8 Apr 2024

Surely the most important question when a country goes to war is – What does success look like? Churchill the wartime Prime Minister left no one in any doubt “Even though large tracts of Europe and many old and famous states have fallen or may fall into the grip of the Gestapo and all the odious apparatus of Nazi rule, we shall not flag or fail. “We shall go on to the end, we shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our island, whatever the cost may be. “We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender, and even if, which I do not for a moment believe, this island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British fleet, would carry on the struggle, until, in God’s good time, the new world, with all its power and might, steps forth to the rescue and the liberation of the old.” Although this was obviously intended to unite and inspire the population, it was also an implicit invitation to persistent pacifists to speak up, stand up or, if necessary, flee. To Vera Britten, success was to be found in defeat. A singular opinion but admirably clear. “There is a strange lack of dignity in conquest; the dull, uncomplaining endurance of defeat appears more worthy of congratulation.” I am no geopolitics expert (I am no anything expert) but I would say that it is obvious that a nation under attack has a reasonably clear idea of what success looks like. If it is losing the war, this will change for the worse where a primitive form of survival becomes an aspiration. We can all look at Ukraine now and make up our own minds about that. Where nations are aggressors under the banner of morality, the definition of success is much harder. The US and its allies invaded Iraq...

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...

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...

20 Jun 2022

I am struck by the knowledge that the stock market hit its Covid panic low on 23 March 2020 (FTSE at 4994). That was the very day that the first UK lockdown was announced. This is a splendid example of how desperately keen share prices are to discount bad news. Because the actual news got much worse for much longer than anyone could have believed – but the low was already in for the stock market. Today, it is hard to see how much worse the news could get for UK consumer shares or government gilts. So here are some deservedly unpopular ideas that might just pay off. THREE SHARES VULNERABLE TO CONSUMER SPENDING National Express (buses and coaches) 217p Since the beginning of March it is an amazing fact that three of the four UK listed bus (& train) companies have received takeover bids Stagecoach – bid 105p (now unconditional) vs March low 76p (38% premium) FirstGroup – indicative bid of 163.6p vs 89p in March (84% premium) Go-Ahead – bid of 1500p vs 550p in March (173% premium) That leaves only National Express which is now just a bus company (plus a few trains in Germany). It is huge (£2.7 bn in revenues this year)  and supposedly in the sweet spot for new transport habits (out of those wicked cars, people, and get on board with the monarchs of the road). It raised £235million from shareholders in May 2020 at 230p per share and the price has gone nowhere (now 217p). It plans to restore a dividend in 2022. It has hedged its fuel costs 100% for this year, 64% of 2023 and 25% for 2024. It has guided to a 7% operating margin in 2022 (10% in 2019).  I do not love this company but it has the potential to benefit from a certain scarcity value. Halfords (auto centres and bikes) 157p Another theoretical sweet spot – second hand car servicing and cycling. This statement of the bleeding obvious last week sent the shares down by 20%. While rising inflation and declining consumer confidence will naturally present short-term challenges for any customer-facing business like ours, we remain confident in Halfords’ long-term...

17 Sep 2021

The company once known as British Petroleum (a name revived by President Obama when he wanted to stick it with all the blame for the Deepwater Horizon oil spill) has quietly rebranded itself in the lower case though almost nobody seems to have noticed. As if it is the corporate embodiment of white privilege, bp can only apologise and beg forgiveness for its own existence.  The splendidly named CEO, Bernard Looney (who will soon rebrand himself as Nigel Neurodiverse) has pledged to reinvent the company as a provider of multi energy customer solutions. My opinion is that if he thinks this is going to keep the eco warriors at bay he needs to change his medication, but never mind.   What interests me now is the entertaining contrast between the reinvention rhetoric and the grim reality that bp is probably having a stupendously profitable year due, of course, to the rises in the prices of oil and natural gas. How embarrassing could this get? I will save you the trouble of ploughing through bp’s 2020 annual report (tagline: “Performing While Transforming”) and take you straight to page 183 where you can get an idea of how the company actually earns its money. Essentially it is 94.5% from oil, oil products and gas. There was little bp could do in H1 2021 to avoid the surge of cash that resulted from the pop in gas prices in Q1 and the stronger crude oil price in Q2.  In its presentation about Q2 it was careful to say that it expected gas supply to remain tight and refining margins to remain roughly unchanged. In fact the natural gas price (Henry Hub) which averaged $2.9 in Q2 is now (17 September) at $5.37. And industry refining margins which for bp were strong at $13.7 per barrel in Q2 seem to be sharply higher again across the industry. It seems probable that bp will experience another embarrassingly strong quarter when it reports in late October.  The share price of bp would surely be higher were it not for the armies of Net Zero shamers whose abuse will only increase in volume as the delightful prospect of that orgy of UN...

