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On 31st July 2020 the FTSE100 index closed the month at 5897.76, a fall of -4.41% in the month of July, and it now stands at down -21.81% for the 2020 calendar year to date.

By comparison the Quotidian Fund’s valuation at the 31st July shows an uplift of +1.84% for the month of July itself and the Fund is now up +32.09% for the 2020 year thus far. We are therefore 53.90% ahead of the FTSE100 at this point in the 2020 calendar year and, of course, well ahead of inflation and the yield on gilts or deposits.

In the Eurozone, official figures released in July confirmed that its GDP fell by 12% in the second quarter (Q2) of 2020 and, within that number, the individual economies of both Germany and France had contracted by more than 10% in Q2. This recessionary trend is reflected in the stock-markets of both countries (France down -19.98% and Germany down –7.06%) in the 2020 year to date. The wider Eurozone is better reflected by the Eurostoxx 50 index which at the end of July was -15.24% down so far this year. As we’ve consistently said since June 2016, the UK will be well out of this sinking ship.

In the USA, GDP figures released in mid-July showed that the US economy tightened by -9.50% in the second quarter of this year. That figure caused a minor wobble in US equity markets (enough to trigger our technical signals). At that point, with 11 of our 18 investment holdings still due to issue their second-quarter results on 29th and 30th July, we reduced our exposure to US equities before a minor wobble could potentially mutate into a major sell-off.

Having already made a substantial profit in largely US-based investments thus far in 2020, we decided that it was prudent to consolidate those profits and reduce our exposure to investment risk until the full reality of Q2 US corporate performance became apparent.

In the event, the results issued from 10 of those 11 holdings were better than expectations and the immediate knee-jerk market reaction was positive. However, that positivity was short-lived and, as we go into the traditional holiday period when low trading volumes can cause mis-pricing and high volatility, we are content to observe from the safety of the sidelines for the time-being.

It is worth noting that only two of the liquid and tradeable global stock-markets are in profit for the year; to date: the tech-heavy Nasdaq in the USA and CSI 300 in China. Regular readers will know that we simply do not trust any figures emanating from China and treat any of its economic statements with scepticism bordering on extreme cynicism. We will therefore not touch that market with either your barge-pole or mine.

The present scenario thus makes it more important than ever to be in the right sector’s of the right market’s at any given point in time. It follows that it is equally vital (and a solid investment decision) to be out of equity markets altogether if there is little or no prospect of earning a worthwhile profit from exposure to risk.

Looking, in particular, at the UK many commentators are suggesting that the local economy here will struggle to move forward until the end of 2021 to mid-2022. We can only hope that these analysts are too pessimistic and wrong (as, indeed, they usually are). At the moment we see little attraction in anything other than the UK small companies sector at the moment and, even then, only very selectively.

Likewise, the Eurozone economies are heading further into recession and continue to suffer from stifling over-regulation, frighteningly high unemployment and an ever-growing debt mountain. Those EU countries who were most desperate for a financial bail-out do not seem to have woken up to the difference between grants (which would not be repayable) and loans (which, of course, will and on the most unfavourable terms. Economic history is obviously not a strong point of those running the finances of Spain and Italy (among others) and their memories of the way the Eurozone dealt with Greece has clearly already faded.

The EU is held together only by pink string and sealing wax seasoned with a large dose of deception. We do not rue the day the UK took the exit road away from this disaster zone.

The main danger now is that the huge financial stimulus programmes that have been introduced by governments around the world in the hope of combatting the economic effects of Covid-19 will expend all their cash injections before their economies even begin the process of recovery.

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On 30th June 2020 the FTSE100 index closed the month at 6169.70, a rise of 1.53% in the month of June and it now stands at down -18.20% for the 2020 calendar year to date.

By comparison the Quotidian Fund’s valuation at the 30th June shows an uplift of 4.65% for the month of June itself and the Fund is now up 29.70% for the 2020 year thus far. We are therefore 49.37% ahead of the FTSE100 at this point in the 2020 year; a pleasing position to be in but, rest assured, there is no complacency here.

In the UK, the Bank of England has injected £300 billion into the economy since March yet UK inflation has fallen from 0.80% to 0.50%. A simplistic definition of inflation describes it as being caused by “too much money chasing too few goods”. This downward trend therefore seems to fly in the face of economic logic but the oil price crash in the early part of 2020 together with weak demand for goods and services as a result of lockdown restrictions seems to have kept inflation in check despite the huge inflow of newly printed money. It remains to be seen how demand responds as business emerges from lockdown and what the knock-on effect to inflation is then.

