Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

Over the first nine months of 2018, the UK stock market was barely changed. In Q4 the world’s obsession with uncertainty overtook it. Trump took on China again, Trump took on the Fed, Congress took on Trump, the ECB took on Italy, the Conservative party took on Theresa May, everyone took on Saudi Arabia and the oil price took fright. While a falling oil price is sometimes considered broadly beneficial to the world economy, it is currently identified as a harbinger of global recession. The FTSE 100 fell by 10.7% in Q4, the 250 by 13.9% and the All Share by 13.1%. The rule that in nervous times investors favour large international shares (i.e. the FTSE 100) overall held good, though not on a scale to promote rejoicing or relief. For roughly the 17th time since the financial crisis the fear of impending inflation faded away. The underlying assumption that we are living in long-term deflationary times held good again. Government bond yields have duly subsided again. The US ten year yield has slipped from 3.0% to 2.6%, the UK 10 year gilt yield is now c.1.2% as opposed to 1.5% three months ago. It is times such as this (when the Japanese stock market’s daily change is one of the news headlines on the Today programme) that it is most important to remember our (or my) basic investment rules. Sharp and extensive falls in the price of classes of assets are caused only by the forced capitulation of unwilling and unhappy sellers. Great market collapses are invariably accompanied by the realisation that something that everyone took for granted is no longer true. Black Monday in 1987 was, with hindsight, a financial services event. Stockbrokers, fuelled by American money following Big Bang, were being paid more than bank directors had earned only a few years before. It was the time of Loadsamoney (Harry Enfield), Money (Martin Amis) and Serious Money (Caryl Churchill) and I am prepared to say without embarrassment that it was bloody marvellous to be part of when you were in your mid twenties. But when it was over you knew it was over. When the DotCom bubble burst in 2000 it...

£££ The case for the pound £££

£££ The case for the pound £££

10 Nov 2018

  When I wrote recently about financial  contagion I pointed out that holding cash is an investment. It is effectively a bet against inflation and for political and economic stability. Moreover, holding any currency involves a potential hidden opportunity cost – that of not holding a different currency. On a couple of occasions in my lifetime, the British government has had to abandon a policy of maintaining the level of sterling against another currency; in 1967 against the dollar and in 1992 against the deutschmark. GREAT STERLING DEVALUATIONS OF OUR TIME On the first occasion, following a 14% devaluation, the PM Harold Wilson attracted a certain amount of ridicule for addressing the nation in the following terms. He acknowledged that sterling was worth less “abroad” but said: “That doesn’t mean, of course, that the pound here in Britain, in your pocket or purse or bank, has been devalued”. Essentially he said that the pound hadn’t been devalued against the pound. In truth, it wasn’t much of an argument but it relied on the fact that currency losses are largely invisible until people are obliged to make some kind of foreign transaction. I don’t remember the devaluation of 1967 but in 1992, on (Black) Wednesday 16th September I was sitting in a dealing room listening to an open line from the Bank of England’s dealer who repetitively intoned the price at which he was prepared buy sterling. One of my colleagues told me that the Bank of England dealer always closed for the day at 4.30pm (presumably to catch the 5.07 to Sevenoaks) and wondered what would happen then. What happened is that he did indeed bid everyone a good afternoon and no doubt picked up his briefcase and headed for the door. In the time the world’s only buyer of sterling could have walked to the station, the dam had burst and he had pissed away £3.3 billion, which was real money in 1992. If that sounds like a story of pinstriped establishment incompetence from ancient British history, I must mention that the Bank of England is sitting on paper losses of some £49 billion (my estimate) from the gilts that it has bought above...

