3 Oct 2023

The last time that the UK stock markets put in a meaningful positive performance was Q4 last year when it was obvious that many highly investable companies were oversold. A year ago I even spotted that. This year has been very dull after that rally. The FTSE 100 is up by 2.3% and the FTSE 250 is down by 2.8%. So larger companies have outperformed smaller ones but not in a way that excites comment from me.  Government bond markets have continued to drift down i.e. yields have climbed more. The US Treasury 10 yr yield rose from 4.1% to 4.7% and the German Bund from 2.6% to 2.9%. Only gilts stabilised at around 4.6%. Rising yields imply that investors remain cautious but do not expect serious economic slowdown (bond yields fall in response to recessions). But higher rewards for playing it safe (as exemplified by National Savings paying 6% for a one year deposit) make investors more risk averse. There are speculative and long-term investments that you will try when cash yields nothing but will spurn when doing nothing starts to be rewarding. This dynamic explains why smaller companies that appear to offer more growth potential are being spurned in favour of larger and duller ones that pay decent dividends.  It seems fairly probable that today’s higher yields will become the future norm. If that is so we can expect stock markets to remain...

26 Jul 2023

All the UK share indices fell modestly in Q2 as the wait for recession continued and inflation remained stubbornly high. Year to date, the FTSE 100 has a clear lead (+5%) over the more domestically exposed 250 (-1.3%).  There was some blood spilt in the government bond markets, especially in the UK where the 10 year gilt yield leapt from 3.49% to 4.65%. Germany (2.18% to 2.63%) and the US (3.41% to 4.00%) moved in the same direction but less dramatically. Sensible but shocked financial TV commentators could be heard breaking a lifetime’s habit and actually suggesting that private investors might invest in government debt.  This is a trickle, as the calm stock markets show and most attention has focused on the woes of those who need to remortgage at rates that they apparently never considered to be possible. Crony capitalism has shown a few stress fractures, not least with a ruling from a judge in Missouri that the Biden administration should stop directing the large media organisations to suppress unwelcome opinions. The bizarre sight of the liberal media closing ranks around big Pharma, big Tech and, thanks to Coutts and Natwest, big Finance, is perhaps paused for a moment.  https://twitter.com/i/status/1677289360486457345 But the subsidy truffle hunters are still snuffling away. Tata has secured unknown public money for its battery factory in Somerset and the Swedish company Vattenfall has halted work on its Norfolk offshore wind farm pending….you guessed...

21 Apr 2023

The first quarter saw a limited banking crisis, including the demise of the wounded Swiss champion Credit Suisse, but otherwise there was not much to see. The FTSE 100 managed to rise by 2.4%, again doing better than the more domestically-based FTSE 250 (+0.4%). Government bond yields were also largely unchanged in the UK and Germany but lower in the US (3.6% vs 3.9%) where inflation is more obviously falling. It was a curious incident of the dog in the night time quarter – despite much noise about failing banks and impending recessions, the markets snoozed their way through.  For an investor, something not happening is every bit as significant as something happening.  My theory is that large corporations are more comfortably in bed with governments than has ever been the case. Due to the explosion of government borrowing and spending since the “great financial crisis” of 2008-9 and the doubling down that occurred with lockdowns. Governments are the most important customers and, as we know, the customer is always right.  Corporate lobbying may be unedifying but it appears to be annoyingly successful. Politicians who take a principled stand tend to find themselves maligned as borderline mentally ill if they cross an agreed line delineating agreed public/private interests.  As Groucho Marx said, “Those are my principles, and if you don’t like them… well, I have others.”  Essentially, the governments of the US, UK and Europe have huge patronage at their disposal and it is hardly surprising that big business knows where to find it.  This is what is sometimes called Crony Capitalism, defined as – An economic system characterized by close, mutually advantageous relationships between business leaders and government...

