News Archive

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Within days of issuing our January report we became increasingly concerned as we noted the inconsistencies emanating from official sources in China in relation to the current outbreak of coronavirus. Further information they continued to present as updated ‘factual’ news we quickly interpreted as simply propaganda (intended only to disguise the impact of Covid-19).

As ever, it is always revealing to observe what people do rather than what they say. ‘Actions speak louder than words’ is a long-held cliché for very good reasons. Sadly, the Chinese leadership going back all the way to Chairman Mao (and perhaps much further) has a long history of being parsimonious with the truth and this trait, combined with their cultural imperative never to ‘lose face’, allows a cynical outsider to see through the manipulation of so-called facts and less than accurate figures (designed purely, of course, to mislead).

As the Covid-19 started to spread, the Chinese government have given every sign of being panic-stricken; factories and schools were closed, travel restrictions were put in place (originally in the city of Wuhan, its province of Hubai and then internationally) and these restrictions were severely enforced. Flowing from this official reaction, industrial production slowed to a halt and consumer activity was hobbled.

When the Sars outbreak began in 2003, China represented just 5% of the world economy. Today it accounts for 20% and in the past 20 years or so the onward march of globalisation has created an interlinkage and inter-dependence that didn’t exist when the Sars issue was at its height.

China’s factories are a significant element of global supply chains and China’s newly-wealthy consumers comprise a sizeable percentage of the global demand for goods and services. In today’s world, therefore, the knock-on effects of poor risk mismanagement are palpable, severe and financially punishing.

For example, Apple issued an earnings warning (which amounts to a profits warning) on 17th February saying that their iphone sales would not meet quarterly revenue expectations due to the impact of the coronavirus. That statement is a proxy for large swathes of industry and commerce and will significantly affect business revenue worldwide. This adverse effect may well be short-lived but it will have an unwelcome impact on corporate valuations.

On 29th February 2020 the FTSE100 index closed the month at 6580.61, a fall of -9.68% in the month of February and it now stands at -12.75% for the 2020 calendar year to date. By comparison (despite the sell-off which began in earnest in mid-February) the Quotidian Fund’s valuation at the 29th February shows an uplift of +2.87% for the month of February and the Fund is up +5.30% for the 2020 year thus far.

Our concerns about China’s official reactions to Covid-19 reached a peak at the end of the first week of February and so, on 7th February, we took the decision to exit equity markets. To ensure that we did not move prices against us, we slowly and methodically sold our equity holdings on that day (and the following Monday) in order to consolidate our profits, protect our investors from investment risk and keep our powder dry until this economic crisis passes.

To repeat our January comment: this outperformance as measured against the FTSE100 and other global markets is simply a function of our oft-stated aim of trying to be in the right sectors of the right global markets at the right time. In that regard, none of the world’s equity markets are now in positive territory for the 2020 year to date and so it follows that the only place to be invested for the time being is in cash. When the facts change, we will change our minds and adapt accordingly.

As an exercise in turning a containable, manageable drama into a full-blown economic crisis, the actions of President Xi (arguably the most powerful man in the world; more-so than either Putin or Trump) and his merry men have provided a textbook example of how not to act in the face of adversity. Suppress, lie and deny swiftly followed by panic has been a masterclass in creating the worst possible economic outcome. History provides a cornucopia of examples of absolute power disguising extreme cunning combined with profound stupidity and, on the face of it, the current Chinese leadership have qualified for an honours degree (summa cum laude) in incompetence.

Actually, however, the hyper-myopia on display here is of such an epic, not to say herculean, scale that one must question whether it was a quite deliberately engineered response designed to further weaken Western economies (many already under serious financial and political pressure) and Western asset values as a means of creating the financial conditions that could allow China to buy large tracts of valuable Western assets at vastly reduced prices. Indeed, that has already been one of the effects whether by design or not.

Real evidence has now emerged to indicate that we are now beyond the point where Covid-19 can be regarded simply as a containable health issue and a temporary economic inconvenience. The current mark-down in equity valuations has already reached the level regarded as a correction. Prices may well continue to decline and there will no doubt be a false dawn or two until a degree of modest confidence and perspective returns.

Having seen enough to extract ourselves from equity markets before this downturn began, our challenge now is to identify a positive and potentially lucrative re-entry point. There will certainly be a huge buying opportunity once all the emotional noise dampens down and the Chinese smoke and mirrors clears away.

The next realistic indication of both the speed and extent of stock-market direction will come when the 1st quarter 2020 reporting season begins early in April. From corporate commentaries since the coronavirus took centre stage, we expect these numbers to be largely disappointing. They could kick-start a modest recovery in equity pricing but it is more likely that the prevailing market gloom will persist.

There is little doubt that the second quarter reporting season during July will be dismal as they will more fully reflect the economic damage caused by the Chinese authorities mishandling of this crisis. However, stock-markets are forward looking and price up on future expectations as opposed to historical data. Global markets are well into ‘correction’ territory (10% down from recent highs) and may even fall further towards a ‘crash’ of 20%.

On the final afternoon of February’s trading the US Federal Reserve (its Central Bank) announced that it would “use all the tools available to us” to support the econonmy. That suggests that they will cut interest rates and/or inject a further round of stimulus by way of quantitative easing (printing money). In the short-term that will inflate asset values again but in the longer term this simply kicks the underlying problem (future inflation) further down the road.

With unerring certainty there will be a point where the risk of further falls is balanced by ‘fire-sale’ prices that offer the potential of great gains. Until then we will keep the sound of trumpets muted on the basis that hubris is inevitably followed by nemesis. In the meantime, we are in the relative safety of cash and unaffected by this severe stock-market correction.

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2019 has been an exceptionally successful year for the Quotidian Fund albeit that it was, in parts, a challenge to all aspects of the skills of investment management In the course of the year there has been one market correction (a decline of circa 10% in July/August) together with an extended period of market doldrums (July through to the end of September) and these have tested our confidence in our asset selection abilities, our patience, our nerve and our resolve.

Having had these put to the test during 2019’s periods of adversity is no bad thing as it has been an opportunity to revisit and reaffirm our methodology and avoid complacency. Obviously we are not infallible nor are we immune from typical stock-market gyrations but the result of being assessed has confirmed our confidence that our management systems and asset selection processes are robust and fit for purpose.

One of the most important qualities for producing successful long-term investment returns is the ability to control one’s emotions during periods of stock-market turbulence. It is this, above all, that has steered us to this year’s remarkable performance.

On 31st December 2019 the FTSE100 index closed the month at 7542.44, a rise of +2.67% in the month of December and it now stands at +12.10% for the 2019 calendar year as a whole. By comparison, the Quotidian Fund’s valuation at the same date shows an uplift of +3.79% for the month of December and the Fund is up +33.41% for the 2019 year.

The main issues to have suppressed stock-markets over the past two years or so have been the putative trade war between China and the USA, the mainly artificial concerns pushed forward for political reasons about Brexit together with the lack of progress in its negotiations and the tightening of money supply (the imposition of higher than necessary interest rates) in the USA. As we look forward to the 2020 trading year these issues have all been recently resolved.

On 12th December the UK general election delivered a substantial majority for the Tory party and Boris Johnson took immediate action to complete Britain’s exit from the EU on 31st January 2020. Negotiations will then recommence with the aim of completing a free-trade deal with the EU by the end of 2020. With goodwill on both sides this should be eminently achievable despite the typically negative media commentary.

It is already clear that the UK is prepared to leave without a formal deal and trade under the auspices of the World Trade Organisation if the EU continues to be deliberately blinkered, self-serving and protectionist.

At Quotidian, we are entirely relaxed about the final outcome of Brexit and we take a positive view of the benefits to the UK economy of being able to trade globally and free of the over-regulation, political interference and petty protectionism that bedevils the EU approach to business and commerce.

We believe that the outcome of the UK general election will remove the inhibitions that have held back economic activity and investment in UK business and its economy generally for over 3 years now. As a consequence, we think that the UK stock market is demonstrably undervalued and, with the right political leadership together with business-minded and intelligent fiscal policies, the UK equity market will make up for three years of effectively going nowhere.

On 31st December President Trump announced that he would be signing the first stage of a trade deal with China on 15th January and the two sides would be meeting immediately afterwards to continue progress towards a wide-ranging and comprehensive agreement.

As 2019 progressed it became clear that the proximate cause of the global stock-market slump in the final quarter of 2018 was the US Federal Reserve’s policy in respect of tightening money supply, In the course of 2018 it had increased interest rates four times despite the obvious strength of the US economy. This strategic error was fully punished by equity markets (although that was not so clear at the time).