Contagion

Contagion

16 Oct 2018

  “The least thing upset him on the links. He missed short putts because of the uproar of the butterflies in the adjoining meadows. ” PG Wodehouse Financial contagion is a phrase employed by those who try to explain a fall in an asset price that they didn’t see coming.  If it means anything, which is not certain, it describes the fallout from the volatility that results when any market falls because people are forced sellers. This is prone to cause panic which in turn means that the attraction of holding cash rises. Given that no one likes to sell a falling asset (a psychologically taxing experience) people prefer to raise money by selling things that haven’t fallen in price but look potentially vulnerable (especially if viewed with a newly sceptical eye). As the quote from PG Wodehouse shows, when things go wrong we tend to cast around for something to blame. Bad things happen to relatively overpriced assets and the nature of the event that triggers their decline is really of no consequence. The need to explain what happened is driven by a reluctance to take responsibility for a poor investment decision. Hence we are allegedly the victim of the devaluation of a currency, the collapse of an obscure foreign bank, the failure of a harvest or the uproar of beating butterflies’ wings. In reality, contagion is not a hidden threat but a constant reality that we should never forget. All assets are in competition all the time, subject to perceived risk and liquidity. All asset values are relative to each other. The most crass mistake that financial analysts make (and I certainly write from experience) is to compare the price of an asset with its own history and to declare that this proves it to be cheap or expensive. Here are ten assets in which you, if your assets and liabilities are UK based, might conceivably invest, ranging from cash (the most liquid) to commercial property arguably the least liquid). Note that all savings are investments, even cash.   Gross yield Cost of ownership Net yield Capital gain/loss? Building society 2.0% 0.00% 2.0% No Government Gilt 1.7% 0.25% 1.5% No Cash 0.0%...

Report on Q3 2018

Characterised by such slogans such as “sell in May and go away”, the third quarter of any financial year is often expected to be cautious. This year saw a mild confirmation of that view – the main UK indices in Q3 fell by +/- 2% compared to Q3; year on year there was an increase of around 2% leaving shares year-to-date down marginally (-0.25%). This is something of a relief in view of the political noise that irritates us on a daily basis but we should note that the US S&P is +8.5% year-to-date.  Whether it is the combination of tax cuts and trade deals or something else, the US is showing either where we could be going or what we are missing, depending on your view. US government bond yields are still inching rather than exploding upwards. US 10 year treasuries are now hovering just above 3% and 10 year gilts are just above 1.50%. These started the year at 2.4% and 1.2% respectively. Perhaps this is a trend. But we should not forget that although there are plenty of Britons who remember inflation, it is 25 years since it was last a problem. I think that wage inflation is worth keeping an eye on but there again it seems that so many of today’s new jobs are relatively unskilled – the more that technology leaps ahead the more we seem to need people who can drive a car or ride a bicycle. When pricing power reaches sellers of that kind of labour then inflation might be off to the races. At the end of the quarter there was another bout of panic about Italy being rebellious against the decrees of the EU/ECB. The premium of 10 year Italian yields over Bunds is climbing. If it continues it will politically disruptive in Europe and could conceivably affect the Brexit deal, though whether it would make the EU negotiators more conciliatory or more obstinate is anyone’s...

Report on Q2 2018

Report on Q2 2018

5 Jul 2018

In Q1 the main UK indexes fell by between 6% and 8%. In Q2, they rose by 7% to 8%. The chart of the first six months is a “V” or perhaps a two-fingered salute to all the financial commentators who claim knowledge of the future. Bond yields again did almost nothing.   I have written elsewhere about the prevailing mood that seems to try to put a pessimistic spin on everything. As a result I would imagine that most people would be amazed to know that shares were so strong in Q2. How could they be in the turmoil of the imminent collapse of international trade, courtesy of the hardball tactics of Mr Trump and M Barnier, l’homme who loves to say “non”? The sole purpose of trade rules is to prevent trade from taking place and that these two gentlemen are both happy to use that threat as what I suppose we must call a negotiating tactic, if we could only tell what it is that they are trying to negotiate. Never mind that. The stock market doesn’t seem very concerned about it. Last quarter I listed thirteen everyday UK shares with markedly high dividend yields. Unsurprisingly, in view of the market performance, you would have done quite nicely if you had bought them. Not a single one of them went bust between April and June, I am pleased to say and the shares of none of them declined. It is better to look at valuations and to ask what they are telling us than to listen to what commentators are actually telling us. How about the yields on government bonds? I have said that there was little change in Q2 (despite innumerable predictions of falling prices) but are there trends and what do the absolute levels tell us? Germany is the benchmark bond for the EU. The ECB will continue its asset buying programme until the end of this year. It is still boosting asset prices by its own version of QE, implying that the crisis that started in 2008 continues. A year ago, 10 year Bunds yielded 0.5%. Now they yield 0.3%. Not many signs of imminent recovery there. Bond yields...

