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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.

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From the beginning of October through to the end of 2018 global equity markets went from drama to pantomime and, in the final fortnight of the year, to farce.  The week before Christmas was the worst single week in world markets since 2008 and the last quarter of the year saw the worst equity market performance for over 60 years.  Not one of the global stock-markets ended the year in profit.  Indeed, the majority were severe double-digits in the red.

As stated in our November report we felt that, in the short term, there was an equally balanced chance that the stock-markets might re-test their recent lows again before a more substantive and lasting recovery and that is exactly what happened. Whilst the first two weeks of December were relatively benign, equity valuations returned to the frenzied and unfocused mark-downs seen in October.  When one sees an index being degraded by 6% (with individual company valuations being reduced by 10% or more) in a single day it is a clear sign that the market has temporarily lost touch with economic reality.  Trading in these market conditions would be no better than guesswork and so we held (or built) our positions and kept our patience.  It does not pay to panic but, conversely, it is rewarding in the longer term to control and manage the understandable fear that such wild market conditions can sometimes generate.

In the last two weeks of December equity valuations were relentlessly hammered downwards regardless of the individual company’s strength.  By the Christmas break, stock prices generally had reached levels that suggested bankruptcy risk.  In November we gave you a comprehensive list of our investment holdings and their up-to-date financial positions.  It was and still is clear from those figures that the companies we are invested in are not liquidation prospects and are far from being on the road to ruin.

Our fundamental aim has always been to “be in the right sectors of the right markets at the right time”.  Of course, to a degree that is an idealistic aim;  markets are dynamic and today’s ‘best sector’ can become tomorrow’s also-rans.  We therefore keep this situation under regular observation by running a quarterly check on all global markets in order to identify those sectors that are regressing and uncover those sectors that are upwardly mobile.  Given the performance of market sectors over the past three years, it is hardly a surprise that we are invested as we are…….our holdings have indeed been the ‘best of the best”.  Perversely, these have also been the hardest hit by the mark-down in valuations since the start of October. 

In our considered opinion this is a passing correction based more on political influences rather than economics. 

On 31st December 2018 the FTSE100 index closed the month at 6733.97.24, a fall of -3.61% in December itself and it now stands down at -12.48% for the 2018 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a fall of -12.04% for the month and the Fund is now down -21.56% for the 2018 year to date.

As far as future performance is concerned we still feel that the FAANGS have some way to run. For example, Apple still has more cash in hand than the US government but, sadly, the financial media, in its unseemly haste to specifically criticise that company, tends to mis-report Apple’s message. Apple’s CEO stated very clearly about 6 months ago that Apple would now be focused on selling fewer iPhones but at higher prices and their third quarter 2018 results prove that they have succeeded thus far in that strategy. It hasn’t stopped the knockers from repeating the mantra that Apple is failing because it is selling fewer phones!

However, Apple is no longer just focused on iPhones; it is steadily improving in the lucrative music streaming market (it currently has 30 million subscribers) and is moving into TV. This tends to be ignored or go unreported by the relentlessly negative narrative preferred by the usual suspects.

On the first trading day of the New Year, Tim Cook (Apple’s CEO) gave fair warning that sales in the last quarter of 2018 had been lower than expected (citing the recent short-term strength of the US dollar and the impact of the putative trade war with China) and that revenues for the 4th  quarter were now anticipated to be $84 billion as opposed to the previous estimate of $91 billion.  Naturally, the market took a negative view of that but it is worth noting that on the two previous occasions that Apple has made such a lower earnings statement the actual numbers then proved to be higher that their guidance figure and were therefore a positive surprise (prompting its share price to soar again). Apple’s actual results will be issued on 29th January and we will, of course, be watching them very closely.

Personally, I am not a fan of Facebook and certainly not an admirer or supporter of its CEO (Mark Zuckerberg) but there is no doubt that the company has been a cash cow and, despite its detractors, it seems set to continue to generate high revenues and profits in the foreseeable future.

Amazon and Netflix are also dominant in their fields and are still just scratching the surface of potential future profitability whilst Google dwarfs the search engine field. 

These companies remain largely well-managed, well-motivated and profitable. If and when we detect signs of commercial weakness then we will reduce/remove our investments in any of these organisations. At the moment though they are still flying high despite the current downgrading of their share prices.

Likewise, the same philosophy will guide our actions in respect of our other current holdings and if we detect any potential up and coming areas to more profitably invest in then we will change horses.

On the other side of that coin and as an example of the dysfunctional nature of the last quarter’s market movements, shares in Tesla (a company that has a potentially first class product but has a history of voraciously eating its way through working capital and has yet to turn a profit) have been upgraded over the last quarter whilst established and profitable companies have been substantially marked downwards. How strange to see that on the first trading day of the New Year Tesla’s shares have suddenly and substantially plunged!

As mentioned in our October report, there is no obvious or logical economic basis for this severe downgrading in equity prices and we felt that ‘behind the scenes’ political issues were the more likely proximate cause. No doubt the perspective of time will ,in due course, shed greater light on that. In the meantime, in spite of the Armageddon-like tone adopted by much of the ‘serious’ financial media, there are still positives to be found in the financial results from large swathes of the real corporate world.

In the USA, unemployment continues to fall and now stands at just 3.7% (which is getting close to a level regarded as ‘full employment’). Consumer spending is buoyant, inflation is under control at 2.2% (having been 2.9% a year ago) and US GDP is running at an annualised rate of 3.4%.

By contrast, UK GDP for the 2018 year is expected to be running at 1.5% whilst the self-congratulatory Eurozone (despite benefitting from substantial quantative easing) is only on a par with that.

China’s industrial production has fallen to 5.4% (from an expectation of 5.9%) and its retail sales figures (a reflection of consumer spending and consumer confidence) stand at 8.1% (down from an estimate of 8.8%). These lower than anticipated numbers may well be an illustration of the impact on China of the US trade  tariffs imposed earlier in 2018.

On that note, there had been news at the start of December of a thawing in trade relations between China and the USA with  both parties expressing keen-ness to structure an equitable free trade deal. Indeed, this caused global markets to have an immediate and very positive reaction. However, the media then chose to wilfully misreport a short series of communications from the US side and this upturn in equities was quickly reversed. However, on New Year’s Eve the US issued a statement to say that there had been substantial and constructive progress towards a comprehensive trade deal and, if this indeed proves to be the case, then it would provide a very positive and sustainable boost to global (and particularly US) equities.

At its mid-December meeting the Federal Reserve, as expected, did increase US interest rates by another 0.25% (taking them up from 2.25% to 2.50%). However, the Fed chairman made much more dovish comments about the direction of future interest rate policy and made reference to just 2 increases next year rather than the 3 that had been anticipated. 

Controlling inflation is one of the Federal Reserve’s main functions and maximising employment is the other. In the knowledge that US inflation had fallen from 2.9% down to 2.2% by the end of 2018 and US unemployment has also fallen to just 3.7% there is a strong argument to suggest that the Fed will leave rates untouched through 2019 (and perhaps should have left rates at lower levels earlier in 2018 too). In fact, the Fed Yield Gauge now points towards a cut in interest rates by the first quarter of 2020 if not earlier. Certainly there is substantial political pressure for that to be the case sooner rather than later and any sign of a slower/lower pace of interest rate policy will be good for equity markets.

A lot of hot air was expended last year in relation to the yields on 10 year US Treasury Bonds (the US version of gilts). In comparing the relative attractiveness of Bonds v Equities the most common measure used is the return on 10 year US treasuries.  If the yield on these bonds goes above 3% then (to some investors) bonds become more attractive and they will exit the stock-market in favour of obtaining that yield. In fact the 10 year yield did climb to as high as 3.30% at one stage last year but this was not the cause of a mad dash out of the stock-market. Those who were predicting disaster for equities when the 10 year yield did reach that 3.30% level are strangely quiet now that the yield has fallen again to just 2.70%. Another indication of the bias and politically motivated influences that have dogged equity markets over the past three months. Project Fear is alive and kicking in the USA too.

The 2018 fourth quarter reporting season will begin next week and in the course of January we will see the latest financial figures from our corporate holdings. Overall, we expect these numbers to be a continuation of the positive returns seen throughout 2018 and, if that is the case, then they should motivate a much more upbeat and progressive revaluation of those companies whose equity valuations have been most badly affected by the October-December downturn.

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The counter-intuitive frenzy of downward pressure on equity prices which had begun early in October continued to infect global stockmarkets throughout much of November too.  The 2018 year has not been particularly positive for UK, Far Eastern and European equities and at the end of September only the American markets (the Nasdaq and the S&P500) were in profit for the year.  However, they were then the hardest hit by this latest correction. At one point during November we noted that of the preceeding 37 trading days, 24 of them had been deeply negative whilst the remaining 13 days had been only modestly positive.

As illustrated in our October report, there was no logical economic basis for this severe downgrading and we felt that the hidden hand of politics was the more likely proximate cause.  Indeed, the last time global markets suffered this type of chaotic markdown was during the first month of 2016 when over 20% was wiped off stock valuations.  Much later, it emerged that the source of that short period of mayhem could be found in China (where local rules allow for gross over-leveraging by Chinese investors) when investors on the wrong side of what began as a typical small correction were unable to meet margin calls and so were being forced to exit their positions in a hurry.  That situation inevitably creates a domino effect.

In the absence of any negative economic evidence to justify the October/November downgrades, it crossed our minds that the root cause of this (much as it was in 2016) might also be found in China and be political in nature rather than economic. It is clear that the additional tariffs imposed by Trump on China/US trade earlier this year have already had a severely detrimental effect on the Chinese economy and, in line with his usual approach to negotiations, Trump has been threatening even more punitive measures.  The Chinese, on the other hand, are fully aware of the enormous scale of their investments in US companies and the market-moving power their huge shareholdings give them.

As a communist based managed economy, the Chinese are perfectly used to manipulating exchange rates to their own trade advantage and it is only a small step from there to manipulating stockmarkets in a tit-for-tat response to tariffs. As we approach the latest deadline for the implementation of yet more tariffs, it is conceivable that political activity in China could have been behind this recent downturn.

So much for an overview of the fundamentals; now a little glance from a technical viewpoint.

Whilst the economy’s fundamentals determine the stock market’s medium/long term outlook, technical analysis can help in taking a view on the stock market’s short/medium term outlook. At Quotidian we focus on the medium and long term but for the purpose of this report let’s take a look from the long term, to the medium term, to the short term.

The following comments are all based on the US economy and US markets and so are a realistic proxy for global markets (which invariably play “follow-my-leader” with the US).

Our long-term outlook remains bullish. This bull market will probably last until Q2 2019 at least, after which there could possibly be a downturn.  As we have shown in the past, if a real (rather than an artificial) downturn presents itself then we are perfectly happy to revert to cash until the storm passes.  We see the current stock-market situation as a synthetic markdown and (in light of so many positive company results for the 3rd quarter) we are prepared to hold our nerve.  In our view it would be entirely wrong to panic and sell out and, in so doing, turn a temporary paper devaluation into an actual financial loss.

The economy and the stock market both move in the same direction in the long term, hence leading economic indicators are also long-term leading stock-market indicators. Most leading indicators are still improving.  However, the US economy is getting close to “as good as it gets” which suggests that it may start to deteriorate later in 2019.

Our medium term outlook (next 6-9 months) remains bullish.

Our short-term (1 to 2 month) forward view suggests there is a 50% chance that the stock market will pullback again before heading higher but, in our considered opinion, head higher it will to reflect the economic reality of demonstrably positive corporate performance.   

So this is where we believe we are right now:

We’ve seen the substantial downwards correction in October and November; we had the typical 60% retracement (upwards bounce) in the first three or four trading days of November and since then we’ve suffered the re-visitation downwards to retest the recent lows. In the final week of November we had a very positive upwards movement again and this is exactly where we stand today. 

We believe that markets are now on the way back up (but there is an equal chance that we may re-test the recent lows again before a more substantive and lasting recovery). The fundamentals are positive and on our side; the technicals are evenly poised but we think more likely than not to be biased in our favour too. Isn’t it strange how these patterns tend to repeat themselves; they are not entirely infallible but recognisable nevertheless.

An investor is always best advised to focus on the medium term and the long term. Short term judgements are in danger of being too greatly influenced by emotion and decisions taken when under the influence of fear can very often be poor ones.

Whilst writing this (on Sunday 2nd December), breaking news from the G20 meeting currently taking place in Argentina suggests that there has been a rapprochement between the USA and China on trade talks. The threat of further tariffs being imposed on 1st January has now been removed and it would seem that all is now sweetness and light. It will be very interesting to see how equity markets respond to this news. If stock-markets now turn quickly upwards again on the back of this trade breakthrough then that would add credence to the theory expressed above in respect of the underlying cause of this period of market negativity.

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As I’m sure you are already aware, October has been a dismal month in global stock-markets.

You will, of course, have seen the carnage in equity markets all around the world over the past three weeks with days of very severe price mark-downs occasionally interspersed with similarly large upswings. Overall, though, the general trend has been profoundly negative.  Naturally, Quotidian’s performance has been adversely affected in the same way as the market and all other equity-based funds.

On 31st October 2018 the FTSE100 index closed the month at 7128.10, a fall of -5.09% in October itself and it now stands down at -7.28% for the 2018 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a fall of –15.28% for the month and the Fund is now down -6.06% for the 2018 year to date.

We have seen this sort of remarkable volatility and tumultuous price-action many times before; it is an inherent feature of equity markets and a regular occurrence. It can, indeed, be unnerving whilst it’s happening but valuations inevitably recover. Earlier this year equity markets went through a 10% correction late in January and had recovered in full by 26th February.  Similarly, in just the first few trading days of 2016 markets suffered a 20% correction but had recovered to their previous highs by 6thApril that year. 

At times of such excessive and relentless turmoil it is always worth revisiting and reminding oneself of the basic principles of equity investment.  Fundamentally, equity valuations and pricing are a reflection of a company’s current profitability, its prospect of future profitable growth and the relationship between the demand for and the supply of its shares.

Valuations can be and are affected by non-economic considerations but nothing particularly fresh in terms of political news has emerged that would cause real panic to disturb and distress stock-markets.  Markets have known for quite some time about the potential economic effects of Brexit (and, on balance, we believe these to be much more positive than negative), and the Italian budget issue with its potential knock-on effects on the Eurozone has been well reported.  The threat of trade wars is old hat as is the existence of substantial sovereign debt. All are well-worn, repetitive and tired excuses for negativity.

With that in mind, the speed, severity and indiscriminate nature of the price mark-downs suggests to us that much of this correction is synthetic.

On the subject of putative trade wars we have already seen positive results achieved between the USA and Japan, South Korea, Canada and Mexico all through the use of Trump’s standard tactics.  A new and balanced trade deal will ultimately be achieved between China and the USA too after the necessary face-saving preliminaries have been duly observed. It has been obvious for many years that China has regularly manipulated its currency in order to make the prices of its exports to the US attractive.  This blatant curreny manipulation continues to this day; it must be simply coincidence that in the six moths since Trump first imposed higher tariffs on Chinese goods the yuan has depreciated in value by 10% against the US dollar.  How remarkably strange that this is exactly the same level as the initial round of tariffs.

Expanding upon the current market turbulence, just consider these points:

  • As an illustration of the recent stock-market climate, on 23rd October the Nasdaq index opened flat but then dropped by over 3% in less than half an hour. By close, however, it had recovered to finish just marginally down. That incredible volatility cannot possibly relate to economic reality or individual company prosperity.  It is symptomatic of the current absurdity. 
  • One of the companies we invest in issued a new product on 19th. It was well received but one analyst took the first three days sales figures and extrapolated those three days (two of which were Saturday and Sunday) to produce a ‘serious’ report which concluded that annual sales would be disappointing and thus justified downgrading the shares. At best we would suggest that this is implausible and no better than guesswork (or an analyst trying to make a name for himself) and at worst this is breathtaking idiocy. Sadly, this is also symtomatic of temporary periods of market myopia.
  • In the first week of October, official figures were released showing that the US economy had expanded at an annualised rate of 4.2%.  In itself that is an extraordinary level of economic growth and, when compared to global rates of growth, this is stellar. Taken with other economic indicators it also gives every reason to suggest sustainable growth in the USA.
  • The Federal Reserve (the Fed) has been increasing US interest rates from a position of strength not as a reflection of economic panic and these increases are at a snail’s pace so as not to spook the equity markets.  An age-old economic adage holds that when money supply tightens (that is, when it becomes more difficult and more epensive to borrow money) then stock-markets tend to plateau or gently decline; but that does not infer falling over a cliff.  It may be that the Fed has pushed interest rates higher at too fast a pace but striking a balance between maintaining economic growth whilst also controlling future inflation is fraught with difficulty and the results of their current policies will not become clear for a year or two.  Either way it doesn’t satisfactorily explain the recent mayhem. Yes, the 10 year US Treasury yield has just slipped slightly above 3% and this will cause some investors to switch from equities into bonds but we’re not talking here of a mass exodus.
  • In recent years there has been an exponential growth in the use of computer-activated trading based upon man-made algorithms (algos). These programs automatically trigger unthinking responses to share price movements (usually on the sell side) and simply create a domino effect which magnifies and aggravates market downturns. 
  • Closely related to algo-trading is another relatively recent phenomenon known as High Frequency Trading (again, of course, computer driven) which facilitates the placing of huge volumes of trades in timescales measured in micro-seconds. The aim is to create tiny amounts of profit from a sequence of very large trades (both in size and frequency) which may be opened and closed again in a matter of mere seconds.  The effect of this method of trading is that it manipulates the market and disorts its real pricing mechanism which always used to simply be based on factual supply and demand.  In our view High Frequency Trading amounts to market abuse; we feel that it lacks integrity, is immoral and should be prohibited.
  • October was the start of the third quarter earnings season and these earnings and projected future sales figures were expected to be strong…..very strong.   Indeed, over half of the asset holdings in our fund have already now reported their figures have all been well above forecasts.

A cynic could take the view that market-makers might be eager to encourage onto their own books a substantial number of shares in ‘obviously profitable companies’ in advance of their earnings releases; and if they can buy those shares at fire-sale prices then so much the better.  Creating fear and panic selling would be an obvious way to motivate some investors to dump shares at deeply discounted prices and then those very same market makers will magically cause prices to slowly rise again and thus make a huge profit for themselves.  Cynical?….yes.  Crazy or paranoia??….No.  It’s the reality of the marketplace!

The incredible level of imagination or invention needed to translate positive results numbers into a negative and pessimistic narrative simply in order to justify share price reductions can be quite astonishing.

Fourteen  of the 22 individual companies in which we hold shares have now reported their third-quarter results and, without exception, all of these have produced profits (earnings per share) higher than market analyst’s expectations (and six of them have been very much higher!).  We anticipate a similar picture as the remaining companies in our portfolio release their figures too.  The indiscriminate marking down of their share prices should therefore be a temporary (but typical) market blip. 

We haven’t sold anything and so we haven’t consolidated a temporary paper price-cut into an actual financial loss. Quite the reverse in fact; instead, we’ve been topping up a number of our holdings at bargain basement prices and in the longer term that is a winning philosophy.  

We anticipate that their temporary market prices will turn again to reflect their intrinsic maket value before too very long.  We also remain entirely confident in the constituent parts of our portfolio.  If and when that confidence changes then we change the relevant holding in the fund.

The best way forward is to keep one’s head, keep emotions in check and let the current madness pass.

As a final thought to reflect on.  On 4thOctober our oldest and longest-standing client was called to join the heavenly choir.  He would have reached the age of 90 next month and has been a Quotidian investor for nearly 30 years.  It is both poignant and relevant to recall his reaction to the many and typical points of turmoil in the stock-market cycle over that period of time.

Whenever equity markets hit turbulence or went through a period of correction he would be the first to telephone and the conversation was always exactly the same:  “Courage, mon brave; we all know that markets correct once in a while; I trust you implicitly and I’m happy to leave it to you to get on with managing it through; it’s always reassuring to know that the pilots are in the plane too.”  That situation remains the same; our own capital sits alongside yours in the Fund and is subject to exactly the same same investment performance.