7 Jun 2021

When money and virtue share a bed, strange and disturbing things tend to happen.  I have written before (in 2014) about the ethical contradictions concerning the destination of the UK’s Oversea Development Aid budget. Seventy three percent of it went to countries where homosexuality was illegal but if there was ever any debate about that I never heard it. Like a Christmas sweater, the giving is more important than the receiving. Once the donation box has been ticked we can pat ourselves on the back and tell ourselves that to enquire about how the money is spent would be colonial and racist. Seven years later, the shadow of virtue casts a much longer and no less contradictory shadow. Here is a brief case study. THE ETHICS OF TOP LEVEL SOCCER I have found the current season of the English Premier League quite hard to watch. The team with the biggest financial backing won easily. Three brave and impoverished strugglers were relegated long before the end of the season. In stadiums empty of fans (who might well have reacted with displeasure) the clubs and officials all participated in “taking the knee”, originally a show of disrespect for the US national anthem, despite it seeming obvious that the anti-capitalist vibe of Black Lives Matter could hardly be further from the realities of club ownership.  These realities came to a head when some of the owners, acting as if they thought the clubs belonged to them, tried to create a breakaway super league. The result was a mob of multi-millionaires, who, unlike the owners, owed their personal wealth to football itself, rushing to denounce the idea that money should be allowed to ruin the game, as they saw it. Many people, unless they happen to support the clubs funded by wealthy foreigners, would say that that ship sailed a long time ago.  While UK football constantly pledges to “kick out racism” and to take women’s soccer seriously there is not a whisper on the subject of sexual orientation. In the past, fans have been notoriously homophobic. They may not be now but we have no way of knowing because, as luck would have it, not one of...

8 Feb 2021

As far as I remember, the word “philosophy” means “love of knowledge”. Some of the philosophers whose books were in my college library tried to prove that God knew all the answers and others that truth lay in empirical observation or the meaning of words. “Whereof we cannot speak, thereof we must pass over in silence” – Wittgenstein. Somewhere buried in their philosophical texts one might find a grudging reference to probability. John Locke wrote that probability “is to supply our want of knowledge”. In the search for certainty, probability was to some, it seems, as admission of defeat, a last resort. A brief disclosure: the only thing written by me in the college library are the letters zzzzz carved into the leg of a table. The fact that I couldn’t see what Locke, Descartes and Wittengenstein were so exercised about was confirmed by my examination results. But I value the awareness of probability as highly as anything else. PROBABILITY – MAN’S BEST FRIEND?  Some people point to the fact that humans initially learn by imitation and get hung up on the observation that animals do that too. The ability to observe that, if A, then B, puts animals on the first step of logical thought. When I pick up my dog’s lead she immediately starts to celebrate her forthcoming walk. You could say that she thinks the probability of a walk is 100%. In Locke’s terms, the sound and sight of the lead being picked up has supplied her want of knowledge.  The weakness in my dog Hattie’s understanding of probability is her failure to appreciate that there are any numbers between 0% and 100%. Her world is essentially binary. But she should not be too despondent. Humans sometimes think in exactly the same way. The easiest example of probability is 50/50. When we toss a coin we know, assuming no skullduggery, that a head or a tail is equally likely. (Dogs always expect tails, obviously). We should also know, though gamblers sometimes don’t agree, that no matter how many times the same side comes up in a row, the odds do not change for the next toss.  For what it’s worth, this...

28 Dec 2020

This is a personal record to help me understand how and when this shitstorm blew up and if anything of importance was missed by me (or anybody else) that should or could have been anticipated. Most of the material comes from my email in and out boxes and has not been edited. I should say that the virus itself has never particularly concerned me. I think that there are broadly two kinds of fear, both of which we all experience to varying degrees. There is the fear caused by specific and known danger in the face of which some people try to hold their nerve and respond as rationally as they can. Dorothy Parker glamourised this kind of courage by attributing to Hemingway the phrase “grace under pressure”. And there is fear of the unknown which has a tendency to induce panic and paralysis. I make no claim to be courageous but I have a certain amount of contempt for fear of the unknown, though in the UK it appears to have gripped a majority of the population. The trigger word for these people is “uncertainty” as in “markets/investors/businesses hate uncertainty”.  It seems to me that the more that is known about Covid-19 the less frightening it is. It also appears that for some reason the government, its public servants and most of the media tend to promote fear and to suppress reassuring news lest it leads to complacency and (can I really be using this word?) disobedience. As an investor, as I have written elsewhere, uncertainty is to be welcomed because it causes assets to be mispriced. The problem, as 2020 has demonstrated, is that it sometimes takes extraordinary imagination to see it. Thursday 23 January  The Foreign Office advised against non-essential travel to Wuhan province. I cannot seriously suggest that I could have interpreted that as a harbinger of what was to come.  Wednesday 29 January  BA halted all flights to mainland China. At the same time, there were reports that the virus had definitely arrived in Lombardy in Italy. This is the point when it seemed real to those of us living in Europe and if I am hard on myself...