Report on Q4 2017

Report on Q4 2017

4 Jan 2018

For the third successive quarter, the markets were mysteriously calm. Long term government bond yields barely stirred again. Bunds yielded 0.44% in September and they yield 0.44% today. The range, if that word applies, of gilts has been almost as tight. The UK stock markets slow-marched upwards in step in Q4: FTSE 100 +4.4%, FTSE 250 +4.5%, FTSE All Share +4.4%. It would seem that behind the blizzard of infantile stories about Bitcoin and Brexit, there were no events of substance.  The US has been much more exciting. The Dow Jones Industrial Average rose by 24% last year and by 10% in Q4 alone. Almost all the reporting in the UK mocks Donald Trump and strains to suggest that he is incompetent and dangerous. Given that Trump campaigned on the basis that “good people don’t go into government” it is, to put it mildly, understandable that many people are keen, not to say desperate, to see him fail. It may turn out to be the only major legislation that he ever delivers but the tax reform is certainly a thing and the stock market seems to like it. Cutting the corporate tax rate from 35% to 21% is clearly beneficial for business and has been naturally portrayed as Trump helping out his true personal constituency but it is interesting that the balancing reduction of allowances is causing some huge short term hits in reported earnings ($5 billion for Goldman Sachs alone).    As soon as the bill was passed a raft of companies announced immediate $1000 cash bonuses for every employee. This looked suspiciously coordinated but I don’t suppose the 200,000 AT&T or 100,000 Comcast recipients mind. And the US consumer has been in celebratory mood with spending over the holiday period up by around 5%. The overall effect of the tax cuts has been reported as if they are a straight transfer of money from the poor to the rich. This is a question of whether you think that the lower taxes will promote economic growth (the classical capitalist view) or whether you think that they will merely drain government coffers (a more left wing attitude of course). The undeniable fact that individual...

Populism explained!!

Populism explained!!

21 Dec 2017

The causes of the financial crisis have not been properly addressed. In particular, the perpetrators are widely and correctly seen as having got away with it. This, in my view, lies behind the populist behaviour that keeps giving us “anti-establishment” election results like Brexit, Trump and Corbyn. That’s the conclusion of this essay. Here are my arguments, looking at what happened in the US, the EU and the UK and the common failures of leadership in all three territories. WALL STREET AND THE FINANCIAL CRISIS I think we all know that the financial crisis involved junk debts being packaged by rogues as AAA and sold to idiots. Faults on both sides, no doubt. US officials are relatively good at hammering those considered dispensable. (Bernie Madoff was sentenced to 150 years at the age of 71. That showed him). But the biggest banks were considered “too big to fail”. They operated with an implicit guarantee that, no matter what, they would be bailed out by the state. This was extended to the claim that they were “too big to jail”. It has been said that it would be destabilizing to the financial system if the senior management of a major institution were taken on the “perp walk”, handcuffed in front of a global TV audience. At the same time, the alumni of US investment banks seem to penetrate government at the highest levels. The original bailout was presided over by the Treasury secretary Hank Paulson, once of Goldman Sachs. Also from a Goldman career is the current Treasury secretary, Steve Mnuchin (there are limits to President Trump’s populism). You can read plenty about Goldman Sachs here. US politicians who complain about the big banks tend to stand out because they are unusual. Bernie Saunders and Elizabeth Warren are portrayed as “progressive liberals” (that’s an insult in establishment parlance) and possibly anti-capitalist or un-American. It is estimated that the US banking lobby spends more than $100 million a year fighting attempts to regulate it.    In 2011 the Occupy Wall Street movement claimed to represent “the 99%” against income inequality and corporate influence. President Obama said perceptively that: “I think it expresses the frustrations the American...

Prepare to turn left

Prepare to turn left

14 Nov 2017

I have been on the town recently. Two weeks ago I went to see Reasons to be Cheerful, a brilliant play based around the music of Ian Dury. It is performed by the Graeae theatre company that featured in the 2012 Paralympics opening ceremony. I saw it when it was produced the first time in 2010 and eagerly returned for more. Ian Dury was to say the least an anti-establishment figure and by today’s standards not politically correct. I’m not sure whether he would have appreciated the fact that a new song was tacked on to the end of the show. “If it can’t be right then it must be wrong” has rather puerile lyrics that I don’t think Ian himself would have written (“Keep the funding flowing from a loving cup”). As the song was played and sung, pictures of various politicians with devil horns sprouting from their heads were flashed onto a screen: Mrs Thatch, natch, David Cameron and, oh look, Tony Blair. But I will let someone else summarise: “This new anti austerity song from Graeae and the Blockheads captures the current mood of the country. Its lyrics bring people together in a moment of shared experience to challenge the status quo.” Jeremy Corbyn, Leader of the Labour Party. There I was watching a play set in 1979 and suddenly the “mood of the country” in 2017 was sprung on me. How did that happen, I wondered. Last week I revisited 1979 for the second time by paying a 2079 price to see Squeeze at the Royal Albert Hall. And it happened again. In between Cool for Cats, Up the Junction and Labelled with Love, the band naturally played songs from their new album. These included Rough Ride which laments the lack of affordable housing in London and A&E which really challenges the status quo by calling for more funding for the NHS. Perhaps I should get out more but I was struck by the way in which the anti austerity message was offered on both occasions with such confidence, as if it were not a politically contentious message but almost a fact. Perhaps I live in a London bubble but...