During 2019 the Federal Reserve effectively owned up to its erratic and erroneous interest rate policy by reducing rates four times in the course of the year. There are suggestions that further loosening will continue in 2020.

The three main issues that have held back equity market progress have, therefore, been addressed and we take an optimistic view of the prognosis for the coming year. We recognise that there will, of course, be periods of decline in stock-market pricing; we all understand that this is an inherent feature of equity investment. Each and every year sees global markets go through a correction which allows equities to wipe away any frothiness that may have built up in pricing, draw breath and then move higher again. There will, no doubt, be new challenges but we feel well equipped and well-motivated to deal with them as and when they arise.

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In last month’s report we set out those corporate financial results for the third quarter of the year that had already been released during October by the companies we currently invest in. At that stage, 15 of our corporate holdings had reported and we were awaiting figures from the remaining 7. All of those outstanding results were released during the month of November. We were expecting good news and we were not disappointed. All 7 of those companies produced results that were higher than analysts’ expectations (based upon their percentage outperformances above expectation in respect of Earnings Per Share) and we set them out herewith:

Corporate results for the third quarter of the year have been feeding through during October and have largely been above market analyst’s expectations. Thus far, 15 of our holdings have reported profit and future sales numbers which have substantially beaten anticipations whilst only two members of our current portfolio have fallen short (and in each case for good reasons). We still await figures from the remaining 7 individual company holdings (all of which we expect to be good news).

Celgene (+10.60%), Regeneron (+4.10%), Jazz (+14.10%), (+1.50%), Activision (+36.80%), Take Two (+13.60%), Nvidia (+14.80%).

You can perhaps understand and forgive the merest scintilla of irritation and frustration that may have permeated our reports from May through to the end of September as inaccurate, overly-pessimistic and poorly researched predictions from the major market analytical outfits served to suppress stock market pricing. Our own analysis clearly suggested to us that stock valuations should be rising (for our holdings anyway) rather than going sideways or falling. Quotidian’s investment performance during October (and even more-so in November) has now reflected the economic reality of our portfolio instead of the turgid, fatalist and defeatist predictions of doom from Wall Street.

On 30th November 2019 the FTSE100 index closed the month at 7346.50, a rise of 1.35% in the month of November and it now stands at 9.19% for the 2019 calendar year to date. By comparison, the Quotidian Fund’s valuation at the same date shows an uplift of 6.52% for the month of November and the Fund is now up 28.54% for the 2019 year to date.

Of course, there will be periods of decline in stock-market pricing; we all understand that this is an inherent feature of equity investment. But in the long run, prices reflect the economic success of each individual company itself. Our cliché’d old adage of aiming to be in the right companies of the right sectors of the right global markets at the right time is fundamental to achieving successful investment returns. On occasion the market is determined to go against you no matter what, but, in the long term, patience and the courage to stick with a reliable and well-proven investment strategy does pay off.

As we look forward, three potential market-moving events are on the near horizon:

If the first stage of a China/USA trade deal has not been executed by 15th December then President Trump has stated that he will impose the additional sanctions he first threatened (and then postponed) earlier this summer. It is impossible to predict whether this is another bluff; an empty threat intended to put time pressure onto the Chinese negotiators or whether it represents a loss of patience as these talks have stumbled from one missed deadline to another. If tariffs are applied then the market is likely to react.

It would be sheer guesswork, however, to make investment decisions based on such an uncertain scenario and we do not believe in making judgements centred upon pure speculation. We will wait to see exactly what happens and make our judgements on the actuality.

The UK general election on 12th December will bring clarity once and for all to the doubts, fears and inactivity of the past three years in the government of the UK. Many of these doubts and fears have been deliberately manufactured and have served simply to add fuel to Project Fear; some have sought to pursue an overtly political agenda and some have simply been Machiavellian devices designed to derail and perhaps frustrate Brexit. Whatever the motives, the government of our country has been made to look inane, inept and foolish. Worse still, it has been so obviously undemocratic.

Of course, the result of the 2016 referendum is now the focal point of this fresh election and the result on 12th December will be pivotal for the immediate and the longer-term future well-being of the UK’s economy. With the benefit of hindsight and the perspective it provides, it is instructive to revisit the referendum result and consider its likely effect on the format of our next government. There is a strong possibility that Leave voters in the current election will now make their Brexit frustrations known through the ballot box.

Hopefully, the outcome of the current election will remove (or at least begin the process of removing) the inhibitions that have held back economic activity and investment in UK business and the economy generally for over 3 years now. We believe that the UK stock market is demonstrably undervalued and, with the right political leadership together with business-minded and intelligent fiscal policies, the equity market will make up for three years of effectively going nowhere.

Finally, you may have seen that Michael Bloomberg has just announced his candidacy for the Democratic Party nomination in next November’s USA presidential election. Bloomberg is 11th on the list of the richest people in the world; his wealth is put at $39 billion. He was the founder of the financial news service, data supply service and journalistic business that bears his name and dominates the supply of ‘news’ stories and financial data to the global Financial Services Industry. This is a position of enormous power and immense influence over the direction of equity markets.

Bloomberg himself was once a leading light in the Republican movement but, in a moment of sudden and unexpected epiphany, he became a ‘born-again’ socialist (of the champagne variety). Whilst his current set of beliefs are not as extreme left as Elizabeth Warren (who makes Karl Marx look middle of the road) or Bernie Sanders (who could be Josef Stalin’s long-lost twin brother), Bloomberg would certainly bring a socialist agenda to US politics and its financial and fiscal systems.

He has asserted that he will “spend whatever was needed” to remove Donald Trump from the White House. I mention all this simply because, in due course, the outcome of the next US election will have a profound effect on the direction of the US stock-market.

It is fair to say that the Democratic Party has moved even further to the left since Hilary Clinton was defeated by Donald Trump in 2016. As was already the case under Clinton’s manifesto, the Democrats were proposing unhelpful tax and monetary policies together with suppressive and interfering legislation. In particular these would have had a depressing effect on the healthcare and biotechnology sectors of their economy. These proposals would get worse for business and consumer confidence if an even more left-wing agenda (whether that is under Bloomberg, Warren or Sanders) takes power.

The entry of Bloomberg into the race raises cause for concern from an investment perspective. Firstly, in the run-up to the election Bloomberg has the tools, the power and the financial clout to disseminate even more ‘fake news’ and mud-slinging than is currently a regular feature of the US media. Propaganda and biased opinion being presented as news or as ‘fact’ is already rampant. It could get even worse.

Evidence of market manipulation regularly features when we see the financial authorities (both in the USA and the UK) impose eye-watering fines on those blue chip’ financial organisations that transgress market rules and feather their own nests. It often seems that ‘devil take the hindmost’ is the practice note of choice for some of these supposedly impeachable companies.

Given Bloomberg’s personal financial position, his huge level of wealth has the power to move markets to his heart’s desire. Trump has taken it upon himself to encourage people to measure the success of the US equity markets during his period of office as a proxy for the success of his Presidency overall. In so doing he has effectively set himself up as a hostage to fortune. That rather naïve and boastful stance may come back to bite him and ease the passage of those who wish to unseat him. As things stand today we are still of the view that Trump will be re-elected for a second term. That view may mutate as the US election campaign develops.

We are not for one minute suggesting that Bloomberg would act illegally or use his wealth and his media influence to move markets as a means of denigrating, embarrassing and ultimately defeating Trump.

Of course, we all know that politicians are men of honour and above reproach; their innate sense of integrity and their high moral standards would surely not allow them to sink to such depths.

All we are saying is that he has the means to do so and US equity markets could potentially become strangely difficult as we move ever closer to November 2020. We will be keeping our wits about us as we move towards the next Presidential election.

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Following four successive months of doom-laden, fake-news-dominated and dithering equity markets we are pleased, at last, to report a positive return for Quotidian in the month of October. Partly as a consequence of the anticipated loosening of US money supply referenced in our September report and partly as a long-awaited nod to economic reality, we have now recovered the ground that had been slowly and unwillingly ebbing away since the end of June.

Corporate results for the third quarter of the year have been feeding through during October and have largely been above market analyst’s expectations. Thus far, 15 of our holdings have reported profit and future sales numbers which have substantially beaten anticipations whilst only two members of our current portfolio have fallen short (and in each case for good reasons). We still await figures from the remaining 7 individual company holdings (all of which we expect to be good news).

