforward once the deadline expires is simplistic (even if it does instill a sense of urgency).

The thesis that there is a mutually beneficially desire for Dems and the GOP to cut taxes after a rise rather than pre-empt the rise (and so the fiscal cliff with have limited impact) is interesting, however, because of how recent this it is. No-one was entertaining thoughts of retroactive tax cuts and technical tactical maneuverings two months ago – if you spoke to to analysts and traders, the majority would say that they anticipated a deal with time to spare. This meant that stock markets, which have already seen impressive gains for the year, could push on – especially in Europe. Yet at the same time the good news of a resolution is not seen as priced in, so a resolution, it is anticipated, could see prices spike higher. Even U.S. indices, which haven’t seen gains in December, don’t really seem to have the bad news priced in (S&P 500 is up 12 percent on the year). And as the deadline closes in, stocks may finally be easing off on gains, but people in the market are still inventively coming up with new reasons why a deal isn’t getting done, and new reasons for longer term optimism. And I’m not saying they’re wrong to, it’s just interesting that had you put it to them two months ago that we’d have 2 business days til New Year and no deal, I think they’d have been less phlegmatic about it.

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Euro zone banks: cheap for a reason

Yesterday my piece for Reuters on Euro zone banks finally hit the wire; you can read it here. A few more thoughts on the sector, which have obviously had a tough time, with first the financial crisis and then the euro zone crisis clearly not being the ideal cocktail for the euro zone’s financial and banking sector…

When any company trades below their accounting value, the market is pricing in some pretty serious tail risk. Draghi’s July speech seems to have removed that tail risk; so what’s holding them back? There’s a whole plethora of issues, including regulation which will jack up capital requirements, as well as the sense that bank’s balance sheets themselves may not tell the whole story, as Neil Dwane says in my article. But there’s also a sense that the rally of the summer has brought prices to a position where by recent standards banks are expensive, despite being below 1 on price to book. There’s a sense that, according to a recent JPMorgan survey, funds are, in terms of recent history, actually overweight; that is to say, because funds have been underweight on banks for so long, that they are now slightly less underweight leaves them holding more banks than at any time in recent history.

The implication is that seeking the usual valuation plays in examining price/book ratios is misplaced, because the risks that remain in the sector are enough to suggest that other stocks or assets just offer better risk-reward returns. Alan Higgins, CIO at Coutts, said he favoured Spanish banking corporate debt, with +10% yields and priority for repayment in worst case scenarios. People like Dwane or Stefan Angele see banks as very unattractive given other sectoral plays to be made.

Being below book is no longer enough to offer a compelling valuation play; the sector has to provide a good news reason why you want to bet on bank growth. That so much of the rally was fuelled by hedge funds closing out shorts on the sector means that, now these hedge fund have finished, investors have to make active decisions that euro zone banks are going to actively outperform other assets on the table. And at this point, not everyone is prepared to make that leap.