We salute his intelligence and grieve his passing.

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More often that not the final quarter of the year tends to be the most productive and profitable from an equity investment viewpoint.  Perversely, September has a relatively poor historical record of stock market performance. Of course, these comments are generalisations based on bygone records and I can find no cogent or logical reasons to explain this phenomenon.  The best I can come up with is that the markets pause for breath in September in order to prepare themselves for the anticipated final quarter uplift.

Having said that, with the exception of the US markets global equities have largely been under a cloud for 2018 thus far.  In particular, the UK stockmarket has been hobbled by the ongoing grind of Brexit negotiations.

In his pretentiously entitled  ‘State of the Nation’ speech this month (and with no hint of irony) Jean-Claude Juncker declared that over the next ten years the Euro will become the global currency of choice.  With a sense of bravado bordering on idiocy he seriously asserted that a currency unlikely to still exist in 10 years’ time will usurp the US dollar as the world’s predominant reserve currency.  Group-think bubble or blowing bubbles?

If nothing else, it casts a ray of illumination onto the inner workings of the EU and the delusions of grandeur that permeate its upper echelons of power.  The Euro was hastily cobbled together and prematurely introduced towards the end of 1995. Using the EU’s own data, in 1999 it accounted for 20% of global currency reserves.  By 2004 it was close to 25% of the world’s reserves but by 2017 it had fallen back to 19.90% again. 

Indeed, since 2009 it has fallen 3% and continues to fall as a percentage of global reserves; but why let the EU’s habitual and typically inelegant variation of the facts interfere with hubris.  Hubris, of course, is often rapidly followed by nemesis; there is more chance of the Monopoly money issued by the Reserve Bank of Toytown ever becoming the world’s reserve currency.

Juncker was shown on television earlier this month literally staggering and stumbling from one meeting to the next (needing a man on either side to hold him upright).  Following that remarkable episode the EU felt the need to issue a statement explaining that J-CJ apparently suffers from bouts of sciatica.  Unkind commentators have suggested that these bouts occur in direct proportion to his consumption of champagne.

Whilst Brexit continues its weary path towards March 2019 the UK equity market will remain in thrall to Juncker and his merry men.

On 3oth September 2018 the FTSE100 index closed the month at 7432.42, a rise of +1.33% in August and it now stands at -2.03% for the 2018 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a rise of+1.08% for the month of August and the Fund is now up +10.88% for the 2018 year to date.

Since 1972 there have been 48 referendums on the EU by a variety of its member states.  It is an interesting and revealing fact that every one of those that went against the EU was re-run “until the electorate gave the right answer”.

With that as the background, the EU’s strategy in relation to Brexit has been simply to try to force a second referendum.  It’s tactics in that aim have been to deliberately obstruct and frustrate progress towards an equitable settlement, to create and focus on synthetic  ‘problems’ in order to divert attention away from real issues and generally to waste time as a means of arriving at an artificial cliff edge.  All this has been accompanied by over-emotional jargon designed simply to engender fear as opposed to using more pragmatic language to better explain and clarify the pros and cons of the UK’s decision to leave the EU project.

Simultaneously and with increasing vigour, the EU and its gang of ‘useful idiots’ (viz. the Governor of the Bank of England, the head of the IMF, committed high net worth remainers and swathes of the visual, aural and written media) has choreographed a constant drip of negative propaganda liberally laced with disinformation and threats.  These seeds of doubt are intended to sap our will to continue by creating the impression that escape from the EU would be too difficult, too expensive and not worth the effort.   Exactly the same tactics were used in the past to overurn the democratic anti-EU referendums referred to earlier in this piece (particularly those in Denmark, in Ireland and in France);  they worked then and the EU believes that they will work now.

In another sphere, but equally important from an economic viewpoint, on 25thSeptember the EU proposed a new payments system (a European Monetary Fund) designed purely and simply as a device to circumvent and attempt to wreck the sanctions that the US has imposed upon Iran.  It is generally accepted that Iran is the leading sponsor of terrorism in the Middle East and further afield.  Towards the end of his tenure, Obama’s removal of sanctions on Iran in return for a worthless promise to de-nuclearise was one of his ‘signature’ deals.  Iran was given renewed access to £100bn which was promptly used to develop its nuclear strength.  At best Obama was naïve and at worst he was reckless and made the world a more dangerous place.

The EU’s new payment system and its dubious intent sends a very clear message that Europe will plumb any depths in order to save its trading relationships with Iran regardless of the wider risks.  In so doing it illustrates clearly that the EU sees financial protectionism as more important than the cost in human lives.

Despite the EU’s typical back-stabbing and underhandedness (and in spite of the sniping and negative comment that he attracts from those areas of the media that would prefer to see him fail) Trump’s economic successes continue to accumulate.  Having terminated the North America Free Trade Agreement earlier this year (an unbalanced trade agreement involving Mexico, Canada and the USA which was created by his economically myopic predecessor), a new and fairer (to both sides)  trade deal was agreed between the US and Mexico. Negotiations are continuing with Canada to include it in the new pact and I have little doubt that Canada too will join this fresh and equitable trade pact later this year.

Shortly after taking office, Trump also withdrew from the Trans-Pacific trade treaty (TPT)  set up by the previous US regime.  It was announced on 27th September that Japan and the USA will now open negotiations on a bilateral trade agreement between the world’s first- and third-largest economies.  This represents a significant change of attitude by Japan (a change which may have some marginal connection with Trump’s threat to impose punitive tariffs on Japan’s motor car exports to the US.  The world is now entirely familiar with Trump’s tactics and (given the huge importance of the American consumer to world trade) there is no doubt that they work.  A realistic new trade deal will now be struck and one could reasonably conclude that the positive end justifies the means.

This month also witnessed news that South Korea and North Korea are preparing to enter into a trade agreement (unthinkable until very recently and a rapprochement that was instigated by President Trump).

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From an investment perspective August has historically been a slow, tedious and dismal month featuring very low volumes of equity trading which leave stock-markets open to volatile intraday movements and day to day see-saw action.  This year has been no different.

In theory, of course, equity prices should reflect a company’s current profitability and its prospect of future growth in profits.  In practice, however, prices can be manipulated to reflect market-makers’ interpretations of political events (or natural disasters) and so, particularly during periods of low activity, share valuations can fluctuate wildly day by day.  Ultimately though, economic fundamentals will reassert themselves and shares prices will reflect the laws of supply and demand.

One of the skills of investment management, therefore, is to recognise the difference between share prices based on the emotional interpretation, corporate opinion and financial self-interest of market-makers as opposed to prices that reflect economic reality.

On 31st August 2018 the FTSE100 index closed the month at 7432.42, a fall of-4.08% in August and it now stands at -3.32% for the 2018 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a rise of +3.63% for the month of August and the Fund is now up +9.84% for the 2018 year to date.

I have attached to my covering email a screen shot of the 2ndquarter results for all our current holdings. You will see from this that we presently hold shares in 22 individual companies.  Of these, 21 have produced figures that are ‘positive surprises’ (being above market expectations) and only 1 which marginally missed its estimates. As markets returned to normal volumes of trading in the last week of August that positivity has been reflected in their share valuations.

During August the problems in Turkey’s economy have become even clearer and it is obvious that these issues have developed as a result of persistently inept financial management from its ego-driven President Erdogan.

The Turkish lira has fallen in value by very nearly 40% this year to date vis-à-vis the US dollar.  This should make its exports more attractive to the US market but Turkey and the United States have been embroiled in a fractious dispute focused on an American preacher who faces being tried on terrorism charges in Turkey.  Diplomacy has failed to achieve an equitable resolution.

Never one to miss an opportunity to gain a negotiating advantage by kicking a man when he’s down, President Trump has therefore stymied that potential area of financial relief by doubling the tariffs on Turkish exports arriving into America.  It gives a new, fuller and more profound meaning to the phrase ‘being trumped up’.

The wider economic implications relate to the flawed currency that is the Euro. European banks areup to their necks in Turkish debts; Italian banks are exposed to Turkish liabilities to the tune of $17 billion;  French banks: $38 billion and Spanish banks: $83 billion.  Whilst I do not have relevant figures for German banks I have no doubt that their numbers would also show a worrying degree of exposure to Turkey’s indebtedness.

The Lira’s collapse may be forewarning an implosion in Turkey’s economy as a whole and its debt structure too which, in turn, is already creating substantial money inflows to the United States and stress-testing the Eurozone’s viability to withstand Turkey’s potential default.

However, Italy poses an even greater threat to the Eurozone’s stability.  The European Central Bank will be reducing its Quantitative Easing (‘QE’) programme by half in October as a precursor to ending QE altogether on 31stDecember.  From 2019 onwards there will no longer be a lender of the last resort in the Eurozone.

The Italian government has promised to effect fiscal expansion equivalent to 6% of Gross Domestic Product (‘GDP’).  The EU, though, wants to impose fiscal austerity and budgetary control upon Italy but, with a large degree of justification, the Italian government will not accept that.  Italy is not the economic basket case it has historically sometimes appeared to be; it still comprises the EU’s second largest concentration of manufacturing industry and it has a current account surplus of 2.8% of GDP.  Italy is also a net positive contributor to the EU and, whilst its sovereign debt now stands at 132% of GDP (which is an area of vulnerability), it would only risk insolvency because the EU will no longer have a lender of the last resort from 1stJanuary 2019.

Thereafter, any bailout would require the backing of the European Stability Mechanism (‘ESM’) and, as we saw with Greece, the ESM imposes profoundly stringent terms and conditions designed essentially to protect German banks from their own bad debts and to beggar (I think that’s the correct spelling) the ‘offending’ country.

Italy would certainly not accept the draconian terms forced upon Greece and it has already put in place a parallel currency which could be introduced to replace the Euro. If this were to happen (and the new Italian government gives every indication that they are prepared to act assertively) then the structural flaws in the Eurozone would be exposed yet again and Italy’s parallel currency would subvert monetary union from within. 

Italy plans to rebuild its dated infrastructure (and the disastrous collapse of a road bridge in Genoa last week provided stark evidence of the pressing need for that) without budgetary constraints. 

The Italian government has cited “The Golden Rule” as its means of funding the expenditure it intends to make on renewing infrastructure.  In this sense the ‘Golden Rule’ was a device instigated by the slippery, one-eyed and wanton Gordon Brown (once the UK’s financially incontinent Chancellor) and which, by dubious mathematical sleight of hand, excludes public expenditure from the national budget deficit. 

Those of us of a certain age will recall a somewhat different definition of The Golden Rule: “Those who have the gold make the rules”.  In the EU’s case, Germany has the gold and the control over it.  A trial of strength is looming therefore between Italy and its new government (which, for a refreshing change, has not been imposed by the EU and therefore does not contain EU supporting placemen) and the Brussels/Berlin axis; a test of will which could bring down the fragile Eurozone banking system (and cost Germany around 2 trillion euros in loan defaults).  Interesting times.

The latest in the Brexit saga has been the EU’s assertion that British intelligence has been bugging EU working party meetings and had thus penetrated the inner circle of the EU’s negotiators.  By coincidence this revelation came on the very same day that Theresa May was meeting with Angela Merkel in a ‘hastily arranged’ attempt to sell her anaemic ‘Chequers’ plan.  When it comes to negotiation and salesmanship (or indeed any social interaction) miscast May resembles the stiffness of a poker but contrives to radiate nothing even of its occasional warmth. 

In light of the problems now facing the EU from both Turkey and Italy, any UK negotiator worth their salt would now use the blunt instrument of time to put pressure onto the EU.  Despite its arrogant and aggressive approach, the EU needs a workable Brexit arrangement far more than the UK does.  A Brexit deal should therefore be ‘kept on the long finger’ (as they say in Ireland when they mean ‘kept waiting’ or ‘deferred’) to avoid making any agreement until the challenges posed to the EU by Turkey and Italy have played out.

The shabby Brexit letter issued by Toothless Theresa in mid-August is yet a further salvo in Project Fear and is shameless in its negativity, mendacity and bias.  When the UK needs the Iron Lady what it has is Polythene Pam; the weak-willed Myopic May who now lacks even a scintilla of credibility.  In the season of A-Level and GCSE results her tawdry missive earns an A* in the Art of Deception.  Worse still she is backed up by Fireman Sam, the half-hearted, hapless Hammond who is doing his utmost to hinder progress towards successful Brexit negotiations.

Taxes paid by the 26.7 million people working in the UK’s private sector pay for the salaries, pensions and expenses of the 5.4 million people employed in the public sector (teachers, police, firemen, doctors and nurses, politicians and civil servants).  That being so, is it too much to ask our civil servants (the clue is in the name) and politicians to respect democracy and give effect to the majority view rather than pursue their own personal wishes, opinions and agendas.

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The main issues of investment significance this month have both emanated from the United States; one reflects positive corporate strength and the other signals economic vigour.

As I write, the second quarter reporting season is in full swing and, to date, 245 of the companies that comprise the S&P index have reported their latest results.  Of these, 216 (88.9%) have issued positive earnings numbers that are well ahead of analyst’s estimates and 180 (73.5%) have also produced higher than expected sales figures.

In addition to these wide-spread corporate successes the latest statement on US Gross Domestic Product (GDP) was released on 27th July and showed that the US economy had increased at an annualised  rate of 4.1 percent in the April-June quarter.  The same statement also revealed that the US trade deficit had fallen by $52 billion; quite an achievement.

These exceptional figures come as a direct result of the Trump administration’s tax cuts together with their repealing of substantial layers of petty-fogging regulation put in place by the Obama administration and which had hobbled US business activity.   The US government’s actions have rejuvenated consumer confidence, boosted consumer spending and improved business investment. However, in the eyes of large parts of the media Trump can still do nothing right.

Perversely, the US stock-market (and particularly the tech sector) had a severe four day sell-off on the back of these remarkable numbers. The rationale offered by market-makers was that these results were backward looking (ie. historical) whereas sales (and therefore potential profit) projections were forward looking.  To a degree that is true but, for the moment, it’s a pretty limp response to demonstrably positive economic progress. 

Market commentators also offered the opinion that the rise in GDP could not be sustained (which is entirely conjecture and contrary to the US Treasury’s guidance statement for the foreseeable future).  The real facts will emerge in due course and equity valuations will eventually have to reflect the actuality.

Facebook (a company that is hard to like from an ethical viewpoint but, from an investment stance, is a huge cash generating machine) was chosen for special treatment when it was one of the minority to miss its estimated earnings level.  Its shares were marked down by just over 20% in a matter of minutes as the market digested its results.  The Quotidian Fund has a holding in Facebook and this mark down alone caused the Fund’s year to date profit to fall by just under 1%.  However, the tech sector generally was also heavily marked down across the board.  We took the opportunity to increase a number of our holdings at a remarkably low prices in the expectation that this gross over-reaction will correct itself over the next few months.  If we are wrong then we’ll seek to extract ourselves before any real damage can be done.

Trump’s negotiation tactics continue to pay dividends.  His threat to impose further tariffs on trade between the US and the EU (and specifically to introduce substantial new duties on automobiles) caused both Merkel and Juncker to rush to Washington to plead for a rethink.  Of course, the media will not project the velocity of the EU’s rattled and urgent response in that way.  Strange, though, how the EU reacts so swiftly and with a show of reasonableness when the boot is on the other foot and they are not in control of the situation.

Trump is fully aware that this could be a knockout punch to the German economy and also to the entire European Union farrago because it threatens to:

  • cause widespread layoffs and unemployment not only in the German automobile industry but also in the many subsidiary industries that feed its auto assembly lines
  • thereby create a new budget crisis in Europe’s richest country
  • potentially precipitate a collapse in the euro
  • and further reduce, or even remove, any vestiges of political support for the old guard-defenders of the failing EU experiment (and, in particular, Angela Merkel).

Naturally, Merkel and Juncker are equally aware of the impending disaster if Trump’s motor tariff threats become reality and are seeking to delay or remove that possibility.  It appears that Trump has now agreed to delay implementation for the time being whilst further talks on a revised trade deal take place.  There is no doubt about who will be holding the whip hand in those talks.

Meanwhile, Muddling May continues on a painfully slow path towards her latest version of Brexit, although her latest iteration comes nowhere near the Brexit that the majority of the UK voted for.  Of course, we have become used to deceitful politicians but it still comes as a shock when her duplicity, deviousness and mendacity is so blatant.  Hopefully the EU will still refuse to accept this latest deal it in the expectation that they can force her to even greater give-aways.  Perhaps we can then walk away and revert to World Trade Organisation rules for ongoing trade with the EU whilst building profitable new trade deals around the world with trading partners who are not blinkered by self-interest, protectionism and left wing ideology.
The UK stock-market remains in the doldrums whilst Midshipman May fails miserably in her navigation and steerage.  If only Turgid Theresa could grasp the real meaning of leadership.

On 31st July 2018 the FTSE100 index closed the month at 7748.76, a rise of +1.46% in July and it now stands at +0.79% for the 2018 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a fall of -0.43% for the month of July and the Fund is now exactly +6.00% for the 2018 year to date.

Returning to the theme of tariffs in relation to the automotive industry it is worth noting some numbers which may illustrate the importance of this sector to the overall economy:

MarketCars sold in 2017

Projection of cars to be sold in 2020

China

24m35m

USA

17m

17m

EU

15m

15m


These figures make the magnitude very clear of the car manufacturing industry very clear, especially to Germany.  Demand in the USA and the EU is set to be static; any additional costs flowing from tariffs on raw materials (eg. steel and aluminium) are likely to make the price of the end product uncompetitive in the expanding Chinese markets.

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Global stock-markets were benign to moderately positive for much of June until the last week of the month when prices were subjected to dramatic see-saw action.  This was largely based upon exaggerated fears of a potential global trade war which, in our view, is nothing more than media-inspired market noise for the time being.

June 30this, of course, also a quarter-year end and, as such, is the expiry date for a range of futures and options contracts. It is hardly surprising therefore that equity prices fluctuate in the lead up to that.  However, short-term equity market downgrades simply create the chance to buy shares at attractive prices and so we took the opportunity to top up our holdings in those companies that we think highly of and that we trust to perform.

In past reports we have highlighted President Trump’s well established negotiating techniques; initially he seeks to intimidate in order to put the other side onto the back foot and focus their attention. This is particularly so when dealing with the Chinese and EU leaders (he doesn’t need to adopt the same tactics with the UK because we don’t currently have one) by using theatrical statements designed simply to bring his target audience to the negotiating table.

Trump’s initial threats of trade tariffs brought a petulant reaction more suited to the primary school playground from the EU followed, without a shred of irony, by ineffectual complaints and reciprocal threats of their own.  The fact is that trade between the USA and the EU is carried out under World Trade Organisation rules and has for years been characterised and tainted by EU protectionism and disproportionate tariffs.  For example, new cars exported to the US from Europe are subject to just a 2.50% tariff on arrival in the USA and yet new cars entering Europe from the US are penalised with a 10% EU tariff.  The list of similar tariff discrepancies in Europe’s favour is a long one.  Hypocrisy or arrogance?  Either way, Trump is no longer prepared to turn the lazy and complacent blind eye favoured by his predecessor.

Like him or not, Trump has a clear trading strategy and knows how to play his negotiation cards.  The aces up his sleeve are that EU and Chinese manufacturing industries are highly dependent upon the US consumer whereas the US, as the world leader in technology (and which China and the EU are particularly reliant upon) is not nearly as dependent on selling its industrial output to them.

After a period of typically tedious political posturing, the current storm in a teacup is highly likely to blow over soon enough simply because none of the parties involved can afford the dystopian reality of a full-blown trade war.  In time, Trump will no doubt achieve his aim of fairer trade between the USA and its main commercial partners and the empty threats of a global trade war will die away again.  Stock-markets should then emerge from their torpor.

It is worth noting that the FTSE 100 index has only recently exceeded the peak it reached on 30thDecember 1999.  It was then at a reading of 6930 and today it stands at 7636.  In other words, it has taken the main UK Index just over 18 years to increase by 10%; roughly equivalent to just 0.55% p.a.  Of course, that is a somewhat simplistic measure because it ignores the inherent dividend yield achieved.  Over the period, that yield has been running, on average, at 3% per annum and whilst its overall performance has therefore just about kept pace with inflation it is hardly a strong endorsement in favour of passive tracker funds.