18 Jan 2023

For the first time in five quarters The FTSE 250 outperformed the FTSE 100 (+9.8% vs +8.1% compared to Q3). This does not change the fact that the big-cap index with international exposure trounced its smaller more domestically exposed rival over the year as a whole (+1% vs -20%). But some recovery by FTSE 250 shares would be very welcome in the face of much public negativity about the UK economy. In my Q3 report I wrote that half a dozen shares must be long term buys. I invest in line with what I perceive as probability and necessarily one is sometimes correct. While I take a brief lap of honour I shall recite as follows – Sainsbury +40%, Tesco +20%, Halfords +39%, Kingfisher +23%, Pets At Home +27%, M&S +52%. I own all those shares but the only one that I actually bought at the end of Q3 was M&S. The government bond markets have been interesting, as I wrote here on 23 December. Over the quarter UK 10 year gilts fell from 4.23% (a peak induced by the Bank of England, not Liz Truss) to 3.67%, a normalisation from an excellent buying opportunity. US 10 year Treasuries were flat at 3.88%, summing up the unresolved debate between inflation mongers and recession peddlers. German yields rose from 2.1% to 2.5%. CHINA AND NUMBERS Finally, a geopolitical strategist named Peter Zeihan mentioned something that I have seen before – namely that China, in addition to reporting dodgy population and Covid numbers, has long overstated its GDP growth. While this might seem just the grandiose bull of an authoritarian government, it has huge mathematical implications once you take into effect the compounding effects over time. An overstatement by 3% of a number that is itself already overstated will, in twenty five years, produce a GDP number that is distorted by 100%. It could be that the reason why the world has withstood the repeated closure of the Chinese economy is that China is not as important as its official GDP numbers...

8 Oct 2022

The FTSE 250 fell by 8.0% in Q2 and is down by 25.5% year to date. The FTSE100 is down by just 2.7% year to date, a massive and, in my experience, unprecedented outperformance. On average FTSE 100 companies are larger and more international meaning that they are typically earning dollar revenues, a very good cushion in recent months. UK ten year government bond yields began the quarter at 2.06% and ended it at 4.1%, a rout that was ludicrously attributed to a trivial mini budget. As I wrote recently, this has been coming for a long time and the cause is a combination of relentless excessive borrowing, to which the nation appears to be addicted, and blundering behaviour by the Bank of England which naturally fails to accept responsibility. The overdue correction in government bond yields was certainly not confined to the UK. Ten year German Bund yields soared from 1.2% to 2.1% and US Treasuries more modestly from 3.02% to 3.8%. As those yield movements imply, Europe has a bigger inflation threat because most commodities are priced in dollars. Stock investors in the US have seen most commodity prices well off their highs and are disappointed that the Fed appears to be set on continuing to dampen an economy that appears to be slowing down quite nicely. It is worth mentioning that most US commentators see a bad recession across Europe as a given. I have been buying two year Gilts yielding above 4% in the knowledge that these represent a very viable alternative to stocks, at this difficult time, as they say when flags are flying at half mast. There is no doubt that many share prices are very low and some of them may even be cheap. I have been looking at retailers. Sainsbury, Tesco, Halfords, Kingfisher and Pets at Home all have solid balance sheets and yield between 4.5% (Pets) and 7.5% (Sainsbury).Marks & Spencer, which must be selling hair shirts, pays no dividend for some reason but its historic free cash flow yield is 33%. Barring serious management blunders, which are of course quite possible, these companies are long term buys. I am tempted to write that there...

8 Jul 2022

The FTSE 250 fell by 11.8% in Q2 and was down by 20.5% in the first half. For the FTSE 100 those numbers were -4.6% and -2.9% respectively. The message was that the big international companies were relatively unscathed but the more domestically exposed businesses flashed a big warning about recession or worse.  It was only to be expected that government bond yields, with less central bank support than before and gathering inflation, would rise and so they did. By mid June, UK 10 year gilt yields jumped from 1.6% to 2.65%, US treasuries from 2.34% to 3.48% and German Bunds from 0.56% to 1.76%. But in the second half of June, a mini bull market resumed in government bonds. On 1 July, UK yields were back down to 2.06%, US to 3.02% and German to 1.2%. On the face of, the bond markets are now more frightened of recession than inflation.  Consistent with this, despite the front page news about inflation and wage demands and threatened strikes, most commodity prices are well off their highs. Oil is +39% this year but was up 73% in March. Wheat is +23% but was up by 56% in May. The near certainty of rising prices for aluminium and copper has turned into falls of 13% and 19% respectively year to date. There has probably been stockpiling by producers as well as the self-inflicted closure of much of the Chinese economy. One should also remember that the monetary splurge that accompanied lockdowns probably filled the savings of the professional classes very nicely. History may record that this was a huge and regrettable transfer of resources in the wrong direction i.e. from the relatively poor to the relatively well off. Whatever one thinks, it is notable that the summer holidays are marked not by complaints of price gouging by holiday companies (though there is some of that if you were a regular user of Eurotunnel) but by the scandal of not enough flights to transport those who sport pale skins to the sun.  I note also that despite the threat or probability of costlier mortgages, UK house prices rose at an annual rate of 13% in June. Once...