In Europe, the existential financial crisis the EU now faces as a result of the Covid pandemic colliding with its incoherent fiscal policies has forced this protectionist trading bloc towards an acceptance that the only way to save the euro (and indeed the entire communist-inspired, anti-democratic structure itself) is to pool existing debt and agree to unification of debt for future liabilities too.

Germany, with its long history of financial prudence (since the hyperinflation currency crisis it suffered in the early 1920’s anyway) has always found this a bitter pill to swallow and has resisted with all its might.

However, faced with the largest economic crisis in its history (and now barely clinging to economic and fiscal reality) the EU’s leaders have belatedly been trying to agree a rescue fund of 750 billion euros as a means of keeping this creaking and politically outdated show on the road. Simultaneously (and having lost the UK’s substantial contribution to their coffers) they are attempting to agree a budget of 1.1 trillion euros for its next 7 year financial cycle.

The bizarre conundrum here is that the EU desperately needs to stimulate consumer spending as the means of kick-starting economic growth yet, at the same time it needs to agree and impose substantial new tax-raising powers to cover the cost of its salvage operation largesse and its imprudent plans for future spending. Of course, by taking spending power out of the consumer’s pocket means lower discretionary spending which thus defeats the main objective of the exercise. Good luck with solving that one painlessly (it only hurts when you laugh).

In North America, figures released in mid-June showed that US retail sales posted a record monthly rise in May. Official data confirmed a 17.7% rise (far better than expectations) and comprehensively beating the previous record monthly rise of 6.77% in October 2001. So much for all the doom and gloom nonsense emanating from the usual suspects in the grey and murky world of financial analysts.

Better than expected US industrial production numbers in May added further gloss to this optimistic tone. Will these positive numbers be a precursor to the upcoming corporate results season on the near horizon?

As we enter the second half of the year we are moving ever closer to seeing the financial effects of the global lockdown restrictions imposed by governments around the world in their efforts to control the impact of Covid-19.

The inexorable rise of politically-biased fake news is making it increasingly difficult to find reliable, quality information, especially in the USA during this presidential election year. When official evidence can be found it invariably disproves the prevalent ‘project fear’ narrative. Scaremongering in the US media about a second wave of Covid-19 is largely a political device intended simply, in advance of the forthcoming election, to throw more mud at Donald Trump and criticise his suggested mishandling of the coronavirus epidemic. Of course, Trump doesn’t help himself (or us) with his penchant for issuing late night retaliatory tweets which inevitably detract from our search for illumination.

These bogus fairy tales typically lack any supporting evidence and are woven with imprecise adjectives which express unattributed ‘concerns’, ‘worries’ and ‘fears’. Emotive language of this sort is usually a sure sign of straw-clutching intended only to mislead and create a sense of panic.

One example of trustworthy information that came to hand just last week is a useful indication of unvarnished reality. The State of Texas has been named as one area that, if one believes the relentlessly negative narrative, is apparently overwhelmed by a second wave of Covid cases. However, official figures clearly show that Texas (with a total population of 29 million people) has suffered just 2324 deaths since coronavirus first struck. Is that really a reason to panic?

The big reveal will shortly be upon us in terms of the second-quarter financial results season when companies the world over will be releasing their sales and profit/loss figures for the lockdown period as well as divulging their prospects for the future. We will now see the truth of the old cliché; everyone can look good and bella figura when the tide is in but, when it goes out, we can then clearly see who has been skinny-dipping.

Yields on bank deposits and investment in gilts remain pathetically low and, adjusted for inflation, are in fact negative.

In tandem with the financial incontinence of central banks around the world (motivated by governments who are prone to opt for short term, blinkered solutions to long-term problems as a means of deflecting or deferring blame for the pig’s breakfast they have thus far made of financial management and fiscal control) the effect has been to drive investors into equity markets in search of positive returns.

Central banks around the world continue to pump trillions of dollars, euros or pounds (or their local currencies) into the global economy and that flood of fiscal and monetary stimulus appears to have been taken as the green light for investors to buy equities with gay abandon, seemingly regardless of valuation.

As this situation continues, and whilst many a blind eye is being turned to sensibly evaluating investment risk, we seek to take advantage of that scenario but we are intensely conscious that, at some point, the piper will have to be paid. We therefore continue to check the soundness of our holdings on a daily basis.