The lifeless and unexciting tone of global equity markets continues as we reach the halfway point of 2018. Only two of the world’s stock exchanges are now in positive territory for the year  to date as political uncertainty and unsustainable levels of sovereign debt continue to weigh on market confidence.  In the UK the stock market still awaits a positive resolution to the monotonous Brexit negotiations whilst in Europe they face additional political, social and economic problems which the EU desperately tries to deflect attention away from.

The eurozone has problems aplenty although you would not necessarily think so from the propaganda flowing out of Brussels.  In economic terms, over the eight-year period from 2008 to 2016 the eurozone’s real gross domestic product (GDP) increased by a meagre 3% in total; an average annual growth rate of less than 0.4%.  And they trumpet this as success!

Putting that figure into better focus by comparison with US economic performance over the same period; in 2000, just one year after the euro was introduced, the US economy was only 13% larger than that of the eurozone.  By 2016, however, it was 26% larger (and it is salutary to note that this significant outperformance has occurred despite the fact that during this period the US economy suffered the bursting of the dot-com bubble, the sub-prime loan catastrophe, the failure of Lehman Brothers and the subsequent banking crisis leading on to the ‘Great Recession’).  And now the eurozone economy is faltering badly yet again.

Expanding that theme to some of the largest individual component parts of the EU:

Italy’s new government is refusing to ratify a long-awaited EU free-trade agreement with Canada, a refusal which is threatening to derail the EU’s most ambitious commercial deal thus far and is driving Brussels’ eurocrats to distraction.

To quote Joseph Stiglitz (an Economics Nobel Laureate):  “The euro was a system almost designed to fail. The backlash in Italy is another predictable (and predicted) episode in the long saga of a poorly designed currency arrangement in which the dominant power, Germany, impedes the necessary reforms and insists on policies that exacerbate the inherent problems.”  Germany, of course, has been the main (arguably the only) beneficiary of the euro construct.

In Germany, durable goods orders have fallen for the fourth consecutive month which clearly signals an economic downturn in Europe’s largest economy.  As a consequence, the German Institute for Economic Research has just cut its growth forecast for Germany, partly due to its unexpectedly weak start to 2018 and partly because of the potential financial disaster (in terms of a default on huge German credits) which could ensue from the actions of Italy’s new government.  Even a well respected German economist, Claus Vogt, now predicts that “The party in Germany is over.”

Yet despite these obvious signs of weakness (which one would expect to be countered with a stimulus programme) Germany’s finance minister has just announced a further dose of austerity.  He wants to reduce investment, cut defence spending and lower the country’s contributions to the EU budget.  Brussels is aghast but is powerless to stop him.

Meanwhile, Germany’s anti-EU “Alternative for Germany” (Afd) party continues to gain strength whilst Merkel’s cobbled-together, wishing-and-hoping coalition government (which is held together only with string and sealing-wax) struggles to keep its head above the waterline.

From the latest figures available, Germany runs a current account surplus equivalent to 8.7% of its GDP. According to EU rules, a surplus this large is illegal but it’s strange how the EU’s bureaucrats always seem to find a way around their ‘immutable rules’ when it suits them to (and particularly when it suits Germany).

In simple terms it means that Germany sells to its trading partners far more than it buys from them.  Ecomonic theory (or, at least, Keynesian theory) holds that a country with such a huge current account surplus should use it (indeed, has a duty of care to use it) to increase the amount it buys from those countries with a current account defecit and thus kick-start demand in those countries (which in turn will motivate supply and ultimately create profit in what then becomes a virtuous economic circle).  The fact that Germany steadfastly refuses to do so could be interpreted as it maintaining a substantial financial buffer in recognition of its own social and economic difficulties.

Trump, of course, is fully aware of Germany’s economic weaknesses, ergo the timing and precision of his threats to introduce tariffs.  It is very obvious and commonly held wisdom that, in business or in sport, one seeks to identify the weaknesses of one’s opponent and then exploit them.  Trump has focused on German economic weaknesses (and it would be cruel to also mention the travails of their football team so I won’t) which may explain the speed and naivety of the EU’s initial response; he has clearly hit a nerve or two.  The bargaining power that Trump now has with the EU (using Germany as a proxy) will, in due course, probably secure the fairer trading terms he has been seeking.  He also, quite understandably, reasonably and rightly, wants the EU to pull its weight in terms of financial contributions to the costs of maintaining NATO.

As for Brexit, it is the least of the EU’s worries.  EU negotiators are still using time as their blunt instrument in the hope (or expectation) that shortage of time will lead to an abandonment of Brexit altogether or, even better for them, a fudged deal that leaves the UK in thrall to the EU but without a say in any of its policy-making.

Whilst Michel Barnier is the suave face of the EU’s Brexit negotiations (exhibiting all the arrogance and complacency befitting a member of its all-powerful but unelected elite), the real terms of the UK’s departure are set by Germany and, in particular, by a department of the European Commission headed by Martin Selmayr.  Selmayr is an honours graduate of the Arthur Scargill School of Charm and has made it his aim to force through a Brexit deal which papers over all the cracks in Germany’s economy at the UK’s expense; a deal that leaves Germany with all the economic advantages and the UK with nothing.

The EU’s unity is crumbling as disagreements over the migrant crisis continue to rumble on and there is an enduring failure to complete new trade agreements (particularly with China, with the USA and now with Canada).  In fairness, the UK is not being dealt with any differently from other member states. EU mandarins are nothing if not even-handed; they treat us all with equal contempt!

Whether by accident or design, the timing of Trump’s trade threats is very helpful to the UK.  If those in charge of Britain’s end of Brexit negotiations were bold enough to take a leaf from Trump’s strategic approach and assertively exploit Germany’s multiplicity of economic and political weaknesses we might actually see some positive progress towards an acceptable exit deal.  That would certainly help to cure the UK stock-market’s current constipation.

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Only three of the established equity markets around the world are currently in positive territory for the 2018 year to date and even those three are just marginally above the waterline.  Markets have been subdued by a series of political issues whose economic significance has been either invented, misinterpreted or blown out of all proportion.

A great deal of hot air has been expended in respect of a putative trade war between China and the USA.  This has been one of the main excuses put forward for lacklustre and volatile equity markets in the first five months of this year.

However, as a guide for the perplexed, one only has to recall Trump’s mantra on the day of his inauguration that his aim was to put ‘America first’.

It has become increasingly clear that trade deals entered into by Trump’s predesessors have been commercially inept from the US viewpoint and those deals agreed in respect of nuclear disarmament and climate change have, at best, been naïve and, at worst, simply reckless.

Those who seek to deride President Trump or diminish his methods and achievements find it all too easy to target his appearance and his negotiation techniques but, in their eagerness to find fault and project him as a figure of fun, they tend to overlook or underestimate his successes.  

The current imbalance of trade between China and the US runs to a not insignificant $375 billion in China’s favour.  A knock-on effect of that has been to diminish America’s manufacturing industry and marginalise those who were once employed in that sector.

In April, China’s huge telecoms business (ZTE) was proved to be guilty of breaching US trading sanctions against Iran and North Korea and, as a result, it was banned from dealing with any US companies.  ZTE provides employment for  70,000 people in China and from mid-April until now this veto has already cost ZTE an estimated $3 billion in lost revenue.  Clearly, an extended period of prohibition would create unwelcome economic and social problems for ZTE and the Chinese government (which is its majority shareholder).

Trump has described the Chinese leader (President Xi) as ‘a world class poker player’ and in direct negotiations this month between Trump and Xi it has been agreed that ZTE will accept a fine of $1.3 billion plus a guarantee to buy US components to the tune of $200 billion.  The conciliatory tone adopted by both leaders suggests they fully recognise that a trade war would be detrimental to both countries and it would seem that this risk (if indeed it was ever a real risk rather than a negotiation stance) has receeded.  Trump, despite his many critics, has ensured that ZTE will stay in business whilst simultaneously eroding substantially, in the short term, the present China/US trade imbalance.  In so doing, he has shown himself to be an equally gifted poker player!

On 31st May 2018 the FTSE100 closed the month at 7678.20, a rise of +2.25% in May and it now stands at -0.12% for the 2018 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a profit of +4.68% for the month of May and the Fund is now standing at +4.67% for the 2018 year to date. 

As I was putting the finishing touches to the narrative of this report on the penultimate day of May a further news story broke in relation to the ongoing trade talks between China and the US.  These talks are set to resume on 2ndJune and, in what we currently perceive to be a simple device intended to concentrate minds, Trump has again raised the threat of imposing tariffs on Chinese imports to the USA.

The fact that any detail of these tariffs will not be announced until mid-June and only potentially then come into force at the end of June does rather suggest that this is no more than an unsubtle basis for negotiation on the future trading relationship and ongoing balance of trade between the two largest economies in the world.

Turning now to Europe.  In a shameless attempt to overturn the result of the recent election in Italy and so subvert the will of the majority of Italians, the EU has pressurised the current Italian President (a position not noted for its longevity) into refusing the right of the victorious parties to form an anti-EU government. 

This deliberate denial of democracy may eventually come back to bite them.  However, given the EU project’s long historical record of escaping from the tightest of corners we would not discount its ability to manufacture a method of circumventing the burgeoning Italian financial crisis. 

In a typical show of arrogance and complacency from an unelected technocrat, the European Commissioner for Budget and Human Resources (Gunther Oettinger) was quoted as saying that “the markets will teach the Italians to vote for the right thing”.  Oethinger obviously remembers (as do we) that, in 2011, the EU toppled Berlusconi’s elected Italian government by manipulating bond spreads to exert maximum financial pressure on Italy.  It will no doubt use the same tactics again but Italy is a bigger nut to crack than Greece was and have more cards to play with.

Sadly, the EU continues its preferred response to any challenge by refusing to listen to alternative points of view and simply seeking to bury its head in the sand.   If it persists with that inherently anti-democratic approach then it may well discover that burying one’s head in the sand inevitably leaves another part of the anatomy fully exposed. 

More seriously, the EU’s unwillingness to adapt to a rapidly changing world could very easily lead to catastrophe (not just in Italy but throughout Europe) from political, economic and monetary points of view.  We are attuned to further developments and will aim to position the Fund’s assets accordingly.

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Following the fluctuations of March, equity markets were smoother in the early weeks of April but that calmness soon turned out to be a false dawn as volatility returned with a vengeance in the last ten days of the month when intra-day price swings of 5 to 6% were commonplace.

For many years past we have observed with a mixture of amusement and amazement the institutional myopia (or blinkered idiocy) of market analysts and, by extention, their influence on market makers and equity pricing.  If we were to compile a list of all the predictions (both by number and in percentage terms) that analysts got wrong and still consistently continue to get wrong it would challenge War and Peace for its lack of brevity.

It never ceases to surprise us that these organisations (which largely comprise the major investment banks) scour the best universities for the best brains but when these very talented people are inducted they are then discouraged from independent thought (or, indeed, any thinking at all) in favour of accepting without question a bland, prosaic, superficially risk-averse house style.  In many cases, however, they often fail to grasp more profound and meaningful concepts of risk at all.  Strangely though, they tend to be highly attuned to the concepts of corporate profit and self-enrichment.

These highly trained analysts are employed to make assumptions and prognoses on economic and geo-political issues; their assumptions very quickly mutate into ‘fact’ and, because very few dare to be out of step with the mainstream, then group-think is allowed to prosper.  Whilst arrogance, compalcency and the certainty of their own infallibility causes relatively short term negative effects on equity valuations, it also has the benefit of providing investment opportunities and good value for those with an alternative (perhaps more considered and less self-interested) viewpoint.

Under specialist utilitarian training the intelligence, open-mindedness and natural optimism of youth is quickly transformed into an army of Jeremiah’s*; Jerry can swiftly becomes Jerry can’t.  Perhaps if this army could be matched with a similar number of Cassandra’s** then between them they could continue to produce tediously depressing off-beam and negative analysis but nobody would actually believe it.  That fanciful piece of wishful thinking will, of course, never become reality but it might at least give us some relief from these regular periods of pointless and synthetic market turbulence.

On 30th April 2018 the FTSE100 closed the month at 7509.30, a rise of +6.42% for April and it now stands at -2.32% for the 2018 calendar year to date.By comparison the Quotidian Fund’s valuation at the same date shows a profit of +1.38% for the month and the Fund is now standing at down –0.02% for the 2018 year to date.

Some analysts are more read (or should that be more red) than others but one example will suffice to illustrate the point I am trying to make about the poverty of mainstream analysis in general:

The share price of Facebook at close of business on 16thMarch was $185.  The following day the ‘privacy scandal’ involving Cambridge Analytica’s apparent misuse of the personal data they had obtained from Facebook became public and this army of insightful analysts sprang into action.  En masse, they made the assumption that this manufactured ‘scandal’ would cause catastrophic falls in customer numbers which, in turn, would lead to a huge drop in advertising revenue and profitability. In effect they were predicting that this could signal the demise of Facebook and by 27thMarch its share price had been marked down to $152.  By association, the tech sector generally was also priced downwards across the board by circa 4%.

As we had signalled in our March report, the 2018 first quarter reporting season was just beginning and, with their share price having been under the cosh since 27thMarch, Facebook issued their latest results after market on 25thApril. Far from being in accord with analyst’s gloomy predictions, earnings per share were $1.69 (24.8% higher than analyst’s estimates of $1.354), and the number of monthly active users had increased to a not insignificant 2.2 billion (in the previous earnings report for 4thquarter 2017 it was 2.13 billion).  Naturally, this will have a positive effect on future revenue and earnings per share. 

In the blink of an eye, Facebook’s share price was revised substantially upwards again and is currently trading at $175 and it will go higher again.  It is worth noting that in 2008 Facebook’s revenue was $272 million for that entire year; in 2018, its revenue is now $272 million every 2 days! 

A similar story applies to the tech sector in general and the likes of Amazon, Apple, Google and Netflix in particular.  Amazon’s share price was marked down, for entirely artificial reasons based on poor analytical judgement, from $1605 on 12th March to $1371 by 2ndApril.

Amazon’s results (released after market on 26thApril) were also exceptional (in complete contradiction to so-called ‘serious analysis’) and its share price immediately after the results were released soared up to $1625.  We now expect to see the dark cloud that has been (deliberately) held over this sector for much of the past few months to be progressively lifted.

In view of the persistently negative reports and analyst’s warnings in relation to the tech sector it is worth emphasising that this sector includes the five largest companies in the world in terms of their market value.  Quotidian has an equity holding in each of them.  These five companies rarely sem to find favour in analyst’s reports but collectively they are worth more than the entire economy of the United Kingdom. Together they are currently valued at $3.5 trillion; the gross domestic product of the U.K. was just $2.6 trillion in 2017.  In fact, only four national economies are larger than these tech giants combined: those of the USA, China, Japan and Germany.  Despite their current size, they are still growing and making extraordinary profits.

Facebook, Microsoft, Amazon and Google (aka Alphabet) reported exceptionally large profits last week. 

Facebook’s profits were almost $5 billion in the first quarter of 2018.  That is equivalent to $56 million a day, $2.3 million an hour, $39,000 a minute.  Amazon’s profits more than doubled and the fifth(Apple) releases its latest set of earnings on May 1st.

Apple makes roughly $151 million every day (a figure calculated from the company’s expected profit in the January/March quarter and which will be released after market on May 1st).

Google and Facebook can afford to offer free services thanks to their hammerlock on digital advertising. These two companies will sell an estimated $61 billion in US online advertisements this year according to reliable research from eMarketer.  That is roughly a quarter of the expected total spending in the USA on all forms of advertising and yet it is all in the hands of just these two companies.

Amazon has just announced that it is raising the annual price of its Prime membership program for customers in the USA from $99 to $119, This simple change will generate an extra $2 billion for the company.  Incredible.

The current US earnings season is shaping up to be one of the best in the last 20 years (based on the percentage of companies that are beating estimates). To return to my main theme, by the end ofApril those companies that have already reported their results have mainly posted phenomenal earnings and profit figures.  Indeed, nearly three-quarters of those companies that have thus far reported have beaten analyst’s expectations.

These companies are not currently being rewarded with higher stock valuations. Instead, prices are basically flat despite these strong earnings reports but when the prevailing period of negativity passes then the financial reality of these achievements cannot simply be ignored; eventually they will have to be factored in to equity values.

The other item of April’s economic news that needs to be mentioned here is that on 24thApril the yield on US Treasury Bonds briefly hit 3%.  You may recall the relevance and importance of that figure from our various briefing reports over the past year.  If one can achieve a 3% yield with no risk to one’s nominal capital (other, of course, than the effect of inflation) then some investors will be tempted to move from equities into Treasury Bonds. 

However, the 1o year yield has already slipped back again; if and only when it establishes itself above a 3% yield would we expect a relatively small amount of slippage from the equity markets into government debt. 

The real importance of this issue it to stress again how vital stock selection, insight and patience are in order to firstly create and then maintain an equity portfolio which can provide attractive, above average investment returns combined with a reasonable level of security.  This is Quotidian’s raison d’etre.


  * Jeremiah – the weeping prophet, relentlessly negative
**Cassandra – whose prophesies were sometimes right but nobody believed her anyway

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The turbulence that has dogged global stockmarkets since late January reasserted itself from the third week in March through to the end of the month.  A downturn in January/February (during which all major markets around the globe saw a 10%+ fall in valuations) had recovered rather quickly (certainly in less than the 3 months we would normally expect such a recovery to take) and so it came as no surprise to see a further correction before prices begin to move higher again.

Just to put this current period of market instability into focus for you let me compare the last quarter of 2017 with the first quarter of 2018 by illustrating the number of trading days that the market moved by more than 1% (either up or down):

  • in the first quarter of 2018 the S&P 500 index moved by greater than 1% (up or down) on 23 trading days (of the 62 trading days in that quarter) whereas, by comparison, in the last quarter of 2017 (also 62 trading days) it did not exceed that 1% daily movement even once.Zero trading days of volatility!
  • Similarly, the Nasdaq index exceeded 1% daily movements on 25 trading days in the first quarter of 2018 compared to just 6 trading days in the final quarter of 2017.
  • And just for completeness, the figures on exactly the same bais for the FTSE 100 index are 13 trading days during the first quarter of this year set against only 4 trading days in the last quarter of 2017.

Equity markets are, of course, inherently dynamic and have occasionally bouts of extreme volatility but even in such periods of uncertainty there are usually still sectors and individual stocks that will hold up and continue to grow despite general market unease. Having said that, even these sectors and specific stocks are not immune from typical short-term market gyrations.

Market makers were keen to ascribe the March mark-downs to concerns over a potential global trade war as a result of President Trump’s decision to impose tariffs on steel and aluminium imports to the USA.  Having observed and analysed Trump’s negotiation tactics over the past year or so (which typically begin with heavy artillery as a means of kick-starting real negotiations) we see these comments from marlet-makers and, strangely, from largely left wing dominated media sources as nothing more than disingenuous and self-serving.  Trump’s real target is China and, in particular, the detrimental effect that its subsidized and therefore artificially cheap exports to the US have on US industry and employment. 

In line with Trump’s typically and quite deliberate bullish opening salvo with the simple intention of bringing about a negotiation, we have no doubt that the US and China will successfully resolve their trade issues through dialogue and conciliation.  Indeed, the fact that China’s retaliatory tariffs have already been introduced and can be seen to be more for appearance and face-saving purposes, indicates that China is very willing to ease the intensity of any potential trade conflict.  The fact that their new tariffs are not substantial and do not cover some of the US’s biggest exports to China is a reliable signal that Beijing clearly wants to avoid an all-out trade war.

Of more relevance to the real world and genuine stockmarket action, a sell off in technology stocks was sparked towards he end of March when Facebook was found to have enabled the unauthorised use of personal data by one of its associates (Cambridge Analytica, a company that specialises in data mining and analisis for political and advertising purposes).  The concern is that this careless, not to say cavalier, approach to personal privacy could lead to the introduction of new and intrusive regulation across the technology board.  However, any move towards regulation would rather overlook the fact that Facebook users have freely chosen to put their personal details on display in the public domain in the first place.