4 Apr 2022

The stock market trend that began in Q4 accelerated in Q1. The FTSE 100, with its big oil, gas and mining shares, rose by 1.8% while the FTSE 250, mostly populated with companies that use those products as raw materials, lurched down by 9.9%. I cannot recall such a divergence between those two indices in a single quarter. Despite this, the bond market action was more dramatic still. Ten year UK Gilt yields rose from 0.97% to 1.6% as purchases by the Bank of England ceased. In the US, 10 year Treasuries yielded 1.51% on 31 December and 2.34% at the quarter end. The German 10 year Bund yield rose from -0.18% to 0.56%. Despite the serious risk that Putin, net zero and raw material prices will combine to send us back to recessionary times, the main message from government bonds is that inflation is a problem that historically demands high interest rates. The theory that the cost of borrowing should rise in order to discourage speculative investment looks rather thin in today’s circumstances but markets are not famous for looking around corners to see what might lie just out of sight. . Rishi Sunak’s spring financial statement contained the inevitable tax increases that many seem to find unbelievable and the reason for them. The government is now expected to pay interest of £83 billion in 2022/3. This may include losses on its stock of redeeming gilts but even so it is a shocking number implying that the nation is now paying 4% to borrow, which is roughly twice as much as its more solvent citizens. Though the latter can only expect their mortgage rates to rise in turn. The time may have come for the idea that the credit worthiness of all governments is something that must be factored into the usual calculations about the relative cost of...

4 Feb 2022

The FTSE 100 outperformed (+4.2% in the quarter) the other indices (250 and All Share) because big resource shares (oil, gas, metals) did well as the market began to realise that high commodity prices promised outstanding profits. Free cash flow would be enhanced by the fact that the environmental lobby has bullied these businesses out of making the investments that would once have been expected. Instead the likes of BP (sorry, bp) have begged for forgiveness by bidding up the price of offshore wind licences.  For the full year, all the main UK indices rose by just over 14%, perhaps a sign of a fairly indiscriminate wall of money looking for a home. This was not a great result by international standards: the S&P 500 returned 27% in 2021. Meanwhile UK gilts began to show some signs that the Bank of England Asset Purchase Facility was nearly full, meaning that 2022 gilt auctions would be offered to an unrigged market. In December the 10 year yield rose from 0.82% to 0.97% and (spoiler alert) in January was set to soar up through...

7 Nov 2021

Q3 was again quite calm in the equity markets. The FTSE rose by 0.7%, quarter-on-quarter, and the domestic orientated FTSE 250 by 2.9%.  It is the bond markets that are relatively volatile. After a rather surprising rally in Q2 (when yields fell) the official message that inflation will be transient began to met with scepticism again in Q3.Government bond yields began to rise again – US treasuries from 1.3% to 1.6% and gilts from 0.6% to 1.1%. At present there is much speculation about whether the Bank of England will raise the Bank Rate from 0.10% to 0.25%. So what? Is a reasonable question. The Bank Rate is the interest that the Bank of England pays to commercial banks when they deposit money with it. The long years of near zero rates are part of a policy to encourage banks to lend. In addition, QE has swamped the private market with cash. The Bank Rate is classically raised in order to discourage excessive lending which leads to overheating and inflation. As a Fed chairman once said, you take away the punchbowl just as the party is getting going.  I find it hard to imagine that interest rates play any significant role in commercial bank decisions at the moment. If the Bank Rate is effectively an opportunity cost of lending it is going to have to be much higher than 0.25% to make any difference. Perceived counterparty risk must be the dominant consideration. The most important factor for the Treasury and the Bank of England is their own borrowing costs. At some point, surely, the government will have to stop borrowing from itself and will need to raise money from savers and investors who will need inducements. Keeping the Bank Rate low will be an irrelevance and won’t stop long dated yields from rising. Roll on the...