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I am obliged to Daniel Hannan (the writer and former MEP) for the literary image in a recent essay of his that lit the spark for the hypothesis of this opening paragraph alone:

The global economy can best be pictured as an inverted pyramid which relies upon a relatively small number of well-motivated, well-regulated and reliable countries each of which are similarly dependant on an equally modest number of consistently profitable and reliable companies. It follows that the vast majority of stock market-listed companies worldwide are not suitable for long-term profitable investment.

As we already know, the pre-coronavirus world as a whole was already facing a substantial fall in GDP and the subsequent closing down of economic activity in an attempt to suppress the spread of Covid-19 is highly likely to lead to even further and extreme economic pain. In many ways long-term corporate success (or failure) can thus be likened to the Darwinian concept of survival of the fittest.

We could all name a number of once-great companies that, through a toxic mix of arrogance and complacency, are no longer in existence. The sea change now effected on industry and commerce by this coronavirus pandemic together with the as yet immeasurable knock-on effects (strategic and financial) of Covid-19 adds another layer of complication to future business activity, stock-market valuations and, indeed, survival. Later in this report I will expand upon this theme as it relates to Quotidian’s investment strategy and process.

In the USA the first quarter reporting season is virtually complete and positive surprises still far outweigh the negatives. In terms of the best global markets the US still comfortably leads the way so far this year. Indeed, the Nasdaq is the only one of the world’s stockmarkets to be in positive territory year to date.

Digging a little deeper and with only a handful of results yet to be issued, a clear picture has emerged and shows that, in terms of Sales, 10 out of the 11 market sectors that comprise the US equity markets have delivered positive surprises (in other words their results have been above analysts’ expectations). The only errant sector has been Telecommunications which contains only 4 organisations. Obviously we have avoided that sector.

Turning now to Earnings, all 11 sectors have produced positive surprises ahead (and in some instances well ahead) of expectations. Question marks hang over the Financials and Consumer Services sectors and, again, Quotidian has had no interest in these sectors either.

A more reliable picture will emerge in the second quarter reporting season beginning from early July onwards. This, of course, will cover corporate performance during the ‘lockdown’ period and we await those results with keen interest. In the meantime we remain 90% invested and have cash in hand to deal with any potential buying opportunities and a finger on the pulse if a move to safety is deemed necessary.

In Europe, in mid-May the ECB announced a proposal to undertake a £2 trillion bond purchase programme as a means of providing financial support to the weaker EU countries and help them deal with the economic fallout of Covid-19. Although the term ‘bail-out’ was not used, this financial assistance is in direct conflict with the EU ‘rules’ which do not allow such state support. Indeed, Ryanair were fined last year for apparently being the beneficiaries of such state aid.

We are again treated to vivid proof that apparently rigid and immutable EU ‘rules’ can have their interpretation changed when the proverbial is about to hit the fan. However, the German Federal Constitutional Court (in a deliberately abrupt judgement designed to bring the EU’s attempt at unbridled largesse to heel) declared this programme to be ‘ultra vires’ of the ECB’s remit and therefore illegal and of no force in Germany.

In a rapid but vapid response, and in another vain attempt to convince (although perhaps this could be more appropriately shortened simply to con) a deeply cynical world that the European Union really does have a proper federal identity, the EU then wheeled out a stage managed and televised pantomime starring Angela Merkel (as Baron Hardup; the “deus ex machina”) and Emmanuel Macron (as the Dame: “unattractive, simple and slow-witted”). This charade only served to provide yet a further insight into the EU’s shameless use, abuse and manipulation of unelected but self-appointed ‘power’.

This double act presented a statement that Germany would underwrite a 135 billion Euro rescue package to help the hardest hit EU countries to rebuild their economies (in other words the same horse that had been rejected by the German Constitutional Court but wearing slightly different colours as camouflage).

It is interesting to note that Angela Merkel has long lost her mandate in the German parliament and Macron’s ‘En Marche’ party has also lost its majority in the French National Assembly and yet, despite that, both cling on by their fingernails to a mirage of power but with all the supportive authority of a wet paper bag. How strange that two lame ducks can combine in an attempt to force through a financial plan that has already been declared to be illegal and of no force in Germany (which just happens to be the largest and wealthiest State in the European Union).

