Report on Q3 2014

Report on Q3 2014

4 Oct 2014

The stock market remained nervous, reportedly seeing below-average turnover in Q3. The trend that began in Q2, of the shares of smaller companies performing worse, continued. The FTSE 100 fell by 1.7% and the FTSE 250 by 2.9%. For the third quarter in a row, yields on European government bonds fell to previously unimaginable lows. German 10 year Bund yields have fallen below 1% (now 0.93%). To put this in some context, 10 year Japanese bond yields were around 1.9% before the financial crisis bit in 2008. Japan is considered to be the reference case of a country suffering from long-term deflation. Its 10 year yield is now 0.53%. Since June 2008, Japanese yields have declined by 72% and German by 80%. As I have noted before, the bond markets are shrieking the news that global growth has made a long-term shift to lower levels. Many will argue that this is bound eventually to be reflected in lower corporate profits. It is hard to argue with that but wrong to assume that share prices are consequently too high. When yields on all financial assets are falling, investors are paying higher prices for them. A dollar of corporate profit literally becomes more valuable than it used to be. Many stock market commentators, seemingly obsessed with short-term news and the aphrodisiac of growth, appear to be incapable of understanding this. Given that the cloud of deflation continues to hang over the world (see above), the traditionally nervous month of October will probably produce plenty of gloomy headlines. In my post about the supermarkets, I pointed out that, when operating leases are included as liabilities, Morrison was much cheaper that Tesco and Sainsbury. Well, the gap has reduced but not necessarily as anticipated. Morrison’s price has fallen but the others have fallen further. Tesco’s accounting practices have caught up with it and I must say that, as yet, there is no price at which I would buy it. At last I have noticed the beginning of a backlash in the press against Lidl and Aldi – our nostalgia for the 1970s must surely be limited. Sainsbury has promised a strategic review, a development that appears to have...

Report on Q2 2014

Report on Q2 2014

3 Jul 2014

I have noted before that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. In Q2, the FTSE 100 rose by 2.2% but the FTSE 250 (companies 101-350) fell by 3.4%. There has been widespread profit taking from the shares where much of last year’s good stock market performance was concentrated. This is evidence that nervousness is about. As was evident in Q1, the prices of assets regarded as safe continue to rise and the definition of “safe” to become less demanding. I mentioned the marked fall in European government bond yields in my Q1 report and returned to the theme in June. Irish 10 year bond yields fell from 3.43% to 2.83% in Q1 and have since declined to 2.37%; Portuguese from 5.9% to 3.73% and now to 3.66; French from 2.46% to 1.99% to 1.61%; and so, it seems, it goes on. Nervousness among equity investors is generally a good thing. Complacency is dangerous but very hard to spot. (An interesting philosophical question is: can one simultaneously be complacent and recognise one’s complacency?) It is only when nervousness turns to panic and rout that it becomes destructive. There is a stock market saying to the effect that a bull market climbs the wall of worry. I find this quite wise. There is another well-known traditional piece of advice – “Sell in May and go away” with its less famous follow up – “Come back on St Leger’s day”. The St Leger is a horse race which falls this year on 13 September. I have always felt that this is suspiciously convenient for City types who want to go to Wimbledon, Lords, Henley and the south of France. Certainly share volumes fall in the summer and market moves can be exaggerated. It’s a nasty thought that your portfolio might misbehave if you are not there to look after it. So, by all means, make up a little rhyme to justify some profit taking. I have certainly questioned the level of my shares that have done well and have taken profits in some. But I have failed...