Before leaping to ignore personal freedom of choice in favour of regulation and control (increasingly the favoured political response to every tiny area of our private lives) our poltical classes would do well to take into account that the world is run on US software.  From work productivity to entertainment, from graphic design to database management, the world runs on ubiquitous American software.  In essence, US software is the world’s operating system and any restrictive regulation upon it could have unintended, expensive and undesired economic effects. 

Reverting to the subject of potential trade wars, it is very unlikely that foreign governments would decide to place restrictive tariffs on these American technology products as it would immediately increase prices for almost every sector of their own economies, including the costs of running their own governments.

In the UK and Europe, it may simply be coincidental but it does seem rather strange that the Italian election result (dominated, as expected and trailed in last month’s report, by the two successful anti-EU and anti-euro parties) has been closely followed by a complete change of tone and attitude towads the UK by the EU’s Brexit negotiators.  Hopefully, if the EU’s more realistic approach is maintained, this will be reflected by a more positive tone in the UK stockmarket too.

Over the next few weeks the 2018 first quarter reporting season will begin. Advance estimates suggest that those companies that comprise the S&P500 Index will report that earnings growth will have risen by 17% in the first 3 months of this year; if so, this would be the largest increase in profits since the first quarter of 2011. Whilst we wait to see whether this apparent surge in profitability comes as a result of increased sales and/or lower costs (increased efficiency) or is largely a function of the new tax regime introduced by Trump’s administration, increased profits should be reflected in share valuations.

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In our January report we highlighted the fact that a global stock-market correction was long overdue and the likelihood that the week-long fall back in the UK at that stage together with three successive days of negativity in US markets was evidence that a realignment of market values was underway.

The classic definition of an equity market correction is a decline of 10% in market valuations.  A market crash is similarly defined as a fall of 20% plus.

As February progressed, the FTSE100 did indeed fall by 8.82% from its previous peak in mid-January (and, intraday, it did exceed a 10% drop on 9th February before recovering slightly to close at that figure of -8.82%).  At close on 28th February the Footsie is still down -7.03% from its January high point.

In the USA, the S&P 500 index fell by 10.16% from its January high and is still down -5.54% at the end of February.  The tech-heavy Nasdaq market fell by 9.70% (although, intraday, it also exceeded the 10% ‘correction’ level).  The Nasdaq has now recovered to stand at just -3.10% down from its recent high.

We saw those market declines as an ideal buying opportunity and so we began to rebuild our equity holdings on market down-days to the extent that we were 45% invested throughout much of February.  The last two trading days of February have given us yet another attractive chance to buy more and we will continue to buy on market dips until our ideal portfolio requirements are filled.  The effect of these last two days of increasing our holdings is that we are now 66% invested.

On 28th February 2018 the FTSE100 closed at 7231.91, a fall of– 4.00% for the month and it therefore stands at -5.93% for the 2018 calendar year to date.  By comparison the Quotidian Fund’s valuation at 28th February shows a fall of -0.28% for the month and it follows that the Fund is now up +0.52% for the 2018 year to date.

The UK stock-market is still in thrall to seemingly never-ending Brexit negotiations and, until a degree of clarity emerges, we see no great advantage to be gained from anything beyond minimal and sharply-focused exposure to it.  It has been perfectly clear from the outset that the EU has no intention of negotiating a reasonable and equitable exit deal with the UK; it’s intention is simply to frustrate the process and (with the help of a motley collection of ‘useful idiots’) ultimately aim to derail the whole thing.  We can but hope that some real leadership in UK political circles makes itself evident sooner rather than later.

In Europe, the Italian general election on 4thMarch may become an interesting and helpful feature of Brexit negotiations. Polls in Italy are predicting that the votes will be shared between the two largest anti-EU parties (but with neither party achieving an overall majority) and with the current Democratic Party regime (personified but no longer led by the EU puppet, Matteo Renzi) finishing a distant third.

Not only are the two likely highest vote-winning parties (Forza Italia and Five Star Movement) anti-EU, they are both anti-Euro too and have threatened to reject and replace the Euro as Italy’s currency.  Sunday’s result will be interesting to say the least and it may well help the UK’s position in that it will create a second profoundly negative front to occupy the attention of the anti-democratic EU bureaucrats.

In the USA, its economy is clearly expanding and economic fundamentals are still very positive. Its new tax rules are helpful for the stock market and they also reinforce prevailing positive consumer confidence and spending. In our opinion these factors alone are bullish for the US stock markets.

In the past it has, on average, taken markets 56 trading days (roughly 3 months) to recover the ground ceded following a correction.  We therefore anticipate continued short-term volatility but if that turbulence continues for longer than usual (or longer than we expect it to) then we have kept funds back to buy more of our chosen assets at even lower prices.   In the medium to long term this is a very positive strategy.

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We noted in our December report thatit would not be a complete surprise if the artifice and froth of the ‘Santa rally’ were to disappear again in the early part of the New Year.

In fact, the London market’s exuberance continued through the first two weeks of January but eventually economic and political reality reasserted itself and equity valuations in the UK fell back again into negative territory by the month end.

Conversely, stock-markets in the USA continued relentlessly to make record highs and trading activity in US equities in the last full week ending 26thJanuary saw an inflow of US$7 billion.  US markets have now surpassed their previous longest-ever period without having at least a 5% correction.  However, as the US dollar continues to weaken against the pound, their equity returns to a sterling investor have been subdued.

There continues to be a great deal of speculation in the media about an impending stock-market crash and, in broad terms, we agree with the premise that a correction (not a crash) is overdue.  That, of course, is why we substantially reduced the Fund’s exposure to equity markets last July by going largely into cash and, to date, this decision has served us well. 

In the medium to long term, though, cash is an unimaginative, unproductive and risky place to hold one’s money.  As evidenced above, flight capital continues to flood into the USA and the paltry yield available in Treasury Bonds (T-Bonds) simply drives that money towards equities.  Whilst this weight of incoming money continues, historical market certainties seem to be temporarily in suspense.

On 31st January 2018 the FTSE100 closed at 7533.55, a fall of -2.01% for the first month of the New Year, and it therefore stands at -2.01% for the 2018 calendar year too. By comparison the Quotidian Fund’s valuation at 31stJanuary shows a rise of +0.81% for the month and it follows that the Fund is also up +0.81% for the 2018 year to date. 

The financial media is fond of making reference to CAPE (Cyclically Adjusted Price Earnings ratio) and PE ratios as measures of equity market attractiveness.  We look most closely at the current Price/Earnings (PE) ratio.  Over the years a PE ratio of 16 has been seen as a reasonable average and a good touchstone for making value judgements on equity investment.  In terms of evaluating the market as a whole, anything higher than that is an indication that the market is over-valued; conversely, anything lower is obviously seen as the market being undervalued.

The current PE ratio of the S&P500 (as a proxy for global markets) today is 26.4, indicating that the market generally is indeed overvalued.  But the PE ratio just before the dot-com bubble burst stood at 40 and that suggests that we appear to be a long way away from ‘crash’ territory.

Another issue which, perhaps temporarily, supports current valuations is that the figure quoted above in relation to trading volumes in the US validates the assertion that there is still a huge wave of flight capital flowing into the USA from troubled parts of the world.  In years gone by a large percentage of that incoming capital would find its way into Treasury Bonds (the US version of gilts) which were then seen as the safest of safe havens.

To develop that theme; the best measure of Treasuries as an investment alternative to equities is the 10 year T-bond which, at the moment, is yielding just 2.60%.  Prospective T-Bond buyers are therefore faced with the deeply unattractive prospect of exchanging their capital in return for a 2.60% annual income and the return of just their original capital in ten years’ time (with no prospect of growth in either the coupon payment or the capital).  Alternatively the yield alone on the S&P market for example is 3% and there is the strong prospect of capital growth over a 10 year period too.  It is unsurprising therefore that the majority of this flight capital is flowing into the stock-market (instead of into Treasuries) and so supporting current equity valuation levels.

Exactly the same rationale applies to the UK market where the return on 10 gilts is presently running at 1.4%.

A further consideration is that the latest quarterly earnings reporting season is now underway and, perhaps surprisingly, has largely been supportive of current equity valuations.  In the USA by the end of January, 204 of the companies in the S&P500 had reported their results and, of these, 167 (that is, 82% of them) had declared positive earnings surprises.  The majority had also announced better than expected sales figures too.

Of course, these situations will evolve and when annual yields on 10 year T-bonds eventually come back up to exceed 3%+ and, in the UK, rise to at least exceed inflation then monies will again gravitate towards bonds at the expense of equities.  We still appear to be a distance away from that situation right now.  As and when circumstances change we will reconsider our investment strategy accordingly.  In the meantime, equities hold sway in our strategic planning.

However, we have now to solve the conundrum of when and how to take up equity positions again and we have been weighing up the evidence, much of it outlined above.

We have already selected our portfolio; we know exactly what we want to buy and have simply been patiently waiting for an appropriate time to get back in to stock-markets.  In particular we wanted to see a correction, ot at least a little downturn, before re-taking equity positions.

The fall back in latter part of January in the UK markets and three negative days in succession in US stock-markets gave us an ideal buying opportunity and so we have now begun to rebuild our equity holdings on a piece-meal (little by little) basis and we will continue to buy on market dips until our current portfolio requirements are filled.

Given the inherent nature of stock-markets there is always the risk of further downturns in equity valuations but if one has a well-chosen portfolio and is prepared to hold on through occasional periods of stockmarket volatility then capital values will inevitably recover. Perseverance, confidence, timing and patience are some of the necessary attributes in achieving the right long-term result.

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Global stock markets were surprisingly calm in 2017 and went through the year with just an occasional downturn but without a really significant correction. In the UK, the FTSE100 index was constrained within a narrow trading range for much of the year until a typically superficial festive ‘Santa rally’ added a belated but unworthy gloss to a lacklustre year.  In the USA, the S&P 500 index has now risen for a record 14 successive months but a weakening dollar diluted gains for a sterling-based investor.  Neither of these situations are likely to persist.

On 31st December 2017 the FTSE100 closed at 7687.77 (a rise of+ 4.93% for the month) and it now stands at + 7.63% for the 2017 calendar year.  By comparison the Quotidian Fund’s valuation at the same date shows a rise of +0.06% for the month of December and the Fund has achieved an increase of +32.42% for the 2017 year.

It is worth noting that at the end of May the FTSE100 was up 5.28% year to date (YTD) whilst Quotidian at that point was up by 25.33%.  Within a month of that date Quotidian took the decision to consolidate and secure its 2017 YTD profits by converting the majority of its portfolio into cash rather than remaining exposed to markets that were largely lacking motivation and direction.

In the seven months from the end of May to 31stDecember Footsie rose by just 2.23% (and all of that uplift in valuations came during Christmas week) whereas the Quotidian Fund  (largely unexposed to stockmarket risk throughout this period) still managed to increase by 5.66%.  It would not be a complete surprise if the artifice and froth of the ‘Santa rally’ disappears again in the early part of the New Year. 

2018 will mark the 30thanniversary of Quotidian (under one aegis or another) managing clients’ money.  Indeed, a significant number of clients have been with us since those formative years.

One of our earliest pieces of research was an analysis of UK-based mutual funds (Unit Trusts, OEICs and Investment Trusts). At that time there were just over 3200 of these investment vehicles available on the UK market and we were looking to identify reliability and consistency of performance as well as the effect of charges.  We have a very specific self-developed proprietary method of measuring investment performance in such a way as to clearly separate the men from the boys.

The result of our scrutiny and evaluation showed quite clearly that only 54 of this total number cleared the hurdles that, in our estimation, made them worthy of investment consideration.  Frankly, little has changed in the interim.  I can recall that this research took very nearly four months of painstaking effort to complete.  Nowadays, with the power and speed of computers and the depth of information available on their databases, this analysis can be completed more quickly, more thoroughly and more regularly throughout the year.

Towards the end of 2012 Quotidian eventually rid itself of any remnants of unnecessary and unproductive baggage and since the beginning of 2013 we have operated entirely independently under our own flag and using our own research.

The Quotidian Fund’s performance since 2013 has been:

  • Over one year:    +32.42%     (FTSE100:  + 7.63%)
  • Over 3 years:      +32.74%      (FTSE100:  +17.08%)
  • Over 5 years:      +66.68%      (FTSE100:  +30.35%)

Quotidian’s figures are net of charges and based upon exact calendar years (not cherry-picked nor cleverly contrived ad hoc periods of time).  Res ipsa loquitur.

Our full analysis of global stockmarkets produces a similar result today both in respect of mutual funds and, more significantly, for individual stocks and shares too.  For example, by our evaluation, of the roughly 4200 publicly traded shares in the US markets today no more than 50 could be regarded as suitable investments (certainly as far as the Quotidian Fund is concerned).  And of that group, only a handful are currently trading at a price that makes them attractive for the time being.  It is the same story in other markets around the world.

We are under no illusion that private investors are at a serious disadvantage when trying to deal in the world’s stockmarkets. Of course, stockbrokers and other self-interested parties will continue to recommend ‘sucker’ stocks simply because their income depends upon the commissions they can generate and in the knowledge that private investors can be relied upon to regularly take the bait. Many of these ‘sucker’ stocks are well known names.  The graveyard of stocks that have fallen more than 80% in recent years include such once-famous names as Pitney-Bowes, Enron, Sears, Royal Bank of Scotland, Motorola, Nokia and Cisco.

Sadly, market insiders (stockbrokers, market makers, major banks) use a technique they call ‘pump and dump’ to generate sales and commissions from unwary investors.  It works like this:

Firstly they identify a well-known name (to give a degree of credibility and a mirage of security) whose stock has a high level of liquidity and preferably is undervalued.  They then buy these stocks for themselves, often at bargain basement prices. 

Their in-house analysts then write glowing reports on these shares and rate them as a ‘strong buy’.  Then their ‘friends’ in the media and ratings agencies add to the hype, tout these stocks to typical retail clients and millions of small investors do just that.  As a result, of course, the share price goes up…..which is when the brokers, banks and hedge funds get out, leaving unwary amateur investors holding the shares as their price drops back to its original level or below.

In some cases, lack of training and experience means that many of the enthusiastic young men sitting at sales desks in stockbroker’s offices or in the trading departments of the large battalion’s do not have the insight to realise that they, too, are being duped.  It is difficult to get a man to understand something when his salary depends upon him not understanding it!

In the medium to long term cash is an unimaginative, unproductive and risky place to hold one’s money.  In the short term, however, being in cash creates an opportunity to acquire worthwhile assets as and when cheaper buying opportunities arise (and one wouldn’t be able to take advantage of any price drops unless one has the cash available to buy).

And finally, a word of thanks.  Without your support, Quotidian would not have the opportunity to pursue its professional passion of searching global markets for attractive investment opportunities.  We truly value the trust you place in us and the confidence you maintain in our investment judgement.  It is greatly appreciated and we are profoundly grateful.  Thank you.

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Equity markets continue to be generally uninspired and in the doldrums.  Advances in US markets are followed by retrenchment and any stockmarket gains to a UK investor are being largely negated by a weakening dollar.

In the UK, deliberate political obstruction encouraged by a lack of leadership, clarity and purpose in relation to Brexit, combined with increasing instability related to the potential of a hard-left Labour party being voted into power, continue to suppress equity markets here far more than economic issues.

The EU’s political leaders and negotiators are being allowed, unfortunately, to dictate terms, retain the initiative and set the agenda.  It is evident that their main aim is to extract a huge amount of money under the guise of a divorce settlement, to create a number of ‘impossible’ conditions and impose artificial timescales in the hope that they can eventually crank up sufficient pressure to circumvent Brexit altogether. 

As ever, the EU remains strangely silent on its current sources of taxes and positively mute on its areas of expenditure (the consumers of their tax revenues).  As best one can see of the financial position of an organisation whose accountants have steadfastly never been prepared to sign off audited accounts, the EU has thus far run up a vast level of debt and, despite that, has already committed itself to further huge expenditure in the future.  Vanity knows no bounds.

Live now, pay later seems to be the mantra.  The most reliable figure we have (courtesy of William Hague) is that the EU is underwater to the tune of 250 billion euros.  No wonder they have invented such an enormous divorce bill.

Perhaps the UK’s negotiating team should stress the importance of the UK to the EU by reminding  themselves and their counterparts across the channel that:

  • The UK represents 16% of the EU’s GDP
  • It comprises just 13% of the EU’s population
  • Yet only 3.50% of the EU’s officials are British
  • Britain is also the 2ndlargest net contributor to the EU coffers
  • The EU comprises just 20% of the global economy
  • The costs of complying with EU bureaucracy are estimated to reduce UK GDP by 7%
  • In 1999, 61% of the UK’s total trade was with the EU; the latest figures show that it’s now only just over 40%. Ergo, just about 60% of UK trade is already now with the rest of the world
  • There is a large defecit on the UK’s trade with the EU
  • There is a substantial surplus on the UK’s trade with the rest of the world
  • Current political chaos in Germany, Italy and Spain threatens to derail ‘the EU project’

Sadly, the EU’s negotiating tactics (not only with Brexit) are characterised by ferocious campaigns of truth reversal and character assassination. These campaigns are used simply to create an illusion of mass support in order to better manipulate and intimidate people.  They are based on sustained misinformation, unevidenced allegations and downright lies. Our friend Juncker continues to make himself look foolish; but then again he’s had plenty of practice.

Finally on the wearisome topic of Brexit (and it appears regularly in our reports simply because it continues to be the most important influence currently on the UK equity markets).  In an interview early in November, James Dyson, an excellent businessman who has an impeccable record of invention and solid achievement, stated that years of experience had taught him that you simply cannot negotiate with the EU.  In his view, Britain should just walk away and “they will then come to us simply because they need to sell us their goods”.

It is readily apparent that the EU’s negotiating style is to test the UK’s resolve to breaking point. Whenever past referenda outcomes have gone against them, the EU has used the same tactics in order to achieve a reversal of the democratic result and so they are used to these devices ultimately leading to capitulation.  From the UK’s perspective, the EU must therefore be made to understand that we are not bluffing and to achieve that goal they must be brought to a realisation that the the UK will indeed walk out of negotiations, whatever EU threats (and empty threas they are) may be made, if an equitable deal is not made available.

One should also beware of the rather sleazy EU phrase “nothing is agreed until everything is agreed”. This is also just a tactic to wear down the opposition.  In the last few days of November there is a suggestion that the divorce settlement figure has been agreed.  In our view, that is far from the truth.  In due course the EU will revisit that number with a view to pushing it even higher.

In addition to that, the financial reality is that when the second largest net contributor to the EU Treasury leaves the European Union the remaining 27 members are left with the dilemma of whether to cut their budgets or increase the national contributions of each remaining country.  It is not in their political DNA to cut budgets!  That is the root cause of their desperation to extract a substantial and unsubstantiated divorce settlement.

There has been a distinct movement to the political right in various recent elections and referenda throughout Europe.  Perhaps the imminent unseating of the once all-powerful Angela Merkel will add velocity to this trend towards the conservative (small ’c’) ideal of free trade.  It can only benefit European and UK equity markets if that happens.

On 30th November 2017 the FTSE100 closed at 7326(a fall of– 2.22% for the month) and it now stands at only +2.57% for the 2017 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a rise of +0.17%for the month of November and the Fund is now up+32.33% for the 2017 year to date.

The Quotidian Fund has the facility to short equity markets with a view to making profits in falling markets.  However, our overriding principle is that we seek to expose the Fund to risk (either long or short) only when we perceive an established trend, either positive or negative, and the potential opportunity for significant profit.

For the past six months global markets have been generally going sideways and are presently constrained within relatively narrow trading ranges.

We therefore take our cue from The Grand Old Duke of York; when we are long (buying the market) we are long and when we are short (selling the market) we are short, but when we are only halfway up (if we deem the risk/reward ratio to be unattractive) then we are out,  unexposed to stockmarket hazards and unseduced by the temptation of what would likely turn out to be return free risk.  Keeping the powder dry until a better balance of risk emerges.

