News Archive

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Quotidian’s last two monthly reports have both been rather extensive simply because there have been a wide-ranging number of worthwhile , market moving topics to bring to your attention. June, however, has been less newsworthy but more performance driven and I see no virtue in highlighting or repeating many of the factors that you are already aware of. You’ll no doubt be relieved to hear that this month’s report will therefore be far more concise.

It may also please you to see that there has been a respite from the period of subdued valuations that has dogged equity markets for much of this year. Hopefully, common-sense has made a long-awaited and welcome return to the process of pricing shares; long may that persist.

On 30th June 2021 the FTSE100 index closed the month at 7037.47 (a rise of +0.21 in the month of June itself) and it now stands at up +8.93% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 30th June shows a rise of +4.73% for the month and so the Fund is now up +10.33% to the halfway point of 2021.

For the time being it appears that the optimism we’ve expressed over the past three months (despite the pessimistic, disconsolate and unnecessarily miserable equity market pricing) was well placed. We also continue to believe that the second half of 2021 will continue to be much more positive.

In particular, and to support that view, please indulge me whilst I briefly re-emphasize two salient economic facts that I first mentioned in last month’s report. On 25th May we learned via forecasts from the National Association for Business Economics (NABE) that the US economy is expected to rise by 6.70% this year and that inflation in that country is expected to remain at 2.80% for 2021 and then fall to 2.30% next year.

Isn’t it bizarre that during May many of the usual gloomy market-making suspects were promoting scare stories and issuing intensely negative briefings based upon confected ‘concerns’ about rising inflation leading to precipitous falls in equity markets. This was the general narrative just before those very markets began, throughout June, their steepest rise of the 2021 year thus far. Surely the gangsters who control the stock-markets wouldn’t have been trying to dislodge unwary or easily alarmed investors (and thereby simultaneously taking deliberately undervalued shares back onto their own books) just before marking those previously suppressed prices upwards again to more economically realistic levels (and selling them back again at higher prices to another raft of gullible investors). Perish that unworthy thought.

We also draw a degree of comfort from a piece of research issued by Goldman Sachs on 21st June wherein they anticipate that $500 billion will be invested into the US stock-markets in the foreseeable future. In fairness, we would normally treat that sort of hubristic statement (and especially from that source) with a high degree of scepticism.

However, on this occasion, what gives it some credibility are the encouraging forecasts mentioned above from the National Association for Business Economics together with consistently positive messages from the Federal Reserve in relation to their attitude to and intended methods of controlling future US inflation.

Let me leave you on that high note for this month and, for the time being, we remain on course for a more upbeat and confident (and less volatile) second half of 2021. Steady as she goes.

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“Nothing is either good or bad but thinking makes it so” is the most apposite description of the ongoing battle between the forces of good (as represented by the Federal Reserve, the USA’s Central Bank) and the powers of evil (economic analysts and equity market-makers) as the 2021 investment year moves tediously towards its midway point.

That quotation, of course, comes with my thanks to a very promising, up-and-coming English playwright (originally from a little hamlet near Stratford-upon-Avon) whose work I first had thrust upon me when I was aged fifteen. I must say that I found his style then rather laboured and cumbersome and his technique somewhat naïve and old-fashioned at that point in time but, by the time I reached the age of twenty-one I was quite amazed by how much he’d matured. Long may his elegance, finesse and panache with use of the English language continue to progress and brighten our lives.

On 31st May 2021 the FTSE100 index closed the month at 7022.61 (a rise of +0.76 in the month of May itself) and it stands at up +8.70% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st May shows a rise of +0.35% for the month and that means that the Fund is now up +5.35% for the 2021 year so far.

You will be aware from our earlier monthly reports this year that global equity markets (and, in particular those in the USA) have fluctuated this way and that but essentially been directionless since 2021 began. The good news is that, despite this period of lacklustre performance, we still remain nicely above the UK’s annual rate of inflation and so the real value of your capital is well ahead of the game (and we anticipate that this will continue to be the case). Indeed, we also believe that the second half of the year will be much more positive.

Our optimism is sustained by the massive financial stimulus injected into the US economy by the new Biden regime in the early stages of his Presidency. Whenever this form of financial impetus has been used in the past it has always created an impressive uplift in real asset values (ie. typically in the values of stocks, shares and property).

Economic theory could be interpreted to suggest that money essentially created out of thin air could be the cause of short-term gain (perhaps two or three years) but then followed by longer term pain and it has been the disagreement between those factions on opposing sides of this debate that has been the proximate cause of continuing equity market volatility.

However, we can argue with equal force against the negative narrative preferred by equity market-makers as they attempt to justify their reasons for adjusting prices downwards.

We are clear that the economic recovery since the pandemic has been in retreat is based on real activity and measurable growth and this gives further support to our confidence in equities.

There is every reason to suppose that the confected narrative of a rotation from growth stocks into value stocks being pushed by market-makers (and the market-analysts who serve them this garbage) will prove to be a red herring. In our view this has been a synthetic and deliberately misleading storyline created simply to inject concerns, doubts and fears into investor’s minds whilst resolutely maintaining complete silence about the hugely successful latest corporate results season (especially in the tech sector) in order to justify the wild gyrations in recent equity pricing.

Market analysts are generally held to fluctuate between mildly eccentric and a sandwich short of a picnic. Their findings are best received with a gentle (but not condescending) smile whilst simultaneously looking skywards. Market-makers, on the other hand, employ a wide range of devices (based largely on the psychology of fear and greed) designed to encourage investors to panic out of markets when they should be holding tight and to rush back in to investments when they should be sitting motionless on the sidelines.

It is also possible to interpret the 2021 disconnect between economic data and equity pricing (and its volatility) as the market reaction to a political difference of opinion and power struggle between the current chairman of the Federal Reserve (Jerome Powell) and the immediate past chair of that body (Janet Yellen). Powell is a right-wing Republican and Yellen a left-wing Democrat. No surprises that there are differences of opinion then.

As the man currently in the hot seat, Powell, quite rightly seeks to maintain and defend his authority from unwelcome and politically motivated interference by his predecessor. For example, it was Yellen (in her new role as Secretary of the US Treasury) who, last month, proposed and promoted a global minimum corporation tax rate designed to prevent profit shifting by companies as a means of minimising or avoiding tax. There is increasing pressure from Biden in the US and Macron et al in the EU for this to be adopted (or imposed) globally at the G7 meeting this month (11th – 13th June).

Powell and Yellen also seem to disagree on the likelihood of future inflation in the USA and the most effective interest rate policy to adopt in order to control it. Between them they make Tom and Jerry look like the very model of organisation, common purpose and friendship. Not helpful when investors are seeking to forecast and navigate stock-market gyrations with any degree of accuracy.

On 25th May we learned via forecasts from the National Association for Business Economics (NABE) that the US economy is expected to rise by 6.70% this year and that inflation in that country is expected to stand at 2.80% for 2021 and then fall to 2.30% next year. How strange that analysts and market-makers have been promoting scare stories of 5% inflation in the US being on the horizon.

It might well be that US inflation will rise in future years as a consequence of Biden’s remarkable stimulus program but the Federal Reserve has declared time and again that it is ‘on the case’. It is dovish about inflation and states that it does not intend to raise interest rates for at least two or three years into the future. It has also reaffirmed that it continues to closely monitor the situation, will tolerate inflation at its current levels and still has all the tools necessary (and will use them without causing unwanted economic damage) to deal comfortably with any spike higher if and when that becomes the case.

In our opinion, those statements from the policymakers at the Fed make a nonsense of the charges of complacency and of causing an ‘inevitable’ increase in inflation made against them by the usual suspects in US investment banks (who largely comprise the bulk of equity market-makers) and who have used these assertions as an excuse to manipulate equity prices and cause the quite ridiculous volatility we have witnessed in recent months.