EVERYBODY KNEW

EVERYBODY KNEW

27 Oct 2017

There was a glorious time – and it was just a few weeks ago – that I had never heard of Harvey Weinstein. Apparently he was thanked over the years in thirty four Oscar acceptance speeches because although it was widely known “what he was like” there was some kind of implicit consensus that his behaviour, though reprehensible and pathetic, was a price worth paying for the chance of more Oscars. I may have misunderstood, but if it is true that many people knew or suspected and turned a blind eye then it was an inconvenient truth. There is often a financial motive behind the ignoring of inconvenient truths. Enron was a notorious example. It was widely admired: according to various articles it was named “America’s Most Innovative Company” by Fortune magazine for six consecutive years between 1996 and 2001. When a lone Wall St analyst asked on a recorded conference call in April 2001 why the company hadn’t published a balance sheet, Jeffrey Skilling, Enron president, replied, “Well, thank you very much, we appreciate that … asshole.” The company filed for bankruptcy before the end of that year. “As of last month, 13 analysts covered the company. Eleven recommended it as a “buy” or “strong buy.” Just one said “sell” and the other said “hold.” This was just one week before the roof fell in”. (Forbes magazine on Enron, 29 November 2001) There were a couple of brave analysts who waved a red flag about Enron just as there are some brave women who spoke out against Harvey Weinstein. But stating inconvenient truths does not make you popular at the time. Once the truth is out, the righteous mob surges forward like a tidal wave. Jeffrey Skilling was sentenced to 24 years in prison and Harvey Weinstein might lose his honorary CBE and who knows what else.     How do we identify inconvenient truths that “everybody knew” before anyone realises that everybody knows them? Merely holding a view with which everyone disagrees is not the answer. (Would that it were: making money would be so easy).   It is important and potentially lucrative to question consensus views, if only to check that they...

Report on Q2 2017

Report on Q2 2017

5 Jul 2017

The UK stock market was on a rollercoaster ride to nowhere in Q2. The FTSE 100 fell by -0.3% and the 250 managed a rise of +1.8%. Given that we had a shock election, a shock result, a hung parliament and that the shadow Chancellor thinks that democracy has failed, you could say that the stock market has been amazingly calm. Likewise the government bond market. The 10 year gilt yield was 1.23% at the end of Q1 and 1.26% at the end of Q2. This is the dog not barking in the night time. We are widely told that the pale imitation of austerity that has been attempted for the last eight years is to be abandoned but the bond market is not panicking yet. Here is a picture of gilt yields since 2007.    One of the lessons of the election was that voters under the age of fifty or so are not frightened of the things that made the 1970s rather messy. Inflation, double digit interest rates and labour unions challenging the government’s right to run the country to name but three. It remains the case that the return of inflation is what bears warn about most frequently. In the 1970s the best way to protect oneself against inflation was to buy property. House prices rose by 492% over the decade. I wouldn’t advise the same strategy now. In fact I would consider doing the opposite. The world still seems pretty deflationary to me. You can choose your own explanation and file it under “uncertainty” but it still seems to me that listed companies are still being very cautious about capex and expecting their shareholders to approve of this caution. Here are five domestically exposed UK companies that have reported March or April year-end results recently. Halfords cut capes by 11% and raised its dividend by 3%. Dairy Crest cut capex by 62% and raised its dividend by 2%. M&S cut capex by 25% and kept its dividend unchanged. Stage Coach cut capex by 18% and raised its dividend by 4%. Royal Mail cut capex by 16% and raised its dividend by 4%. All these are behaving in a risk averse...