In homage to Sun Tzu’s edict to “appear strong when you are weak” their aim was to present an illusion of unity and perpetuate the myth that the Euro is a real currency and a force to be reckoned with. But when one is presented with a threadbare and discredited script, even the best of actors will struggle to achieve a curtain call. The hole in the heart of the Euro has always been the complete lack of EU fiscal unity and communality of debt and so this comedy duo ran for one night only and to an empty house. Empty vessels do indeed make the most noise but, ultimately, they are doomed to sink without trace.

Given the glut of gloomy forecasts (Economics is known as the dismal science for a good reason) in respect of profitable corporate activity (or lack of it) following the global ‘lockdown’, the current positive stock-market action may, on the face of it, seem to be counter-intuitive but it is supported by extraordinary levels of state-sponsored stimulus in terms of both extremely low interest rates and exceedingly high monetary easing. Certainly the US markets have rebounded very quickly from the depths of the February/March downturn but it may well be that the vast and comprehensive financial rescue packages introduced by central banks around the world will be enough to perform the same salvage miracle as was achieved following the great depression of 2007-2011.

In these circumstances it is vitally important to make hay and maximize available profits in what might otherwise appear to be illogical markets in order to build a meaningful cushion of financial safety to counteract the potential of any negative impact from a typical stock-market correction in the future.

Central banks the world over have unleashed a tsunami of financial stimulus into the worldwide financial system and this will certainly inflate asset values in the short-term. That may well be enough to keep the global economy above water for the time being but, in our view, it will lead to painful problems with inflation further down the line.

Simply in order to test the efficacy of our investment processes in that scenario we were prompted to measure the Quotidian Fund’s investment performance against all the other funds in our sector. I can confirm (with a degree of humility rather than boastfulness) that the result of this experiment showed that from a global peer group of 34,917 similar investment funds the Quotidian Fund is currently in the top 450 in the world. The only reason for highlighting this point is that it encourages us to believe that our decision-making systems remain robust and fit for purpose. We are not supporters of the Cult of Personality that has afflicted investment management and its methods since the City became Americanised. Indeed, we are very happy to avoid that marketing gimmick. As a deliberately and determinedly boutique organisation our aim continues to be to provide first class investment performance and high quality personal service to a self-limited number of successful, intelligent and like-minded clients. We have no ambition to become a huge and impersonal investment house and, in doing so, lose touch with our clients or our fundamental business principles.

Some commentators have expressed concern that stockmarkets (and the Nasdaq in particular) have recovered too quickly from their recent precipitous falls but we disagree with that view. Since 1985 there have been 44 occasions when the Nasdaq has fallen by more than 10% in a relatively short period of time (the most recent being from 19th February to 23rd March this year). This latest downturn has been the ninth time that such a markdown has exceeded 25% and the sixth time it has exceeded 35%.

Equity markets have always bounced back and it has usually taken no more than 56 trading days (circa three months) for that recovery to have taken place. The point is that the extreme volatility we saw again between 19th February and 23rd March is not an isolated incident and our proprietary program of technical analysis allowed us to be out of the market and free of exposure to risk from 7th February through to 20th March.

We hasten to add that our technical process is reliable but not entirely infallible and in the normal course of events it gives us trustworthy decision-making signals. However, if there is a ‘flash crash’ (a double-digit fall in just one or two days…..and we have seen three of those in the last 10 years) then the signal can arrive a few days too late and so we simply have to keep our patience, hold our nerve and successfully manage our way out of the negative situation and back into profit.

The whole point of subjecting you to this turgid piece of history is to emphasize that it has been proven time and again that stock-market corrections (down 10%+) or slumps (down 20%+) have never been terminal and, whilst they can be unpleasant, they should not induce one to be fearful or panic-stricken.

As for the financial future post-Covid, it is not going to be easy or straightforward but it will be a successful recovery. In order to avoid the long-term negative interest returns on offer from Building Societies or watch one’s wealth being inflated away in so-called ‘safe’ negative-yield gilts and bank deposit accounts (and thus losing their value in real terms) one’s investments, savings and pension schemes will need to identify positive returns in other asset classes. Over the past one hundred years or so history clearly shows that the most reliable asset class to successfully meet this challenge is equities.