As for Biden’s role in all this, he presents himself as a pillar of rectitude despite having poured ever more freshly printed money into the rampantly hot US economy. He has already shown himself to be way out of his depth and is seen as weak and a figure of fun by America’s enemies in China, Russia and Iran.

That, rather neatly, brings us back to the meaning of the opening Shakespearean quotation; fundamentally people think what they choose to think and believe what they prefer to believe.

Quarterly corporate results issued in January and updated again in April (together with hugely positive expectations of future sales and profits) suggest very clearly that a number of highly successful companies have been severely underestimated and undervalued. This will no doubt correct itself in the course of the second half of this year.

As ever, as the 2021-year progresses, if our analysis and judgement prove to be off beam then we will make any necessary and appropriate adjustments to our current portfolio in order to continue to achieve the attractive investment returns that usually emerge from being in the right sectors of the right markets at the right time.

On the penultimate working day of the month we received details of a court judgement issued in Holland that could have severe implications for the oil industry and have equally worrying knock-on effects to commerce and industry specifically and investment generally.

In a judgement that is full of opinion and sadly lacking in facts, a court in the Hague has ordered Royal Dutch Shell to cut its carbon emissions by 45% (as compared with its 2019 levels) by the end of 2030 and not, as had previously been targeted, by 2035.

In this unexpected and unprecedented ruling, Shell’s “sustainability policy” was deemed to have been “insufficiently concrete” and it was told by the court that it had a ‘duty of care’ to ensure that the level of its carbon emission reductions should be brought into line with the Paris climate agreement (which is not actually law in any jurisdiction in the world but merely a cobbled together piece of empty rhetoric comprising wishful thinking, idealistic aspirations and hopeful targets).

Further, the court averred that “the interest served by the reduction of carbon emission obligations outweighs the Shell group’s commercial interests”. I would read that sentence again just to emphasise and fully appreciate the extraordinary implications of that blatantly political statement.

It is a fundamental challenge to the continued existence of capitalism and the profit motive inherent in it. Lest one forgets, capitalism has been the prime route out of poverty for generations upon generations of the world’s population. Indeed, free trade and capitalism are the positive processes by which prosperity is spread as the wealth thus created cascades through the economy, thus enriching all. Prosperity underpins social cohesion; social cohesion, in turn, underpins political stability and political stability is the bedrock of a collective and peaceful society.

The EU and its anti-democratic system adopts a completely different philosophy which is why its functionaries continue to invent judgements such as this Shell farce and imposes silly fines that have no legal basis and (having made a political and financial splash) are usually withdrawn.

This perfectly ridiculous judgement is nothing more than the opinion of a very small (but active) group of climate activists. If it is not challenged and if this piece of opportunism is allowed to stand then capitalism will be under the existentional threat of legal precedent.

Quaintly and ludicrously, in giving its judgement the court actually stated that “the company (Shell) had not acted unlawfully” but that the court was concerned that there could be “an imminent violation” of the emission reduction obligation”. Apparently it would seem from that statement that the law is now to be applied to possible (but not actual) future events on the whim and opinion of a politically biased judge!

In a mature, democratic and free society the accepted norm is that the legislature (its Parliament) makes the law, through a process of debate and free voting, and the legal profession then simply administers and applies it. Lawyers would be acting ‘ultra vires’ the instant they step over that demarcation line and attempt to make the law themselves.

What we are seeing here is a blatant attempt to impose left-wing dogma through the back door with unelected socialist and woke lawyers making the law up as they go along and cutting out the democratic process altogether. This may have been the behaviour of soviet Russia (and may still be under the Putin regime), it may be the way that communist China’s leaders rule the Chinese people and it may be the preferred means of control in Iran too, but it is not the way that Great Britain and the rest of the capitalist world has done things for a thousand years or more and it needs to be ensured that this form of unelected rule being slipped past by stealth and quasi-legal ‘judgements’ is overturned.

The EU clearly persists in its underhand attempts to extend its regulatory and judicial reach and seeks to impose its ideology through the use of deliberately blinkered ‘judgements’ or via the introduction of ‘practice notes’. These devices are used simply because the EU leaders must know that its political dogma would be highly unikely to pass through the normal procedures of law-making.

In this particular instance, yet again a pompous EU judge has overplayed her hand and in the short term may appear to have won a battle but, in the longer term will lose the war. This perverse judgement must and surely will therefore be appealed and overturned as soon as the “law’s delays and the insolence of office” (Shakespeare again comes to my rescue) allows.

There have been a series of these attempts in recent years to invent and apply quasi-legal judgements against the interests of free and democratic systems of commerce and trade. You may recall the extraordinary interventions of Margarethe Vestager (leader of the European Commission’s anti-trust authority) and yet another self-important left-wing EU functionary who has tried to impose swingeing fines on a number of big-tech companies for having the temerity to organise themselves in a highly tax-efficient manner (and without breaking any laws whatsoever in the process).

In 2016 she imposed a fine of £11.1 billion on Apple…..and in a sleazy manoeuvre instructed the Irish government to pay that fine to the EU and then recoup it from Apple.

She similarly imposed a £215 million fine on Amazon based, it would seem, simply on the fact that it is hugely successful.

After years of appeal, argument and resistance, the Apple fine was eventually rescinded and (as you may have seen) on 12th May 2021 the judgement against Amazon was quietly withdrawn too.

Amusingly, the Amazon farrago and its initial ‘verdict’ had been based on ‘sweetheart’ tax deals that Luxembourg had agreed with Amazon many years ago. By strange coincidence the Prime Minister of Luxembourg at the time that these legally sound tax arrangements were made was a certain Jean-Claude Junker who, (just to be sure that all necessary power was in his own hands) had made himself the Finance Minister of Luxembourg too.

Who was it that said ‘power corrupts and absolute power corrupts absolutely’?

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As 2020 has thankfully reached its demise it seems appropriate to begin our ‘end of term’ report by briefly reviewing the now-familiar factors that have affected the world of investment throughout the past year and, at the same time, consider the likelihood of these same issues flowing over into 2021.

The global pandemic has, of course, been the most dominant and persistent issue to blight 2020 both from an humanitarian perspective as well as an investment viewpoint.

Brexit and the tediously repetitive process of negotiating its completion has been a constant headwind for the UK stockmarkets and, indeed, European bourses too. Of course we learned very quickly that what the EU says very rarely accords with what it means.

A process that supposedly began under the terms of the ancient and quaintly romantic southern European phrase uberrima fides mutated behind closed doors (and was even further disguised behind a seemingly bland French façade) into the pragmatic reality of the rather more harsh northern European slogan of Deutschland uber alles.

I recall a quotation from Alan Greenspan (who was well known for speaking in riddles as chairman of the US Federal Reserve under the Presidency of Bill Clinton). Following a particularly opaque speech intended to ‘clarify’ the Fed’s then current interest rate policy he once said that “if you think you understand what I’m saying then I’m not making myself clear.” He would certainly have made an ideal president for the European Union.

The US Presidential Election was the third and most significant issue to affect investment markets during 2020 and, even now, its longer-term impact is still in the balance.

On 31st December 2020 the FTSE100 index closed the month at 6,460.50 (a rise of +3.10% in the month of December) and it stands at -14.34% for the 2020 calendar year to as a whole. The over-optimism apparent in the first week of November has now given way to a more considered realism.

By comparison the Quotidian Fund’s valuation at the 31st December shows an uplift of +0.38% for the month and the Fund is now up +33.56% for the 2020 year in its entirety; (47.90% ahead of the FTSE100 index and light years ahead of inflation and the yields available from gilts or on typical building society returns).

Whilst the bare bones of these performance figures are pleasing, the most satisfying aspect from our point of view is that we achieved a positive return in each and every month of the year. Given the inherent volatility of equity markets (and the particular challenges posed during 2020) that ideal is much easier said than done and it is an achievement that we are most proud of. It validates our investment philosophy and reaffirms our confidence in our proprietary investment processes.