26 May 2020

Despite the fact that the UK government appears, like Gilbert’s Duke of Plaza-Toro*, to be leading from behind, I suppose that this fearful fog of indecision will eventually dissipate and some kind of hobbled phoenix will stumble out of the smoking ashes of the economy. In passing, I would like to bestow their share of responsibility on the political opposition, including the trade unions, who constantly urge caution and demand something called “safety” for all, in the calculated knowledge that the worse the economic consequences of lockdown, the worse for the government.  Can they really be that cynical? Oh yes. THE DAMAGE DONE But whether you believe that lockdown was a) catastrophically late or b) completely unnecessary, (and history may one day deliver a verdict but you won’t find it on Twitter this afternoon), a vast amount of economic damage has been done. And the longer paralysis continues, the worse it will be.  And given that the government is now a follower of international decisions rather than a decision maker itself, we must look at the US, Germany, France (!), Sweden and pretty much anywhere else you care to name to see how our future might look.   Donald Trump has an election to win in November. (Ladbrokes still has him as the marginal favourite, which seems surprising). Naturally, he is desperate to get America back to work and, as his son says, make it great again, again. Whether you think he is gambling with people’s lives or trying to save them from destitution actually doesn’t matter. What matters is what has already happened.  The US unemployment rate jumped from 3.5% in February to 4.4% in March to 14.7% in April. That’s 23 million Americans out of work. But it will be more than that. The total of initial unemployment claims is at nearly 39 million by the end of last week. That looks like an unemployment rate closer to 25%, an utterly unimaginable number.  If it turns out that “it’s the economy, stupid” then Trump’s Thanksgiving turkey is cooked unless there is a near-magical recovery. Whatever you think of Trump, and there is no need to say or even think it out loud, a...

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...

29 Mar 2020

On the 23rd of February I published these seemingly prophetic words. SPLENDID ISOLATION Another idea that we are rowing back from is internationalism. To put it another way, nationalism appears to be on the rise wherever you look. A better word might be insularity because this is not primarily about xenophobia. It is mostly an economic phenomenon again. For some reason we don’t really care about global poverty half as much as we care about global warming. Of course I didn’t have the slightest idea of what was about to happen. So sadly this blog is not a description of how I moved all my assets into cash and am now reinvesting at a 30% discount. While the world appears to have been turned upside down in the last four weeks, people everywhere were very already receptive to turning their backs on the rest of the world. And I was too kind when I downplayed the role of xenophobia. Every country seems to want to lie in its own dirt now and in many countries’ foreigners are regarded with suspicion or even hostility.  I am absolutely not referring to the UK, which is a highly diverse and generally welcoming country, but rather to more monocultural nations. I was in Sri Lanka last week just as the country started to go into lock down. Sri Lankans are and were almost uniformly delightful but when I found myself on a crowded bus with many people standing and the seat next to me vacant, no one wanted to sit next to the white man.  There are reports that African countries are wary of Europeans and Mexicans are demanding to be protected from US citizens.   Here is a comment found on Twitter: Today on my final reporting trip in China, my colleague and I are eating when a man walks up: “You foreign trash. Foreign trash! What are you doing in my country? And you, with him, you bitch.” I think he wanted to fight, but we stayed silent and let him rant. Quite the farewell. Poland closed its borders, causing huge disruption to citizens of Baltic states trying to get home. Given how many Poles work abroad,...