Our winners (and their percentage outperformances above expectation in respect of Earnings Per Share) were: Broadcom (+0.60%), Adobe (+4%), Constellation Brands (+ 3.2%), Netflix (+ 40.5%), Biogen (+ 10.8%), Alexion (+13%), Service Now (+ 11.9%), Paypal (+ 17.1%), Visa (+ 3.1%), Electronic Arts (+ 243.0%), Facebook (+11.9%) and Apple (+6.8%).

Amazon and Google (aka Alphabet) were the two recalcitrant companies to miss their expected profit figures and, in both cases, that was because they had chosen to invest in the future development of their services with a view to increasing future sales and profits. In Amazon’s case they have devoted themselves to providing a 24 hour delivery service and have invested substantially into the necessary infrastructure to bring that about.

As for Google, their accounts included a mysterious “other expense” item related to “equity investment.” Strong market rumour suggests that Google intends to make a bid for Fitbit (a highly successful organisation in its own right) which would further expand and extend Google’s future market reach, future sales and future profitability. Fitbit’s current market capitalisation is $1.4bn which, by extraordinary coincidence, is almost exactly the same as the “other expense” figure mentioned in their accounts.

It goes without saying that we have no immediate concerns about the current solvency of either Amazon or Google nor do we have any current distress in relation to their ability to further increase sales and future profits.

For your interest, our holding in Biogen hit the front-page headlines for all the best reasons during October. The company has been trying for quite some time to develop a drug that can combat the onward and increasingly cruel march of Alzheimer’s disease (a condition which ultimately disrupts a person’s ability to function independently).

As you will already be aware, Alzheimer’s disease is a progressive disorder that causes brain cells to degenerate and die. Alzheimer’s is the most common cause of dementia — a continuous decline in cognitive functions, behavioural and social skills which disrupt a person’s ability to function independently.

Biogen has been conducting initial trials and pursuing a promising line of ongoing research and development for some time without quite gaining the necessary evidence to confirm its efficacy. In the face of some disappointing test results (which in the event proved to be too short-term) the company abandoned that particular project in the early part of 2019 and focused instead on what seemed to be a potentially more attractive route. By September, however, enough long-term evidence had accumulated to show that Biogen’s earlier project has indeed discovered a drug that could demonstrably slow the progress of Alzheimer’s (and the hope is that it might eventually halt the decline in those who suffer from its indignities).

Armed with those latest test results and increasingly positive evidence, the USA’s Food and Drug Administration (the Federal Agency responsible for approving drugs in medicinal use in the US) met with Biogen at the beginning of October with a view to taking this drug through the necessary approval process. This is wonderfully encouraging news for those in the grip of Alzheimer’s disease and, indeed, it could also be extraordinarily good news for Biogen’s shareholders.

On that note of corporate profitability and reward for investment risk, Quotidian does not entertain the current (and in our view) unpleasant political penchant for virtue signalling. There is no doubt whatsoever that our main purpose is to invest for the long-term profitability of our investors but our investments very often do have the welcome side-effects of improving quality of life and well-being (through medicinal development work done by healthcare and biotech companies), through greater efficiencies achieved by advances in technology (our tech holdings) and through the relief from tedium achieved via the application of artificial intelligence on so many mundane and repetitive tasks.

For those who can never find a good word for the concept of capitalism but instead constantly seek to criticise and undermine its great advantages, Biogen is a valid proxy for the positive benefits of this monetary theory. Biogen and its ilk clearly validate the fact that it is entirely possible, fair and reasonable to make profits whilst contemporaneously benefitting the common good and improving the human condition

Finally, the Neil Woodford debacle came to its inevitable but sad conclusion in mid-October when the previously high-flying investment manager was relieved of his pre-eminent role in the organisation that bears his name. This is relevant in our report only in the sense that it allows me to confirm and reassure you that Quotidian does not invest in any unquoted or illiquid assets (the proximate causes of Woodford’s problems and ultimate demise).

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On 5th September the latest unemployment figures were released in America and showed that the US economy had added 195,000 new jobs in August, well above the 140,000 expected by economists. Well, what a surprise. Economists and analysts get their sums wrong yet again.

In the meantime, though, market makers had wasted no time in lowering the equity markets during August and all based on these false estimates. Of course, the markets rallied again in line with economic reality but it is tedious to observe the repetitive lack of accuracy from those who are relied upon and royally paid to produce valid assessments.

Most of September therefore was relatively positive in equity markets as supportive economic considerations guided the rebound in equities upwards both in the UK and the USA. However, in the final week of the month the dead hand of politics (accompanied by further evidence of market malpractice) intervened once again to temper the economic positivity.

Believe me, I don’t set out to write about politics but politics and its knock-on effects on equity markets has now become such an integral part of equity pricing that one simply cannot avoid it.

As we all know, the recent prorogation of Parliament in the UK led to politically motivated Divisional Court hearings in both Scotland and England. In each case the initial judgements were then taken to appeal at the Supreme Court in London.

This is the same Supreme Court that itself, in 2014, ruled that the Crown’s actions in Parliament were sacrosanct and “cannot be questioned”. In legal terms they were not justiciable.

How strange, therefore, that in their judgement this month in respect of the Crown’s prorogation their ruling now was completely the opposite. Whilst this judgement has to be respected, it raises uncomfortable suspicions that the ruling was politically biased. Fundamentally, the Supreme Court has driven a coach and horses through the long-established norms of the UK’s unwritten constitution.

By a process that raises more questions than it answers Boris Johnson has now been deemed to have acted illegally simply by virtue of an entirely new interpretation of constitutional law; an interpretation that didn’t exist until the Supreme Court created it three weeks after the actual decision to prorogue Parliament (it having been perfectly sound and legal at the point of Johnson’s action). In the circumstances, it is preposterous to claim that Johnson is a liar or that he has misled the Queen but that, of course, has not and will not stop his Parliamentary opposition from trying to make cheap political capital from it. Contemporaneously, the strange (one might even say biased) and eccentric actions of the Speaker with his expansive interpretations of long-standing precedents seem to have gone unquestioned.

In the opinion of the Lord Chief Justice and the Master of the Rolls in the Divisional Court hearing in London the matter was political and therefore not justiciable. A retired bencher and eminent QC with experience in constitutional matters asserted that the Supreme Court’s judgement “does not read as if it follows an argument to its reasoned conclusion but as if it is contrived to reach a desired conclusion.”

Res ipsa loquitur. In our interpretation from an investment perspective, it is difficult not to conclude that the Supreme Court’s stated rationale for arriving at their new interpretation of the law was but a thin disguise for an unprecedented seizure of power. Smash and grab (which I think is still a criminal offence but nowadays I can’t be sure) would be a more accurate and reasonable description of the Supreme Court’s actions.

There is no doubt that the repercussions will have a profound effect on the UK stock-market and on the value of sterling in foreign exchange markets. In the short term that reaction is most likely to be positive but in the longer term it might well delay or derail Brexit and so be detrimental to the UK’s future ability to establish profitable global trading arrangements (thus stifling economic growth and profitability).

We have long believed in the importance of free trade, low taxation, light but sound regulation and the avoidance of small-minded protectionist policies all of which are focused on supporting profitable trade with the growth areas of the world’s economies (rather than being locked-in solely to moribund economies like those of the Eurozone). If the luddites in Parliament succeed in keeping the UK tied only to the EU then the FTSE will revert to its relatively glum performance of the past 5 years.

On 16th September two current traders and one former trader on J P Morgan Chase’s global precious metals desk were charged with multiple counts of fraud and conspiracy to defraud which involved illegal manipulation of prices for gold, silver, platinum and palladium. This scam has apparently been running for at least eight years and involved thousands of illegal trades which have ripped off countless investors (including many of JPMC’s own clients).

A practice known as “spoofing” involves placing multiple trade orders (often huge) which the trader does not then execute but which, by fooling the market systems, still have the effect of moving prices in the trader’s favour. Only J P Morgan Chase has thus far been identified but it would be naïve to believe that they had a monopoly on this type of price manipulation. Similar practices have been prevalent elsewhere and across other asset classes.

In the same way that the judiciary has chosen to profoundly interfere with politics in the UK, the last week of September saw another attempt made to impeach the US President. It has all the hallmarks of previous unevidenced assertions. The CIA official (imaginatively known as “whistle-blower”) who initiated this complaint was not a direct witness to the event he complains about and he apparently comes from the same group who have complained and failed in their earlier unevidenced attempts to assert that the 2016 US Presidential election was rigged by Russian interference. Whilst “whistle-blower” has not been publicly identified he is known to the CIA Inspector General whose report describes him as “having a political bias”. Who would have guessed.