For the immediate future equity markets will still remain in thrall to Covid, Brexit and the result of November’s US Presidential election but there is now at least a glimmer of light at the end of a very long series of tunnels.

As a result of the extraordinary research work performed, inter alia, by Pfizer, Regeneron, Oxford/Astra Zeneca and Moderna there are now four vaccines in production that will combat the effects of this dreadful virus. Whilst that is clearly cheerful news, it must be said that one should remain sanguine but realistic in one’s judgement of a long-term cure. The virus has already shown its ability to mutate and its latest iteration shows that it has the power to spread infection more quickly and more widely.

Whilst vaccination programmes are underway and will hopefully be completed throughout the UK by the late summer of 2021, we simply do not yet have sufficient data or feedback in respect of the long-term efficacy of these vaccines. We are still uninformed as to whether these injections will require an annual (or shorter) boost much like the existing flu vaccine does or whether it’s a once-(or twice)-and-done-forever medication. Until that position becomes clearer it would be wise to keep the sound of trumpets muted.

We have been supporters of Brexit since the 2016 referendum and, as has been consistently stated in our monthly reports, we have been confident that a last-minute deal (as always with the EU) would be reached. Whilst the ‘short synopsis’ (all 1234 pages of it) is littered with legalese and potential double-meanings, the main thing of real consequence is that the UK has now extricated itself and is free from the self-serving and biased judgements of the European Court of Injustice. That alone is a position to celebrate.

Boris’s deal also takes the UK out of the much vaunted (but UK-disadvantageous) single market. This is also a blessing in that it removes the UK from the shackles of EU protectionism and over-regulation. The godsend here is that the UK still has access (for what it’s worth) to the EU’s single market but is now allowed (for the first time since our mistaken entanglement with this communist inspired group of banditti began) to independently arrange more advantageous trade deals of our own around the world.

Twenty years ago just over 60% of the UK’s trade was with the EU. Today, our trade with the EU represents just less than 40% of the UK’s total and that figure continues to fall. Worse still, our trade imbalance with the EU runs at an annual deficit of circa £100 billion. Good business? In contrast, the UK has a trade surplus of £49 billion with non-EU countries.

With typical bravado (whilst ignoring any inconvenient facts) the EU has constantly promoted itself and its single market as the biggest trade bloc in the world. If only that were true! Yes, indeed, the EU has free trade deals (FTD’s) with roughly 70 countries but, in the main (once one looks beyond Germany, France, Italy and Spain), these are relatively small states In its blind self-regard the EU actually makes Arthur Daley appear to be a pillar of probity.

Its own website confirms that “The single market is at the heart of the European project, but its benefits do not always materialise because single market rules are not known or implemented, or they are undermined by other barriers” and goes on to say that “The EU Single Market accounts for 450 million consumers and 22.5 million small and medium-sized enterprises (SME’s)”.

The United Kingdom has already made or grand-fathered free trade deals with 60 of the pre-existing 70 EU arrangements and new FTD’s have already been agreed with Japan, Canada and Mexico. Talks are ongoing with the USA, Australia and New Zealand and these will no doubt come to fruition now that Brexit has finally completed.

Despite its hubris there are a number of other trading blocs around the world which outweigh the EU’s single market. These include: the Asia Pacific Economic Cooperation, the North America Free Trade Agreement, the South Asian Association for Regional Cooperation, Mercosur (Brazil, Argentina, Uruguay, Paraguay and Venezuela), the Pacific Alliance, the Association of Southeast Asian Nations, the Regional Comprehensive Economic Partnership (15 countries comprising 30% of global GDP….and growing) and the soon to be established African Continental Free Trade Area (comprising a population of 1.2 billion people). Brexit freedom will allow the UK to explore potential links with all of these.

However, the most attractive new free trade markets for British products will likely be found in the British Commonwealth which comprises 54 countries (totalling 2.46 billion people) all of whom are members of the Commonwealth by voluntary choice not by diktat. They share a common language, a common legal system and a common ethos (and above all, they want to trade with what many of them still regard fondly as the “mother country”).

As for standardisation and level playing fields, the EU’s website explains very explicitly that “Standards are voluntary technical specifications” although I don’t recall there being any mention of charitable, self-selection or personal choice arrangements being available during the Brexit negotiations. We are well out of this farrago of self-interest and centralised control whose motto should be “all for one (Germany) and one for one too”. Let me assure you that this is a comment based purely on economics and finance, not on any other grounds.

Only 5% of British companies export to the EU yet, despite that, every British company has to comply with costly EU rules, restrictions and bureaucracy. The UK will be well rid of all that meaningless, burdensome and non-productive red tape.

It is also worth noting that EU protectionism and over-regulation suppresses its ability and its opportunities to increase product development and trade in new areas such as Artificial Intelligence and Biotechnology (witness the extended delay in introducing Covid vaccines within the EU).

Finally, the after-effects of last November’s US Presidential election are still rumbling on and will have an impact on future US legislation, taxation and trade. The final result was much, much closer than generally expected (with Donald Trump still trying to overturn the outcome). If, in spite of all the ongoing shenanigans, Biden is eventually appointed then his ability to pass any meaningful legislation will depend on whether the Democratic Party wins control of the Senate. This will be clarified on 5th/6th January when a re-run of two seats in Georgia will determine whether this State (and therefore the Senate) will remain in Republican hands or move to Democratic governance.

If the former then Biden will struggle to pass any of his left-wing agenda into law; if the latter, then we are likely to see a return to the Obama days of feeble, economically and financially incontinent negotiations combined with a preference for appeasement when dealing with the likes of Iran and China (both of whom are increasingly aggressive towards Western capitalist interests). These countries (and a handful of others) see appeasement as a sign of weakness to be exploited and so an unfettered Biden will make the world a less stable and more dangerous place.

We were further reassured (and I say this with a large degree of humility rather than hubris) that our decision-making systems remain robust and fit for purpose by the fact that Quotidian has won a series of industry awards for its 2020 investment performance: At the recent HFM EuroHedge Emerging Managers Awards ceremony 2020 the Quotidian Fund was presented with both the Multi-Strategy Award and also with the Global Equity Fund (Under $100m) Award. Naturally we are grateful for that recognition from our peer group.

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Following two successive years of exceptional investment performance we briefly celebrated that achievement by way of my wine-track mind and using the principle of ‘Nunc est bibendum’. However, the New Year, as it always does, swiftly brought us all back to earth on 2nd January via a timely reminder that we were starting the 2021 year with the discrete annual investment clock set once again at zero.

Having protected our 2020 gains by avoiding the market’s seduction techniques and false pricing in the approach to Christmas, we identified a realistic opportunity to re-enter equities on 11th and 12th January and so we began to rebuild our portfolio.

Positive signals emerged from the smaller companies sector of the UK market and from three French companies and two Japanese organisations but, by far and away, the most attractive market in the world remained those of the USA (and, in particular, the Nasdaq).

It was clear that a number of our more successful companies in 2020 had begun to run out of steam as the prospect that an imminent global programme of anti-Covid vaccinations would put an end to the tedious process of successive lockdowns and thus threaten to impact negatively on their earnings.

The multiplicity of individuals who had sustained themselves through lockdown by developing an interest in computer games are likely to have more limited time in the future to maintain that particular area of pleasure whereas the benefits of working from home (for both employers and employees) is likely to become a fixture from now onwards.

For example, Zoom has done very well as a platform for conferencing and group meetings but is likely to be under competitive pressure now from Microsoft (with its Teams package) and Apple (with its Facetime facility). Likewise, companies which specialise in computer games (inter alia, Electronic Arts and Activison Blizzard) may see a downturn in demand and usage.

Our portfolio has therefore been adjusted accordingly and we are now 80% invested (70% USA, 10% UK smaller companies) with the balance held in cash in order to top up holdings when worthwhile opportunities arise. In the final analysis neither the French nor the Japanese companies cleared our final hurdles but they have remained on our short-list for future consideration.