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Over the past few years the EU has made a nasty and repetitive habit of trying to impose random fines on major US tech companies either under the guise of them having received ‘illegal state aid’ or, seemingly, simply for being too successful.  Perhaps this reflects a belated underlying recognition that the EU’s revenue generators are overwhelmed by the EU’s revenue consumers.

This year alone Google, Apple and Amazon have been in the firing line to suffer these arbitrary haircuts.

In June the EU fined Google 2.4 billion euros for ‘unfairly dominating the search and advertising market’. At the end of August it also fined Apple 13 billion euros (a figure apparently plucked from thin air) in respect of ‘unpaid taxes’ after the EU argued that Ireland had apparently granted ‘illegal state aid’ to Apple by virtue of a favourable tax regime.

In this instance the EU employed the sly device of instructing Ireland to collect the penalty fine.  By the end of October and in the absence of any settlement, the EU announced that it is now taking the Irish Government to court in order to extract the uncollected fine!  All one happy family!

Earlier this month Amazon became the latest target of the EU’s gaping fiscal maw. The European Union is asserting that Amazon used Luxembourg as a tax haven and that it had received ‘illegal state aid’ by virtue of a ‘sweetheart’ deal with that country for the period between 2003 to 2011.  A fine of 250 million euros (another conjuring trick) has been imposed.

It is interesting to note that the Prime Minister of Luxembourg from 1995 to 2013 was none other than Jean-Claude Juncker! Indeed, the slippery Monsieur Juncker was simultaneously Luxembourg’s Minister of Finance between 1989 and 2009.  It would therefore be beyond parody to suggest that he would have been entirely unaware of these now so-called illegal arrangements.  At the height of the original Greek bail-out crisis Juncker was quoted as saying that “when things become serious you have to lie”.  No wonder that Brexit negotiations are moving ever so slowly!

The active ingredient and common thread in these tawdry attempts to fill the EU’s coffers is EU Commissioner Margrethe Vestager whose approach is typical of the totalitarian, anti-business bully-boy tactics so often employed by our continental friends.  They clearly see businesses as bottomless pits of finance to be endlessly milked in order to cover the EU’s gross overspending.

However, in taking on the US tech giants the EU has bitten off more than it will be able to chew and its vain, naïve attempts to extract fines on trumped up charges is highly likely to backfire.  In mid-October the US Senate finally gave the green light to Donald Trump’s long awaited new tax plans.  These will benefit individual US taxpayers but, in particular, they are framed in such a way as to encourage US multi-national companies to repatriate their profits to the USA where they will now face a much-reduced corporation tax burden. One day the EU will perhaps begin to understand the shortcomings inherent in their dictatorial, autocratic socialist paradise compared to the benefits of international consumer choice. They might be surprised to discover that the customer (or, in this case the taxpayer, whether individual or corporate) can vote with his feet.  The consequential loss of long-term business revenues and loss of consumer spending in EU markets far outweighs the blinkered short-term ‘fix’ of synthetic, concocted fines.

Following the unwinding of Quantitative Easing announced in the US in September the European Central Bank followed suit, to a degree, in October.  With effect from January 2018 the EU will reduce its QE commitments from 60bn euros down to 30bn euros per month.  However, the EU’s QE programme has now been extended to September 2018 with the additional promise that it will be further extended forward again if necessary. Mario Draghi is clearly still intent on ‘doing whatever it takes’ to paper over the EU’s financial cracks but the problem with playing the extend-and-pretend game with finances is that eventually the music comes to a grinding halt.

On 31st October 2017 the FTSE100 closed at 7493(a rise of+1.63% for the month) and it now stands at +4.90% for the 2017 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a rise of +0.35%for the month of October and the Fund is now up+32.10for the 2017 year to date.

To quote Warren Buffett, “interest rates have always been a powerful factor in equity valuations”.  The yield on US Treasuries today is just 2.39% and so prospective buyers are faced with the deeply unattractive prospect of exchanging their capital in return for a 2,39% annual income and the return of their original capital in ten years’ time (with no prospect of growth in either the coupon payment or the capital).  Return free risk still persists in the bond market.

By contrast, the dividend yield on the S&P500 is roughly 2% and on top of that investors have the prospect of growth in the dividend return as well as capital appreciation.  Of course there is always the risk of a downturn in equity valuations but if one has a well-chosen portfolio and is prepared to hold on through the occasional stockmarket storm, capital values will inevitably recover. Perseverance, confidence, timing and patience are some of the necessary attributes in achieving the right long-term result.

However, to introduce a more negative note just to balance the argument with historical data; using the S&P500 as a realistic proxy for global equity markets, momentum continues to be modestly positive although investor confidence is somewhat less so.  As I write, the S&P500 has now gone for 363 trading days without at least a 5% downward correction.  In the past 65 years there have only ever been three longer periods without a significant negative readjustment.  During 1964/65 equity markets went for 386 trading days without at least a 5% decline; between 1993/94 it was 370 days and between 1995/96 it was 394.  The current situation is therefore perilously close to creating a new record.  It may well be that the continuing flow of flight capital into the USA stockmarkets (as referenced in our September report) is the proximate cause of this but by the very nature of equity markets they inherently require a correction to remove ‘froth’ before re-gathering upward motion.

Our aim is to invest with an acute awareness of the risks (economic and political) around us on a daily basis.  In doing so, we seek to protect our portfolio as best we can during the inevitable periods of market declines.  Having taken shelter away from equity markets since July we would actually be much in the same place valuation-wise today as if we had remained exposed to market risk. As outlined above, there are some compelling reasons to recreate our equity portfolio but the continuing risks posed by experimental monetary policy and heightened geo-political tensions (North Korea and Catalonia in particular) still persuade us to bide our time for the moment.

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On 20thSeptember the US Federal Reserve decided, not before time, to put quantitative easing into reverse by unwinding the huge portfolio of bonds it had built up through its efforts to safeguard and stimulate the US economy following the financial crisis of 2007 onwards.

After buying up US treasuries and mortgage-backed securities as part of its ‘easing’ programme the US central bank’s balance sheet has expanded to $4.5 trillion; around four times its size before the financial crisis.   As it now looks to move monetary policy away from what had originally been intended as a short-term emergency measure, from October and each month thereafter the Federal Reserve will start to unwind those holdings at the rate of $10bn per quarter.  We see this as a positive sign of strength and confidence in the US economic recovery.

In line with the Federal Reserve’s approach under the stewardship of Janet Yellen it has been at pains to avoid a repeat of 2013’s ‘taper tantrum’ when its surprise announcement (under Ben Bernanke) that it would start reducing the amount of bonds it bought caught financial markets on the hop and sparked a steep and vicious sell-off.

In complete contrast to the unwelcome surprises regularly delivered under Bernanke (and even moreso the disasterous Alan Greenspan before him) this latest move had been well flagged with the result that markets reacted calmly to the news. 

Greenspan, who turned obfuscation into an art form, is best remembered from his statement that “if you think you understand what I’m saying then I’m not making myself clear”! A similar quote of his along the same lines was “if I turn out to be particularly clear then you’ve probably misunderstood what I’ve said”. 

He and his deliberately obscure style was the direct cause of so many periods of extreme volatility in stock-markets as well as being directly implicated in the origins of the sub-prime loans crisis (which, in turn, was the proximate cause of the global financial crisis).  It is quaintly ironic that , at the age of 91, he is still regarded in some circles in the US as a financial guru!

In her post-meeting statement Yellen said that “the basic message here is that US economic performance has been good” and in view of this strength she signalled that there was a high likelihood of another small interest rate rise in December followed next year by the prospect of three similar modest increases. 

This latest announcement is significant as the Fed’s tightening will further increase capital inflows to the USA from Asia and the world’s economic or political trouble spots.  

On 30th September 2017 the FTSE100 closed at 7318(a fall of– 0.78% for the month) and it now stands at just +3.22%for the 2017 callendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a rise of +0.53%for the month of September and the Fund is now up+31.64% for the 2017 year to date.

As we enter October some of our technical indicators still show that it is not all sweetness and light in global markets despite the positive signals from the USA economy and the Federal Reserve.  In some areas of the globe we note:

  • increasing pressure on some already massively indebted governments
  • a lack of confidence illustrated by stagnant or falling consumer spending and by the hoarding of cash by businesses rather than re-investment of earnings into business development
  • a rising tide of potential conflicts that presently threaten Japan and Europe and which is adding further to the flood of flight capital to the United States.

 Japan is at the centre of two of those conflicts:

Firstly, it is embroiled in a long battle with China over the Senkaku Islands in the East China Sea and at the same time Japan is also in the firing line of the North Korean dictator Kim Jong-un.

The chances that China will invade Japan or that North Korea will actually bomb Tokyo are currently still infinitesimally  small but there is little or no chance that Japan can escape the economic impacts of these threats.  Its Prime Minister is trying to swiftly push through a massive defence build-up that Japan simply cannot afford.  Long before this latest North Korean crisis began the Japanese government was already struggling to deal with an economic crisis of its own making.

Japan’s government is saddled with the largest sovereign debt in the world; more than one quadrillion yen in debt (that’s a 1 followed by fifteen zeros) and it means that even if the country had a annual budget surplus of one trillion yen it would still take 1,000 years for Japan to pay off its current liabilities. 

Tokyo’s existing debt is nearly two-and-a-half times the size of the entire Japanese economy and far larger than the over-indebtedness that pushed Greece, Ireland, Italy, Spain and Portugal to the brink of collapse.  Worse still, Japan’s debt is still trending upwards partly because of its servicing costs but largely because the government is committed to social welfare spending, which already accounts for one-third of its 106-trillion-yen budget and is rising automatically by about one trillion yen every year. 

In Europe the sovereign debt crisis we first saw a few years ago in Greece and the other PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) was only the tip of the iceberg. 

  • Despite repeated bailouts, 22 of the present 28 EU member states (including Spain, France, Italy and the UK) are deeper in debt now than ever before.
  • In Spain and France, it would take virtually every penny generated by their economies in an entire year to equal their national debts.
  • Portugal owes 29% more than its economy produces in a year. In Italy it is 33% more.
  • The Greek government, still in dreadful shape even after six huge bailouts, owes 76% more than its economy produces.
  • In contrast to the US decision to taper quantitative easing and phase it out, the European Central Bank still have their printing presses in full swing creating 60bn euros per month from thin air.This extreme and protracted central bank intervention was what Dragi meant when he promised to ‘do whatever it took’ to save the Euro and, indeed, it is the only thing saving the Eurozone from implosion under the weight of its own indebtedness.
Despite all this, in his most recent ‘State of the Union’ address Jean-Claude Juncker (with all the arrogance, complacency and financial incompetence we have come to expect from him and his ilk) proudly stated that the EU has the wind in its sails once again and is heading towards a glorious future.  Sadly, the only thing in Europe suffering from an excess of wind is Juncker himself.

At the same time as presenting this vision of the EU as a land of milk and honey, Juncker was busy behind the scenes trying to frustrate and repress a referendum in Catalonia to determine whether the majoriy of Catalans would prefer to secede from Spain and form an independent state.  Unlike the economic background to the Scottish referendum, Catalonia is the wealthiest and most productive region of Spain and if it were allowed its independence then that would risk destroying the supposed integrity of the Euro (and, thereby, the EU project itself).

Predictably, the very same ‘Project Fear’ tactics used in the lead-up to the UK Referendum have been in evidence and taken to even further extremes. Despite the fact that a referendum was originally agreed to by Madrid (albeit under a different Prime Minister), it has now been declared to be illegal and attempts have been made to prevent polling stations from opening.  It would be difficult to find a better example to illustrate what freedom of expression and choice really means Juncker-style in a centralised, anti-democratic federal paradise that exists only in the minds of EU technocrats, the politically myopic and the economically naïve.

History shows that politicians can ignore and frustrate majority public opinion for decades, but not forever.  Hubris is invariably followed by nemesis (even if there is sometimes a long time-lag between them).  At some point in the future the piper will have to be paid and it would somehow be quite fitting if he came from Hamelin.

From an investment perspective, for the time being all of this will simply add to the flight of capital towards the USA, which is still seen as the safest of financial havens.

A reliable investment mantra in years gone by was that if money supply was tight (that is, if it was difficult and expensive to borrow money) then the stockmarket would head south. Conversely, if money supply was loose (if it was cheap and easy to borrow) then stockmarkets would rise.  Of course, those were in the days of exchange controls to limit movement of capital and when markets were comparatively naïve and parochial.

Nowadays, stockmarkets are global and more sophisticated.  Huge sums of money can be transferred around the world in the blink of an eye and at the press of a button and, in continuation of the trend we’ve witnessed for the past few years, this flight capital will continue to flow into the US stock markets and support what, in times past, would have been seen as over-extended valuations.

At present we remain just 10% invested in equities with the balance of the Fund invested in cash. A proportion of that cash balance is held in US dollars and has been a welcome source of recent gains as sterling has appreciated against the dollar.

When we believe that the time is right to re-enter equity markets we will remain shy of the problem areas of the global markets outlined above and seek to re-establish a portfolio comprising a focused and relatively small number of carefully selected growth stocks that we trust.

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Year after year, equity market trading volumes in August are extremely light, reflecting the fact that large numbers of market makers and traders are away on their summer holidays.  2017 has been no different and so price action in equities throughout August has continued to be subdued but also very volatile.

This month’s report is therefore shorter than usual (which will no doubt be a blessing for regular readers of my turgid prose) simply on the basis that when there is nothing of substance to say then it’s best to say nothing.

August’s bumpy market ride is best witnessed by the fact that the S&P 500 has had as much daily price volatility in the most recent 12 trading days (to the end of August) as it had experienced in the first 152 trading days of 2017 (that is, from start January to end July).  Intraday swings in the index of 1% or more have been a notable feature. 

As ever, global markets follow the lead set by the USA and so the UK market in August has been equally capricious.  The more cynical among us are inclined to interepret this price manipulation as a series of traps set during quiet and light volume trading periods in the hope of seducing the unwary into what superficially might be perceived as the start of upward momentum.  In our view the siren’s call should be resisted, certainly for the time being. 

On 31st August 2017 the FTSE100 closed at 7340.62 (a rise of +0.80% for the month) and it now stands at +4.03% for the 2017 year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a decline of -0.33% for the month of August but for the 2017 year to date the Fund is up +30.95%.

Since 1992, August has invariably been the worst performing month of the stockmarket year.  Over that 25 year time period the S&P 500 index has suffered an average loss of 0.70% during August.  Conversely, the best performing month over that same timeframe has consistently been April.

Of the 21 holdings we disinvested from for safety’s sake at the end of June, all but 2 of them are now trading at lower valuations.  There will, of course, be an appropriate time to buy back into them all but, for the time being, we continue to be happy to sit out of equity markets until the geo-political picture becomes clearer, the global economic situation gives us greater assurance that upward momentum is more than just a mirage and that the risks inherent in equity investment revert to a point where, on balance, the potential for profit becomes more compelling.  We remain vigilant.

Having said that, we also recognise that in 11 of the past 14 calendar years the S&P 500’s high point for the year has been achieved between September and December.  More pertinently, over the past 25 years the last quarter of the year has consistently comprised three of the best-performing months on average for the S&P 500 Index.  October ranks second-best, November third-best and December fifth-best. Taken together, these three months have produced 54% of the index’s total return.  Opportunity may knock.

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Price action in equities throughout July has been unpredictable and difficult to interpret as markets have been volatile but have also remained within defined trading ranges.

The FTSE100 began the month at a reading of 7312.72 and vacillated between that figure and a high of 7487 before closing July at a level of 7372 (a trading range of roughly 2%).

Likewise, the S&P500 in the USA fluctuated between 2409 and 2477 (a trading range of circa 3%) before closing the month at 2470.

The Nasdaq has been the main focus of real gains thus far this year but it, too, is caught in a slightly wider trading range of between 6000 and 6425 and it closed July at 6348.

On 31st July 2017 the FTSE100 closed at 7372(a rise of+ 0.81% for the month) and now stands at +3.21%forthe 2017 year to date.  By comparison the Quotidian Fund’s valuation at the same date shows an increase for the month of July of +0.74%and for the 2017 year to date the Fund is now up+31.39%.

The technology sector in the USA has turned lower following Amazon’s disappointing latest results and the healthcare and pharmaceutical sector is still weighing up the continuing failure of Trump’s administration to repeal Obamacare.  The market generally might also come to see that failure as a proxy for Trump’s other economic plans and in particular his aim to make sweeping changes to the US tax system.

Also in America the second quarter results seaon is in full swing and has not been particularly impressive thus far.  Just over half of the S&P companies have now reported and, whilst earnings have been robust, sales have largely been weak and lower then expectations.

Just as an example of current equity unpredictability, in the early part of one trading day towards the end of July the share prices of many of those organisations which comprise the healthcare and pharmaceutical sector were marked up by 5% across the board.  By close, however, they had all retreated to close at circa 2% down.  All very disquieting and an elephant trap for the unwary.

We continue to be happy to sit out of equity markets until the picture becomes more clear.

In the UK, the government’s announcement in July that the sale of petrol and diesel cars will be prohibited after 2040 will, if true, eventually have a negative effect on oil companies, automotive and parts manufacturers and dealers.  In place of fossil fuel propelled vehicles we are all expected to be driving electric cars in the future. 

The fundamental motivation behind this policy announcement is the EU’s formal committment to cutting carbon emissions by 60% by the year 2040.  Alice is indeed safely in Wonderland and we live in the best of all possible fantasy worlds.

Given that this embargo is still 23 years away, though, there is plenty of time yet for this policy to mutate (in much the same way that diesel car owners have experienced a roller-coaster ride as successive governments have gone from one extreme to the other in the past ten years about the level of carbon emissions from these vehicles).  For diesel owners to now be threatened with prosecution and financial penalties simply for having had the good grace to follow official government advice is beyond parody.

The real-world implications of this drive to eliminate fossil fuels as our main source of energy have not yet sunk in with our current leaders in Europe nor the erstwhile political elite in the UK.  Of course, they see renewable energy as a universal panacea and so turn a Nelsonian eye to the real facts; others see beyond the propaganda and tend to be more pragmatic, seeing complete reliance on wind and solar energy as a universal fallacy.

The basic question yet to be seriously addressed is simply where all the additional electricity to charge these electric cars is going to come from (and that is before we account for the government’s plans for us all to switch to electricity for cooking and heating too from 2030 onwards).

According to Michael Gove it will come from wind and nuclear power.  One official estimate suggested that it would need an extra 30 gigawatts of electricity to cater just for the mass move to electric cars.  In addition, though, we will not just be changing one of our main methods of transport to electricity but also our cooking and heating needs and a Parliamentary report estimates that this will increase our electricity requirementss to 350 gigawatts.

The UK presently has 7613 wind turbines.  The official estimate is that it would take another 10,000 turbines to provide an extra 30 gigawatts of electricity. However, politicians either wilfully or unwittingly continue to confuse the full capacity production of these turbines with their actual output, which is only one-third of the notional maximum simply because wind is intermittent.

Taking the real output figures achieved by wind turbines as opposed to the notional maximum, it would need 5 times the present number of turbines just to satisfy our expected transport needs, each one taking six months to install and all at enormous cost.

The nuclear option requires an even greater suspension of disbelief.  To produce the additional level of electricity required would take another 9 nuclear power stations the size of Hinkley Point (which itself is not due to come on stream until 2030 at the earliest) to be built.  As yet there are no plans to do so and the potential costs involved would be eyewatering.

How that can be squared that with the government’s plans to obtain all our future electricity needs from renewable energy sources is a mystery.  Cloud cuckoo land is a generous understatement.

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At its mid-June meeting the Federal Reserve, as had been signalled earlier in the year, decided to make a further modest uplift to US interest rates.  What was not expected, though, was that its future interest-rate outlook now appears to have become much more aggressive than markets were anticipating.

In the immediate aftermath of the Fed’s announcement the US stock-market witnessed a three-day sell-off and, in particular, prices in the Technology and Pharmaceutical sectors were marked down across the board by between 3% and 5%. Within a week, however, these valuations had been revised upwards again but it was a salutary warning of potential fragility in what have been 2017’s best performing (and perhaps now overbought) sectors.