28 Aug 2019

Anyone who cares to investigate can discover that the equities that you probably own directly or through your pension scheme are equitable only with each other. Benjamin Graham, the so-called father of modern investing, called them “common shares” which is a better clue. When a company is wound up this typically means that it has run out of money and run out of people who will lend or give it more cash. Equities represent any surplus assets that are left when all other creditors have been paid off. Every other creditor ranks above the owners of the common shares. First are secured creditors like banks or bondholders who have lent money on fixed terms. If the company defaults on those terms it can be forced into formal insolvency, though sometimes the secured creditors will accept equity in return for a further cash injection, if they judge that their best chance of getting their money back in the end is to keep the business going. In those circumstances they will be issued shares on such favourable terms that existing equity investors are diluted to the point of worthlessness. This is happening now in the case of Thomas Cook. After secured creditors have been paid in full, anything left goes to so-called preferential creditors, including employees, and then to the luckless trade creditors and HMRC. You can infer that common shareholders will usually be completely wiped out. Unsurprisingly, people who invest in equities very rarely think about the risk of insolvency and losing all their money. We all dream of the day when the theoretical value of those surplus assets explodes upwards. Bond holders may get their money plus interest back but as Benjamin Graham pointed out many decades ago, common stocks have “a far better record than bonds over the long term past”. It has widely been accepted as a fact that equities are the answer for a long term investor. Cautious share owners look for sustainable dividends that can rise as the company grows; the more optimistic hope for rising share prices as well. Those are the two elements that drive the long-term performance of common stocks observed by Graham. But stock market investors...

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....

4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows: Sir Humphrey : “The Queen is inseparable from the Church of England” Hacker: “What about God?” Sir Humphrey: “I think he’s what is known as an optional extra”. Sir Humphrey explains that a “modernist” is a coded word. “When they stop believing in God they call themselves modernists”. Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you based on the empirical evidence that you see. FAITH IS NOT AN INVESTMENT TOOL By contrast, faith is a great liberator. The more improbable something is, the deeper the faith required to accept it. Faith is not based on reason. Consequently, behaviour driven by extreme faith often looks like irrationality or worse to outsiders. For this reason belief is an essential tool of investment while faith is a menace. It is often difficult to distinguish one’s own beliefs from what might loosely be called wishful thinking. It is quite natural, but not good, to suffer from confirmation bias when hearing news about a company in which one has already taken the decision to invest. Confirmation bias is a symptom of faith. Not merely in investment but in all aspects of life we are keen and competitive to be clever and right and successful. I find it remarkable how hard it can sometimes be to work out what I actually believe. I would like to think that my beliefs frequently coincide with what turns out to be the truth but the relationship between belief...

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%...

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...

30 Mar 2018

Ten years ago, I was paid to write research on investing in software companies. My USP was that I was pretty much a technophobe with little or no interest in software but with something of a passion for finding how to make money by investing in companies. Back in the early 2000s the world of software was full of exclusive jargon which, deliberately or not, served to discourage scepticism. The following is selected more or less at random from the 2006 Annual Report of SAP AG. THE “NEXT BIG THING” IN INFORMATION TECHNOLOGY Today, the IT sector stands on the verge of widespread adoption of service-oriented architecture (SOA), a development that promises to change the dynamics of the software industry as much as the shift to client-server architecture did 15 years ago. In essence, SOA defines the technical standards that enable the various enterprise software applications used by companies and their business partners to exchange data effectively. Thus, SOA will help reduce the costs of creating and maintaining data exchange interfaces, a factor CIOs consistently cite as one of their top challenges. When I read stuff like this I used to think a) does this mean anything and b) even if it does, how is anyone going to persuade the board of a major company to throw money at it? That is why I hit upon a personal rule that can be usefully extended from the narrow world of software analysis to life itself – never be afraid to ask the stupid question. Experience teaches that it’s often the hardest one to answer. Fifteen years ago the normal software business model was to sell a perpetual licence that allowed the customer to use the software plus an annually payable fee that got him maintenance and upgrades. The analyst community was obsessed with the growth of software companies and consequently watched the “new licence sales” number in every quarterly earnings release. Share prices were highly volatile as a result. A “miss” from the quarterly numbers often resulted in carnage for the shares. I was actually frightened. How I could I make recommendations to buy and sell shares when my view could and probably would be...