In the first week of January alone the UK market (as represented by the FTSE100) soared upwards to the tune of over 6%. This remarkably swift rise was based more on misplaced optimism, hope and expectation rather than economic reality and that assertion is supported by the fact that this increase slowly dribbled away as the month progressed. As shown above, at the month end on 31st January the FTSE100 has now slipped back into negative territory at -0.82%.

By comparison the Quotidian Fund’s valuation at the 31st January shows a decline of -0.10% for the month and, of course, it means that the Fund is down -0.10% for the 2021 year to date too. This is the first time since September 2019 that we have had to report a negative monthly number and, to put it mildly, even though the figure is miniscule, it is irritating and galling.

Our frustration is based on the fact that we were nicely into profit from the time we had re-entered the markets earlier in the month but a severe mark-down (which had absolutely nothing to do with economics) in literally just the last hour of trading on the closing day of the month (in a week which had witnessed deliberate, concerted and obvious market manipulation by a large group of social media inspired day-traders) resulted in moving us from nicely over two percent up to 0.10% down. This is clearly an artificial reduction and will be reversed very quickly. On the positive side, this sort of market action gives us an opportunity to increase our holdings in worthwhile shares at artificially low prices (which is exactly what we did). More detail on this later in the report.

For those of you who are long-term readers of my monthly discourse you will no doubt have noticed a tendency to delve into the political arena. Let me assure you that I do not set out with the intention of exploring that particularly tedious landscape but, sadly, there is a direct link between stock-market volatility and politics (or, more explicitly, the actions of governments and their political leaders; a word I use in its loosest sense).

We have just seen a changing of the guard in the USA and this will have significant influences not just on the equity markets in that country but on global markets too.

For the first time in more than 90 years the White House, the House of Representatives and the Senate are all under the control of one political party.

The checks and balances that would normally prevent fiscal and political extremism are no longer apparent and, from an economic perspective, the concern is that the inherent spendthrift nature of the Democratic Party could run out of control. Indeed, the last time this one-party dominance of US government occurred was in 1929 (the Democrats again) and was the precursor to the Great Depression.

One only has to look at the last left-wing government in the USA to identify the danger. Obama was simply a triumph of style over substance and despite his vain attempts to “create a legacy” there was nothing of notable achievement to report about his period in office. Under his stewardship the US national debt surged to never-before-seen levels.

Biden, of course, was his ‘Insignificant Other’; his non-achieving, rarely seen and never heard (expressing any views of his own authorship anyway) Vice President.

On the other hand, Trump had plenty of substance and significant achievements (mostly unreported) but ultimately was shown to be sadly lacking in style. The Pelosi-inspired attempt to impeach him (having failed dismally in her first attempt last year) is another act of sheer spite from a person who is the epitome of the self-serving ‘swamp’ that Trump had set out to clear. Pelosi is a woman with no significant ‘publicly-beneficial’ achievements to her name but her time in politics has allowed her to accumulate a net worth measured in 2014 at $102.2 million (quite strange for someone who has spent her entire career in a political party that was once proud to be the party for the working classes). Twas ever thus, I guess. She will fail again in her publicity-hungry impeachment ambition. I only mention this self-seeking individual because she is third in line to the Presidency should anything happen to Biden and Harris.

An immediate sign of purse-strings being loosened was not long in coming from the new administration in the form of an announcement that it intended to pass a stimulus package worth $1.9 trillion. In the normal course of events a huge financial impetus of this sort would be a signal that real asset (equities, property) values would inflate. However, it was only relatively recently that Trump had endorsed a Covid ‘relief’ package of $2.3 trillion. Perhaps a small voice from the Federal Reserve should issue a sotto-voce reminder that the US Treasury is not a bottomless money pit.

The huge stimulus thus far delivered in the USA has meant substantial increases to welfare payments (effectively increasing discretionary income for consumers) but a succession of lockdowns has suppressed spending and thereby created pent-up demand. A perverse and perplexing side effect of the stimulus thus far, therefore, is that American consumers have preferred to save rather than take their usual route of spending as if tomorrow never comes. Of course, the US government would much prefer consumer spending to rise and kick-start another positive economic cycle but at the moment it seems that Covid fear has overcome profligacy. When Covid is eventually brought under some form of control, it may well transpire that a pleasure deferred will become a pleasure doubled and when consumer spending gets going again in earnest it should act as a much needed boost to equity valuations too.

Biden’s wider political agenda is long out-dated too. Expanding the welfare state has never worked in the past and will not work in the future either In the short term it buys votes but eventually it leads to inefficiency and economic failure. It is significant to note that Biden has appointed Kamala Harris as his Vice President (an appointment we applaud; she is a woman of substance, intellect and achievement). On the other hand, he has installed Bernie Sanders (a career politician who describes himself as a ‘progressive socialist’ and whose political views are even more beyond their sell-by dates than those of Biden himself) as Head of the Senate Budgeting Committee. Poacher to gamekeeper comes to mind. These two share a common theme in that their political beliefs are still rooted in the losing philosophies and socialist dogmata of the 1950’s, 60’s and 70’s.

Finally, reverting to the reality of stock-market pricing, the true value of a company’s shares is ultimately a direct reflection of its profitability, its earnings per share and its prospects of continuing success in the foreseeable future. On a quarterly basis, listed companies are obliged to issue their financial results and these give investors an insight into the company’s current financial performance and its expectations for the immediate future. Of our current portfolio, six of our 18 holdings have issued their latest financial results in the past fortnight and all were well above expectations; in fact every one of them showed growth in revenue at record levels, For example:

  • Apple’s revenue for the latest quarter was declared at $100 billion (a quite incredible number) and it’s Earnings Per Share (EPS) figure was a positive surprise being 18.6% above expectations)
  • Visa’s revenue for the last quarter was declared at $5.7 billion (and it’s EPS was 11.2% above expectations)
  • Service Now’s revenue for the latest quarter was declared at $1.25 billion (and its EPS was 10.4% above expectations)
  • Microsoft’s EPS figure was 24.2% above expectations
  • When quarterly results are released for the remainder of our holdings over the next four weeks we anticipate similarly sparking figures across the board. We are therefore confident that our reorganised portfolio will be fit for purpose in the post-Covid world. Of course, if that ‘new world’ changes again then we will revisit our choices.

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    A significant feature of the 2021 investment year to date has been the extreme volatility of equity market pricing despite the latest positive corporate results season. In the USA particularly, only the Oil & Gas and Utilities sectors have witnessed disappointing sales figures and (with the sole exception of Utilities) every market sector has issued very positive (mostly double-digit) earnings figures too, well ahead of analyst’s expectations.

    I mentioned in our January report a phenomenon which has not been particularly obvious in the past and that is the concerted action taken by a large group of internet social-media based investors acting in unison and in blatant attempts to manipulate market prices. Their stated aim, apparently, was to ‘punish’ those large financial institutions who make substantial profits by short-selling (selling shares they don’t own in anticipation that they are over-valued and with a view to buying them back after their price has fallen, thus making a profit).

    The naivety behind the ostensible objectives of this group of modern-day Robin Hoods is palpable. Yes, of course, stock-market pricing is subject to the laws of supply and demand but (as anyone who has tried to manage an equity portfolio can attest) it is also subject to the greater force of The Golden Rule (which asserts quite simply that those who have the most gold make the rules!).

    In the long term, (as was famously stated some years ago by our last economically competent Prime Minister; she of the golden coiffure and halo) “you can’t buck the markets” but, in the short term, you can cause mayhem in market-pricing mechanisms. The absurdity of the joint collaboration and actions of this group can best be illustrated by the fact that, on one day alone (24th February, and in just the last hour of that day’s trading) the share price of GameStop (one of the main targets of their market abuse) increased by 100%. Incredible. It will, no doubt, continue to gyrate wildly until their vain attempts to rival King Canute are eventually washed away by the incoming tsunami.