WE NEED TO TAX ASSETS

WE NEED TO TAX ASSETS

20 Jun 2017

Nearly every commentator admits that he or she was wrong about the recent election, in particular their belief that no one with a modicum of responsible judgement would vote for Jeremy Corbyn. I also was wrong when I wrote this: Just as the Labour party cannot afford to be a blunt advocate of public spending because it knows that government debt is critically high, the Conservatives are no longer perpetually calling for lower taxes because they know that services to which we all think we are entitled are going to become yet more expensive. So the result is that the debate at this election has become a little more subtle than usual. As it happened, Labour produced a costed manifesto in which 80% of the extra revenue was to come from corporations or rich people, those joint gold medallists in legal tax avoidance. This was anything but subtle (“people in suits can pay”) and was effectively trashed by the party itself when, in response to complaints from students who have already incurred high debts that their successors would benefit from Labour’s plan to abolish fees in future, Jeremy Corbyn promised to “deal with it”. Dealing with it sounds expensive and was not covered by the manifesto. By contrast, the Conservatives decided that it was a good time to have a grown-up conversation about relieving young people from the burden of paying for the care of the elderly by tapping the assets of the elderly themselves. It turns out that the country is not ready for this discussion which is a great shame. Time is running out. Between now and 2030, for every net person joining the major income tax paying years of 30-59, there will be nine (net) joining the over 75s. The Conservative MEP Daniel Hannan has this plausible explanation for the surprising performance of a Labour movement led by its left wing. No, I’m afraid we’re down to the simplest and most depressing explanation. Quite a few voters will support any party that seems to be offering them free stuff. Labour’s manifesto was a ridiculous list of public handouts. More money was promised for healthcare, schools, the police, public sector pay rises,...

The crumbling social contract

The crumbling social contract

15 Mar 2017

THE LAND OF THE FREE-FROM-RESPONSIBILTY The Occupy protesters (what was it they were protesting about again?) used to chant “We are the 99%”. The 1% were portrayed as the selfish and/or crooked people who had appropriated most of the wealth. It is demonstrably easy to be part of the 99% – in fact, it’s darned hard not to be. Rarely had so many ever been against so few. The trouble with being part of a 99% majority is that it is difficult to be focused. Even the French revolutionaries of 1789, who had pretty much the same numbers on their side, could not agree on their objectives and ten years later succumbed to dictatorship (by a chap named Napoleon). But the recent UK budget, delivered by the harassed Chancellor, Philip Hammond, highlighted one point on which close to 99% of politicians, lobbyists and commentators are agreed. They all have limitless opinions about how public money should be spent but next to no constructive suggestions about how that spending should be funded. There is no responsibility for funding that is commensurate with the responsibility for spending. This seems unfair because the latter offers all the joys of patronage and moral superiority and the former, as Mr Hammond might agree, is like having toothache in a land of no dentists (whose absence is widely attributed to your own austerity policy).      I believe that most citizens are supportive of the idea that they should pay their fair share of taxes. But what weakens their support is any suggestion that the government is misusing their money, either by waste and incompetence or by channelling it to family and friends or by funding causes with which they do not agree. (The 2016 EU referendum ticked all those boxes for many people). There was a great experiment in California in the 1970s that showed what happens when people revolt against their social obligation to pay taxes. PROPOSITION 13 Essentially, Proposition 13, passed overwhelming in a referendum in 1978, imposed severe restrictions on the ability of local Californian politicians to raise taxes. Its genesis was the Howard Jarvis Taxpayers Association. The US has a history of taxing real estate that...