30 Jul 2021

It was another tame and friendly quarter in the equity markets. The FTSE rose by 4.6% and the domestic orientated FTSE 250 by 3.8%. Rising commodity prices are more likely to be good for large international businesses than for domestic companies that often have to import raw materials or finished goods. Year on year, it still looks like boom time for the FTSE 250 (+31%) while the FTSE 100 was up by a more restrained 14%. The major story since Q1 has been the austere message from the bond markets. Once again the only direction for yields has been downwards, a strange reaction to forecasts of rising inflation and post-Covid consumer recovery. US 10 year treasuries which started the quarter at 1.7% and apparently looking to break 2.0% are back down to 1.3%. And UK 10 year gilt yields are down from 0.8% to 0.6%. What is going on? One point to make is that the post-pandemic bounce is being restrained by cautious or possibly panicked government intervention. In the UK, the official opposition, such as it is, is keen to accuse the government of lifting restrictions too quickly and eager to blame it for causing extra deaths in quantities and for reasons yet unknown. The leisure industries have become used to having to incinerate their plans at a moment’s notice and economically this is of course disastrous. In Australia, to take one painful example, a zero tolerance of Covid allied with a snail pace vaccination roll-out has led to huge and endless lockdowns that make Australia and New Zealand seem as if they are now situated on another planet, possibly the birthplace of Jacinda Ardern, who has declared herself the sole source of truth. Traditionally, the bond market is a better predictor of economic direction than the stock market (though to be fair the stock market generally has the predictive capacity of a dog chasing a car). There is also a spreading realisation that governments cannot afford to pay higher interest rates on their extraordinarily high debts. If there could be said to be a consensus it is that all the central banks know this and are trying to send signals that they...

6 Apr 2021

It was an amiable quarter in the equity markets, despite some warnings of bubbles and the occasional bankruptcy. The FTSE rose by 4.1%, the All Share by 4.5% and the domestic orientated FTSE 250 by 5.2%. Year on year, it looks like boom time because the end of March in 2020 was more or less the bottom of the market. A salutary reminder, in case we needed one, that stock markets try to discount news as quickly as possible. Once the pandemic and the lockdown measures had sunk in, it was panic by sundown.   With this flattering point of comparison, the FTSE rose by 18.8% over twelve months, the All Share by 23.8%% and the FTSE 250 by a drool-making 43.3%. Bond markets were stirred from their seemingly endless slumber. Those terrible twins of inflation and currency debasement might be intruding into investors’ thoughts. US 10 year Treasury yields popped from 0.9% to 1.7% over the quarter. UK gilt yields rose from 0.2% to 0.8% – not exactly a compelling offer but a serious price move. German yields “rose” from -0.57% to -0.32%.  It seems that people are beginning to believe in the vast libraries of money that central banks are printing. They expect recoveries in spending and government-inspired investment and equities are the obvious way to play the trend. If your portfolio performed disappointingly in the quarter it’s probably because you owned sensible shares that survived and prospered in lockdown. Sentiment began to move in favour of “reopening stocks” though most of the reopening that we have seen so far has come from a few US States dubbed by President Biden as “Neanderthal”. So far, the throwbacks appear to be doing rather well. As we said, stock markets try to discount news as quickly as possible, even if it’s...