    Whilst this self-satisfied, woke (and therefore always right-on and right) gang of investment ‘celebrities’ roam the internet righting perceived wrongs and causing short-term disruption might deal in millions of dollars, the big boys (those who are really in control of markets) deal in trillions and have the firepower to swat these parvenus at will. The Force will indeed strike back and there will be some long faces, rapid faeces and empty pockets from those arrivistes when faced with surprisingly large margin calls. Sympathy will be in short supply.

    For those of us who live in the real world and make investment decisions based on the cold reality of economics, these self-righteous and self-serving pretenders are causing unhelpful disruption and are fundamentally a pain and, rather neatly I think, a pain in the fundament too.

    On 28th February 2021 the FTSE100 index closed the month at 6,483.40 (a rise of 1.18% in the month of February) and it stands up 0.35% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 28th February shows a rise of 0.28% for the month and it means that the Fund is now up 0.18% for the 2021 year to date.

    Sadly, politics has yet again muscled its way into this month’s report simply because a specific theme from that arena has an important relevance to the investment world.

    As if we didn’t already know enough about the EU’s blinkered arrogance, self-interest, protectionism, gross inefficiency and intransigence, this month has shown us the scale of its sheer vindictiveness and spite in relation to its post-Brexit dealings with the UK.

    The EU’s breath-taking willingness to weaponize the Good Friday Agreement (the main conduit of peace in the Province of Northern Ireland for the past 20 years) by threatening to scrap it in an attempt to blackmail the UK into sharing Covid vaccines (that they had totally failed to make their own provisions for) was an unwelcome surprise. The sense of entitlement that came with this act of attempted larceny was vomit-inducing.

    Its bombastic demands to fishing rights in UK waters whilst refusing to allow shell-fish caught in those same waters to be sold into the EU rather smacks of quite deliberate churlishness, confused thinking or double standards.

    But the thing that concerns us most and could have a negative bearing on future investment facilities is that the EU has refused to grant “equivalence” to the UK (in other words, to recognise that the UK’s regulatory regime in respect of finance and financial services is at least as good as the EU’s).

    The UK has long agreed that a wide range of EU businesses can serve UK customers by accepting that the EU’s regulatory regime is the equivalent of ours in 17 areas of finance and financial services. In return, the EU has allowed the UK only 2 areas of equivalence.

    Strangely, though, the EU has seen fit to grant much wider ‘equivalence’ to such upright, law-abiding and morally above reproach financial powerhouses as Brazil, Albania, Mexico and China but, seemingly, the UK is beyond the pale.

    Of course, this is nothing more than a very thinly veiled attempt to remove the City of London as Europe’s financial hub and replace it with Paris and/or Frankfurt. As Andrew Bailey, Governor of the Bank of England, asserted earlier this month in relation to financial services: “A world in which the EU dictates and determines what rules and standards we have in the UK is not going to work”. Quite right too.

    This is the cowboy outfit that spent four wasted years of Brexit negotiations insisting on the vital and potentially deal-breaking importance of level playing fields (but happily turning a Nelsonian eye if any of these fields were already sloping in the EU’s favour) and the absolute need for everything to be overseen and ruled upon by the EU yes men who control the European Court of Injustice and ensure that every decision is found in the EU’s favour.

    Perhaps surprisingly, the fundamental requirement of a capitalist society is pain-free access to capital markets. The EU is a socialist (communist) based project and it doesn’t have the skills, the expertise the infrastructure or the financial strength to challenge the City’s dominance. That, however, hasn’t stopped them from trying to find more devious ways to achieve its desired end-game. Currently, for example, EU shares can be traded on USA stock-exchanges but not on UK markets.

    Brussels has past form in this context that the UK can learn and benefit from. In June 2019 the EU revoked Switzerland’s ‘equivalence’ in financial services as a punishment for it refusing to be bullied into accepting various EU inspired political commitments.

    Switzerland immediately responded by making it illegal for EU traders to deal in Swiss equities through any market other than the Zurich stock exchange. It was a mistaken and classic lose/lose response founded on revenge and it still leaves a bitter taste on both sides.

    Based on the mantra that revenge is a dish best served cold, instead of retaliating and turning this issue of ‘equivalence’ into a long drawn out saga with no clear winner at the end, the UK would do well to learn from Switzerland’s mistake and outwit the EU’s shameless tactics with a better thought-through strategy of our own.

    Whilst we were members of the EU we were forced to accept a raft of unnecessary, restrictive and pointlessly bureaucratic legislation and ever-changing regulatory practice notes which added to the costs and paperwork of doing business in the financial sector for no obvious benefit to either the client or the service provider.

    The collective noun for EU politicians and functionaries is ‘a constipation’ but following the restrictions of repetitive lockdowns and, given the paltry to non-existent returns available from other asset classes, there is a pent-up demand globally for equity investment. The finance industry’s dilemma, therefore, is how to achieve a positive balance when financially incontinent and willing investors meet the constipation of blinkered and grossly over-regulated EU bureaucracy!

    The EU’s anti-business measures (which include Mifid 1 and Mifid 2) together with pathetically small-minded solvency requirements (applied whether or not client’s money is at risk) should be repealed together with the long-standing imposition of Stamp Duty and any transactional taxes on financial dealings (which produce only a tiny amount of revenue for the UK Treasury – circa £3 billion per annum) but have been a bugbear and an anti-competitive point of contention in the financial industry for many years.

    Of course, regulation of financial services is required in order to avoid the potential descent into a Wild West scenario but this regulation should be light-touch in its nature and common-sensical and business-friendly in its application.

    In short, the UK should become the “Singapore-on-Thames” that the EU has always feared it would and (unlike Switzerland) we could then pursue the path that would maximise the new freedoms that Brexit has given us. Light but intelligent and effective regulation and a low tax regime that rewards ingenuity, effort and risk-taking. Does the UK government have the appetite, the will and the guts to do so? It certainly should.

    Quarterly corporate results have now been released for all of our asset holdings and they have all produced sparkling sales and earnings figures across the board. We are therefore confident that our reorganised 2021 portfolio will be fit for purpose in the post-Covid world. Of course, as an inherent feature of stock-market investment there will be volatility and occasional markdowns but, for the time being, we are content with our portfolio as it stands.

    It is a matter of temporary irritation that the wild unpredictability in certain sectors that is being caused by the actions of the group of social-media based investors (referred to earlier in this report) acting in concert and blatantly manipulating certain shares are creating unnecessary knock-on effects in their wake.

    For example, in the past two successive months the Quotidian Fund’s performance has been muted by these false markets. In January, the fund’s investment performance had risen by a little over 6% during the month but a severe, synthetic mark-down in the final hour of trading on the last trading day of January took us back to all square for the year.

    Frustratingly, the same thing has happened in February; a 6%+ advance intra-month has been reduced almost to parity by month-end on the back of a similar mark-down, but this time on the penultimate trading day of February. It is evidently false pricing and will be short-lived.

    Written by 

    Following three months of lacklustre stock-markets and excessive price volatility we are pleased (not to say relieved) to report very positive upward momentum in April. Essentially, we view this as a ‘catch-up’ exercise after a period of markets going nowhere whilst there was a demonstrable disconnect between equity valuations and economic reality.

    As we were approaching the first quarter corporate results season at the end of March we anticipated in last month’s report that the latest financial results would be far more positive than market analysts and the usual Wall Street pessimists were predicting and, indeed, that has largely been the case. The quarterly financial reports issued to date have been exceptionally good (many startlingly so) and this has been reflected in equity pricing. Future projections have also been mostly positive.

    On 30th April 2021 the FTSE100 index closed the month at 6969.81 (a rise of +3.82% in the month of April) and it stands at up +7.88% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 30th April shows a rise of +4.51% for the month and that means that the Fund is now up +4.98% for the 2021 year to date.