Since the time of his inauguration, the political left wing of the USA (the Democratic party and large tranches of its media) have been hell bent on finding something with which to achieve the impeachment of Donald Trump. Thus far they have dismally failed and the likelihood of impeachment and them forcing the President from office is remote.

In order to achieve that aim, Trump firstly has to be found guilty of improper conduct (usually defined as treason or bribery) and that decision then has to be ratified by both the House of Representatives (held by the Democrats and so more susceptible to voting for impeachment) but then also by the Senate (firmly in the grip of the Republicans) who are unlikely to unseat their own man (although he has plenty of enemies in his own camp). In any case, carrying the motion in the Senate would require at least 66% of the vote, an unlikely hurdle to exceed.

Unless a lot more real evidence emerges then this latest attempt to throw even more mud at Trump will go the way of all the others. As things stand today, the current assertion is just noise and fury but signifies nothing. If proper evidence does come forward then I will change my mind and we will amend our strategy accordingly.

As ever, in reaction to this false narrative the most extreme worst-case scenarios have been implemented by equity market-makers in the last week of this month and have again sent equity valuation downwards. Markets will bounce again when all this silliness calms down. A week ago we were up over 4% for the month but, 5 days onwards, as a direct result of this needless panic attack we close the month in marginally negative territory.

The Eurozone continues its economic decline. On 1st November, at the very point when the EU needs more than ever a person with a grasp of monetary policy, economics and banking, Christine Lagarde takes over from Mario Draghi as head of the European Central Bank. Draghi is no doubt on his way to a well-earned retirement with his many friends in Hamelin.

Mme Lagarde is not an economist nor is she a banker. Her training and experience has been in the law and in politics but, by EU standards, she is obviously seen as well qualified for her new position. Her role is to encourage the economic reform of the Eurozone. Good luck with that! Many have tried, all have failed.

And finally, our old friend the Sino/US trade war. Towards the end of the month news crept through that China had signed a 25-year deal with Iran for the supply of oil, gas and petrochemicals. In an act possibly (although specifically would probably be more accurate) designed to irritate the US, this deal was denominated in the Chinese currency (the yuan) as opposed to the long-established and almost exclusively used US Dollar based petrodollar system. Petrodollars were designed purely and simply to maintain the USA’s hegemony in the sphere of oil and gas and it will not take kindly to its domination and control in that field being challenged.

To add insult to injury, and in a move that will fly directly in the face of Trump’s affirmed intention to reimpose sanctions on Iran, in an integral part of this latest deal China has also committed to injecting $280 billion into Iran’s oil industry in order, apparently, to renew that country’s transport infrastructure.

China has a long history of manipulating its currency (naturally to its own advantage) and so we can expect the yuan to be manipulated to China’s benefit and to Iran’s disadvantage. In Iran’s current circumstances however, beggars can’t be choosers but from both points of view these countries will revel in pulling the US tiger’s tail.

To put it mildly, this is likely to complicate Sino/US trade negotiation (as if they weren’t already complicated enough). Strangely, however, trade talks are due to resume on 10th October and positive vibes have been coming from both sides in advance of this resumption. Perhaps its dalliance with Iran was all part of a cunning Chinese plan. We’ll see soon enough.

On 30th September 2019 the FTSE100 index closed the month at 7408.20, a rise of + 2.79% in the month of September and it now stands at + 10.11% for the 2019 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a very slight fall of – 0.52% for the month of August but the Fund is still up + 16.25% for the 2019 year to date. Despite the negative influences of the past three months, Quotidian remains well ahead of its benchmark and in double-digit profit for 2019 to date.

In periods similar to the past three months of unnecessary volatility and minor but irritating negative share pricing it is always useful to rehearse the basics of what drives stock-market performance and remind oneself of the simple things that ultimately determine long-term investment success.

The most fundamental of these is money supply. Quite simply, when money supply is tight (when it is difficult and expensive to borrow money) then stock-markets head south. Conversely, when money supply is loose (when it is easy and cheap to borrow) then equity markets rise. Currently money supply is loose and getting progressively looser. September saw the second cut in interest rates this year in the US (which accounts for 53% of the global equity market) and augurs very well for ongoing profitable investment in US equities.

Money supply indicates the appropriate timing and relative safety (or otherwise) of stock-market investment and is a guide to the relative attractiveness of one country or sector over another at any given point in time.

There are, of course, additional considerations when constructing the portfolio’s stock-specific holdings. Trading success leading to higher revenue and increasing profitability of each particular individual company is, of course, top of that list and encompasses the potential for it to maintain and improve future sales, further increase its future revenue and create higher profits.

Potential default risk is also high on this list of risk factors and leads to a judgement call on two particular issues. One has to determine whether a downward move in the equity price represents simply a typical market correction or an over-reaction to events. It could even represent a short-term liquidity problem or a long-term solvency concern. Obviously, the latter would most likely cause us to sell that holding whereas the former could be managed through any short period of difficulty.

The issues which have been causing this short period of uncertainty are very clear to see and still have far more to do with politics than with economics. The over-reaction to what can be seen as synthetic fake news, false narratives and bogus issues will retreat again soon enough.

You have seen all of our holdings and the likelihood of insolvency for any of them in the foreseeable future is remote. They are all blue-chip companies with huge future potential. If that changes for any one of them then we will change our strategy and tactics.

In the meantime, the US economy is demonstrably in good shape and with money supply set to loosen even further we anticipate a positive final quarter of the year. Unsurprisingly, this is where the majority of our portfolio is currently invested.

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Having started the month on a positive note, global equity markets in the first half of August remained generally benign and the lethargic holiday season effect was evident through a lack of stimulus.

However, on 15th August the mood changed from sublime to ridiculous as we saw the largest one-day decline on the Dow Jones Index since last year’s final quarter market write-downs. The index slid lower throughout that day and the S&P 500 Index and the Nasdaq Composite both closed down about 3%, too. As ever, markets around the world simply followed Wall Street’s lead and the following few days emphasised the markdown even further.

The impetus for this sell-off was suggested to be that the yield on 10-year US Treasury bonds briefly fell below the 2-year bond yield. When shorter-term interest rates exceed longer-term rates it’s known as an inversion of the yield curve (the slope plotting interest rates on Treasuries of different maturity dates).

In general, the opposite alignment is normally true because inflation and default risks over the longer term are deemed to be greater than in the shorter term and those risks are normally then reflected in higher yields on longer dated bonds. When investors demand a higher return to lend for 2 years than for 10 years historical precedent indicates that it has occasionally heralded a recession.

The justification put forward by market-makers in order to validate their eagerness to downgrade equity prices was, therefore, that every recession since the 1950s had been preceded by an inversion of the yield curve. However, that is only a partial truth and represents simplistic not to say lazy (and perhaps self-serving) analysis. What they didn’t make clear was that there have been a multiplicity of yield inversions over this period but not all of them have been a precursor to recession. So, in other words, yes every recession has been preceded by a bond yield inversion (if you wait for long enough) but not every inversion has been the harbinger of a recession.

To make the same point by using a sporting analogy, it is undeniably true that in a game of cricket the scoring of a run is always preceded by a bowler delivering a ball. However, that is as bland and naïve an assertion as the one above and completely ignores the other side of the coin; the fact that not every valid delivery leads to a run being scored. Likewise in the investment world, not every bond yield inversion leads to a recession and the simplistic assertion put forward by market makers to justify their severe markdown on the basis of a very short-term yield inversion does not hold water or stand up to intelligent analysis.

Putting this month’s volatility aside, stocks have actually tended to do quite well following yield curve inversions. In five inversion occurrences since 1978 the S&P 500 has been an average of 13.5% higher a year later according to data compiled by Dow Jones Market Data. The same holds true on average over the two- and three-year periods following an inversion, with the S&P 500 up 14.7% and 16.4% respectively.

Taking just two examples from the past to further illustrate the point: (in 1978) three months after the 2-year/10-year yields inverted the S&P 500 was down over 10% and (in 1980) it was up over 13%. On average, the S&P index has climbed 2.5% in the 90 days after an inversion of that bond pairing.