How QE plays out – and other guesses

How QE plays out – and other guesses

15 Sep 2016

This is a follow up to my last post about how QE is a wrecking ball that distorts financial markets and economic decision making. I have no opinion – despite a sceptical mindset – about whether QE is being applied correctly or about whether it will work. I doubt if even hindsight will allow people to agree about whether it succeeded. As an investor I need to weigh the probable outcomes of the distortion itself. Even this is not the same as making a definitive call on what will happen. That is gambling. As always, investing is about probability. THE WEALTH GAP – ONLY SHARES ARE CHEAP As long as QE carries on and the pool of safe assets shrinks further, savers in search of yield will keep chasing other assets. The stock market has been climbing the wall of fear this year. Before the referendum vote, George Soros and others forecast a decline of up to 20% in UK shares. Chancellor Osborne did not rule out suspending stock exchange trading in the face of the expected panic. With the atmosphere so full of “markets hate uncertainty”, that notorious cliché so readily embraced by third rate market commentators, many people will have assumed that the stock market would have performed its patriotic duty and dived after Brexit. But shares are cheap and quick to buy and sell, five days a week. I have just been offered a two year fixed rate bond by a building society that yields 0.95%. That’s a decision that ties up my money for two years. Were I to choose to buy Marks & Spencer shares instead I could get a dividend yield of more than 5% – and if I change my mind and decide that M&S is too racy, I can sell it in two minutes. Back in verdant Blackheath and vibrant Lewisham near to my house, yields on buy-to-let properties are between 3.6% and 4.5% (source portico.com). That seems like a lot of cost, time and risk compared to being a passive and better-rewarded owner of M&S. There is no hint that QE will be curtailed or reversed. On the contrary, the central banks of the UK...

QE : a wrecking ball to crack a nut

QE : a wrecking ball to crack a nut

3 Sep 2016

On 4 August 2016, the Bank of England expanded the QE (quantitative easing) programme that it had begun in 2009. This expansion, which now includes corporate bonds as well as gilts, is ostensibly in response to the Brexit referendum result on 24 June. The Treasury and the Bank had warned that Brexit could lead to a bad recession. You might need reminding that the official purpose of QE, since 2011, has been to stimulate the UK economy. You might think that, if this policy has been a success, it is rather a slow burner. But Andy Haldane (Bank of England Chief Economist) is in no doubt that it is the right thing to do and that this is no time to be faint hearted. “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.”   Mr Haldane may be an economist but he knows how employ a ridiculous metaphor to make a point. And although he – incredibly – affects populist ignorance of financial matters (giving interviews in which he says that pensions are too complicated to understand), he does not lack respect for his own ability. He explained that the decision to cut interest rates by 0.25% was in order to save hundreds of thousands of jobs, though whether this included his own was not clear. QE actually commenced in 2009 as an emergency measure to prop up asset prices in a (so far) successful attempt to save the banking system. The banks held vast amounts of tradable assets that could become vulnerable to crises of confidence – so the central bank stepped in as a very public buyer and calm was largely restored. Phew. The official line that this was a form of monetary policy that could stimulate economic growth snuck in later and is much more challenging to justify. It seems to me to be a rather strained argument. Here is the latest official serving. BoE report 4 August 2016 The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that...

Report on Q2 2016

Report on Q2 2016

6 Jul 2016

On the face of it, the quarter was dominated by the UK Brexit referendum decision on 24 June though, in the main, trends were consistent throughout the quarter. The FTSE 100, which delivers its rare moments of outperformance in times of nervousness, had continued to do better than the FTSE 250 up to 23 June. After the referendum result this trend was dramatically extended, partly fuelled by the sharp fall of sterling against the US dollar. At the close of business on 30 June, the 100 was up by 4.9% in the quarter and the 250 was down by 4%, a huge difference in fortunes. (Despite this, over the last 5 years the 250 is +35% and the 100 just +8%). If this signalled nervousness about the future viability of the UK there was no sign of that in the performance of gilts. 10 year gilts yielded c.1.50% three months ago. Now they pay just 0.80%. What this seems to tell us that a prolonged depression is more likely than either a renewal of inflation (normally a probable result of currency devaluation) or a default by the UK government (even though we don’t really have a government at present). The message from elsewhere, especially the EU, is the same. 10 year bund yields were 0.14% three months ago. They are now, as predicted, negative (-0.17%). In Switzerland, even 30 year government bonds yield less than zero. This seems to be confusing aversion to risk with a disinclination to continue to remain alive. The future is unknown. Get over it. I sold some shares ahead of the referendum result on the mistaken view that we would probably vote to Remain. I think that the EU economy is burdened by many problems – unreformed labour markets, burdensome state pension liabilities, unfavourable demographics and ailing banks. European politicians have been allowing the ECB to carry the burden with its “whatever it takes” monetary policy. As I wrote before, “QE looks desperate and desperation does not promote confidence”. It is the banks that really concern me. The share prices of some of Europe’s best known banks are trading near or even below their financial crisis lows. Deutsche Bank...