2 Jan 2021

The European bond markets signalled nothing other than the expectation that cheap or free money is expected to be available sine die. German 10 year yields slipped from -0.50% to -0.57% implying that an extended “oven ready” depression awaits Europe. UK 10 year gilt yields loitered at 0.2%. Only the US, with a rise from 0.7% to 0.9% hinted at any future sign of life as we knew it. It was a much more cheerful quarter in the equity markets. The FTSE rose by 10%, the All Share by 12% and the domestic orientated FTSE 250 by a fairly whopping 18%. This left the FTSE down 15% for the year as a whole, the All Share -13% and the FTSE 250 just -6%.  Despite the obvious fact that the lockdown fanatics are apparently delighted to keep the economy on life support and regret only that we have not shut down sooner, harder or for longer, the stock market is eagerly anticipating a reviving spending spree. Those who find this almost morally objectionable should remember that share markets always try to discount everything as quickly as possible. The FTSE 250 that turned out to be the brightest spot of the year melted by 31% in Q1. I just checked to see what I wrote at the end of Q1: The sight of a self-inflicted depression is unprecedented outside of wartime. It is worth bearing two points in mind: 1) you can’t buy bargains without cash and 2) remember to look down rather than up. Up will look after itself. Eventually. Obviously I could have been more bullish but I did spend plenty of cash while looking down. And I would re-emphasise that up takes care of itself. Stock markets always want to go up. In December we discovered that the UK’s regulatory agency was the fastest in the world to approve the first vaccine and repeated the trick at the end of the month with the Oxford university product. I suppose that this proves how keen or desperate the country is to escape the pandemic. Other nations are more cautious about cutting corners on their regulation processes.  So although the number of people who have...

22 Oct 2020

The third quarter was dull and unrewarding, despite the sadly temporary return of sanity to some human activity. The FTSE 100 fell by 5.2%, having rallied by 9% in Q2, meaning that it is down by 21% year to date. The FTSE 250 has done better (+1% in the quarter, -13% YTD). The main reason for the poor FTSE performance was the oil majors, aided in their dirty work by the banks, especially HSBC. Given that the oil price fell little over the quarter, the problem for BP and Royal Dutch may be perceived to be more existential, which is worrying. Poor old BP bangs away about becoming a renewable energy company and no one listens. I read somewhere that the US oil majors are funding the Biden campaign on the basis of its promise to stop fracking. This will eliminate thousands of jobs but it should reduce the supply of oil. The banks are perhaps more worrying. We hear plenty about the various parts of the economy that are being kneecapped by our apparently random and barely comprehensible lockdown policy but the market seems to be acknowledging that the banks will always be manning the rear of the destitution queue. Remember how the taxpayer rescued RBS (now renamed NatWest Group)? The share price fell from c£60 in 2007 to 120p in early 2009. Eleven years later, the share price was 106p. Our banks are zombies and in my view shouldn’t be listed on the stock market at all. The ten year gilt yield crept up from 0.15% to 0.20%. Cheap borrowing is constantly cited as the reason why the government can pay for everything. The fact that the government is borrowing from and lending to itself (“Thank you so much!”; “Don’t mention it old chap!”) is rarely pointed out. Attempting to avoid a depression by printing money is an experiment that most of us hoped never to witness. The bond market will warn us if inflation appears on the horizon. On a more cheerful personal note, I bought some William Hill at 108p on 3 August (not my first but certainly my cheapest investment in that share). Before the end of the quarter,...

9 Jul 2020

In isolation, Q2 was quite good for stock markets. But in the context of what happened in Q1, we are still in the mire with our Wellington boot just out of reach of our hovering, stockinged foot. The FTSE 100 rose by 9% but is still down 17% year on year. The FTSE 250 recovered by 14% in Q2 (having been down 31% in Q1) but is -12% year-on-year. As usual, the All-Share was between the two. It seems fair to say that we are no wiser about the probable economic outcome of the pandemic though we can see that there is a consensus that central banks can print any amount of money on the single condition that they don’t admit that that is what they are doing. In the US it is more explicit because it is more acceptable to say that anything large is too big to fail when it would involve the loss of large numbers of jobs. Even if you are not seeking re-election as President, it is hard to argue against that. The response to Covid-19 is becoming highly political in the UK, despite there being no general election scheduled until 2024. Mass unemployment cannot be deferred indefinitely, even by money printing. Everyone must know this but no one wants to say it – governing politicians are terrified of hard truths unless they can be floated under a halo of brave sacrifice and oppositions bide their time until they can feign shocked surprise at how badly things turned out.   So we are left with a pretend future funded with pretend money.  Pretend money is far from being just a UK phenomenon.  The euro was infamously pretend money before the financial crash. Greece, Italy etc thought that they could borrow extravagantly but cheaply because their euro liabilities were implicitly guaranteed by the ECB. Kyle Bass, who, in around 2008, took long positions in German Bunds matched against shorts of Greek government bonds, called it the greatest asymmetric trade of all time.  Eight years ago this week, Bunds yielded 1.5% and their Greek equivalents 26%. The spread between the two was 24.5% having been around 0.5% when Bass took his position....