June’s UK general election had been intended to give the present Government a much stronger hand with which to enter Brexit negotiations with its EU counterparts.  Sadly, a toxic combination of arrogance and complacency made even worse by a manifesto that seemed to have been written by a semi-literate (and certainly politically illiterate) child brought about the dismal result it deserved. 

The final outcome has raised the very real possibility (unthinkable just a few weeks earlier) of Corbyn’s circus (with its unattractive collection of of clowns, jugglers and tightrope walkers) actually being presented with the chance to stamp their Marx on the UK economy.  What a political, economic and investment nightmare that would be. 

I am reminded of a quotation attrubited to Churchill but probably mis-appropriated from elsewhere:  “If you are not a socialist at the age of 20 then you have no heart; if you are still a socialist at 40 then you have no brain!”  A similar unattributed aphorism which is also apposite here: “The problem with socialism is that you eventually run out of other people’s money!”

Brexit negotiations therefore began with the UK somewhat on the back foot and, predictably, the EU’s opening salvo was characterised by bravura, unevidenced financial demands and simplistic threats.  As ever, the EU continues to exhibit its anti-democratic and protectionist raison d’etre.   The uncertainty surrounding these long-winded negotiations are likely to continue to weigh heavily on UK equity markets.

As a precursor to the G20 meeting being held in the first week of July, the Bank of England’s current governor, Mark Carney, made a presentation to a gathering of central bankers in Portugal (incidentally, the collective noun for such a group should be a constipation of central bankers).  In it he asserted that the prolonged period of weak growth and weak investment is coming to an end (which, strangely, is the complete opposite of the tune he was loudly whistling just one year ago in the lead up to the UK’s Brexit referendum).  It wouldn’t surprise us if this announcement is just a clumsy attempt to pave the way for an impending intention to remove or reduce monetary stimulus.  That would, though, be an unpleasant surprise for the equity markets which have become addicted to a steady supply of newly printed money.

Central bankers generally (and, more specifically, Alan Greenspan in the USA) were instrumental in the genesis of the financial crisis from 2007 0nwards.  In their misguided attempts to ‘manage’ (or manipulate) the global economy and by proxy global stock-markets, with their policy of near-zero interest rates and their experiments with quantitative easing they were primarily responsible for the financial depression and carnage that ensued.

Given that recent history, central bankers and the politicians who indulge and support them would perhaps be well advised to adopt the philosophy of minimal interference which has proved to be the cornerstone of high achievement and success in other walks of business and life.  That may be too much to ask of those who so obviously hold themselves in such high regard as self-styled ‘masters of the universe’.

On 30th June 2017 the FTSE 100 closed at 7312.72(a fall of– 2.76% for the month) and now stands at just +2.38% for the 2017 year to date.  By comparison the Quotidian Fund’s valuation at the same date shows an increase for the month of June of +4.07%and for the 2017 year to date the Fund is now up+30.43%.

The CBOE Volatility Index (VIX) measures turbulence in equity markets but it should only be seen as a guide; it doesn’t necessarily give any insight to the proximate cause of such volatility.  The VIX has been steadily falling to new lows in recent weeks but, at the same time, volatility among individual sectors of the stock market — especially in tech and healthcare stocks — has been rising.  There is also a growing disconnect between the sanguine forecasts on these sectors from Wall Street and what is actually happening in the US economy and its legislature.

As well as the VIX, we also look at the Citigroup Economic Surprise Index. This is simply a measure of whether economic data (GDP, jobs, unemployment, housing starts, consumer confidence, retail sales, etc.) are exceeding or falling short of expectations and this index now indicates more negative than positive surprises in the current flow of data reports.

In fact, the CES index has dropped to one of the lowest levels on record. The last time it was this low was in 2011, just before the Dow dropped nearly 20% during the summer months of that year.  Of course, one shouldn’t be too pedantic with technical indicators of this sort but, given the extraordinary investment return we have achieved this year to date, we now feel it prudent to bank that gain and take stock-market risk out of the equation for the time being.  Our view is that there is now more downward pressure than upside potential at the present moment. 

We are concerned that the leading sector of the US stock market this year (technology) came under heavy selling pressure this month.  Taking into account the relatively dismal flow of economic data, the uncertainty of Trump’s measures to replace Obamacare actually being adopted and the economic impact of the Federal Reseve’s decision to further increase interest rates (together with the prospect of yet further tightening before the end of 2017) it is only a matter of time before the Dow, the S&P and the Nasdaq move to the downside.

We therefore sold 90% of our equity holdings on 23rdJune and now sit for the time being in the relative safety of cash/money instruments.  The ideal, of course, would be to buy back in to equities at lower prices than our exit point.  Whether that becomes possible remains to be seen but our re-entry timing will depend upon our view of the underlying strength in the renaissance of upward momentum.

As with any typical market correction this will likely be a relatively temporary reverse before equities gather the strength to go higher again but we prefer caution at this stage before seeking to re-enter the stock-market when the prospect for achieving further gains is weighted more in our favour.

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The huge income inequality between EU member nations is getting worse year by year. Annual income per capita in 2009 was:

  • In Germany           $41,890
  • in Spain                   $32,412
  • in Greece                $29,819
  • in Portugal             $23,122
  • In Poland just        $11,454

Now the differences are even wider:

  • Germany: By 2014 income per capita had grown to $47,852and it would have risen even further since then had the country not taken in over one million impoverished migrants which has had the effect of skewing and suppressing today’s figure
  • Spain: By 2016 per capita income had fallen to $27,012
  • Greece: By 2016 it had dropped to $18,078
  • Portugal: By 2016 it was down to $19,759
  • Poland: By 2016 it had inched up to $12,309

Clearly the richest European country has managed to recover well from the depths of the great Global Recession of 2008-11 but many of the poorer EU countries have continued to slide further into an even darker economic hole.  It is fair and reasonable to conclude that only one country has really benefitted from the EU and the synthetic currency that is the Euro.

As a consequence of that, levels of sovereign debt remain a source of concern and pose a distinct threat to economic recovery and the velocity of it.  Indeed outright default in some cases, whilst unlikely, cannot be discounted

In the UK, sovereign debt is currently running at 85% of Gross Domestic Product.
In France it is over 90% of GDP.
Ireland stands at 117% of GDP.
Italy is at 127% of GDP.
The USA’s indebtedness is 138% of GDP.
Greece sits at 158% whilst Japan is at a resounding 238% of GDP.

Of course, some nations default slyly via the slow drip-drip-drip of a long-term currency devaluation (not possible, of course, in the one-size-fits-all construct of the Euro).  Others beg for a bailout from their central bank or from the IMF (de-facto default by another name) or seek to issue bonds/gilts to unwary, immature or easily pleased investors.  One way or the other, the end of that road is inevitably ugly.

These figures give one pause for thought and they are one of the reasons that Quotidian continues to rely on a tightly focused portfolio which concentrates on a relatively small number of reliable, trustworthy companies.

On 31st May 2017 the FTSE 100 closed at 7485.29 (a rise of+3.91% for the month) and now stands at +0.86% for the 2017 year to date.  By comparison the Quotidian Fund’s valuation on the same date shows an increase for the month of May of +2.53% and for the 2017 year to date the Fund is now up +24.38%.

The fragile nature of global equity markets was tested again in mid-May when the anti-Trump and left-wing biased media in Washington and New York contrived to create a story attempting to link Trump’s sacking of the FBI chief Comey to an alleged leaking of secret information during a meeting with Russia’s foreign minister, alleged attempts to pevert the course justice and yet another re-hash of allegations relating to supposed Russian interference in the 2016 US election (basically throwing any mud they could invent in the hope that some of it would stick).

Without waiting for anything remotely resembling evidence to emerge, the usual suspects immediately began a chorus of calls for Trump’s impeachment.  We live in hope that one day soon the land of the free and the home of the brave will embrace the concept of democracy.

These allegations have all the hallmarks of a politically based stich-up and, from the paucity of evidence currently available, they do not stand up to even the slightest scrutiny.  Intellectual rigour is rarely the forte of the leftist, politically correct media either in the UK or the USA (who much prefer to work on assertion, commentary and opinion). The much touted chain of incriminatory emails and supposedly damning contemporaneous minutes of meetings held in February are, as yet, nowhere to be seen.  The ‘facts’ that have thus far emerged certainly do not support the media’s assertions; indeed, they chime more with the propaganda and inventions we are familiar with from Project Fear.

We are keeping an open mind.  If and when real evidence of wrongdoing does come to light then we will change our views of Trump and of global equity markets.

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April has witnessed further examples of the negotiation techniques favoured by Donald Trump and with which we are becoming increasingly familiar.

For the 2016 year the US trade deficit with China stood at a very substantial $347 billion.  With a view to redressing this imbalance, in his immediate post-election speeches Trump accused China of chronic currency manipulation and threatened to impose a 45% tariff on Chinese imports. 

However, during their meeting earlier this month China’s President Xi Jinping offered concessions for better US access to China’s financial markets and agreed to open up access to the Chinese market for American beef producers too.  Clearly the US is a hugely important export market for China and so it made Trump’s deliberately heavy-handed approach more likely to bear fruit.  I think it’s fair to say that, initially and on the face of it, this is a positive and promising result for Trump and his tactics.

On the other hand, Trump’s attention has now turned to Canada which is the world’s largest importer of US products and the most important foreign market for 35 out of the 50 individual US States.  In fact, Canada is one of the few nations that the US enjoys a trade surplus with (exporting $337.3 billion worth of goods and services to Canada against imports of $325.4 billion); a surplus of nearly $12 billion.  According to data from the US Department of Commerce, America’s exports to Canada support an estimated 1.7 million US jobs.

US-Canadian relations are quickly deteriorating, though, as Trump intensifies a trade dispute with the Canadians by foisting tariffs of up to 24% on imports of lumber from Canada.  Apparently this escalating trade war is in retaliation for recent changes in Canada’s dairy policy that US milk producers claim violate the North American Free Trade Agreement (NAFTA). 

Trump’s standard approach of threats followed by reasonableness is potentially less helpful when the boot is on the other foot.  Given that the trade surplus with their northern neighbours is currently biased so far in the US’s favour, his administration would be well advised to consider more carefully how it proceeds to re-negotiate trade policies with the likes of Canada.  History shows that ‘protectionism’ in any form simply leads to unhelpful tit-for-tat trade wars which ultimately benefit no-one at all (a point that the EU bureaucrats would also be wise to heed).

On 30th April 2017 the FTSE 100 closed at 7203.94(a fall of-1.62% for the month) and now stands at only +0.86% for the 2017 year to date.  By comparison the Quotidian Fund’s valuation on the same date shows an increase for the month of April of +5.54%and for the 2017 year to date the Fund is now up+21.29%.

April has seen yet another resurgence of how European stock-markets in particular are still in thrall to political issues rather than simply to economic concerns.

In the UK, on 19thApril Theresa May surprised markets by announcing a snap General Election to be held early in June.  Markets were caught entirely on the hop and have largely reacted in a negative fashion simply because they dislike uncertainty.  Whilst the outcome of this election is a foregone conclusion and will certainly strengthen the UK’s hand in negotiations for Brexit, markets are likely to remain subdued and in a narrow trading range until the voting is over and the result confirmed. 

The second round of the French presidential election was held on 23rdApril.  The first round last November had produced an apparently decisive lead for Francios Fillon, the middle-right Conservative candidate, and running second was Marine Le Pen, the far right Nationalist nominee.  Both of these contestants are determinedly anti-EU.  However, following a concerted media-led and politically motivated campaign to discredit Fillon and promote Emmanuel Macron, a pro-EU entrant who had finished a distant third in the November primary round but was heavily favoured by the Brussels bureaucracy, the second round saw Macron pip Le Pen (both of whom now go on to contest the final round on 7thMay) whilst Fillon was a close up third and thus knocked out of the race.

Initial stockmarket reaction was very positive but illogically so. Markets across Europe rose by 4% on 8thMay as if all the economic ills of France (and indeed of the EU) had disappeared at a stroke.  Economic reality will reassert itself to European equity valuations soon enough.

The relevance of all this is that Macron is now the strong favourite to prevail and become the next President of France; he has already made it clear that he will not make the Brexit negotiation process a straightforward or reasonable one and whilst Brexit still remains a focal point of investor’s concerns in the UK it is likely to continue to be the cause of short term volatility. 

Elsewhere, and on a more positive note, Trump’s much heralded tax reforms in the USA have now been tabled and will go through the legislation process early in May.  The intention is to cut Corporation Tax from 35% down to 15%, to radically simplify the labyrinthine system of US Income Tax into just three simple rates of tax (10%, 25% and 35%) with more generous tax reliefs, and to repeal the death tax (the US version of Inheritance Tax). 

There is abundant historical evidence to support the case that such reductions and simplifications actually have the effect of increasing the overall tax-take (the concept known as The Laffer Curve). Not least, Trump’s new proposals are designed to encourage those US companies who currently avoid paying tax in America by establishing their tax domicile elsewhere, to return home and make their contributions to Uncle Sam.

Likewise, by putting more discretionary income into the hands of US consumers, there will be an increase in the tax revenue via the US Sales Tax (essentially their version of VAT) as that money is spent.

Despite that, the usual anti-Trump voices have already been raised in protest against this new tax system and it will no doubt have a rough ride through the House of Representatives and the Senate.  It seems that anything to denigrate Trump is the prevailing theme in Washington and if that means ignoring any supporting evidence in his favour in order to criticise and frustrate positive progress then so be it. 

Ultimately, though, I do think the new tax system will be adopted (in part if not in whole) and the expectation of such positive tax reform has been one of the drivers of the recent US stockmarket ebullience.  In some eyes, Trump still remains a figure of fun but there is no doubt that since he took office equity markets in the USA have been and continue to be very positive.  Long may it continue.

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During March three significant events caught the attention of equity markets.  The first of these was the well-heralded uplift in US interest rates announced by the Fereral Reserve following its mid-month meeting.  As expected, this increase was of 0.25% and simply reflects the developing strength of the American economy as it continues to emerge from the dark days of the global financial crisis.

The important point to reiterate here is one we made in last month’s report.  That is that the Federal Reserve tinkers with just short-term interest rates which, in the overall scheme of things, are relatively inconsequential.  In terms of equity market performance the much more relevant rate of interest to watch is that on the 10 year US Treasury Bond.  At the start of this year that yield stood at 2.45% and by 31stMarch it had fallen even further to 2.40%.

The dividend yield on the S&P 500 is a smidgen above 2% which, by comparison, makes investment in US equities a much more attractive proposition than watching the real value of one’s capital inexorably decline in bonds (Treasuries and gilts).  Despite the element of risk inherent in stockmarket exposure, the shrewd element of the investing public has cottoned on that assertion.  In our view, growth in corporate dividend payments coupled with capital appreciation in the medium and long term from a portfolio of well chosen equities is the best way forward.

Secondly, President Trump suffered his first major defeat when his attempt to repeal ‘Obamacare’ was rejected by the US legislature.  It would seem that a number of his fellow Republicans voted against their Commander-in-Chief not because they thought Trump’s plan was too extreme but because it did not go far enough! Stockmarkets reacted badly and we endured four successive days of declining valuations.

The triggering of Brexit eventually took place on 29thMarch after a gestation period of 9 months (quaintly, the same average gestation period as the tortoise*).  Article 50 was invoked by snail mail with a letter from Theresa May being hand delivered by our man in Brussels to one of the multiplicity of EU Presidents. 

Whilst exit negotiations will, no doubt, be deliberately difficult and long-winded we believe that the final outcome will be of great benefit to the UK and its successful economic development.  Simply emoving the extraordinary burden of piffling, unnecessary EU regulations will allow the British economy to escape from the constipation of petty bureaucracy and prosper.

On 31stMarch 2017 the FTSE 100 closed at 7322.92(a rise of+0.82% for the month and now stands at +2.52%. for the 2017 year to date).  By comparison the Quotidian Fund’s valuation on the same date shows an increase for the month of March of +1.64%and for the 2017 year to date the Fund is now up+14.93%.

Despite the negative market reaction to Trump’s setback with Obamacare the Quotidian portfolio continued its upward momentum.  The real engine for recent stockmarket growth in America has been the President’s promise of tax reform and we have little doubt that Trump will succeed in getting his restructuring of the US tax system passed by the House of Representatives and the Senate.

It is inherent in the character of stockmarkets that there will, no doubt, be a correction before this year is out.  However, that will be a pause for reflection before another move higher. 

It is worth noting that in the past 25 years there have been declines of more than 10% (and, on occasion, two or even three such declines) in each and every year.  Nevertheless, in 17 out of those 25 years the market has still ended the calendar year in profit.

The Quotidian Fund comprises a core portfolio of high quality growth stocks and so we believe that we are well set to weather any short-term corrections.

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One month into Donald Trump’s tenure and a clearer picture of the man and his methods is emerging.  Unlike generations of politicians before him, his determination to fulfil his pre-election promises is already apparent and his actions so far are having a palpable positive effect on the US economy and its stockmarkets.

We mentioned in our January report the beneficial effect of lower taxation (both corporate and personal), less regulation and the creation of more jobs; Trump has made positive progress in each of these areas.  In particular, corporate taxes take a huge bite out of a company’s cash flow and profits.  Trump has committed to lowering corporate tax rates and creating incentives which will encourage companies to keep their operations in the US and to hire US citizens (who, of course, would also be US personal taxpayers).

As a result, companies are now more likely to reinvesttheir tax savings in order to grow their businesses.  This would allow them to take on more (and better-trained) employees, improve their infrastructure and technology use and capture greater market share.

During Trump’s first day of actual work as President he met with representatives of many of the largest companies in the USA.  At that meeting he emphasised that he would cut business regulations by 75%.  Freed from the burden of more and more complicated compliance regulations (and the ever increasing numbers of non-productive staff needed to cope with them) this is a huge boost to American business.  Even if he ultimately ends up cutting existing business regulations by only 30% that would still provide businesses with the capital to hire more productive workers, to expand growth and thus to generate greater profits for shareholders.

In particular, at a meeting with the CEO’s and senior executives of major companies in the biotech and pharmaceutical sector (following an initial plea for lower drug pricing which was mere rhetoric and window-dressing) he confirmed that he was reducing the enormous burden of regulation that had been increasing imposed by his predecessor and that had become a constipation to research and development as well as to profits. 

New medicines and drugs will now achieve FDA approval much more quickly and thus generate cash-flow and profits to the conceiving company in a much shorter timescale.  Whereas in the past it could have taken, in extremis, as long as 13 years for a new drug to be approved, that approval process is now expected to be no longer than 4 years.  The impact on share valuations in this sector has been dramatic and the dark cloud hanging over it under the last 18 months or so of Obama and Hilary Clinton’s inept stewardship has cleared.

Since Trump was elected last November the Dow Jones Index has risen by over 10%and held above the technically significant 20,000 level whilst the S&P500, the Nasdaq and the Russell 2000 index (which measures Small-Cap stocks) have also reached all-time highs. This has demonstrably been a very broadly based uplift in US equity markets.

Now that he is established in office and by judging his actions thus far simply from an economic perspective, we believe we are on the cusp of a period of economic growth in the United States that hasn’t been seen in decades.  And as a direct consequence of that, as the USA economy expands then there will be a beneficial knock-on effect to the global economy.

Aside from the economic reasoning outlined earlier in this report, our optimism is based on one market statistic that has been a fundamental factor behind  the US stockmarket’s move higher and that factor is the yield on 10-year US Treasury bonds.  This yield rate has an influence on returns across the entire global financial market not just in the USA.

At the start of 2017 the 10-year US Treasury yield stood at 2.45% and despite the uplift in US equity valuations it has barely moved since. This means that current 10-year US Treasury buyers (of which there are few) are exchanging their investment capital for an annual yield of just 2.45% and the return of their original investment ten years from now with no hope for growth in either the coupon payment or the original capital investment (no more, no less) being returned at the end of their 10-year holding period.  We have often described investment in Treasuries (or gilts in the UK) as return free risk and this is a perfect example to illustrate that point.