Report on Q1 2016

Report on Q1 2016

8 Apr 2016

Following a nervous rally in Q4, in Q1 the UK stock market was merely nervous. For the first time in seven quarters, the FTSE 100 (-1.2%) outperformed the FTSE 250 (-3.0%). This is a small indication that investors were becoming more worried about the outlook for earnings, I suppose. Since the Fed made the first tiny upward move in rates (0.25% in December), the economic smoke signals have deteriorated. Janet Yellen has publicly backtracked on the outlook for more rate rises this year. The ECB has signalled that more stimulus may be needed. Then there is China, Brexit and, most particularly, blah blah.      As usual, market commentators think that equity prices should reflect their view of the world. As usual, they miss the fact that equities are merely assets that compete with the value on offer elsewhere. The implicit secondary purpose of QE (the primary purpose was to bail out the banks) is to make the value of every other investment so unattractive that people begin to invest directly in riskier ventures that are more likely to help the economy. That’s the theory on which, despite its having the weight and robustness of a Twiglet, the world seems to be relying. How’s it going? Well, the price of “safe” investments has climbed to yet more prohibitively unattractive levels. The yield on German 10 year Bunds was 0.63% on the 30th December 2015 and 0.14% on 30th March 2016 and is thought by some to be heading negative. Well, why not? The Bank of England started its QE purchases of gilts in March 2009. At the time, the average UK dwelling cost £157,500 (its low point of the last ten years). In March 2016, the average dwelling cost £224,000 a nifty rise of 42% or 5.2% compound over seven years. No wonder that most Britons think that housing is the best possible investment and that we must have a housing shortage. Memo to everyone: house prices have been inflated by a deliberate and unprecedented policy of monetary easing, not by supply shortage. This is not going to end well. How about the next stage? Are people helping the economy by making riskier investments? Today’s...

Report on Q4 2015

Report on Q4 2015

5 Jan 2016

Following a very wobbly third quarter, we saw a nervous rally in Q4. As usual, the FTSE 250 (+4.5%) did better than the All Share (+3.5%) and the FTSE 100 (+3.1%). As a reminder, over ten years the 250 has performed more than ten times as well as the 100, yet index trackers continue to offer the 100 or the All Share (than which the 250 returned 5x over 10 years) as the default choice. Quite by chance today I read this from Ross Clarke in the Spectator blog. Jeremy Corbyn wants to get rid of the British Empire Medal and David Cameron wants to ditch the Human Rights Act. But I have a different nomination for the national institution most desperately in need of abolition: the FTSE 100 index. It is harming our economy by consistently underplaying the returns to be made on stock market investments and encouraging us all to invest in property instead. Despite the first nudge higher in the Federal Reserve interest rate government bond markets were quiet. The 10 year Bund yield slipped fractionally from 0.61% to 0.58%. Ten year gilt yields nosed up from 1.8% to 1.9%. The weakness in commodity prices is making people nervous about global GDP growth and the next cycle of rising interest rates seems no closer than it did this time last year or this time the year before…. One of the features of Q4 was the relative scarcity of actual bad corporate news and the relative abundance of negative opinions. The latter seem to suit the spirit of the times. Stock market analysts invariably provide opinions for which there is a demand – don’t be hard on them, it’s the nature of what’s left of the job – and if investors wanted bullishness they would get it. At the moment, anyone putting the view that China is going to be ok, that global demand will eventually underpin commodity prices and allow investment in production again, that middle-Eastern politics are ultimately pragmatic and that the effects of terrorism are statistically trivial would be accused of being naive, stupid or wilfully misleading. This is interesting because one would normally expect Cassandras prophesizing doom to...

Monday 19th October

Monday 19th October

14 Oct 2015

Next Monday is an evocative date for those of us who worked in the City of London in 1987. The nineteenth of October became known as Black Monday (not the first or the last) as global stock markets went into meltdown. The Dow Jones Industrial Average fell by 22.6% in that single day. At one point during the trading day it was reported that the Chairman of the SEC (the U.S. Securities and Exchange Commission) had mentioned the possibility of suspending trading. Naturally this increased the level of panic. It felt all the more dramatic because the previous Friday, the 16th, had seen the Great Storm that felled trees all over Southern England. My wife and I drove into work that morning through streets that had been laid to waste a few hours before. The City was spookily quiet and the stock market felt abandoned but was also very weak. It turned out to be an eerie harbinger of the full scale panic that was to follow. If you search for explanations of Black Monday you will generally read that the stock market was overheated, partly inflamed by excited takeover activity. In September 1987, the ad agency Saatchi & Saatchi made an approach to buy Midland Bank. Nothing better exemplified the mood of the time – that anything was possible for the new money of the eighties. The Conservatives, led by Margaret Thatcher and Chancellor Nigel Lawson, had won the General Election on 11th June, seemingly confirming that the corpse of socialism had been buried and that capitalism could bring prosperity to anyone with the ambition to pursue it. It is certainly true that the developed world stock markets had risen substantially in 1987. By mid-July the FTSE 100 was up by 45%.  In that sense, prices were high though of course that is not the same as saying that they were expensive. All value is relative, as we know. As stock markets rose, bonds fell. This is a classic danger sign. Ten year gilt yields rose from 8.8% in May to 10.1% in September. High street savings accounts paid 9%. From today’s perspective, it seems incredible that equities were so popular. In relative...