In their attempts to instil fear into the minds of investors (simply because this stimulates equity activity and so profits the trading house itself) market makers have, by using a brief period of bond yield inversion as their vehicle, tried to create the illusion of inevitability and certainty into an intrinsically uncertain forum (ie. of a forthcoming recession). In fact, this latest yield inversion lasted for a mere 5 days before the 10 year yield overtook that on the 2 year bond again and, as we have seen this month, the short-term implications of this negativity has been another unnecessary markdown in share valuations.

Of course a recession will occur at some point in the future but to suggest that a very short-term bond yield inversion is proof positive that recession is on the near horizon is nonsense. One waits wearily but patiently for the mirage to become apparent (if that’s not a contradiction in terms) and for common sense to revisit equity pricing once more.

On 30th August 2019 the FTSE100 index closed the month at 7207.18, an fall of – 5.00% in the month of August itself and it now stands at + 7.12% for the 2019 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a fall of – 3.20% for the month of August and the Fund is now up + 16.86% for the 2019 year to date.

In addition to the synthetic excitement surrounding bond yield inversion, investors’ fears were stoked with a vengeance by market makers following another round of Donald Trump’s tweets which threatened to impose 10% tariffs on yet a further broad range of consumer goods imported from China into the USA. We clearly recognise that Trump’s negotiation tactics are to wear his opponents down by constant repetition; initially giving the impression that progress has been made only to change tack once more. Raising positive expectations only to dampen and crush them again is a well-trodden path of psychological torture simply intended to weary and weaken the other side in the negotiation.

China’s initial response was to impose fresh tariffs of its own and equity valuations were again hit by negative sentiment. This period of alternating between risk-on/risk-off mentality on a daily basis in stock-markets is as wearing as it is ridiculous but it will come to an end when the inevitable trade deal between China and the USA is finally secured (as it surely will be). Perhaps the Chinese government has belatedly begun to realise that because it announced in the last days of August that it would not now be following through on its subsequent tit-for-tat threats to impose new and additional tariffs.

Stock-markets by their very nature are volatile and that volatility has increased in recent years partly as a by-product of algorithmic (automatic, unthinking and impersonal computer-program’d trading) and partly as a result of fear deliberately initiated by the greed and self-interest of market makers.

Despite the negative month, Quotidian still remains well ahead of its benchmark for the year to date and the reversal of the short-term inversion in bond yields as well as a much more conciliatory tone in the US/China trade negotiations is reflected in more positive sentiment in equity markets as we move into September.

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In the dog days of early summer global stock-markets potter gently towards the mass exodus of market makers and traders that marks their long August holidays in the sun.

At the risk of sounding like a broken record, the issues that have continued to motivate the direction of equity markets are the ongoing negotiations towards execution of a China/USA free trade agreement, the prospect of interest rate cuts (particularly in America) and the success or otherwise of second quarter corporate results which began to filter through from mid-July onwards.

In the UK specifically, Brexit continues to dominate the equity trading agenda but its piquant denouement appears now to be relatively close at hand.

Just two hours before the US markets closed on 31st July the Federal Reserve delivered its long-awaited interest rate cut (the first rate cut since 2008). Analysts had created an unrealistic expectation of a half-point decrease and were disappointed when the decision was actually a drop of 0.25%. Despite it having been made clear that there will likely be further rate cuts later this year, the immediate knee-jerk reaction by ever-pessimistic and short-term thinking market makers was to mark down equity prices in the final hour of trading before they conveniently went off on their holidays. Irritatingly, that action moved the Fund from positive into negative territory (albeit marginally) for the month of July.

On 31st July 2019 the FTSE100 index closed the month at 7546.80, an increase of 1,63% in the month of July itself and it now stands at 12.17% for the 2019 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a fall of -0.50% for the month of July and the Fund is now up 20.72% for the 2019 year to date.

A multiplicity of economic statistics from around the world were released in July and they paint a very confusing (not to say contradictory) picture. In the USA, figures produced by the Philadelphia Federal Reserve suggest that its economy is heading for recession but those numbers are in direct contrast to the US Manufacturing Index which has just reached a one-year high and so points to a US upturn.

In Europe, the European Airfreight Index fell to minus 7.9% in June and similar data from the Pacific Rim is even worse (the Asian Airfreight Index dropped to minus 8.6%). These suggest a steep contraction in the volume of trade and economic activity in those areas.

Singapore’s export values fell by 17.3% last month and Japan’s export index has fallen to a 7 year low.

Strangely but more encouragingly, the Baltic Dry Index in the UK (which is a reliable proxy for and a leading indicator of future manufacturing and construction activity) has soared upwards by 75% since the tepid Theresa May announced her resignation. Two pieces of good news for the price of one there then.

Reverting to Europe, the economies of Germany, France and Italy are firmly in the grip of recession. In a speech on 25th July, Mario Draghi (President of the European Central Bank) announced a further contraction in the euro-zone’s economy and stated that “the euro-zone outlook is getting worse and worse”. Coming from the man who essentially runs the EU’s finances this is a surprisingly honest and damning indictment of the entire EU project.

Having wound down the financial stimulus programme at the end of 2018 (which was the only thing that had been papering over the cracks for the past few years) Draghi signalled that a fresh round of money-printing will be launched in September. This clear evidence of continuing EU economic failure and fiscal weakness must be exploited by the new team of UK Brexit negotiators in place of the pathetic, unfocused and timid approach of the past three years. Hopefully the UK should then be able to leave this failing quasi-communist bloc before its own economy is dragged down too. We are highly encouraged by the much more positive, assertive and refreshing approach thus far shown by Boris Johnson and his team.

Despite the abundant evidence of EU economic failure, in her opening speech to the EU parliament its new president, the financially unqualified, untalented but very well-connected Ursula von der Leyen, announced that she will create an EU state that “will take control of every aspect of our lives”. When she said ‘our’ she, of course, meant ‘your’. The EU’s bureaucratic elite will remain entirely unaffected by their own monetary folly. So much for democracy, personal freedom, personal choice and freedom of opportunity. Ursula the Unready may have replaced Juncker the Unsteady but the same outdated and myopic mindset continues. One only has to recall the decline and demise of the old Soviet Union or remember the novels of Huxley and Orwell to see how all this will end.

Accounts issued by the UK Treasury in July for the year ending 31st March 2019 showed that the UK’s annual contribution to EU coffers was now running at an eye-watering £15.5 billion (a substantial increase from the already painful £12.9 billion it had been in the previous year). This huge increase makes it abundantly clear that the more successful the UK economy is, the higher our contribution becomes in order to support the financial incontinence of all the EU’s economic and policy failures. Far from rewarding success, this ever-increasing contribution is a financial penalty and disincentive for effort.

The financially incompetent Mrs Von der Layen would do well to learn that when one buries one’s head in the sand it inevitably leaves another part of one’s anatomy fully exposed. The UK should thank its lucky stars that it will be well clear of the fiscally damaging fall-out when the EU eventually implodes under the weight of its own hubris.

As mentioned earlier, the Baltic Dry Index is a reliable gauge of the health of the global economy. It measures the cost of chartering a cargo ship and so tends to be used as a proxy for the volume of goods being moved around the world. By extension, it thus gives a strong measure of the overall level of economic activity.

Since Mrs May eventually tendered her resignation on 24th May the Baltic Dry Index referenced above has risen from a reading of 1066 on 24th May to 1868 today (an uplift of 75%). We take that as an indication that things are not as sluggish as many investors, pessimistic analysts and investment managers seem to believe.

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You may have noticed just the slightest trace of cynicism in last month’s report as we recounted our assertion that the mark-down in equity prices in the last two weeks of May was entirely unnecessary and had not been a true reflection of economic reality.

We am pleased to say that this assertion was well-founded and has been proved to be correct thus far as share prices in June have already recovered to their levels before the synthetic May write-offs. Our irritation as these occasional periods of false pricing is unbounded as is our scepticism with regard to the financial analysts who tend to produce self-serving or badly researched reports and market makers who over-react to irrelevant market noise, gossip and waffle. Sadly, it is something we are wearily familiar with and are practised, on most occasions, in interpreting reality from a false narrative. In dynamic markets it is a skill that requires patience, practical experience and an understanding of market action.

A significant number of the analysts whose work we have observed over the years tend to have all the personality of a poker but lack even the modest benefit of its occasional warmth. They know the effect that a negative analytical report will have on a market sector or on an individual company’s share price but far be it for us to even hint that it might be in their own interests to ‘encourage’ a share price to move lower in order that they (or their organisation) can buy it for their own account at an artificially low price. Perish the thought. Strangely, though, a short time later the share price or the market itself often then tends to move higher again.

