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...

The ECB, QE and the waiting game

The ECB, QE and the waiting game

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...

Report on Q4 2014

Report on Q4 2014

5 Jan 2015

In a confusing financial and political world in Q4, the UK stock market offered small but notable evidence of calm in as much as the FTSE 250 (+4.5%) easily outpeformed the FTSE 100 (-0.9%), reversing the trend seen in Q2 and Q3. Normally, larger shares perform better in nervous times as they are seen as safer havens. In the case of this quarter, the collapse of oil and oil sensistive shares (including other resource and energy related companies) may have delivered a particular blow to the FTSE but I am still inclined to take the 4% gain in the FTSE 250 at face value. For 2014 as a whole, the FTSE fell by 2.7% following a rise of 13.9% in 2013. Once again, major governmrnt bond yields provided a supportive background. German 10 year Bund yields fell in the quarter from 0.93% to 0.54%. A year ago they were 1.96%. 10 year Gilt yields have fallen from 2.88% to 1.72%. While these seems incredibly low to anyone who has followed gilts over the years, it could be seen as high when compared to the equivalents in Spain (1.62%) and Ireland (1.25%) and France (0.83%). Last quarter I wrote that “bond markets are shrieking the news that global growth has made a long-term shift to lower levels”. The fall of nearly 30% in the oil price in Q4 appears to confirm this view, though it can be argued that a cut of this scale in the price of such a key commodity will ultimately benefit the economies of all countries that do not depend on oil revenues.Initially, though, the effect is more likely to be felt by oil producers and will play out as generally negative in the short term. See my next blog post for more discussion on this. In the UK, the political future appears more important than usual. But it does not seem likely that a change of government would result in a great expansion of government spending. Nor does it seem probable that a referendum would result in a vote for the UK to leave the EU. Most of the political outcomes that frighten investors are highly unlikely and their probability...

Report on Q3 2014

Report on Q3 2014

4 Oct 2014

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

Report on Q1 2014

Report on Q1 2014

22 Apr 2014

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

Jittery January

Jittery January

6 Feb 2014

“The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery.” The dangerously alluring feeling of comfort that I wrote about in my Q4 report did not last long. Major stock markets have fallen this year: FTSE -4%, Dow Jones -6%, Nikkei -13%. Many financial commentators are saying that this is the result of weakness in emerging markets which are in danger of being starved of investment dollars as the Federal Reserve continues its tapering policy. Even writing that makes me feel slightly ridiculous. It is typical of the confusing non-explanations offered by the financial services industry, helping only to encourage ordinary punters in the belief that all this is far too hard for them to understand. “Emerging markets” is an inherently biased way of referring to exotic countries in need of investment.  The term seems to have been invented in the 1980s. According to Wikipedia, prior to that the label Less Developed Countries (LDCs) was used. In 2012, the IMF identified 25 emerging markets. For the record: Argentina;  Brazil; Bulgaria; Chile; China; Colombia; Estonia; Hungary; India; Indonesia; Latvia; Lithuania; Malaysia; Mexico; Pakistan; Peru; Philippines; Poland; Romania; Russia; South Africa; Thailand; Turkey; Ukraine; Venezuela Note, sadly, that that the only African country is RSA. Looking again at the list, if you are particularly attached to democracy, private ownership rights or tolerance of homosexuality, you might find the thought of investing in some of these countries hard to digest. You might also ask how many countries have succeeded in emerging since the 1980s. The answer to that would appear to be zero. Foreign investment in emerging markets tends to be tidal: it flows in and it flows out again (if it can). Why then should this concern the risk-averse investor? There are two reasons, one specific and one general. The specific reason is that businesses in which we might be invested could be hit by diving emerging market economies. Global companies that sell consumer products are especially prone to this. Last week, Diageo the drinks company reported weakness in China and Nigeria. The general reason is that nervousness is infectious (especially in the banking industry). Undoubtedly, we have both these...

Report on Q3 2013

Report on Q3 2013

2 Oct 2013

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

The savers’ lament

The savers’ lament

10 Sep 2013

Your savings have gone down the plug ’ole, Your savings have gone the plug… I am giving up on saving with the UK retail banks and building societies. I can potentially live with low interest rates if the service is competent and not annoying, but it appears that customers willing to be paid badly are losers who must expect to be treated badly. Last week a young man who was not born when I started working in the City told me that I would need to book a 30 minute appointment with him on a different day in order to be offered 1.7% on a two year fixed bond. In a rival establishment, another half hour appointment was required if I wanted to switch out of a savings account that pays 0.2%. In each case, the only convenient option was to close the account. This is fine with me, but why does it seem to be what the retail banks want? Here are three reasons. First, the bank rate is at a record low (0.5%) and the new Governor of the Bank of England is very keen to convince us that it is going to stay there. The experiences of the last few years have lowered savers’ expectations and have caused them, understandably, to be suspicious of those who offer surprisingly attractive interest rates. Why are they bidding for our money? Surely it must be safer to deposit our hard-earned with those who appear to be indifferent to it? Secondly, the regulations introduced to protect us from unscrupulous financial advisers have caused many of the banks to withdraw from the advice business. Since 1 January, independent financial advisers have to charge a fee rather than take a commission out of what they sell you. If banks were ever pretending to offer independent advice, they cannot do so now. A person with financial flair and ambition would not stick it for long as a customer advisor in a retail bank reading out the small print and asking us to sign here and here. Consequently, nobody working in the local branch of your bank really gives a toss what you do with your savings. Thirdly, another...