Report on Q1 2014

Report on Q1 2014

22 Apr 2014

The FTSE 100 fell by 2.2% in the quarter. The FTSE 250 (that’s companies from 101 to 350) rose by 2.1%. I wrote in the Q4 report that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is worth noting that in the first three weeks of April, FTSE 250 shares have become more jittery, falling by 2.2% compared to a modest 0.4% recovery in FTSE 100 stocks. It looks as if there has been plenty of profit taking in the best performing shares of the past year, many of which are those of FTSE 250 companies. These were relatively trivial ups and downs in UK equities. Of more consequence for relative valuations is the continued strength of major government bonds. Yields on US, German and UK 10 year bonds have continued to fall, despite much talk of stronger economic data and falling unemployment. More impressive still has been the rebirth of demand for the bonds of Greece (yield on 31 December 2013, 8.41%; today, 6.12%), Portugal (5.9%; 3.73%), Ireland (3.43%; 2.83%) and even France (2.46%; 1.99%). Cash continues to chase yield and is becoming less fussy. At a time when the price of assets regarded as safe continues to rise, it would seem irrational to turn negative on the shares of established and financially sound companies. On that basis, this year’s flat equity market is probably resting rather than expiring. Turning to shares that I have recommended, in December I highlighted four companies with long-term strategies. UBM, whose share price is nearly unchanged since then, has just acquired a new CEO. I must admit that I had missed the declared intention of the CEO David Levin to retire in 2014. He has now been replaced by Tim Cobbold, ex-CEO of De La Rue. There is no reason to think that this will change the company’s long-term strategy. UBM raised its dividend slightly in 2013 and, with its low capex requirements, is confident of maintaining its “progressive” dividend policy. But, there is inevitably a risk that a new CEO will surprise investors (new managers are usually...

Report on Q4 2013

Report on Q4 2013

7 Jan 2014

The FTSE 100 rose by 4.4% in the quarter for a full year gain of 13.9%. The FTSE 250 (that’s companies from 101 to 350) performed twice as well in 2013, rising by 28.8%. There are never truly hard factual reasons why share prices move but it generally remains the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is also probably the case that smaller companies are less well known and consequently deliver more surprises. Note that in bad times they typically deliver more bad surprises which point takes us back to why large stocks do better when investors are nervous. It is reasonable to conclude that confidence improved in 2013. The mood implied by the yields offered by government bonds rose from clinically depressed to merely grumpy – in the case of the UK this was from 2.0% in January 2013 to 3.0% now. In the US the rise was slightly sharper, from 1.8% to 3.0%, but it was much the same story. The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery. Analysts sometimes name this “Goldilocks” (not too hot, not too cold) and it feels like a very comfortable investment environment. Comfort eventually causes complacency and this is exactly why it is wrong to commit one’s investment strategy to an opinion about the future, no matter how tempting. Investment is always about how probability is priced. Consensus rarely offers compelling value. I am pleased though not surprised to say that my satellite index of companies with female executives quite dramatically extended its outperformance against the FTSE 250. After the first nine months of 2013, the FTSE 250 was +25% but the 27 companies with female executives had risen by 35%. After the full twelve months, those numbers were +29% and +46% respectively. As for the shares that I recommended this year, in Q3 I wrote that I was surprised that Enterprise Inns rose by 40% in Q3. In Q4 it was much quieter, rising by 6.5%. I am not attracted by the value of the company now and I don’t...

Report on Q3 2013

Report on Q3 2013

2 Oct 2013

The FTSE rose by 3.9% in the quarter (Q1 +8.7%, Q2 -3.0%) meaning that year-to-date it is +9.2%. I didn’t recommend a single new share in the quarter. This is partly because I was away in France, but is also because no compelling new ideas turned up. City analysts are expected to come up with recommendations (usually ‘Buy’s) regularly but real people don’t have to. To some extent, this reflects my current view of the stock market. The most likeable companies are generally priced accordingly. As I mention repeatedly, value is always relative and shares must always be compared to other asset classes. On that basis, there is not so much to worry about. UK house prices are creeping higher from unaffordable levels, encouraged by the government’s reckless Help to Buy scheme. (I heard the PM complain that the average income is unable to buy the average house. You might think that the solution is to raise the average income or lower the average house price or preferably both, but the answer from our government is to play “let’s pretend” and to forward the problem into the future, as usual). With growing numbers of people hooked up to the life support of the 0.5% Bank Rate, the chance of regular savings accounts bidding for your money are also about 0.5%. The only practical rival to equities in Q3 was, surprisingly, government bonds. On 10 September I recommended one. UNITED KINGDOM 1 3/4% TREASURY GILT 22 was trading at 92 then. This is an investment to tuck away for the long term but in the short term it has risen to 93.78, which, for a gilt, is pretty exciting. Shortly before the end of Q2 (12 June), I suggested a yield portfolio of twelve shares. From that date, they have returned 6.1% (including dividends) against 2.3% for the FTSE. So my implied caution has worked out quite well. The only stinker was Ladbrokes, thanks to a profit warning derived from its concerning failure to manage its online business. That having been said, its cash flow remains good and it has pledged to maintain the dividend. Today (167p) it yields more than 5% so I am,...