Fever Tree (the up-market mixer drink producer) is the only company specific holding we currently have in the UK market. As an example of the idiocy and absurdity too often prevailing in reports from financial analysts (Nigel Lawson used to call them teenage scribblers and he wasn’t often wrong) a report was issued by one of this happy but barmy army in mid-May in which he had taken supermarket only sales figures from the first two weeks of the month and, on the assertion that the weather was expected to be very poor over the summer months too, he then extrapolated these numberss as if they were a proxy for the entire year. On that basis he then concluded, with the full confidence of his own foolishness, that Fever Tree’s sales would fail to meet expectations and be very poor for the 2019 year as a whole. On the back of that flimsy confected ‘evidence’ the share price immediately dropped by 10%. Two days later the shares had regained that 10% and moved even higher again. Economic reality or absurd folly?

Volatility is one of the inherent features of equity investment and Quotidian has long, hard-earned and successful experience in navigating these occasional absurdities, pitfalls and stock-market gyrations.

For the past year or so one of the main areas of market focus has been the putative trade war between the USA and China. In our January report we highlighted the fact that in 2018 China had posted a trade surplus with the US of $351.76 billion, a surplus that President Trump is determined to bring more into equitable balance.

Presidents Trump and Xi were due to meet (for the first time since their positive discussion early in 2018) at the G20 gathering on 29th/30th June and we await news on the outcome of their discussions. Positive progress towards a reasonable trade deal will be a boost for equity markets (and particularly the US markets); continued negativity and entrenched positions are already largely priced in although they may still cause a short term knee jerk reaction.

The US/China trade debate has diverted attention away from the ongoing failings of the EU economy and Trump’s enduring aim to end blatant EU protectionism (which is at the heart of the declining EU federalist project). Examples of this protectionism and the trade tariffs that support it can be found in the way that French wine is traded between the EU and the USA. The EU levies rates of between 11 to 29 cents per 75cl bottle of American wine imported into the EU whereas America charges just 5 cents for similar sized bottles of French wine imported to the USA. There are similar imbalances (always, of course, in the EU’s favour) in respect of Spanish olives and German cars. The list is extensive and illustrates the ongoing legacy of economic myopia from the Obama regime.

But the real problem for the EU is that the German economy (by far the largest economy in the EU) is already in recession and the potential of increased import duty on German cars going to the USA (tariffs which Trump has already threatened to impose) would have a devastating effect both on Germany itself as well as the EU’s GDP. At a time when the German auto industry is also under threat from Brexit, Trump’s threats are well timed (from both the US and the UK’s points of view). When Brexit is finally achieved it will provide positive motivation to a UK stock-market that has been largely moribund for much of the past three years.

Of course, Trump also has an advantage in that one of the leading figures in trade negotiation from the EU side is Guy Verhofstadt…..well known for his bumbling, self-important incompetence in Brexit negotiations. I’m sorry to repeat the same (or a very similar) joke twice: Verhofstadt has all the intellectual capability of a traffic cone but sadly he also lacks its external brightness too.

You will no doubt have read about the troubles afflicting Neil Woodford and the various funds under his management. There is no doubt that Woodford is a bright and pleasant individual who has had a long period of success as an investment manager.

Sadly, though, the Americanisation of the City since the early 1990’s has brought with it the American obsession with celebrity culture and thus the creation of ‘star names’ in the world of investment management.

With that in mind and having had years of demonstrably high achievement under the Invesco Perpetual banner Woodford was encouraged to establish a fund management business under his own flag in 2013.

The trouble with being a high profile ‘star’ is that it causes a huge and uncontrollable inflow of new clients and substantial additional sums of money to manage. The danger with this is that the sheer volume of monies he then has to find investment avenues for often means that the fund manager loses the ability to be quick on his feet and be able to react quickly to market opportunities or market risks.

Star status also tends to mean that the fund manager loses touch with his clients who ( just by virtue of the over-extended business size) mutate into numbers rather than names. It essentially depersonalises the business itself which then becomes simply a vehicle for creating fees.

In Woodford’s case that size pressure played its part in forcing his hand towards investing in a large number of very small and consequently illiquid companies (and, in so doing, exceeding the fund’s maximum allowance for illiquid investments).

When clients then want to withdraw their capital a fund manager who is over-exposed to illiquid investments finds it difficult (if not impossible) to sell these illiquid positions and so is obliged to disinvest from those profitable liquid holdings that he would very much prefer to keep. This, of course, creates a domino effect and a downward spiral.

Whilst the financial media (most of whom would struggle to boil an egg and wouldn’t know one end of an equity trade from the other) are generally unforgiving and assert that his problems have been self-generated, we sympathise fully with the awful situation Neil Woodford (a decent man) now finds himself in.

In the six years and one month since 2nd June 2014 when Woodford founded his flagship fund (the Equity Income Fund) it has produced a negative investment return of -6.60% (‘A’ Share Class, Accumulation units, ie. total return) up to the present day (30th June 2019). The FTSE over exactly the same period has increased by +8.49%. Modesty forbids me from mentioning that the Quotidian Fund has returned +39.17% over exactly that same timeframe (and that figure is net of all charges).

By contrast to the Woodford organisation, and to avoid losing the personal touch that is the essence of Quotidian’s business model, we have a self-imposed maximum number of clients for whom we will act. We take great care to avoid investing in illiquid companies (or, indeed, anything that we cannot extract ourselves from at a moment’s notice). We know our clients in the fullest sense of that phrase and we never want to lose this particular level of personal service and care.

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Following four consecutive months of substantial recovery from the 2018 correction it is in the nature of equity markets to then pause for breath with another short-term correction. In the middle of May and from a clear blue sky, therefore, global equities suffered a markdown in prices which has taken some of the gloss away from the sizeable upward momentum that had been generated since the start of the year.

It is blindingly obvious that market analysts simply do not know how to interpret the ongoing negotiations between China and the USA in pursuit of a comprehensive trade deal. It is equally clear that in the absence of intelligent and reliable analysis, simply negotiating their way across the road unaided seems to stretch market maker’s ingenuity and imagination to its limits and so they find it much easier to simply put a red pen through equity prices across the board until a greater degree of clarity emerges.

As a consequence of that we are currently seeing exceptional levels of volatility once again but, as has been re-inforced historically (and particularly reasserted over the past six months) equity markets inevitably bounce back and resume their upward momentum. That assertion is supported by the fact that (despite market-makers inate pessimism) the last two quarterly earnings seasons in the USA have indicated that its strong economic progress continues. The best US companies have produced brilliant corporate results which provide proof positive that, in the real commercial world, they continue to show growing sales and increasing profits.

This latest spat in trade discussions between the USA and China was triggered by a series of tweets from President Trump threatening to impose another range of tariffs onto Chinese goods. This blatant negotiation tactic simply follows a well-trodden and familiar path and is becoming rather tedious to observe. The retaliatory tariffs then imposed by China fall mostly onto the US agricultural industry. For example, the highest in the Chinese range of tariffs (25%) are being applied to peanuts, spinach, sugar, wheat, coffee, chicken and turkey. The Chinese equivalents of Charley Brown and Popeye will clearly be in the van of those who will suffer worst!

The rest of us look skywards for divine inspiration and, on earth, to the Dalai Lama for guidance in the skills of patience and the control of exasperation! One of the largest US market making operations at least had the grace to admit that equity pricing during this month’s correction has been nothing more than guesswork.

On 31st May 2019 the FTSE100 index closed the month at 7,161.70, a fall of -3.46% in the month of April itself and it now stands at +6.44% for the 2019 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a fallback of -9.71% for the month of May and the Fund is now up +12.67% for the 2019 year to date.

Analyst’s reports are jam-packed with ‘if, could and possibly might’ which serve to illustrate their lack of certainty and inate preference for negative pricing. It is often just guesswork with a bias towards negativity.

By a process of thought that raises more questions than it answers about the inate negativity and self-interest of the investment industry’s highly esteemed market makers, it obviously makes great logical and economic sense to them in that the most severe markdown in equity prices have been applied to the technology sector.

We recognise, of course, that the revenue exposure to China of companies like NVIDIA and Broadcom (who earn 50% of their revenue from that market) leaves them exposed to the possibility of further retaliatory actions. The situation with Huawei and the major US chipmakers being under Presidential diktat not to supply it with hardware or software is also concerning the stock-market but we simply don’t yet know if China will make any additional retaliation and, if so, what form that retaliation will take.