    In last month’s report we also mentioned a major sell-off in US markets as the result of the quite deliberate and substantial failure of a hedge fund by the name of Archegos Capital to meet its margin calls on short positions worth $20 billion. More details of that issue emerged as April progressed and it is worth mentioning the salient facts simply to give you an insight into unhelpful market practices in some areas of the world that then have negative consequences in others.

    Archegos Capital Management is the investment vehicle for the mega-wealthy Hwang family (once of Hong Kong but now based in New York). Through the use of a range of derivative contracts (which are perfectly reasonable and rational investment vehicles in the normal course of events) Archegos built up very substantial short positions mainly in the technology and banking sectors. However, these shorts require and rely up on the investor to act in good faith and honour margin calls if and when their chosen trades, even briefly, go the wrong way. Hwang’s use of very complex total return swaps had helped to hide Archegos’s remarkably high exposures from its lending banks and, when its huge trades did indeed go bad, Archegos chose to renege on its commitments, thus triggering the need for these investments to immediately be liquidated ‘en bloc’.

    Despite the obvious bad faith inherent in Hwang’s actions, it is the lending banks (largely Credit Suisse and Nomura) who have had to take the hit (which, in turn, has adversely affected the bank’s shareholders) as well as the shareholders in the various companies that Archegos had gone short on and whose shares had to be squared off at fire sale prices. Not a happy story but one that did not impact Quotidian’s holdings (other than by way of suppressing market confidence and creating unwanted short-term volatility).

    Reliable figures are hard to come by but Bloomberg reported that Hwang had lost $20 billion in 2 days. Just another quiet day at the office then!

    Much more reliable information is available from those banks that allowed the dishonourable Bill Hwang (who has past form in this regard and in 2014, was banned from financial trading in Hong Kong) to treat the stock market as a casino by lending incredibly enormous sums of money seemingly without any worthwhile analysis or purposeful process of risk management. His contempt for his lending banks and market rules beggars belief.

  • Credit Suisse has reported a loss of $4.7 billion in relation to its involvement with Archegos.
  • Nomura has similarly owned up to an Archegon-related loss of $2 billion.
  • Morgan Stanley has reported an Archegos-related loss of $911 million.
  • UBS also reported a loss of $770 million in respect of Archegos.
  • Mitsubishi UFJ Financial reported a loss of a mere $300 million on the same basis.
  • It’s hardly surprising to note that Archegos Capital Management is now defunct but, rather like Julius Caesar, the bad will live on long after it’s passing. The biggest question is whether Hwang will be called to account and adequately punished for what essentially was a crime. Don’t hold your breath. In the meantime, Credit Suisse has announced that it will have to raise up to $2 billion in new capital to support its own equity base. Good luck with that one. This is the bank that had also been a leading lender to Greensill Capital (the UK investment house that David Cameron had, for a large fee, been an ‘adviser’ to). Despite (or perhaps because of) having had the full benefit of his financial wisdom, Greensill had, only in March, met the same grim fate as Archegos.

    To back one big loser is unfortunate and regrettable; to back two huge losers within a month of each other smacks of over-exuberance in their analysis of risk combined with a lack of attention to detail bordering on recklessness. I have had to try very hard to avoid using the words Credit Suisse, risk management and frontal lobotomy in the same sentence. For any investor who is tempted to help Credit Suisse refuel its financial strength, I would merely suggest caveat emptor and, to Credit Suisse itself, I would recommend that a change of name to Credit Swizz might be appropriate.

    Nomura’s US trading chief has stepped down; at least one honourable man found in a sea of sleaziness and incompetence.

    With the finger-on-the-pulse alacrity, readiness and velocity we have come to expect from the world’s great financial regulators and compliance controllers, on 5th April (11 days after the proverbial had hit the Archegos fan) the USA’s Securities Exchange Commission announced that it was going to ‘conduct an investigation’ and, not to be outdone in the enthusiasm stakes, the UK’s Financial Conduct Authority has ‘requested information’. Well done chaps; perhaps we shouldn’t expect to see regulators and compliance to be first onto the dancefloor. Stable doors and horses come to mind and it is not unreasonable to believe that (given the costs in time, bloated paperwork and their annual charges) financial regulation and overseeing should be made of sterner stuff.

    I expect that when, in the fullness of time, these august bodies eventually produce their reports, the findings will be masterpieces of self-serving bovine excreta. Indeed, they will likely be tours de farce.

    It amused me to note that Credit Suisse’s risk management team was led by a chap called Brian Chin who has now (in US jargon) been freed up to pursue potentially more suitable and lucrative opportunities elsewhere. So it’s chin-chin to Mr Chin whilst, quaintly, CS’s investors have had to take their losses on the chin.

    For your information and interest each individual stock-market listed company is given a risk rating on a scale of 1 to 6 (lowest to highest risk). Of our current holdings we have 9 at a rating of 1, another 7 at a rating of 2 and just 1 at a rating of 3. We have nothing at any higher rating.

    De mortuis nil nisi bonum as the man on the Colosseum omnibus was wont to say as he merrily sipped his breakfast cappuccino. It is a maxim that, in general, one can agree with. However, there are occasional exceptions to this kindly and well-meant saying and Bernie Madoff is one of them.

    His massive Ponzi fraud was eventually uncovered in 2008 having been developed over the previous 40 + years under the very noses of the financial authorities (who thought so highly of him that he was once appointed non-executive chairman of the Nasdaq stock-market, was also on the board of the Securities Industry Association (and Chairman of its trading committee) and also acted as an adviser to the US financial regulators and legislators. Madoff was the very definition of ‘hidden in plain sight’. Precise figures will never be known but the best estimate is that investors lost $19 billion in the collapse of his Ponzi scheme. For every loser there has to be a commensurate winner. Guess who it was.

    Bernie the dolt’s indiscretions do suggest an individual who was not overburdened with powers of intelligence or morality and whose actions were motivated by sheer unbounded greed combined with great cunning and chutzpah. He died on 14th April at the age of 82 and, for very good but tragic reasons, was not mourned even by his own family.

    By blissful coincidence, the presiding judge at Madoff’s trial was also a Mr Chin and, having studied mountains of evidence, this Chin sent Madoff down for a term of 150 years.

    Madoff is the man we can thank for the dense thickets of overweening, often naïve, ill-informed, pointless regulation and compliance rules that bedevil the financial services industry today (to the point where one can barely complete even the most straightforward of tasks quickly and easily).

    In the unlikely event that my rambling prose has retained your interest to this point, you will no doubt have already realised by now that the main theme of this month’s report is regulation and compliance in the financial services industry and its associated markets.

    As strong believers in the age-old concepts of ‘utmost good faith’ and ‘my word is my bond’ as being the most effective regulations necessary to run orderly markets, (naïve, I know, in today’s day and age but it worked pretty well until the American banks invaded the City in the late 1980s and brought their interesting and unusual interpretation of investment ethics with them) you can only imagine the opinion we hold about the slippery Bernie and his ilk.

    In global markets where nowadays one can move huge sums of money around the globe at the press of a button we, of course, fully understand, accept and support the need for robust regulation and compliance but that regulation must be well-informed, realistic and workable. It certainly should not be based on the concept of “one size fits all” and it should also start from a presumption of innocence rather than assumption of guilt that seems to be in vogue and which currently appears to dominate rule-maker’s thinking.

    To illustrate those assertions it is worth noting that, since the year 2000 one large American bank has paid a total of $35,819,302,225 (yes, you read that correctly) in fines for a range of financial misdemeanours. Strangely, smaller financial organisations seem to cause much fewer problems. Perhaps it’s because they treat their clients with greater respect and know them far beyond just holding copy passports and utility bills.