Report on Q2 2013

Report on Q2 2013

5 Jul 2013

The FTSE fell by 3% in the quarter meaning, obviously, that the easy wins of Q1 (+8.7%) were unavailable. My Q1 recommendations of Enterprise Inns and Go-Ahead trod water. Home Retail Group fell after its last trading update, apparently on the basis that the rain kept people away from Homebase. Such absurdities provide buying opportunities for investors and would-be barbecue chefs. At 138p it has a historic FCF yield of 29% (admittedly 2012 was an exceptionally good year for its free cash flow.) In May, I updated on ICAP which was still at 327p. The volatility of this share can be unnerving but right now it is 15% higher at 378p and it has maintained and paid its large dividend. In May I wrote that I would not be buying FirstGroup at its ex-rights price of 111p. At today’s price of 97p I am still not buying but I’m still watching. I also offered a list of twelve yield stocks. So far, so good. Ten are essentially unchanged or higher compared to a slight (0.8%) fall in the FTSE. Only UBM and Royal Dutch are down (I don’t know why). For anyone fretting about my worst ever investment (in Taylor Wimpey), it just released a positive trading statement and is trading at just over 100p – and yes, I have sold some. In April I wrote dismissing gold as an investment after it fell below $1400 an ounce. It is now $1242 and as unappealing as ever, in my opinion. My view on QE, available here and there, is that it probably does nothing to stimulate economic growth but that it will continue to be favoured by the Treasury which influences the Bank of England decisively. Yesterday the MPC under its new Governor Carney stated that: “..the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.” In other words, the Bank Rate is going nowhere from its 0.5% base and QE is safe in their hands. The stock market duly rose 3% in...

Report on Q1 2013

Report on Q1 2013

26 Mar 2013

I will review the success of my own advice every quarter because it looks like a good discipline and it feels like the chance to brag or whine, both of which could be satisfying. First, the share tips. My first ever post in November suggested that Enterprise Inns was probably worth more than 67p and suggested 120p as a possibility. Today’s price of 109p (+63%) is a nice slice of beginner’s luck. Then I suggested that Marks & Spencer could not justify a share price of 400p unless it was a takeover play. The takeover talk faded and the shares fell. Then the takeover talk restarted and it popped up to 400p again. My opinion is that it is too messy to be a plausible target but never say “never”.  In January I recommended ICAP at 327p. It had a decent jump on news of slightly better trading but then fell back when it was linked with the Libor “scandal”. So it is basically unchanged and still appears to yield 7%, albeit now with a “known unknown” risk. Then I tipped Home Retail Group, which jumped while I was writing about it. I’m chuffed to say that it has jumped again. It was 122p when I started writing about it, 140p when I published and is above 155p now. So far, so good: I expect it to go further.  Then in February I recommended Go-Ahead at 1367p. That has also lived up to its name and has risen by 8% including its half-year dividend. Obviously these triumphs are not unconnected to the fact that the FTSE rose by c.8% in the quarter. Now, the other posts. The student sub-prime loans are designed to blow up in 20 years, which is when my “model” student will start to reduce his outstanding debt. The guilty should be out of sight by then. Interestingly, RPI (now 3.2%), which is the driver for the increase in interest on the loans that students took for the first time this year (RPI +3%), will no longer be designated as a national statistic” according to the United Kingdom Statistics Authority. When I say “interestingly”, what I really mean is that I...