Following Trump’s latest round of tariff increases Chinese negotiators made a particular point of saying that China would not ‘weaponise’ its financial holdings in the USA. That statement is, of course, a shot across the bows and a thinly veiled threat of the economic damage that might be caused to the US if China so wished. For the moment that is just a negotiating stance…..but it could give Trump pause for more profound thought and a modification of his tactics. Rarely, if ever, has Trump had to negotiate with an adversary who has at least equal, if not greater, financial power than himself.

Thus the financial incompetence, economic illiteracy and sheer commercial idiocy of Obama’s years in power still acts as a brake on the US economy today. Obama’s spendthrift regime was financed to a large extent by the issuance of Treasury Bonds (the US version of Gilts in the UK) and which are essentially cheap and seemingly “risk-free” loans to the government from bond investors. China now holds the eye-watering sum of $15.9 trillion in T-bonds which (in addition to its huge equity holdings in US stockmarkets) gives it enormous financial leverage in current trade negotiations. As ever, there is eventually a price to be paid for the Obama regime’s period of deliberate gross over-expenditure.

On the positive side of that both parties are fully aware that a comprehensive trade deal will be in the best interests of both countries and so I have little doubt that a fair and reasonable trade deal will ultimately be agreed. However, Trump needs to understand the vital importance in Chinese culture of not losing face. China’s response to Trump’s standard approach of bullying tactics will be key to whether an early resolution of this ongoing dispute will be agreed. The Chinese simply will not be humiliated or forced to back down. Our view is that the current bout of equity market weakness will actually put US/China trade talks back on track.

On the more pessimistic side, there are differing economic views on how serious a long period of dispute would be and the current stock-market turndown is based entirely on the easy option of just marking down prices. Against that, Goldman Sachs research believes that the effect on economic output of an extended trade argument would be less than 1% in both countries and therefore would not be drastic.

Another positive signal is that a cut in US interest rates in 2019 is now rated by currency markets at over 80% and that would provide a very constructive boost to equity markets.

Less tangible but more interestingly, Trump is obsessed with the strength of the US stock-market as a proxy and measure of his success as President. He knows that his chances of re-election in next year’s Presidential election will largely depend upon the US markets being much higher than they are today and there is little doubt that he will seek to secure the support of Wall Street with that aim in mind.

The final trading day of May added insult to an already poor investment month. Another surprise tweet from Trump gave advance notice of tariff sanctions to be applied to Mexico (despite a recently executed free trade agreement) if the Mexican government do not do more to restrict illegal immigration to the USA. The usual Trump tactics and no doubt they will facilitate the velocity of Mexico’s compliance. But the immediate knee-jerk reaction from market-makers was to create another round of equity price reductions in all global markets.

We remain of the opinion that this a a time to keep clear heads and hold our nerve. May’s nonsensical market action and unnecessary price reductions will pass and equity valuations in the US will return to a point where they properly reflect the reality of growing corporate profits and increasing future sales.

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“Time reveals everything” is an old adage which is particularly true of the financial world. As you will no doubt recall, the 2018 investment year as a whole was dreadful and, from our own high point on 30th September, Quotidian’s performance mimicked the market’s downward trajectory so that our result for that calendar year was dismal too.

In particular, the last quarter of 2018 was one of the most difficult periods in global stock-makets since the depths of the financial crisis of 2007 to 2011. We did suggest at the time that this severe markdown was artificial, synthetic and overblown.

Here we are just four months later and, indeed, time has put the travails of 2018 into better perspective. In support of our contemporaneous assertions, we can now see that by the end of April 2019 the most attractive of the global markets (the Nasdaq and the S&P500; both in the USA) have already recaptured the reduction in equity valuations of the last three months of 2018.

On 30th April 2019 the FTSE100 index closed the month at 7418.22, a rise of +1.91% in the month of April itself and it now stands at +10.26% for the 2019 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows an increase of +4.52% for the month of April and the Fund is now up +24.79% for the 2019 year to date.

Quotidian’s investment strategy is based upon being (or at least aiming to be) in the right sectors of the right markets at the right time.

With that in mnd and on the basis that a picture paints 1000 words, I attach two graphs for your information and interest. The first illustrates the extreme volatility of global stock-markets from 1st January 2018 up to the present day and the second graph shows the performance of the most important of the worldwide markets from the start of 2019 up to 30th April.

These graphs confirm that the leading three equity markets for a GBP investor thus far in 2019 are China, the Nasdaq and the S&P500. It is no coincidence, therefore, that our current portfolio is 80% invested in those two US markets and 20% invested in UK Smaller Companies.

We do not invest in China simply because long experience of that market leaves us feeling less than secure about its corporate governance, the lack of quality of economic and financial information emanating from that country and our concerns over its stock-market illiquidity.

Simliar concerns negatively influence our view of Emerging Markets. We also remain shy of the relentlessly underperforming stock-markets of Europe until such time as its political and financial woes are better managed.

Our strategy should not be seen as dogmatic; our thinking is flexible and our decision-making can be mutated to suit current market conditions and ever-changing circumstances.

Time does reveal all and visual aids hopefully help to illuminate my usual dull commentary ……..but please don’t think for a minute that I won’t continue to use a 1000 words anyway in future reports!

Graph Showing Financial Markets from 1st January 2018 to 30th April 2019

Graph Showing Financial Markets from 1st January 2019 to 30th April 2019

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The large and medium sized company sectors of the UK market (as represented by the FTSE100 and 250 indexes) continue to wallow in the fog of Brexit and so (with just one exception) we remain shy of anything other than generic exposure to UK smaller companies.

Our only stock-specific company holding in the UK is Fever Tree, the premium tonic water and mixer maker. Fever Tree declared its latest set of results on 26th March and their figures were spectacularly good. The company reported a 40% increase in sales for the 2018 year and a 34% increase in profits for that same period. Sales in the UK rose by 53% and the company’s expansion into the USA is set to add further impetus to this demonstrable success story. Fever Tree’s share valuation is already returning to a level that reflects its continuing growth.

A recent official report from Germany’s ‘Centre for European Policy’ shows that the euro has brought a net gain 0f 21,000 euros per person to the Germans, whereas in France it has cost 56,000 per capita and in Italy 74,000 euros……and both France and Italy are expected to accept this disadvantage on the basis that it is apparently all for the greater good of the European ‘project’.

As we have stated many times over the years, there has only ever been one economic beneficiary of the EU project and that is Germany. We remain deeply sceptical of European stock-markets too as the Eurozone’s three largest economies (excluding, of course, the UK) are in recession and the ECB have run out of ammunition in respect of the financial levers that have papered over the cracks and brought superficial short-term relief in the past. Even the golden tongued Mario Draghi is struggling to put a positive spin onto his usual propaganda as the realities of the EU’s financial and economic woes mount. He is reduced to following his well trodden path of obfuscation, denial and bluff.

Markets are fully aware that the ECB cannot raise interest rates (for fear of turning a recession into a full blown slump) and, with brilliantly inept timing, the ECB terminated its quantitative easing programme at the end of 2018, just as it was about to be needed most.

The incompetent, indecisive and weak ongoing efforts being made by the UK parliament to resolve Brexit in a democratic, realistic and equitable way continue to suppress any substantial and sustainable progress in the UK’s stock market. Devoid of leadership and lacking even basic negotiating skills we are still no nearer to a satisfactory denouement than we were two years ago.

There are fundamental but vitally important differences between the UK and the EU project that never seem to have entered this unending debate. For example, the basis of British law is that an individual is free to do anything he or she wishes unless it is specifically and legally prohibited. An endearing element of British culture to counterbalance any potential misuse of that freedom is that (even in today’s more cynical and less gracious world) the majority of people self-police their behaviour and take care not to infringe, impair or reduce the freedom of others.

The basis of EU law, however, is that nothing can be done unless it is specifically permitted. These differing approaches and the philosophies behind them (freedom of choice , freedom of speech and free trade versus governmental diktat, command and control) are in direct opposition to each other. This has an impact on economics, finance and, in particular, their approach to trade.

Historically the UK has a long-standing belief in free trade and, by extension, its close association with capitalism and democracy.

Free trade is a positive means by which we can spread prosperity as wealth cascades through the economy. Prosperity underpins social cohesion and, in turn, social cohesion underpins political stability. Political stability is the bedrock of a collective (and peaceful) society.