Now if we compare the 10-year Treasury return to the S&P500. With the dividend yield on the S&P500 hovering around 2%, investors committing their capital to that benchmark US stock index will receive a regular dividend payment of about 2% annually and, more importantly, the prospect of future growth on both that dividend payment as well as their capital investment.  Growth in the dividend payments as well as potential appreciation on the capital invested is a powerful combination.

Growth (in the equity environment) versus No Growth (in the bond environment).  No wonder that long-term investors are increasingly choosing to opt for growth and that is what is driving stock prices higher.

Even if interest rates are, as expected, pushed marginally higher by the Federal Reserve during 2017 it will only affect the short-end of the yield curve and not the 10-year rate.

With this scenario unlikely to change in the foreseeable future we are of the strategic view that we stay in stocks and shares until the 10-year bond yield moves higher.  If and when that 10-year bond yield noticeably changes then we will change our minds.

Of course, equity markets cannot and will not continue upwards at their recent breakneck pace and so we expect to see a typical stock market correction (to allow share prices to draw breath before moving higher again); that eventuality will be a buying opportunity rather than a panic to the exit doors.

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2016 was an investment year when political considerations rather than economics dominated global markets. Whilst the main indexes in both the USA and Great Britain ended the year in positive territory, those indexes do not act as a proxy for the wider market.  Both the Dow Jones Index and the FTSE100 are weighted indexes and are biased in such a way as to largely reflect Oilers, Miners, Financials and Telecoms as opposed to the middle and smaller sized companies which better indicate the overall economic health of a country.

With the induction of a new President in the USA, the imminent initiation of Brexit negotiations and forthcoming elections in the three largest economies of the Eurozone (Germany, France and Italy; and which seem likely to further diminish the waning power of the EU), we expect 2017 from an investment viewpoint to be in thrall to politics too.

However, we also believe that there are some notably positive economic influences and improvements that will help to propel the US economy forward and, by osmosis, the UK and selective parts of the global market too.

We draw support for that assertion not from the bombast but from the initial actions of the newly installed President Trump.  In his pre-election rhetoric the new President committed to making a number of fundamental economic changes and in his early days in office he has begun to make good on those promises.  Beneficial modifications already include:

Less regulation:  Obama, in his two relentlessly un-achieving terms in office, imposed countless new regulations on US business that only had the effect of stunting corporate growth.  In the early days of January the Republican-controlled Congress moved aggressively to repeal a series of Obama regulations and in the immediate aftermath of his inauguration Trump has lifted many more simply through a series of executive orders.  This process of freeing the US economy from stifling bureaucracy will no doubt continue.

Lower taxes:  The eight years of Obama’s administration saw the imposition (and continuation) of some of the biggest tax burdens in the history of the USA both on US citizens and on businesses.

Not only federal and local income tax rates that extracted as much as halfof an individual’s annual income but also sales taxes, capital gains taxes and death duties.  On top of all that were ‘stealth’ taxes in the form of increasingly high health insurance premiums.  So much for Obamacare.

According to the non-partisan Tax Foundation, US workers had already had to suffer a 31% tax burden even before they came to pay income tax. Trump will be the first American president since Reagan to introduce tax cuts.  He will also replace Obamacare and so greatly reduce health insurance costs.

More jobs: Trump has committed to creating many more new jobs in those parts of America that have suffered most from chronic lack of investment and outdated industries. We have little doubt that he will fulfil that pledge.

The benefits of Trump’s actions (rather than his oft and easily criticised ‘media personality’) can already be seen.  According to a recent University of Michigan survey just the prospectof these tax changes has boosted US consumer confidence to a 13-year high.  Thus, even before the real impact is felt on corporate profits, the positive psychological impact is already sweeping through the US economy and its financial markets.

It all points to radical change in the US landscape; a seismic shift of epic proportions in the economy and in the investment markets. Unshackled from onerous government interference and freed from the suppressive effects of high taxation the US economy should now improve substantially.

“What a man thinks and what a man says is of no particular note. The only thing of importance is what a man does”.  An old aphorism that we keep in mind when sizing up Donald Trump.

He is a man who, on superficial judgement, is easy to deride and underestimate.  A long-term associate of his believes that Trump has succeeded because his opponents miss his message when they take him literally but not seriously.   His supporters do just the opposite and so have shared in his success.

Time may prove otherwise but until then we believe in ignoring most of President Trump’s controversial actions and ‘tweets’ and focusing simply on what he actually does.  From his actions thus far we are persuaded that the promise of strong economic growth in the USA will be fulfilled (and, by extension, that will benefit the global economy too).

At the end of January Trump went on record with theWall Street Journalsaying that the dollar is too strong.  He went on to assert that the value of the dollar is too high (partly) because China manipulates the value of its currency lower.  That situation has been rather obvious for quite some time. 

But currency manipulation does not only apply to China; the Bank of Japan has for years been manipulating the yen lower against the US dollar and every other nation on the planet does exactly the same thing by periodically marking down the value of their currencies too in order to secure a competitive advantage for trade.

The European Central Bank is also doing everything in its power to water down the value of the euro.  Of more economic relevance, the eurozone’s growth rate in 2016 rose to the dizzy heights of 1.6%.  The depressing fact is that this paltry number is actually still double the average EU growth rate over the previous ten years.  Will they ever admit that the ‘federal Europe’ experiment has been a dismal failure?

Perhaps Trump will shortly amend the notice famously kept on the President’s desk in the Oval Office so that it will quite simply read “The buck drops here.”!!  We are sure that ideally he would like to weaken the dollar partly in order to make US exports more competitive and partly so that the US can repay with a weakened currency the enormous debt mountain built up under Obama’s spendthrift stewardship.

However, Trump’s plan to lower corporate tax rates is very likely to trigger massive capital inflows into the dollar as US multinational companies seek to take advantage of lower tax rates to repatriate profits earned and held overseas.  Whilst that may hobble any desire to weaken the dollar, history shows that such incoming money invariably moves into and boosts the stockmarket.

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At the risk of stating the obvious 2016 was been a challenging investment year and the counter-intuitive nature of the year started with a very substantial downturn in global markets on the very first day of trading. Within the first weeks of January that markdown in equity valuations around the world had reached a fall of 15% in trading conditions that were starkly reminiscent of the height of the global financial meltdown in 2008.

Since those darkest days of the global recession it has been a long, slow and stutteringly hit-and-miss recovery with regular setbacks revolving primarily around slow global GDP growth (which, in turn, have been caused by an over-indebted world and systemic demographic issues).

Following January’s awful start to 2016 it took until May for the Quotidian Fund to recover to more or less an even keel and then, in the lead up to the UK referendum and the weeks following the Brexit vote, markets went over a cliff for a second time.  By September we had again recovered most of the lost ground but the latter part of October saw yet another double digit sell-off.

We have seen these market conditions before and are familiar with the necessary management of them. Over the past 25 years there have now been 20 similar occasions when global equity markets have fallen by more than 10% in a relatively short period of time (the most recent of these being in October 2016).  

After that October markdown we again found ourselves in an almost identical situation as we had been following January’s market downturn and that we revisited after the further sell-off in June.  However, by late September/early October we had recovered all the value ceded in June’s downturn and we knew very well that the situation was again one for calmness and cool heads until the storm passes.  We fully expect the markets and our performance to recover its ground yet again in a relatively short timespan; what we see just now is simply a temporary paper markdown not an actual crystallised loss.

On 31stDecember 2016 the FTSE 100 closed at 7142.83 (a rise of + 5.29% for the month and +14.43% for the 2016 year).  By comparison, the Quotidian Fund’s end of year valuation shows an increase for the month of December of + 1.30% and for the 2016 year overall the Fund was -13.99%. 

It is pertinent to note that during the recent US stockmarket rally five stocks have accounted for over 60 percent of the uplift in the Dow Jones Index.  In other words, roughly two-thirds of this latest rally in the Dow can be attributed to just these five companies: Goldman Sachs Group, UnitedHealth Group, JP Morgan Chase & Co, Caterpillar Inc, and Boeing Co. 

And of these, one company has stood head and shoulders above the rest during this post-election upturn: Goldman Sachs.  In fact, the upward re-rating of shares in this investment firm alone have been responsible for 30 percent of the uplift in the Dow Jones Index.  The other four shares combined make up another 30 percent.

The point I am making here is that the apparent increase in the DJ index is superficial and narrowly based, as indeed is the similar rise in the FTSE 100 index.  On closer scrutiny these increases in index levels are confined to a relatively small number of companies which are driving the headline index forward whilst the wider market (and, in particular, the mid-cap and smaller companies) currently remain relatively turgid.  However, there are increasingly positive economic signals from both the UK and the US and it is only a matter of time until these demonstrably more upbeat monetary figures and improved economic confidence cascade through to the wider reaches of the stockmarket.

Evidence to support that view includes:

  • The recent pick-up in economic data (including improving unemployment and income numbers, increased consumer confidence and spending statistics and increasing home-sales figures).
  • The positive uplift in S&P 500 (ie. the wider market) profits and earnings in the last quarter.
  • Prospects for less business regulation, lower taxation and greater fiscal stimulus under President Trump.
One year ago in December 2015, and for the first time in nearly a decade, the Federal Reserve raised US benchmark interest rates by a quarter-point.  At the end of 2015 the Federal Reserve also expected US inflation to trend higher in 2016; indeed it has, with core inflation in the USA up 2.1% year on year and accelerating over the past few months.

Ironically, however, the Fed also forecast four more interest rate increases in 2016 and, despite the fact that this is the one area it has most control over and the one that investors count on the most, it got that future ‘guidance’ hopelessly wrong.  The recent mid-December increase was actually the one-and-only US rate rise in 2016.

Generally speaking, higher interest rates lead to lower stock market valuations and, after that December 2015 rate uplift, equities suffered a severe adverse reaction at the very start of 2016 with the Dow plunging about 2,000 points until the market eventually bottomed out in February.

In its recent statement following this December’s interest rate increase the Federal Reserve signalled a faster trajectory of interest rate increases during 2017.  Historically, though, its forward guidance projections have consistently been so far wide of the mark that we see no reason to overreact to this latest assertion.

In the UK, the 20% drop in the value of the pound against the US$ and most other major currencies since the Brexit vote has made UK Manufacturing highly competitive in the short term. However, UK Manufacturing is just a relatively minor part of Britain’s economy and the very same depreciation in the currency that has helped manufacturers could cause prices to spike for most UK consumers (who rely on the importation of many key goods).  The ongoing uplift in the UK economy and its wider stockmarket through 2017 will be reliant on the continuing ability of UK consumers to maintain upward momentum in their demand for goods and services.

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One of the quirks of the US presidential election system is that there is a long inter-regnum period between the outgoing president actually departing and the president-elect assuming office.  Despite the fact that we have known the recent election result since 9thNovember, Trump does not take over the reins until 22ndJanuary and so markets are effectively in a period of limbo.

In the days immediately following the outcome of the election the US stockmarket (and especially sectors such as biotechnology and pharmaceuticals) soared upwards but it has since been treading water and in the doldrums.  As ever, the US is mimicked by world markets. Until the present vacuum is filled by Trump’s eventual accession, equity valuations are seemingly being based upon conjecture and guesswork. 

In the meantime, Obama is yesterday’s man and now spends his time on a valedictory world tour cementing the hallmark of his tenure as being a period of impressive oratory but very little effectiveness or achievement; honeyed words not matched by action.  Under his stewardship the US national debt has more than tripled and now stands at $19.8 trillion.  Worse still the Committee for a Responsible Federal Budget expects a further $4.6 trillion of debt to be added over the next 10 years as the long-term effect of Obama’s financial incontinence.

With a sense of optimism that turns a blind eye to hard economic reality the US government hopes to fund that deficit through a huge increase in the supply of Treasury bonds.  However, there is just a little problem with this fanciful sanguinity in that investors are becoming ever less willing to lend money at parsimonious yield rates to spendthrift governments.

In the week after Donald Trump‘s election victory investors withdrew more cash out of US fixed-income funds than at any time over the last three years. Foreign governments had already been selling US Treasury bonds hand-over-fist ahead of the presidential election. This is highlighted by Treasury International Capital (TIC) data released last week that showed the liquidation trend already firmly entrenched in September.

For example, China holds a mind-boggling $1.157 trillion in US Treasury securities (the second largest holder on the planet) and they’ve been selling those Treasuries to fight against yuan devaluation.  They have plenty of inventory left to sell as they contend with capital flight and a pullback in trade.  The sell-off thus far from this source could just be the beginning.

Saudi Arabia is another heavy seller of US Treasuries.  In fact, they’ve liquidated nearly one-third of their Treasury holdings since the start of the year.  With its income from oil diminishing greatly as the price of oil has declined, we are likely to see even more selling.

The good news is that with everyone selling bonds, that money is looking for a place to land and historically that landing site has inevitably been the US stock market.  The fact is that many US blue-chip companies have stronger balance sheets than most national governments and are a palpably safer place for capital investment.  In our view this will propel US stocks much higher in 2017.  The Dow Jones index has closed and held above 18,500 already this month and, from a technical perspective, that will validate the next move higher.

On 30thNovember the FTSE 100 closed at 6783.79 (a fall of –2.45% for the month and +8.67% for the 2016 year to date).  However, the mid-cap and small-cap indexes have still not performed nearly so well thus far this year.

By comparison, the Quotidian Fund’s current valuation shows an increase for the month of November of +2.42% and for the year to date the Fund is now -15.10%.  The Fund’s monthly uplift was much better than that until a 3% across the board markdown on the last trading day of November temporarily took some of the shine off.  Yet again this markdown was based entirely on political speculation and has nothing to do with economic common sense.

On the immediate horizon there are three issues of market-moving potential. One of these issues is economic and the other two are political:

Throughout 2016, despite market rumours to the contrary, we have consistently pinned our colours to the mast in terms of US interest rates by repeatedly stating our belief that the next increase in rates will be made at the Federal Reserve’s meeting in December.  We still expect, with a degree of confidence, that the Fed’s mid-month meeting will deliver a small increase of 0.25% to US interest rates.  That should not disturb market sentiment although it would not surprise us to see a short-term flurry of negativity; it is in the self-interest of market makers to create uncertainty in the certain knowledge that it will cause some investors to panic and sell their holdings.  Strangely, and to the sole benefit of the market makers themselves, those same investors will buy back in at higher prices once they feel ‘safe’ again.

The primary elections towards appointing a new President in France are under way and there has been a palpable move to the right of centre politically.  The country’s left wing is fragmented and in complete disarray; Hollande is rapidly heading for the exit door and the velocity of his departure will be facilitated when he fails to win the socialist primaries in January.  It is highly probable that the final outcome will be fought out early in May between Francois Fillon (moderately right of centre) and Marine Le Pen (far right).  Both of these candidates are Eurosceptic and the result will certainly disturb the complacency and self-satisfaction of the EU apparatus in Brussels.

Long before that denouement in France, on the first Sunday in December the Italian referendum will determine the fate of their current Prime Minister (Matteo Renzi, who brought a socialist and pro-EU agenda into office with him). Renzi’s Government has implemented numerous reforms including a relaxation of labour and employment laws with the intention of boosting economic growth.  None of this has had the slightest positive effect on the Italian economy or its lamentable unemployment rate and euro-scepticism in that country is rampant.  Whilst the referendum is not directly concerned with the euro or Italy’s membership of the EU, the outcome will have a profound effect on both of these issues. If the ballot delivers a ‘no’ result (as seems a foregone conclusion) then it will further shake the foundations of the EU and the future of the euro in much the same way as Brexit did.

The Eurozone remains dysfunctional.  There is no fiscal union, no political union, no shared debt nor genuine banking union (all of which should have been essential precursors to the launch of the Euro).  Even the Euro’s founding economist (Otmar Issing) has now disowned it.  His comment on 16thOctober that “one day the house of cards will collapse” is telling indeed.  His implication was that this fateful day would be sooner rather than later.  Our view is that the EU in its current form will implode under the weight of its own hubris by 2021 at the latest.

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For the third time this year investor’s patience was put to the test in October by yet another period of relentless negativity in global stockmarkets.  From 7thOctober onwards equity markets were marked downwards day after day with just the occasional pause for breath. Whilst the FTSE100 retained a mythical level of serenity, the mid-cap and smaller companies end of the UK market took another hit and negative contagion spread through all the major world markets.

The trigger point was attributed to Theresa May’s keynote speech to the Conservative Party conference following which the term ‘hard Brexit’ was invented. Of course, Mrs May did not coin that phrase nor did her speech make any aggressive reference or intent towards forthcoming negotiations with the EU.  Quite the reverse in fact.  What she actually said was quite benign:

“The Britain we build after Brexit is going to be a global Britain.  Because whilst we are leaving the European Union, we will not leave the continent of Europe.  We will not abandon our friends and allies abroad and we will not retreat from the world”.

However, as is becoming ever more blatant and ever more tedious, the ‘hard Brexit’ phrase was created by those with an axe to grind and vested interests to serve (either commercial or political) in newspapers to sell, television schedules to fill and fear, discord or nuisance to stir up.  As a result, equity markets around the world were rattled.

Simultaneously, and adding fuel to the prevailing negative tone, the third quarter earnings season also began this month and analysts were quick (much too quick) to predict profit declines based on a very small sample of early results.  After just a handful of early reports (from less than 5% of the entire S&P500) had been disappointing Wall Street analysts pressed the panic button and simply extrapolated those early negative releases as a template for the entire earnings season.

As their past performance indicates though, market analysts generally and Wall Street analysts in particular have a near-perfect track record of missing the point.  They continually underestimate actual results and are often way off the mark with their forecasts.  Despite that, they do influence the short-term direction of stock market valuations.

Towards the end of October that assertion on the efficacy of analysts gained credence and support from a surprising quarter.  In a statement on 25thOctober the Governor of the Bank of England, Mark Carney, acknowledged that current market action may be based on ‘mistaken’ analysis of the state of the economy.  Such an admission from one of the leading lights of Project Fear is most welcome and better late than never.

In fairness, corporate management also contributes to the forecasting problem in that it has a tendency to under promise and over deliver and so analyst’s estimates are frequently too pessimistic.  Companies and the analysts who cover them effectively “conspire” to set the bar too low in order that companies can surpass it with positive earnings surprises and so keep shareholders happy.  Equity valuations that have been artificially suppressed then rise again to more realistic levels when actual results turn out to be better than dubious expectations.

In fact, over the past four years actual corporate results have, on average, beaten analysts estimates by 4.3% according to research by FactSet.  And so it has proved again this year as the results season has progressed through October.  As I write, 61% of the S&P500 results have now been released and, of these, 78% have produced positive upside earnings (profits) surprises.  Thus what has been marked down on unjustified low earnings assumptions and self-fulfilling pessimism must come up again on the reality of higher actual results.  There is good reason for optimism that these better than expected earnings will now be reflected in a belated but warranted uplift in share valuations.

Lurking in the background and adding to the October gloom has been the US Presidential election, now entering its finishing straight.  Markets abhor uncertainty and although in recent weeks the contest seems to have swung towards the Democratic party there is still a very real possibility for the result to reflect the opposing views held by very many disaffected Americans living outside the left-wing ‘bien pensant’ and media-savvy bubbles of New York and California.

On 31st October the FTSE 100 closed at 6854.22 (a rise of +0.80% for the month and +11.40% for the 2016 year to date).  However, the mid-cap and small-cap indexes have not done nearly so well thus far this year.  Many of the companies in the Footsie index have a substantial part of their earnings denominated in US dollars or Euros and so have benefited from the depreciation of the pound since the Brexit vote.  This is a currency-driven short-term boost simply because the pound is trading on politics not on the economy at the moment.  By comparison, the Quotidian Fund’s valuation at the same date shows a markdown for the month of October of -10.06% and for the year to date the Fund is now -17.11%.

US capital markets are still considered the most liquid and safest markets on the planet and that is why our portfolio has a major bias towards the American markets. Although the Federal Reserve is likely to raise US interest rates in December (if for no other reason than just to save face) the Fed is not going to tighten nearly as much after that as the market currently seems to think.  In our view it could be another six to nine months into 2017 before they move on rates again.  The fact of the matter is that the global economy is just not strong enough yet to absorb a normal round of monetary tightening at this stage.