    For balance, let me add that a major European bank has amassed a total of $10,410,557,626 in fines for similar offences over the same time period. And to show that we are nothing if not even-handed, a major Far-Eastern bank has, since the year 2000, been fined $29,400,000 for the same range of transgressions.

    These fines come under the headings, inter alia, of toxic securities abuses, tax violations, investor protection violations, economic sanctions, foreign exchange market manipulations and mortgage abuses. The Wolf of Wall Street was clearly not an entirely fictional film.

    In light of these figures and the actions of the Madoffs and Hwangs of the world, it is blindingly obvious that regulation, supervision and compliance is very much required in the financial sector but, equally, it must allow markets, proficient boutique investment managers and small but professional financial advisers to function properly as opposed to stifling normal, reasonable and honest activity through the ever-increasing burden of over-heavy-handed rules-based constipation. Under the guise of client protection, these ever-increasing ‘nanny state’ rules and restrictions invariably, in practice, operate palpably against the best interests of investors.

    No doubt these rules are well-intentioned but they are dreamed up by ruling bodies that, so many times in the past, have shown themselves to be incompetent. Let me support that assertion with another couple of recent examples.

    Despite repeated warnings of suspicious activity, the Financial Services Authority just in the recent past has overseen the demise of London Capital and Finance (costing UK taxpayers £120 million in compensation payments) and the collapse of ‘Blackstone Bonds’ at a cost to investors of £47 million. Both organisations were offering ‘low risk’ investment bonds which proved to be nothing of the sort. In the meantime the FCA was either asleep at the wheel or simply averted its eyes.

    Still on the subject of regulation, after months of quite deliberate obstruction, obfuscation and delay (spiced with insults, premeditated and calculated rudeness together with ill-judged threats and demands) April saw the EU belatedly add its signature to the free trade deal which formed a vital part of Brexit.

    The UK’s response to all this vindictiveness has been insipid to the point of lethargy. I can only think that Boris didn’t want to risk rocking the boat until the trade deal was formally ratified but now that the ink has dried on the required signatures it is a priceless opportunity to move rapidly forward to promote the UK’s best interests worldwide.

    The financial industry is the largest contributor to the UK’s economy and the City of London is its epicentre. It has been obvious for quite some time that the EU is intent on stealing the City’s business and the profits it generates and the UK must now move to safeguard and then further develop its pre-eminent position in global financial services. In order to achieve that we therefore need a joined-up strategy and a rigorous, no-nonsense and experienced negotiator.

    Whereas Tony Blair was rightly called a kipper (two faces and no backbone), Boris is more of a lobster (a hard exterior but a soft centre). Neither would be a suitable choice as a negotiator.

    Sadly, whilst Boris has a variety of talents he also has a major character flaw that mitigates against his suitability as a negotiator. He is not a man for detail but much more a ‘concept’ man who wants (desperately) to be liked and that is something that a skilful negotiator can take advantage of (and that’s where Lord David Frost comes in).

    The UK needs to adjust its taxation system to make it much more attractive to global investors as well as our home-based equity and other asset investment stakeholders.

    In addition, the UK urgently needs to amend the framework of its regulatory and compliance arrangements to make them more realistic and fit for purpose. In other words it needs to remove the stranglehold that the EU’s penchant for over-regulation currently holds the financial services industry in thrall. By going back to basics we need move away from the current presumption of guilt and return to the presumption of innocence which is at the root of the British legal system (and which has been lost in the EU’s unseemly and unjustified rush to impose its heavy-handed systems of control).

    Mifid I (The Markets in Financial Instruments Directive) was imposed by the EU upon the European Union’s financial services industry financial in 2007. Not content with tying up the European financial services sector with the constipation of knotweed introduced in Mifid 1, EU regulators moved swiftly on to its bigger brother Mifid II which, after a gestation period of eleven years was force-fed onto the financial industry in 2018 which introduced even more pointless and stultifying bureaucracy.

    To give you a simple explanation of what we in the financial services currently have to contend with, Mifid II comprises 1.7 million provisions of box-ticking and meaningless guff (that is not an exaggeration) that we all have to contend with from rules and regulations that have been created by navel-gazing buffoons. Actually, one could be forgiven for amending that description to anal-gazing idiots.

    By comparison, it is generally accepted that the Constitution of the United States is one of the best drafted pieces of legislation the world has ever seen. It comprises 4543 words and runs to 4 pages in its entirety (and even if you add its 27 later amendments it only takes the word-count to 7591).

    It is clear that effective regulation needs only to be short, precise and to the point. The sooner that Mifid is repealed (or heavily redacted) in the UK and replaced by sensible, well-thought out and workable regulation that removes us from any vestiges of the EU’s orbit is based in the real financial world the better.

    And finally, we offer our homage to Prince Philip, the Duke of Edinburgh who, as we all know, died on 9th April. Without fuss or flounce he supressed his inner alpha male persona for the greater good and, in so doing made a huge contribution to the well-being of the United Kingdom, its Commonwealth and its monarch, the Queen. He was a giant surrounded by the host of pygmies who comprise so much of the current political and public service world.

    No-one dies until the ripples they have left fade away; and in the ongoing Duke of Edinburgh Award Scheme those ripples will last for eternity. We salute his achievements and mourn his passing The best and most apt eulogy I can offer is taken from a verse of poetry by Charles Spurgeon whose elegant use of the English language I gratefully acknowledge:

    It takes more grace than I can tell To play the second fiddle well

    And for more than 70 years the Duke of Edinburgh played second fiddle as a maestro of the art.

    It’s a strange quirk of the human condition that we often tend to take things for granted; “you don’t know what you’ve got till it’s gone” in the words of the Carly Simon song. And so, using Prince Philip as a proxy for those who are under-appreciated, let me also salute all those (particularly of the fairer sex who are the most likely to be in the frontline of this form of myopia) and who have foregone careers of their own in order to support their husbands or partners.

    The Duke of Edinburgh would be tickled pink if he knew that he’d been the conduit for well-deserved recognition elsewhere…..and, you never know, the acknowledgement and appreciation could mean that your partner might be happy to be tickled pink too.

    Written by 

    At the risk of sounding like a broken record we have to report that, for the third month in succession, March witnessed continued excessive volatility in global equity markets. Whilst we all recognise that stock-markets are dynamic and price action is intrinsically changeable the current scenario, where prices are being regularly and significantly marked upwards and down again in as large as a 5% range on a daily (and occasionally an intra-day) basis, clearly has little or no obvious relationship to our interpretation of economic reality. It is absurd to purport that the intrinsic value of a successful company could mutate so often, so quickly and by such extreme latitudes in such short periods of time.

    Market-makers are fond of using the terms “risk on” when there are seemingly more buyers than sellers and “risk off” when the converse applies. In an ideal world that concept should be true but any intelligent analysis of the relationship between risk and reward cannot possibly reach the conclusion that a company’s shares can be priced downwards by 5% in the morning, priced upwards by 5% at teatime and be marked down by 5% again in the last half-hour before the closing bell.

    I fear we at a loss to explain this current phenomenon and the explanations, rationales and narratives put forward by market-makers to justify these price manoeuvrings are, in our opinion, little more than hot air. To quote Homer: “words empty as the wind are best left unsaid.” Clarity will no doubt emerge.

    Despite the frustration and irritation caused by the continuation of this extended (but temporary) period of false markets we can, however, offer three items of positive news that one can take from this disconnect with reality.

    Firstly, we have taken advantage of unremitting and seemingly endless opportunities to top up our holdings at bargain prices in businesses that we trust. In the longer term this is a winning strategy.

    Secondly, the Nasdaq market in particular has now completed a correction (which is the term formally used to describe a 10% fall from a market’s most recent high) but the effect on the Quotidian Fund’s performance has been negligible (and is measurable more in terms of opportunity cost that in any meaningful loss of actual profits). The extra good news here is that this correction should have created some headroom to allow for some steady and reliable upward momentum in the tech-heavy components of this index.