30 Mar 2018

In my report on Q4, I wrote that “for the third successive quarter, the markets were mysteriously calm.” The calm was disrupted in Q1 for sure: the main UK indexes fell by between 6% and 8%. The German DAX was -6.3%. Supported by a falling dollar, the US markets, though volatile, did better with the DJIA -2.5%. I hinted before that the stock markets might be vulnerable to rising interest rates or, more specifically, rising bond yields. In February it started to look as if this was happening; the US 10 year treasury yield had risen from 2.40% to 2.94%; but by the end of the quarter it was back to 2.74%. A similar pattern played out elsewhere. The 10 year gilt yield rose from 1.20% to 1.69% but ended the quarter back at 1.34%. It would seem that the wait for inflation goes on. Aside from the usual nonsensical white noise about “uncertainty” it is hard to escape the conclusion that the stock market is truly concerned about the ability of large corporations that feature in our lives daily to invest capital, service debt and pay dividends. Here is your day described in terms of dividend yields: you are woken by the ringing of the house phone (BT: 6.8%) and switch on the light (National Grid: 5.6%); you turn up the central heating (Centrica: 8.5%) and clean your teeth (Glaxo: 5.7%); you decide to go into town but your car has no petrol (BP: 6.0%, Royal Dutch Shell: 5.8%) and needs a new rear light (Halfords: 5.4%) so you decide to take the bus (Stagecoach: 9.0%, Go-Ahead: 5.8%); you do some shopping in Currys PC World (Dixons Carphone: 6.0%, Vodafone: 6.7%) and M&S (Marks & Spencer: 6.9%) before treating yourself to a pub lunch (Marstons: 7.4%, Greene King: 7.0%). Is it the end of the world as we know it? Yet, against this rather sinister background something quite different has been happening. Companies who want to buy each other seem to like these prices very much. On 22 December GVC announced its intention to buy Ladbrokes plc. On 17 January, Melrose bid for GKN; on 30 January UBM agreed to be taken over;...

3 Oct 2017

In the Q2 report I said that the stock market had been amazingly calm. The amazement intensified in Q3. Political and economic commentators are so certain of impending collapse that they can hardly get the words out quickly enough. The politicians themselves are cringing in response, like the invertebrates that most of them sadly appear to be. You can be sure that if the fear gets to investors they will panic but, rightly or wrongly, they are not doing so. It has usually been a sound investment policy to say that if it’s reached the front page of the news, it’s probably in the price. In other words, the perceived risks have been accounted for.  Obviously perceived risk is a moving target and securities will continue to trade accordingly. To take a singular example, the Labour party wants to nationalise Royal Mail, probably at its issue price of 330p. The shares are down 17% this year to 385p, just a further 14% above Labour’s assumed confiscation price. The company just raised the dividend again and they yield 6%. That looks to me as if the price is discounting the risk quite efficiently. (Given that the competitors to Royal Mail are “gig economy” delivery companies I cannot imagine why Labour hates it so much). Labour’s wider threat is that it proposes to confiscate privately owned assets (starting with anything that has ever been state-owned which is pretty much everything that existed before the internet). This is potentially catastrophic (defined by Dr Johnson as “A final event; a conclusion generally unhappy”). The wing of the Labour party that hates capitalism would be delighted because capital would flee to the land of Anywhere Else. The stock market tells us that, specific victims like Royal Mail aside, it thinks that Corbyn’s electioneering pledges are hot air on which he would never be able to deliver. But the closer he comes the more frightening he will get. So watch that space.        In the quarter, the FTSE 100 was +0.9%, the All Share + 1.3% and the 250 + 2.8%. 10 year gilt yields rose from 1.26% to 1.33%. A big yawn, even if it was a nervous...

2 Sep 2017

Who is in the room containing those who are supposedly negotiating the terms of Britain’s exit from the EU? We seem to have sent a team of men (mostly) who are used to attending meetings without trousers which is perhaps appropriate.  The Europeans are fielding another team of men (mostly) who are seemingly permanently “flabbergasted” and like to talk about the conditions for talks about talks. Were they to remove their trousers you can be sure that they would be wearing a second pair underneath. But what is that large white quadruped that keeps sticking its proboscis where it’s not wanted? It is the elephant in the room and its name is sadly not Donald the Tusk but Erich the Euro. Here is a picture of Erich, trumpeting towards his glorious target of parity with the pound (the chart runs from 2014 to this week – click to enlarge).   No one knows for sure why currencies move against other currencies. To listen to analysts and other commentators you might imagine that it is quite obvious, in retrospect if not in advance. This is largely tosh. The best answer is the one that I heard every day when I worked on the floor of the London stock exchange: “More buyers than sellers, mate”. THE REASON FOR CURRENCY MOVEMENTS IS UNCLEAR AND UNIMPORTANT Looking at the elephant picture it appears that there have been more buyers of euros than sellers. In 2015 there were more sellers than buyers. Remind me, why was that again? There just were! Okay, okay. I suppose that Brexit uncertainty and a slowing top-end property market (yes, they might be the same thing) have caused foreign investors to buy less sterling this year. You might just about persuade me that others have been buying euros in preparation for opening new offices in Budapest, Valletta and Clermont Ferrand. But currency movements have real effects, though they take time to play out. There has been a 40% increase in UK tourists to Greece this year (doubtless fuelled partly by aversion to Turkey – people prefer oppressed governments to oppressive ones, it seems). As I write, these tourists will be asking themselves why Greece...