4 Apr 2020

It is difficult to remember now but UK equities had a storming close to 2019, driven by the Conservative victory in the General Election and the release from the threat of becoming a loose money, centralised, statist economy. But, as Corbyn finally goes, the UK enters a period of unknown duration featuring the most fiscally “irresponsible” government ever, a nearly universal bailout for the private sector and social rules that are martial law in all but name. Back to Q4 for a second to note that the star performer was the FTSE 250, the most domestically exposed index, which rose by 10%, compared to 2% for the 100 and 3% for the All Share. With the leisure industry shuttered and its quoted representatives suddenly revenue-free and left with only their balance sheets between them and oblivion, it is no surprise that the FTSE 250 was -31% compared to a sprightly -25% for the FTSE 100. With the world now able to agree that any doubt of a severe global recession has been removed, government bond yields fell again. The US 10 year yield fell from 1.79% to 0.62% and the 10 year gilt yields from 0.74% to 0.33%. Despite the proposals of bail out packages which are worth numbers that are too large to have meaning for most people, there is apparently no general worry about governments’ ability to sell debt. I find it hard to believe that this will last, not least because the default solution appears to be that countries buy their own debt. Perhaps I am too dim to understand how this would work but, at least in the case of the UK, it implies devaluation and inflation to me. Most listed companies have issued Covid-19 trading updates in the last week or so and most are assessments of the probability of survival, coupled with cancelled dividends. It is important to remember that a business can continue while its equity becomes worthless – for example, the government seems disinclined to be generous to airlines because it knows that the grounded fleets will fly again one day, regardless of who owns them. Bus and train companies are by contrast largely having their...

6 Jan 2020

The last two weeks of 2019 were a good year for equity markets. The immediate cause was of course a decisive majority for the Conservatives and the apparent dispatch of Corbynism to the library shelf marked “Historical Fantasies”, perhaps one day to be studied by students who feel that their knowledge of the Venerable Bede is as complete as it will ever be. From 13 December, the day the results were known, the FTSE 100 rose by 4% to the end of the month, having been down in the quarter up to that point. The star performer in Q4 was the FTSE 250, the most domestically exposed index, which rose by 10%, compared to 2% for the 100 and 3% for the All Share. Year on year, all the indexes were stars due to a meltdown in Q4 2018 which offered a generous comparison. For 2019 as a whole, the FTse 100 was +12%, the 250 + 25% and the All Share +15%. Wow. The US 10 year yield was stable at 1.79%. 10 year gilt yields rallied from 0.55% to 0.74%, perhaps reflecting very small worries about more government borrowing. A year ago when things looked bearish I wrote the following: Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain. At the time I said that I was bored by politics and Chinese trade wars. On those fronts the noise has remained much the same. Donald Trump is a year closer to re-election, subject to the Democrats deciding to try to defeat him democratically rather than with the law. Climate change activists have got louder and sillier, though following COP 25 in Madrid, at which 27,000 delegates achieved very little, there was some overdue acknowledgement of the tension between the economic demands of poor countries with hundreds of millions of people living in poverty and the schoolgirl demands of...