Despite the economic effects of Covid, we are sanguine for the future of profitable equity investment but not blind to the huge economic problems now facing the world economy. Our optimism is based on solid historical evidence together with a belief in the human spirit to respond well to adversity. Necessity being the mother of invention, old and flawed business models will be reviewed and revised, successful new businesses will be established which will take up the slack; unemployment will fall; there will be a Thatcherire surge in self-employment; a new wave of entrepreneurs will emerge; consumer spending will recover and kick-start demand for goods and services to thus complete a virtuous economic circle. In Darwinian terms: only those who fail to adapt, modify, invent and evolve will fall by the wayside.

This brings us rather neatly back to where we began. A small number of well-motivated, well-managed, reliable and consistently profitable companies (combined with fortitude and patience) is all that it takes to produce first class investment returns and beat inflation. Our portfolio is not selected on emotion and does not follow fads, fashions or short-term bubbles. It pays simply to have robust, reliable, tried and trusted investment processes which cut out extraneous, fear-based media noise and thus allows us to make unemotional decisions with confidence, factual corroboration and good timing.

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For the third consecutive month the economic impact of Covid-19 has been the only significant story on the Street and in financial markets globally as equity market-makers continue to struggle to price in the ongoing risk of this woeful virus. This uncertainty will continue until a reliable vaccine is developed to counter the tragic human costs of this coronavirus and until sufficient clarity emerges in respect of the financial effect of progressively lifting the global lockdown.

On the positive side we have already noted the extraordinary levels of monetary and financial stimulus already put in place by central banks around the world both in terms of lowering interest rates and quantitative easing (QE). In the UK, bank rate has now been reduced to 0.10% and elsewhere interest rates have also been pared back to near zero or indeed into negative territory.

As for economic stimulus by way of money-printing (QE) the US Federal Reserve had already led the charge in mid-March with a financial injection of 2 trillion dollars and on 9th April (to ensure that the central message had been loudly heard and clearly understood) they went the full pantomime by adding a further $2.3 trillion to their rescue package. The Fed’s statement to coincide with this additional boost highlighted that it was intended “to enable vigorous economic recovery.”

If there was even the slightest scintilla of doubt before, I think we’ve got the message now!

Rather optimistically its chairman (Jerome Powell) added that “he didn’t see inflation as a problem”. That indicates a complete and, no doubt deliberate, disregard for the basis of economic theory; perhaps what he really meant was “I won’t be here when inflation does become a problem” and so I won’t get the blame!

Last month’s Quotidian report confirmed that we had begun the process of re-entering the equity markets and, from 20th March onwards we slowly rebuilt our portfolio in harmony with daily market movements. As April mutates into May we are now 90% invested and are keeping the balance up our sleeves to cater for the certainty of further short-lived downturns (and potential buying opportunities) or the possibility of another sell-off later in the year.

The first quarter reporting season is roughly halfway through and (from the results that have been released to date) positive surprises far outweigh the negatives. We take this with a pinch of salt as it is much more a reflection of the depressingly low projections and ultra-conservative assumptions made by the multiplicity of innately pessimistic analysts than it is of outstanding commercial progress. I think we should be grateful that their typically unenthusiastic gloominess and inability to price risk allows us to make profits. A far more reliable picture will emerge in the second quarter reporting season beginning from early July onwards.

Finally, and as a canary in the mine for potential problems on the near horizon, there have been siren calls (particularly in the UK) for an early release from lockdown. A salutary thought in that respect: Germany released itself from lockdown on 20th April and was forced to reimpose those security measures on 29th April following a severe spike in Covid-19 infections in just over one week. Much as we would all like our freedoms back, too much too soon might have unwelcome consequences.

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At the risk of stating the blindingly obvious, from economic, fiscal and investment viewpoints the month of March was entirely overshadowed by the Covid-19 crisis. As we become more familiar with the vicious and cruel effects of this virus itself so we become more certain that it will be the predominant factor to affect global financial markets for at least the next five years, if not longer.

The knock-on effects of expansive monetary policies and rigorous social restrictions introduced by governments around the world to counter the unwelcome impact of this coronavirus on the global economy (inter alia, rampant unemployment with its associated financial woes, threats to corporate solvency and to personal freedom together with unwelcome future inflation) will be far reaching and long-lived.

Whilst we are naturally pleased that we were in a position to anticipate the recent significant stock-market crash and move into the relative safety of cash as this coronavirus spread far and wide, the depth of the decline in equity valuations was still surprising and reflected the extreme difficulty that market-makers faced in attempting to price in the risk relating to the time it will take to bring the virus under control and thus limit the economic damage it will create in the meantime.