On a lighter note we have been amused by the childish posturing of various politicians in Europe who are trying to give the impression to their own people that negotiations with the UK on Brexit will be tough and uncompromising. Of course, neither Merkel nor Hollande will still be in office when the real negotiations are in full swing next year.

The suggestion by one Eurocrat that negotiations will only be held in French was particularly laughable.  I understand that discussions are now taking place to employ Brian Blessed to lead the UK’s negotiating team in order that we at least have someone to shout loudly at them in English!

Finally, I am obliged to two professors at the London Business School for research going back as far as 1955.  It shows that investing in UK smaller companies over the past 60 years has achieved an annual return of 15.4%.  That, of course, is why we also focus a large part of our efforts in the small caps area.

There is a catch, however (and a rather obvious one).  Although this performance track record over such a long period is very attractive (and the sector tends to be overlooked by the majority of investors) the 15.4% return did not, of course, come smoothly year after year. In some years’ smaller companies powered ahead by 30% or even 40% but in several other individual years between 1955 and the present day they also fell by similar amounts.  As we all appreciate, volatility is inherent in equity market investment; it’s the overall medium to long result that counts.

Falls of this magnitude so often cause private investors holding UK small caps to make the mistake of giving up in fear, crystallising their 30-50% loss and then never investing in the stockmarket again.  This is a much more costly error than enduring periods of volatility.

We invest in good, reliable companies and hold them through these market cycles (often building up our holdings at attractive low prices).  We are long on stoicism and strongly believe in the proven benefits of riding out periods of volatility and times when temporarily muted valuations have been based on institutional group-think and over-pessimistic analysis.  Patience is particularly relevant in this current period of lacklustre investment returns.

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Global stock markets were relatively quiet from mid-July through to the end of August.  In fact, the S&P 500 went for 43 trading days without moving more than 1% in either direction.  However, that period of relative calm was decisively broken in the early part of September as the S&P 500 plunged 2.50% on Friday 9th, rebounded 1.50% on Monday 12thand then again plunged another 1.50% Tuesday 13th. 

There was no actual economic reason for this renewed turmoil.  Wall Street just loves to engineer investment volatility and sometimes take it to uncomfortable extremes.  Market makers like to keep the fear factor at the forefront of non-professional investor’s thinking and thus provoke the unwary into selling when they should hold fast (and let buying opportunities pass when they should be filling their boots). In this latest burst of volatility all major asset classes saw declines.  As ever, Wall Street bangs the drum and global markets march to the same tune.

In theory, stock and bond prices move in opposite directions from each other; when share prices decline bonds rally upwards and vice versa.  Too often for comfort that old truism does not persist in today’s markets. One of the consequences of the financial crisis has been that much conventional economic thinking has been turned on its head.  Thus we see that supposedly non-correlated asset classes frequently now all move in the same direction whereas in times past they counter-balanced.

In practice it has always been true that stock, bond, commodity and currency markets are influenced by the actions of central banks.  In recent years, however, that influence has reached new extremes as a direct result of endless political tinkering and central bank intervention. This has created an unhelpful addiction to financial stimulus which, in turn, has the effect of illogically distorting asset prices across all the main asset classes.  It can be compared to giving £10 to a drunkard; you know what he’s going to do with it but you just don’t know which wall he’s going to use! These frequent and unpredictable bouts of volatility will only stop when politicians stop interfering and simply allow markets to price assets on the basis of economic reality.

A few months ago the Bank of Japan (BoJ) decided that it would take the ultimate monetary policy action (and a step into the unknown) by taking short-term rates into negative territory.  Seemingly the thinking (if one can call it that as opposed to guesswork) was that Japanese banks would thus be forced to lend out money rather than see the value of that asset depreciate on their own books.  However, like many market manipulators before them, the BoJ did not anticipate the unintended consequences of their action.  Negative short-term rates drove rates on longer-term bonds into negative territory too and so banks (who make most of their profits by borrowing short and lending long) saw their profits evaporate.  With diminishing profits, banks’ lending standards perversely became even more stringent; they thus lent even less than before and ended up with the greatest hoard of cash in Japanese history.  This, of course, was exactly the opposite of what the BoJ had intended.

On September 21stthe BoJ essentially admitted defeat when it announced that it will no longer practice standard quantitative easing (QE) but instead would focus on yield targeting.  It still intends to buy Japanese bonds and stocks but will now ensure that the yield on the benchmark 10-year Japanese Government Bonds remains above zero.  In short, the BoJ asserted that there was “no limit” to their willingness to keep 10-year rates above zero.  We’ve heard that sort of rhetoric before but invariably it’s a typical politician’s empty promise.

Through its actions the BoJ is effectively nationalizing the Japanese stock-market. From figures compiled by Bloomberg, by the end of 2017 the BoJ will be the largest shareholder in 55 of Japan’s largest companies.

Meanwhile, both the Bank of England and the European Central Bank have announced massive asset and corporate bond buying programmes too and seem to be following the same road as the BoJ.

Observing that situation with a cynical eye, conventional pricing mechanisms are in danger of being swept away by this tsunami of newly printed money and, with governments becoming the largest shareholder in such a substantial number of major businesses, the scope for market manipulation is becoming a cause for concern. 

On 30thSeptember the FTSE 100 closed at 6899.33(a rise of+1.15%for the month and +10.53%for the 2016 year to date).  However, the mid-cap and small-cap indexes have not done as well thus far this year. By comparison, the Quotidian Fund’s valuation at the same date shows an uplift for the month of September of +1.17%and for the year to date the Fund is now –7.82%.  We continue to claw back the ground temporarily ceded during two substantial global market downturns earlier in the year and, with three months of the year remaining, I remain confident that we will be nicelyinto profit for 2016 by the year end.

We have been following with wry amusement various ongoing arguments between the USA and the European Union, which have accompanied their 10 year negotiations in search of agreement on a trade deal. These have come to a head during September.

To gain perspective, it is worth comparing and contrasting the historical background to the trading and business styles of each of these blocs. 

The US approach to international trade can best be understood through the philosophy expressed some years ago by John Connally when he was their Treasury Secretary.  He said that “All foreigners are out to screw us and it’s our job to screw them first”. 

From the other corner, the EU is and always has been protectionist, anti-capitalist and anti-business (think Jeremy Corbyn on performance enhancing steroids).  The latest salvos give one an even better insight into the workings, beliefs and motives of the EU.

At the end of August the EU attempted, through the sly medium of instructing Ireland to collect the sum demanded, to impose an eye-watering ‘fine’ on Apple for what was alleged and painted as tax avoidance.  The device used to construct this artificial judgment, though, was an assertion that Apple had received financial assistance in the form of low rates of taxation from Ireland and that this ‘state aid’ was forbidden under EU ‘rules’.  This interpretation of accepted international tax law is interesting to say the least.

Quaintly, government support given to banks throughout Europe (and particularly in the UK) to ensure their very survival during the global financial crisis was not deemed to have been ‘state aid’. 

Within days of that ‘judgment’ the USA declared that negotiations on a trade deal with the EU were over.

This was followed rather swiftly by the US Department of Justice imposing a $14 billion fine on Deutsche Bank on the grounds of mis-selling (packaging and selling toxic debt monetized in the guise of AAA grade assets). As you will have seen in recent news bulletins, Deutsche Bank is in grave financial difficulties and close to failure and its share price has plummeted accordingly.  How enigmatic that the amount of each of these fines is strangely similar. 

It is also interesting to note that the US has chosen its target well.  Deutsche Bank is close to collapse; will the Germans allow it to go bust or will they step in with financial support (although they were not prepared to help Italian banks in this way)?  Would that be “illegal state aid”?  If a German bank, of all things, were to go bust what would that say about that famed German financial rigour (as used to impose discipline on Greek and Italian banks!) and what would it do for the future of the euro itself.  Hats off to the US official who thought out that particular tactic!

In the background to all that, for the past 5 years the EU has being doing its best to find an excuse to fine Google over claims that it has become too dominant in its field of business which. of course, is deemed to be ‘unfair’ in the other-worldly eyes of the EU.  Apparently, being too good at what you do (and therefore beating the competition hands down) falls foul of EU anti-competition rules.  To inflame matters further, a US investigation in 2013 cleared Google of misusing its dominant position (well they would, wouldn’t they) in the way that the EU were representing. 

All good clean fun.  In its move against Apple I can only conclude that the EU was trying to get its retaliation in first!  The idea that the EU could overturn or even challenge the USA’s global financial hegemony is an alarm call for the men in white coats to pay an urgent visit to Brussels.

It all goes to show that the pantomime season has started early this year!

EU Rules and Reality 
The EU’s unbendable and unbreakable ‘rules’ (and how they are ignored when expediency suits our bureaucratic dictators).

The truth is that these ‘rules’ are simply words that sound good and are meant to intimidate.  However, they are subject to whatever political interpretation suits the Brussels mafia at any given point in time.

For example, the ‘sacred’ stability and growth pact which, when the euro was first introduced, was meant to limit each EU country’s budget deficit to 2 percent.  As soon as the real world interfered with the EU’s Malice in Blunderland economic illiteracy, this pact became unworkable and was quickly and quietly removed.

Likewise, the ‘no bail-out’ clause intended to protect members from bankrolling other nations was quietly torn up as soon as the Euro started to collapse.  It could well become the same with the ‘single market’ and ‘open borders’.

Quite simply, the modus operandi of the EU is that all their apparently implacable ‘rules’ are broken with impunity if political expediency requires them to be broken in order to maintain the charade.

The next potentially market-moving event is the US Presidential election which is now only a month away.  Both candidates are equally unpalatable and are neck-and-neck in the opinion polls (which, of course, have proved to be so reliable in recent elections and referendums!). 

I have no doubt that stockmarkets will react negatively whichever of Clinton or Trump prevails but I believe this will be just a short term effect.  We have known for three months or so that the choice falls between just these two unimpressive candidates and so the final outcome will not be a long-term surprise to financial markets.

If Clinton wins she will in effect be a non-executive figurehead only and have no real legislative power.  The US legislature (Congress, comprising The Senate and the House of Representatives) is firmly dominated by the Republican Party which will subdue and overwhelm any of Clinton’s wilder inclinations and expenditure.  She is profoundly disliked and distrusted by over 60% of Americans most of whom would dearly like a change away from the socialist policies pursued by the Obama administration over his two terms in office and which are so foreign to American culture.  In many parts of the United States it is now possible to ‘earn’ more on welfare than it is to work which is a shocking betrayal of the aspirations inherent in the ‘American dream’.  The fact that Clinton is still in the race is a telling commentary on the persona of her Republican rival.

Trump is beyond parody.  Is he as crass as he appears or is he dumbing down and making wild and idiotic statements in order to appeal to red-necked Americans, the very people who would normally vote for the Democratic party?  Time will reveal all.  If he should prevail and be sworn in as President then Congress will no doubt also supress Trump’s idiotic and exuberant buffoonery.

It beggars belief that, on the face of it, these two are apparently the best alternatives America has to offer. 

Once the election outcome is known and when the dust has settled, I am sure markets will quickly refocus on economic rather than political news.

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This month has been relatively subdued, reflecting lower then normal trading volumes during the main summer holiday season.  There have, however, been some points worth noting for their potential to move equity markets.

The first of these is the timing of a long-expected upward movement in US interest rates.  Yet again market commentators in America are pushing the case that this change will be made at the September meeting of the Federal Reserve. We remain of the view that nothing will be done in advance of the US Presidential election and so December remains the most likely time for this well touted increase.  Whatever the reality, an increase of 0.25% should not be much of a shock and is unlikely to have too dire an effect on equity valuations.

Of more immediate effect has been another politically motivated intrusion by the unlovely Hillary Clinton who, in the last week of August and entirely for electoral reasons, repeated her empty threat to control price increases by drug and biotech companies.  The paucity of her assertion is obvious but it again had the short-term effect of an across-the-board markdown of 3% in the biotech and pharmaceutical sector.  Economic reality will reassert itself shortly.

After ten years of strategic talks and three years of serious and detailed negotiations it was quietly announced by the German vice-chancellor over the last weekend of August that the mooted EU/US trade deal has finally collapsed.  Perpetual disagreements between the two sides have killed off any prospect of a deal to establish the so-called Transatlantic Trade and Investment Partnership (TTIP) and so commercial traffic between these two blocs will continue under the aegis of World Trade Organisation rules (as has been the case for many years now).

Britain had been a major supporter of TTIP but with its impending departure and the ongoing impossibility of getting 27 disparate countries to agree on acceptable trading terms the talks have come to an impasse.  France objected to opening up Europe’s farming and film industry to competition from the US whilst Germany opposed any potential undermining of labour and environmental standards.  Similar EU negotiations with India and China over the past ten years have also ended in terminal deadlock.  Sadly, the unilateral self-interest, protectionism and discrimination on which the EU is founded will continue to prevent its development as a credible economic unit.

It may be coincidental but the EU’s misguided attempt to impose a demand on Apple for ‘unpaid taxes’ may have been the straw which has finally broken America’s patience with what the US Treasury describe as the EU’s attempt to become a ‘supra-national tax authority’.  It is quite clear that the EU has acted well beyond its powers in arriving at this invented ‘judgement’ and both Apple and the Irish Government will appeal the ‘ruling’.  The EU’s logic and its controversial interpretation of international tax law is laughable in its idiocy and will only lead to years and years of unresolved legal argument.

On 31st August the FTSE 100 closed at 6781.51(a rise of+0.85%for the month of July and +8.64%forthe 2016 year to date).  The mid-cap and small-cap indexes have not done as well thus far this year; however, the slow ones now will later be fast.  By comparison, the Quotidian Fund’s valuation at the same date shows an uplift for the month of August of +0.91%and for the year to date the Fund is now – 8.89%.  We continue to claw back the ground temporarily ceded during two substantial global market downturns earlier in the year and, with four months of the year remaining, I remain confident that we will be nicely into profit for 2016 by the year end.

Theodore Roosevelt once described America’s foreign and economic policy as “Speak softly and carry a big stick”. It obviously worked as the US has since established global financial hegemony.

The EU clearly prefers to use “Speak very loudly and carry a plasticine baguette” as their mantra.  It doesn’t carry quite the same force and, fundamentally, it doesn’t work.  Empty vessels.

The EU thus continues to prove itself to be a clueless, inefficient and fraudulent bureaucracy which works entirely and tirelessly for the benefit of its political elite who, in turn, have an infinite capacity to recite (or create) unenforceable rules.  Strangely, those same rules are circumvented or ignored completely when political expediency and self-interest demands.

Wittingly or unwittingly it repeatedly continues to expose the central and fatal flaw in the entire charade.  Its unelected technocrats like to act as if the EU has sovereign power over its individual member countries but, of course, this is far from the reality.  In its unseemly rush in the early 1990’s to establish the Euro as its common currency its leaders failed completely to establish the necessary political and fiscal union as an essential prerequisite.  The EU is thus holed beneath the waterline. 

Much as they would like to believe it and much as they like to bluff, the EU has absolutely no legal right to interfere with a sovereign country like Ireland’s taxation policies and political choices.  Hubris is inevitably followed by nemesis and persistent illegitimate acts of overbearing arrogance by its elite will ultimately (and thankfully) bring about the demise of the entire EU federalisation project.

On a positive note, the collapse of TTIP will have a beneficial implication for Britain in that, following Brexit, the UK will be free to negotiate a mutually beneficial trade agreement with the USA without any of the baggage that the EU brings with it.  Such a deal will not take long to ratify.

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A month on from the Brexit vote and there is growing evidence that the pre-referendum warnings of catastrophic consequences in the event of a decision to leave the EU were, to say the least, overdone.  Deception masquerading as ‘facts’ was the hallmark of the ‘remain’ campaign as can now be clearly seen.

There are welcoming signs of future trade agreements with, among others, China, India, the USA and Australia and the predicted stampede of companies leaving the UK has not materialised.

In the immediate future, though, the first bridge to cross has to be an equitable exit from the EU.

As we will all be aware, the first step in that process is to invoke Article 50 of the Treaty of Lisbon and the UK controls the timing of that in entirety. Whilst the EU might wish to rush things (in order, of course, to avoid any contagion of Brexit to other countries) it is entirely in the UK’s gift as to when that button should be pressed.

We are already in the EEA (European Economic Area) which is where (once outside the EU) we must choose to remain.  This, together with an application to join the European Free Trade Area (EFTA) will give the UK an immediate solution to the ‘access to the single market’ trading problem.

More importantly, under Article 112 of the EEA Agreement, the UK also has the unilateral right to claim a partial opt-out from the EU’s ‘freedom of movement’ rules.  This would allow us to set up a quota system to control immigration from other EU countries.

The EU will no doubt seek to encourage us into going along with their much-touted plans for a ‘two-tier’ Europe which would leave the present Eurozone countries united and centralized and with the UK and other non-euro nations sitting on the side-lines (where we would possibly be joined by so-called ‘neighbouring’ countries such as Turkey and Morocco).

This will no doubt be portrayed by the EU as a very attractive compromise whereas it would, in fact, be a highly deceptive and damaging strategy for the UK. It would still leave us as a part of the ‘supranational’ EU system but as a second-class member and still with all the disadvantages that we voted to extract ourselves from.

EU rules dictate that negotiations for exit must be completed within two years of triggering Article 50.  The most disastrous option is that we could reach the end of our two-year negotiation period without any agreement having been reached.  Bearing in mind that the EU has already taken 10 years to negotiate a trade deal with the USA and still there is no agreement in sight. Likewise, negotiations with India were abandoned after nine years of pointless wrangling and the inability by the EU end of things to make a decision.  The impossibility of 28 countries reaching accord is palpably obvious when one looks at the pigs-breakfast they have made of trade negotiations thus far.

On invoking Article 50, therefore, the UK should immediately apply for an extension to the 2 year negotiating period (as the rules quite legitimately allow us to do) in order to avoid the absurd situation where, after leaving the EU but in the event of having failed to reach an acceptable exit agreement within 2 years, the remaining EU counties could still sell to us but we would no longer have the necessary paperwork to sell to them!

We must hope that our negotiators are capable and well-informed enough to negotiate the labyrinth and the sophistry of their EU counterparts.

On 31st July the FTSE 100 closed at 6724.43 (a rise of +3.38% for the month of July and +7.72% for the 2016 year to date).  The main UK index has already surpassed its pre-Brexit level.  By comparison, the Quotidian Fund’s valuation at the same date shows an uplift for the month of July of +15.39%and for the year to date the Fund is now – 9.71%.

As was predicted in last month’s report, the immediate post-Brexit equity market markdown was synthetic, transient and based purely on panic and fantasy.  Nothing could better illustrate the artificiality (one could even say cynical) nature of that negative adjustment to equity prices than the speed of our recovery.  Substantial ground was regained by the Fund over the month and we remain confident of continuing positive momentum into profit before the year-end.  That sanguine assertion is supported by the following technical analysis:

For the past twelve months equity markets have been stuck in a frustrating trading range which has continued to test the patience of investment managers and investors alike with not just one but three sharp stock market downturns of 12% or more over that period.  Frustrating though they are, it is these downturns that eventually pave the way for the next bull run higher.

Taking the S&P 500 index as an example, history shows that whenever stocks take “a long pause” between 52-week highs and then finally manage to break out to the upside, they go on to post even further gains over the following 12 months (according to research from Merrill Lynch for which I am obliged). The Merrill Lynch data shows that whenever stocks have gone for more than 300 calendar days before making a new 52-week high then, 91% of the time, the S&P 500 continues to go up over the next 12 month period.  That is rather an encouraging precedent.

The S&P 500 Index last attained a new 52-week high in May 2015 but in recent weeks it began to close in on that highpoint once again and then actually reached a new all-time high at a level of 2175 on 22ndJuly.  Such a bullish signal has only occurred 23 times since 1929, and in the succeeding 12 months it has produced above-average gains for equities 9 out of 10 times in the past.

Rather than yet another correction downwards as so many relentlessly negative ‘experts’ are keen to predict, the historical analysis above suggests that this index will rally further to even higher highs over the coming year.  And where the US market leads, global markets follow.