1 Oct 2019

At the end of Q2 I wrote that part of my brain wanted to go on an equity buying spree but I wasn’t sure which part that was. It seems to have been the part that wants a quiet life because the FTSE 100 was unchanged over the last three months. The broader FTSE 250 rose by 2.4%, perhaps due to takeover activity. Sterling rose by 0.7% against the euro which is effectively also unchanged. The political noise of the last three months happened in a wind tunnel as far as the financial world was concerned (though that may change, especially if Britain’s MPs continue to risk their own legitimacy). As the global economic news continued to deteriorate government bond yields fell again. The US 10 year yield fell by about 0.25% to 1.75%. 10 year gilt yields dived from 0.86% to 0.55% and the German Bunds now have an even more negative yield (-0.30% to -0.57%). If these are unprecedented scary times, this is the reason. In my recent post entitled “Equities are the new junk bonds” I pointed out that takeover bids had favoured shares in my own portfolio no fewer than four times this year. I have been thinking some more about why this is happening and, by implication, how one might incorporate that into stock picking. Unlike purely financial investors, corporate buyers hate uncertainty. They like to know what they are buying and are put off by the thought of unquantifiable liabilities. This is one of the reasons why companies in trouble are rarely rescued. It’s far easier and safer to buy the assets from the administrator. The new accounting standard IFRS 16 is now kicking in and it invariably increases a company’s balance sheet financial debt – but it removes the uncertainty of obligations to pay future operating leases which were previously off-balance sheet. Now they are there for all to see. A business with reliable cash flow that easily covers its seasonal working capital requirements, its minimum capital expenditure needs and its annual interest payments is potentially of interest and if it is perceived as badly managed that is not necessarily an impediment. If times are tough, one...

2 Jul 2019

Falling bond yields continued everywhere in Q2. US 10 year yields are now just over 2%, UK at 0.86% and Germany at a record low of -0.3%. In the report on Q1 I wrote: “Perhaps by the end of Q2 we will be able to guess what people were worrying about.” The short answer appears to be world trade. President Trump believes that holds all the cards and, ignoring the fact that he doesn’t seem to know or care that import tariffs are a tax on his own citizens, he is not far wrong. His hostility to China is well known. Some people suspect that he next wants to turn his fire on the EU which to him essentially means Germany. Of course by implication it could also mean the UK. Assuming that Donald Trump is capable of deferring a threat, it might just be that he is waiting for the UK’s exit from the EU before firing his cannons. In the 29 quarters since the start of 2013, the average quarter-on-quarter GDP growth in the US has been 0.59%, in the UK 0.46%, in Germany 0.34% and in the euro countries (the EU 19) just 0.27%. It appears that some combination of factors – demographics, the ECB, the euro itself, the EU’s insular anti-trade practices – has produced an era of disturbingly low growth in the EU and hence the lowest, deadest interest rates since the invention of money. Many people these days are spooked by “uncertainty”. They needn’t worry. There is nothing on the horizon to rouse the economies of Europe from their slumber. When I hear endless warnings about what will happen to the UK economy when or if it separates from the EU (three and a half years of “project fear” so far – keep it up, guys) I don’t know whether to laugh or guffaw. The UK stock market indices rose by 1.9% in the quarter. They are down by 3-6% over the last year and around 1% higher compared to two years ago. So it has been hard going. There is little easy money to be made and those who try too hard can easily come a cropper....

2 Apr 2019

In the Q4 report I listed all the reasons (far too boring to repeat) why the stock market had fallen in those three months. Then I asked: Yet here we are in January 2019 and are any of the alarming headlines remotely surprising? That was a rhetorical question and I listed seven shares that I was trying to buy on weak days. Since 31st December, two of them (Halfords and Victrex) are down but on average the selection rose by 13%, greatly helped by the fact that Dairy Crest, which I tipped on 4th February, received a takeover bid less than three weeks later. As ever, judgement + luck = success. The UK indices had a good quarter, rising by c.9%. Given the general nervousness, which has been reflected in the bond markets, I am surprised that the FTSE 100 (+8.4%) slightly underperformed the more domestically focused FTSE 250 (+9.2%). In the end, perhaps the biggest story of the quarter was the return of 10 year German Bund yields to negative territory, for the second time ever and the first time since the summer of 2016. It is true that GDP forecasts of most developed nations have fallen recently but a negative yield on Europe’s reference government bond implies something more than cautious economic forecasting. It smells of fear. Perhaps by the end of Q2 we will be able to guess what people were worrying about. Finally, a quick comment on UK politics. In the middle of March I had a bet (that’s a gamble, not an investment) that the next general election will be this year. At the time the odds were 11/8 against. Today they are 8/11 on, implying a greater than 50% chance. A Labour government led by J Corbyn and J McDonnell is one of the most obvious risks to our incomes and our assets. These guys are dangerous and if elected they will move quickly. My personal threat level is standing at...

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...