Exceptional day by day (and, indeed, intraday) volatility was breath-taking. It became a regular feature to see equity indexes move up or down by 10% or more on alternate days and intraday swings in the range of 5% up to 5% down were commonplace too. Volatility at that level is simply untradeable (both on the buy and the sell side) and when pricing mechanisms start to trigger investor’s stop loss positions with that degree of frequency and depth then equities start to cascade down upon themselves of their own volition and price action becomes dysfunctional.

On 31st March 2020 the FTSE100 index closed the month at 5671.96, a fall of -13.81% in the month of March and it now stands at -24.80% for the 2020 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st March shows an uplift of 1.91% for the month of March itself and the Fund is up 7.31% for the 2020 year thus far.

It was rather flattering to read a comment in one of the better financial journals that “only a handful of investment managers could have fathomed this scenario for global markets” but, having sought the relative safety of cash on 7th February and thus saved ourselves from the circa 35% fall in equity valuations that ensued, we were and still are far from complacent as we fully recognised that we now had the even bigger challenge of identifying an opportune moment to begin the process of re-entering equity markets and creating worthwhile profits again. As stated in last month’s report, it was clear that there would certainly be a huge buying opportunity once all the emotional noise dampened down, the Chinese smoke and mirrors cleared away and Covid-19 was seen to be under control.

As governments the world over sought to stem the rising infection rate and the ever-increasing death toll in its wake, the potential economic catastrophe was becoming more apparent and their initial fiscal response was to make substantial cuts in sovereign interest rates. In the UK, for example, our rate of interest was cut to a record low of 0.10%. Considering that the UK’s average rate of interest in the period 1971 to 2020 has been 7.40%, today’s figure is incredible and fully reflects the fear of the profound economic damage that could flow if this pandemic is not brought swiftly and surely under control.

On the last day of February’s trading the US Federal Reserve had announced that it would “use all the tools available to us” to support the economy and on 15th March they were true to their word. Not only did they cut interest rates to the bone but they also injected a new round of financial stimulus by way of quantitative easing.

To ensure that the central message (that it would make sure that banks had enough liquidity to help businesses survive the impact of the coronavirus pandemic) was clearly understood, the Fed stated that it would buy $500 billion in US Treasury Bonds and $200 billion in mortgage-backed securities over the next few months in an overall financial rescue package worth 2 trillion dollars. Governments around the world have been emboldened to follow the US lead with their own stimulus programmes.

It is interesting to write that $2 trillion figure down in order to appreciate the number of zeros involved and thus the size and significance of the number. However, it is even more instructive to consider that if you were to pay one dollar every second then you will have paid a million in about 12 days, a billion would take around 32 years and just one trillion would take roughly 31,710 years. Some stimulus!

Having seen the same tactics employed to support the global economy’s recovery from the financial crisis of 2007-2010, we can now see, in broad terms, how this is likely to play out. In the short-term it will inflate asset values once again (although that will not simply be an easy glide to sunny uplands; undoubtedly there will be a number of bumps in that road) but in the longer term it simply kicks any underlying problems further down the road.

Just to expand briefly and in simplistic terms here upon our method of investment decision-making: Using a proprietary amalgam of fundamental and technical analysis we study the financial information contained in a target company’s accounts and its quarterly reports to make a judgement as to whether the figures and commentary therein suggest any potential problems (and, if so, whether those issues relate to short-term liquidity matters or long-term solvency concerns). We then turn our attention to the organisation’s Earnings per Share and its ability to maintain an attractive EPS level into the future. In the current economic climate it is even more essential to focus on whether its core revenue flows will remain robust and strong enough to see it through the Covid-19 emergency.

Our in-house and privately-operated system of technical analysis then comes to the fore in order to determine the most opportune price points and timing for entry or exit to its shares.

By 20th March, our exclusive analysis was showing us positive signals and so we began to buy back in to equities. I hasten to add that our self-developed analysis systems have consistently produced successful results over the past 30-odd years and we are entirely comfortable with their efficacy (but they are not infallible when markets are so fragile, volatile and easily spooked). To begin with, we therefore dipped our toes back into the market and will continue to rebuild our portfolio in sympathy with ongoing market conditions and in harmony with the risk environment becoming more balanced, equitable and positive.

As at the end of March we are currently 40% reinvested in equities and, so far, the markets we are invested in have been rising. Long may this return to a more positive attitude in equity markets continue.

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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%), Booking.com (+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.