The EU adopts a different philosophy. It is deliberately anti-democratic and its innate protectionist approach abhors free trade (other than internally between the EU27 where it is largely for the benefit of German manufacturing industry and French farmers). Instead, the EU adopts a command and control economic system hand in hand with a tax and spend fiscal philosophy. This can be likened to giving £20 to an alcoholic; you know exactly what he’s going to do with it, you just don’t know which wall he’s going to use.

Taxation is an innately unfair and negative way of redistributing wealth and is typically favoured by a socialist goverment (which of course is what the EU is). Taxation penalises success and progressively reduces the motivation to achieve further success (either through taking business risks or simply by working harder) whilst it encourages a reliance upon a benefit culture within a welfare state and thus rewards idleness and economic inactivity.

Given the very different legal systems, political beliefs and economic cultures between the UK and the EU, negotiations to achieve Brexit were always going to be complicated. Sadly, the ineptitude of the UK side in lacking courage, lacking imagination, lacking belief, lacking even a scintilla of negotiating skill and meekly allowing the EU to hold the initiative and manipulate the agenda has resulted in a cul-de-sac (I wonder what the French for ‘dead end’ is) and an increasing likelihood of the entire circus continuing for a few more years into the future.

In the meantime stock-markets both in Europe and the UK will, by and large, remain hobbled and of little or no investment interest. Much better opportunities continue to exist elsewhere.

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Despite political concerns that are still supressing some areas of the global equity markets we continue to regain some of the ground that had been ceded in the fourth quarter of 2018. Our strategy of focusing on the most attractive companies in the most attractive sectors of the most attractive markets at any given time does help in this process but, given the inherently dynamic nature of stockmarkets, it is sometimes easier said than done. At the moment the most attractive of the world’s equity markets is the USA and it is unsurprising, therefore, that our current holdings are biased in that direction.

The US economy remains in rude health and its central bank (the Federal Reserve) is now more inclined to keep interest rates at their current level (albeit under a degree of political pressure). US inflation is stable and unemployment is now at a very low level indeed (virtually at a level that economists would describe as ‘full employment’).

Taking that as the macro-economic background, the micro-economic position adds support to the assertion that the USA economy is performing very well. The fourth-quarter reporting season in the USA is now done and dusted and, of our 22 company-specific holdings, all have now issued their results. As anticipated in last month’s report, all bar one of them have beaten expectations and posted positive surprises.

Trade tensions between the USA and China have weighed on market sentiment over the past year and President Trump had threatened to expand the range and increase the size of tariffs if a trade deal had not been finalised by 1st March. However, in mid-February he announced that the imposition of these tariffs had been postponed and this has been taken as an indication that the execution of a trade deal is imminent.

Our January report highlighted the extraordinary imbalance of trade between these two countries (significantly in China’s favour) and it would appear that China has now agreed to rebalance that discrepancy by committing to a programme of buying American goods and services to the value of $1.7 trillion over the next six years. That would represent a huge change in China’s historic economic model (which over the last 20+ years has been based on production and exporting) and whilst that, if it happens, would be great news for the USA it would cause less helpful knock-on economic effects around the world.

Quite simply, if China was to spend $1.7 trillion on US goods that would seriously reduce the value of goods it could buy from other countries. The opportunity cost to large areas of global industry could put considerable stresses on the economies of other manufacturing economies (the impact on German car manufacturers is but one example of the critical damage that could be caused). It is worth bearing in mind that:

Trump’s mantra from his first day in power has been ‘America first’ and, whatever one might think of him as a personality and whatever mud the media might like to throw at him, he has demonstrably fulfilled that pledge.

China’s political leaders have a long history of promising one thing and actually delivering something completely different. I recall some sage advice I was given 30 years ago:

You can always do a deal with China but you can rarely do a smart and profitable deal with China.

Before we get too carried away with the potential advantages to the US economy and the commensurate strains elsewhere, let’s wait to see what actually emerges from these ongoing negotiations.

We see no point in commenting further on Brexit, which remains as an albatross around the neck of the UK stock market. The complete lack of political leadership, intelligence and belief shown by Mrs May combined with her shameless mendacity has turned the entire process into a farce of Brian Rix proportions (but without the humour). A market analyst who clearly spent his earlier years following the exciting hobby of train-spotting has calculated that May, in her monotonous fashion, has announced 108 times that Britain would be leaving the EU on 29th March 2019. Last week she reneged on that. It is pointless trying to make any serious investment judgements in respect of the UK and the EU until this long and fruitless saga is over.

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Global stock markets have ended their fourth-quarter 2018 slide and staged a solid rebound this month.  Reassuringly, one issue that investors had been worried about has also been resolved: following its meeting on 29th/30thJanuary the Federal Reserve (the central bank of the USA) has signalled its intention to abort its quantitative tightening program which (given the extremely negative effect it had had on equity markets) is very good news indeed.

Quantitative tightening is a monetary policy applied by a central bank to decrease the amount of money within the economy.  With the benefit of hindsight it was, inter alia, that policy that had helped send the stock markets into a frenzied tailspin during the fourth quarter of 2018.

On 31st January 2019 the FTSE100 index closed the month at 6968.85, a rise of 3.58% in the month of January itself and it now stands, of course, at 3.58% for the 2019 calendar year to date too.  By comparison the Quotidian Fund’s valuation at the same date shows an increase of 13.09%for the month and so it follows that the Fund is up 13.09% for the 2019 year to date.

It now seems that the severe equity market markdowns in the final quarter of 2018 were largely a reaction to the Federal Reserve’s interest rate policy and monetary tightening.  One could be readily forgiven for saying that this was a gross over-reaction by analysts and market makers.

On the back of a demonstrably strong US economy, the Fed raised interest rates four times in 2018 in a robotic, pre-ordained and seemingly careless “painting by numbers” approach. When it met in December the central bank issued a projection that it expected to raise rates twice more in 2019, albeit that that figure was downgraded from its previous projection of three times.

However, financial markets still continued to tumble substantially, disturbed that in his subsequent news conference, the Fed chairman (Jerome Powell) had given a very positive view of the US economy yet appeared to suggest that the Fed would still resume raising rates in the coming months.

Since then though, Powell and other Fed officials have (under rigorous criticism and, no doubt, impartial and gentle guidance from President Trump) emphasized their firm intent to be “patient” in their approach to rate increases and they have reaffirmed that there is now no “pre-set course” for future increases.

As a result, equity futures markets have put the probability of a rate hike at any time in 2019 at just 22 percent.  In typical Cassandra-like fashion though, a few doom-laden analysts are predicting up to two Fed rate increases in 2019, though not until the second half of the year.

We believe that the Fed has been and will continue to be under extreme political pressure to hold interest rates steady rather than risk tipping the currently buoyant US economy into recession.  Equity markets have risen accordingly.

Conversely, the Mayhem caused and the resulting pig’s breakfast being made of Brexit continues to supress the UK stock-market.  It is clear from the recent unedifying spectacles in the House of Commons that the chief negotiator on the UK side does not know his Acas from his Nalgo.

In Europe, the German and Italian economies are now officially in recession and France is on the cusp.  Despite the bombast from its leaders it is clear that the undemocratic, protectionist and financially incontinent EU project with its half-baked currency is failing. It beggars belief that elements of the British establishment still desperately want to cling to this sinking ship.

The fourth-quarter reporting season in the USA is in full swing and, of our 22 company-specific holdings, ten have now issued their results.  Of these, every one of them has posted positive surprises and their share valuations have been upgraded accordingly.  The remainder of our portfolio holdings will report in February and we anticipate similar positive outcomes above and beyond analyst’s projections.

The palpable fear and negativity that gripped equity markets throughout the last quarter of 2018 have thus far in 2019 been replaced by a sense of optimism, realism and normality.  Long may that persist.  We remain alert to the fact that there are potential headwinds still to be addressed and resolved.

Chief among those is the huge trade imbalance (in China’s favour) between the USA and China.

Overall for the full year of 2018 China posted a trade surplus of $351.76 billion.  Of that, its politically-sensitive surplus with the USA widened by 17.2 percent to $323.32 billion last year; the highest on record. It is abundantly clear as to why the US President has been so focused on redressing that remarkable imbalance.

Reports from the US during January suggest that positive progress has been made to secure an equitable trade deal between these two countries and, if that does become a reality, then another restraint on positive stock-market progress will have been removed.  We take a sanguine view and hope that the timetable of settling a deal acceptable to both sides is indeed executed by the putative 1stMarch deadline.

Despite the Quotidian Fund’s strong performance in January we are intensely aware that we have much more ground to recover before we claw ourselves back to the heights of 30thSeptember last year.  We remain committed and confident of so doing.