Missing the barrow boys

Please permit me to share an exchange I had yesterday morning with the global head of rates sales at a large institution:

Older readers will remember the barrow boy traders. They were, many of them, people who had left school at 16, who had found jobs in City firms in all manner of capacities, who had proven to be sharp and who were taken on to become front line brokers or jobbers. They traded by instinct with, no doubt, the help of the occasional hot tip from a well placed mate or mucker but they were natural traders. The sobriquet “barrow boy” indicated that it made no difference whether they traded potatoes on a street market, second hand cars or stocks and bonds. The mental discipline (or indiscipline, if you prefer) was, give or take, the same.

They travelled in from Essex on the same trains, drank in the same watering holes and dated the same girls. Lunches were long and the sole rule that applied was not to come back if said lunch had become too liquid. In the end, they did it all for a fraction of what traders are paid today but the felt they were doing just fine. Above all, they traded with a minimum of allocated capital and used their knowledge and their network for source and to place paper.

We are now swamped with eye-watering computer power, playing fields that are so level that they offer no features by which to navigate and rows and rows of enthusiastic mathematicians masquerading as traders by leveraging beta and declaring it to be alpha. As we saw this year, when their Bloombergs went down, their brains became completely and irretrievably incapacitated.

The volatility of the past ten days has been staggering. What has happened to the third and the fourth decimal which had until recently would make or break a trade? Yesterday I was involved in tracking some bonds for Hellenic National Railways, the HELNNR 4.68% 29-October-2015. The self-declared most active market maker in the issue was bidding me for paper 3¼ points below where one of his cohorts was looking to trade the same way. To put that into context, one bid was at a yield of 49%, the other was at 29½%. As the paper is trading in the mid 90s, it is evidently not trading to default and/or recovery values so all I can find is total disconnect.

I have no objection to bonds trading by appointment; that is where we used to, and largely still do, make our money. But then why the veneer of liquidity with endless “runs” and price sheets which are of no more value that a losing betting slip in last year’s Grand National? I feel a rant coming on… Next….

Up and down

Meanwhile, US risk markets had an absolute stinker with the Dow losing 2.84% and the S&P shedding 2.96%. That made the latter the loser of the day, under-performing even the weakest of Europeans other the UK which had an extra day of losses to make up. Equities are now, generically, up and down like the whore’s proverbials although sensible investors can find some cracking value amongst the carnage.

Yesterday it was announced that RWE, the monster German utility group, has been dropped by the Eurostoxx index. Its share price has more than halved in just a year and now, with a residual market cap of €7.9 bn, it no longer makes the grade. Fine. But the gross dividend yield at this level – the stock closed in Frankfurt at €13.105 – is 7.64%. The same company’s junior subordinated debt – I’m looking at the RWE 6⅝ 2075 with a call in 2026 – is trading , in dollars, at a yield of 6.35%. It’s not a quiz. Or is it?

This morning saw Chinese markets perform another one of their rather repetitive death-defying bungee jumps. Shanghai opened down 3%, rallied to +1% and is, at the time of writing, floating around in the -1% space. I don’t care what the pundits have to say about P/E ratios in China, picking entry and exit points is pushing on a piece of string and my best advice would be to try to block out the white noise which Chinese equities are emitting.

One cannot, of course, completely overlook the weaker than expected August US Manufacturing PMI figure of yesterday but does a reading of 51.1 as opposed to an expectation of 52.5 really justify trashing stocks by near-on 3%, especially in light of all the other recent releases which showed America doing just fine, thank you?

If the state of the world were quite as calamitous as markets try to tell us, then why is the benchmark Baltic Dry Index still trading at US$911, well ahead of its 12-month average of US$855? Technical factors play a large role in freight pricing and, although I love to look at the Baltic, it is risky to draw too many conclusions from it for it never tells the amateur how much capacity is being added and subtracted from the global fleet on an ongoing basis. Suffice to say that in the first quarter of the year the price was in the US$500s when there was no headless panic afoot, to coin a phrase.

There are spots to be picked by those who know that they will get some right and some wrong. Those who are trying to look in 17 different directions at the same time in order not to get anything at all wrong are in a bad space and likely to have their rear ends handed back to them on a plate. A bit of a cool head and grown up managing of the volatility is called for; I’m not sure a PhD in Theoretical Physics prepares one for that. What was that? “Bring back the barrow boys; all is forgiven”.

It seems to me that the more hedging instruments we get, the more volatile markets become. Discuss.