Abigail with attitude: Love is … an equity rally?

By:
Abigail Hofman
Published on:

A hedge fund manager came to see me recently and we talked about the state of the market. As US equity indices hover near all-time highs, cynicism prevails.

Abigail cliff-long

"There’s no euphoria," the hedgie moaned. "This is the most unloved equity rally that I can remember. And of course, equity markets tend to fall off a cliff every seven years. Think 2000 and 2007!"

As geopolitical uncertainty swells, it does appear that investors are overly complacent. There has not been a 10% retracement in the US indices during the last two years, yet US 10-year Treasury yields hover around the surreal level of 2.5%. And then there’s Europe, with it’s over-valued currency and treacherously low government bond yields. For how much longer can the key central bankers – garden gnome Janet Yellen, and matinée idols Mario Draghi and Mark Carney – continue to keep all the balls in the air?

One balloon that has certainly been punctured over the last seven years has been that of the freewheeling, self-satisfied, banking industry. By some metrics, the industry has been squashed, like an unfortunate ant, under the heel of overweening regulators. But if you turn the glass the other way up, the industry has not suffered as much as some imagined, when capitalism trembled on the edge of the precipice in October 2008. 

I remember a respected manager, at a top sovereign wealth fund, calling me that month, to ask whether I thought Bank of America would go bust. In fact, all the major banks apart from Lehman Brothers, survived. If anything, industry consolidation has meant that 'too big to fail’ still casts an ugly shadow over western economies. This summer, officials of leading G20 countries are meeting, under the auspices of the global Financial Stability Board to try to sort out the issue of bailing in creditors of globally important, cross-border banks that get into financial difficulty. So it seems to me that taxpayers may still be on the hook, if capitalism crumbles once again.

Bankers still enjoy pay packages that dwarf the norm, even though the shares of most of their institutions are way below where they traded during the summer of 2007, the summit for most developed-market bank share prices. Think: Barclays’ shares which stand at £2.20 today compared to the July 2007 level of £6.80, Credit Suisse shares are at SFr26 versus SFr87 in July 2007 and even Goldman Sachs’ shares are languishing at $175 versus their all-time high of around $235 in October 2007. 

Bye bye Blankfein?

Talking of Goldman Sachs, might it be time for its fearless leader, Lloyd Blankfein, to consider hanging up his abacus? Blankfein has been chairman and CEO of Goldman since June 2006. So, he ascended to the throne, at the pinnacle of the industry’s prowess.

He steered the firm superbly through the crisis and managed the backlash adroitly – memories are already a bit fuzzy when it comes to Fabulous Fab and his antics. Now Blankfein is surfing the wave of 'new normal’ as markets enjoy the rewards of extraordinarily lax monetary policy. 

Will loyal Lloyd choose to resign at the top, before the next crisis hits? Or will he lap up this period of unexpected calm whilst being feted as the elder statesman of the industry? My guess is that he will linger on because few have the perspicacity or discipline to quit while ahead. And of course, if Lloyd were thinking of departing, the succession rumour mill would be whirling. However, it has been a long time since I have read anything about who will take over once Blankfein bows out. 

As regular readers will know, succession planning is one of my key worries when it comes to the financial industry. Finance has been dominated by charismatic leaders who often dwarf, and sometimes tyrannise, their colleagues. Fred Goodwin of Royal Bank of Scotland, stands out. But I am sure that Ken Lewis of Bank of America, Dick Fuld of Lehman Brothers and Stan O’Neal of Merrill Lynch did not look kindly on cavilling colleagues. 

Over at Credit Suisse, I would imagine that long-suffering shareholders must be agitating for change in the C-suite. In July, the firm reported a loss for the second quarter because of a $2.8 billion settlement with US regulators to settle a tax investigation. Pre-tax profit at the investment bank was down slightly at SFr752 million. However, the fixed income franchise performed well, which for Credit Suisse means credit products, and in particular, high yield bonds and emerging markets. 

Credit Suisse is now breaking out its results into 'strategic’ and 'non-strategic’ businesses. This presentation may make employees feel better about the path that the bank is taking. However, when I look at the rubric 'reported results’, I see revenue dropping, compared with the second quarter of 2013, operating expenses going up, a profit of SFr1 billion dwindling to a loss of SFr700 million and a cost/income ratio of over 105%. I therefore don’t get a warm and fuzzy feeling about the firm. 

Furthermore, Credit Suisse announced, along with its second quarter results, that it would withdraw from the commodities trading business. Every few months, senior management seems to chop off another limb. The phrase 'death by a thousand cuts’ springs to mind. It will be interesting to see what the results look like from cross-town rival, UBS, due to report after Euromoney went to press.