Report on Q2 2015

Report on Q2 2015

6 Jul 2015

In Q2 the FTSE 100 fell by 3.3% but the FTSE 250 was up by 2.8%. In the first half year of 2015, the FTSE 100 was flat but the 250 was +9.2%. This divergence is probably indicative of two factors. The FTSE 100 is heavily weighted with banks and resource and mining stocks, few of which have looked like attractive investments for some years. The 250 is more reflective of UK PLC. Second, despite nervous headlines about (in no particular order) Greece, China, the interest rate cycle and the various consequences of terrorism, large companies have not benefitted from any move to perceived safe havens. Blue chip oil and pharma companies yield 5%+ but the average investor doesn’t seem to care. To put it another way, investors are not particularly nervous. European bond markets have normalised to some extent. The UK 10 year gilt yield has risen from 1.6% to 2.1%. Way back in September 2103 I recommended (and bought) a gilt, UNITED KINGDOM 1 3/4% TREASURY GILT 22. It was trading at 92. Having touched 103 in Q1 it now trades at just under 99, yielding 1.9%. This is not yet tempting me to get back in but it’s movement is worth following. Very little happened to the share prices of the major food retailers in Q2. They have all begun to tackle their structural problems. My view is that the market is now ignoring a trickle of good news. While Tesco is taking small steps at the start of a very long road – because Tesco needs to overhaul its financial structure – Sainsbury reported that the performance in its large stores had improved in June. It implied that the appeal of discount stores like Aldi and Lidl was waning slightly. Wishful thinking, perhaps, but Sainsbury is making an effort and its new joint venture with Argos is interesting. Morrisons has a new chief executive, David Potts, who seems to be making the right noises. When the (dull) Q1 numbers were released he said: “My initial impressions from my first seven weeks are of a business eager to listen to customers and improve“. He seems to be as good as his...

Report on Q1 2015

Report on Q1 2015

30 Mar 2015

In Q1 the FTSE 100 rose by 3.3% and the FTSE 250 by 6.4%. The FTSE 250 is probably more sensitive to the domestic economy (or at least to how investors are feeling about it). The FTSE 100 has larger more global businesses including, of course, oil companies and banks, which received another kicking in the recent budget. That last point is a salutary reminder that investors will have to judge political risk in Q2 as the general election arrives 7th May (though the formation of a government may take weeks if the polls are correct in suggesting that no party will win a majority). I strongly doubt whether the economic outlook will be materially changed regardless of who wins. There is very little room for manoeuvre and it is painful to watch politicians trying to pretend otherwise. But where the banks have been led others could follow, particularly if the next government includes Labour. Utility companies have already been singled out to be sacrificed to the mob. No politician appears to understand that electricity supply is a very long-term and expensive commitment. It may be true that utilities are greedy cash cows but they will not invest the vast sums needed in next generation energy supply if they are treated like political footballs. Labour also wants to limit the profits available to companies who provide services to the NHS. I have no idea what they mean by this (drug companies? nursing agencies? hospital retail concessions?) but I am pretty sure that they don’t either. The point to bear in mind that stupidity is no bar to persecuting businesses that can be successfully vilified. Gilts had a relatively quiet quarter with yields falling from 1.72% to 1.57%. Last week I took profits on 25% of my gilt holdings. This was a small insurance against the political scene, but looking across the sea and seeing Irish 10 year bonds yielding 0.76% it is clear that most of us are missing something. Core eurozone bonds i.e. those of Germany saw 10 year yields fall from 0.54% to 0.18% and as I write the seven year German bonds have a negative yield. ECB QE now looks even...