    And, finally, we have bottomless reserves of patience with which to await the return of realistic equity pricing. In the absence of any economic-based imperatives which could indicate a need to move into the safety of cash, we are looking forward to analysing the first quarter results season which will be upon us from the second week of April onwards.

    We anticipate that these latest corporate results will be far more positive than market analysts and the usual Wall Street pessimists, doomsters and fearmongers are predicting.

    On 31st March 2021 the FTSE100 index closed the month at 6,713.63 (a rise of 3.55% in the month of March) and it stands at up 3.92% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st March shows a rise of 0.27% for the month and that means that the Fund is now up 0.45% for the 2021 year to date.

    As we write this (in the early afternoon of 29th March), news is breaking of a major sell-off in the US markets and the cause of this makes very interesting reading. It seems that a very large investment fund has failed to meet its margin calls and has therefore been forced into immediately liquidating a substantial part of its holdings. These “block sales” amount to the not insignificant sum of $20 billion and so are clearly market moving. The negative effects, though, are related largely to the fund’s prime brokers, the individual companies this fund has invested in (which seem to be restricted to the banking and media sectors) and, of course, all of their shareholders will take a hit too.

    The Fund is called Archegos Capital and is the family office running the investments of the immensely wealthy Hwang family. From the details released thus far this appears to be a highly speculative venture which has highly leveraged its chosen investments through the use of derivatives such as options, swaps and futures. Clearly it has made a number of decisions which have proved to be speculations rather than sound investments.

    In themselves, these derivatives are perfectly valid vehicles with which to construct an investment portfolio but if the investment manager has a casino mentality or is simply untrustworthy then badly chosen or badly timed decisions can quickly come back to bite. In this particular case it seems that the managers (apparently led by Mr Hwang himself) decided not to pay the margin calls and so defaulted on what at that point were losing positions. This breakage of good faith has had severe consequences. Those prime brokers who were quick to react (Goldman Sachs, Morgan Stanley and UBS) have escaped relatively unscathed but two others (Credit Suisse and Nomura) have taken substantial financial hits. Nomura’s share price has already fallen by 16% in Far Eastern markets this morning and Credit Suisse’s shares have already fallen by 14% in the USA this afternoon. Their investors will be thrilled.

    As more details have emerged it is interesting to note that Mr Hwang was convicted of insider trading in 2012 and banned from trading in Hong Kong. Given the global nature of today’s investment world, the real questions, therefore, are how on earth (in these highly regulated times) he was ever able to hold a position of trust again and how can Credit Suisse possibly defend the quality (or lack of it) of its risk management systems.

    Extending a huge line of credit to a man of dubious provenance, disreputable character and with past form is quite difficult to justify and criminal negligence might not be too strong a description, especially if this matter can be linked to excessive and otherwise unjustifiable volatility in equity pricing generally.

    Perhaps this episode can cast some light on the trading styles and good faith of individual managers that might better explain the period of exceptional volatility mentioned earlier in this report. Naturally, we don’t have enough evidence to reach a viable judgement but clearly there have been other forces at play beyond basic economic reality.

    We are obliged to Ruth Dudley Edwards (Irish historian, writer and alumna of the University of Cambridge) for lighting the spark that led to my covering the following topic (and which eventually relates to investment).

    Whether remainer or leaver, we have all now become familiar with the EU’s spite-laden determination to undermine Brexit and the UK’s ability to make a huge success of the opportunities it has created now that Britain is no longer under the dead hand of Brussels.

    Following Macron’s dullness and duplicity in trying by lying to discredit the Astra Zeneca vaccine (quel un plonkeur) and Von der Leyen’s pathetic attempts to deflect blame away from herself (and the EU commission) for her and their catastrophic handling of the EU’s Covid vaccine programme, her threats to confiscate private-sector businesses and her flagrant attempts to flout the law and ride roughshod over intellectual property rights. The EU and its clown-like leaders (in name but not in intelligence or by actions) have good cause to be grateful to Micheal (the correct Irish spelling) Martin, the new Irish Prime Minister and his voice of intelligence and reason.

    In a speech on 23rd March he pointed out some salient facts that corrected the invective we had been hearing from the EU’s self-appointed grandees. Mr Martin reminded those who had preferred to deal in baloney that the Astra Zeneca vaccine comprised 280 raw materials which had been sourced from suppliers in 19 different countries around the world. Far from ‘belonging to the EU’, the reality is that these vaccines remain the legal property of the manufacturer until such time as they have been paid for and taken delivery of by the end-user.

    A generous interpretation of Macron and Von der Leyen’s actions (acting on behalf of and with the full authority of the EU) is that they were reckless and self-serving. Macron refused to take professional advice to put France into lockdown in January following another spike in its Covid infections, with the result that he has now been forced belatedly into that very course of action. Too little, too late according to a number of our contacts in that country. Covid is now out of control in large swathes of France and the negative economic effects of that will be dire. Macron himself has moved from slight odds-on favourite in the forthcoming French general election to significant odds against. How apposite that he, like Covid, will likely be out of control too. Von der Leyen’s child-like outbursts have also been naïve acts of deflection of blame and self-protection. Her political career has been a masterclass of King Midas in reverse. Everything she has been involved in has turned to dust. She is inept and her past record has been one of utter failure; the word from Germany (where she was a hopeless defence minister) is that she was moved to the EU to get her out of the way.

    A less generous view of Tweedledum and Tweedledee’s recent actions is that they demonstrate the heights of stupidity. I’ve seen jellyfish with more backbone, alumni of the Arthur Scargill School of Charm with better manners, ants with a greater sense of purpose, rolling drunkards with a better sense of direction, chimpanzees with superior leadership skills, a troop of monkeys with better organisational abilities and darts players with a better grasp of mathematics.

    The theme of this section of our report is protectionism and we’ve used the examples of Macron and Von der Leyen as a proxy for one of the central tenets of the EU itself. This is relevant simply in terms of its actual or potential effects on our investments.

    Protectionism leads directly to inefficiency, low quality and ultimately to poverty. In turn, poverty leads to little or no demand for products and services, a situation which subdues the supply side of the economy and, therefore, any potentially profitable commercial activity. It becomes the slow and lingering death of a country’s economy together with its self-reliance and freedoms. The EU faces the complete failure of its ‘project’ and it doesn’t have the will to change in a more positive direction, the leadership to do so nor the belief in capitalism that would be its route to profitability and future success.

    Proof positive of the negative economic impact of Macron and Von der Leyen’s inabilities and harmful actions comes in the form of an analysis and report on Germany’s current economic status. Germany, of course, is the largest economy in the EU and this report was prepared and issued in March by the IFO Institute in Munich (one of the country’s largest and most respected economic research and think-tanks).

    It states that Germany’s budget deficit this year is expected to rise to 250 billion euros, which is equivalent to 7% of its GDP. The longer lockdown lasts (and Merkel is currently pushing fiercely to impose a hard lockdown through to the end of June in Germany) the higher the risk of “catastrophic levels of bankruptcies”.

    As Churchill once said, socialism is the philosophy of failure, the creed of ignorance and the gospel of envy. He also described the ultimate socialist nirvana of communism as simply the equal sharing of misery. That is the path that the EU still chooses unbendingly to follow and with such idiots in positions of power its continued existence is only a matter if time.

    Having quoted from Homer at the beginning of this report I return to him towards the close. This time, though, it’s not the poetic Greek chap but the sage de nos jours, Homer Simpson, who can always be relied upon for insightful wisdom.

    This Homer’s ironic mantra for strong leadership is “It’s everyone’s fault but mine” which, by sheer co-incidence, perfectly suits Von der Leyen’s ‘management’ style. And having listened to recent speeches from Macron, Homer’s phrase: “Aren’t those the sort of things that dumb people say to try and sound important” hits the nail right on the head.

    Written by 

    Following six months of dismal performance in equity investment markets typified by confected ‘fears’, synthetic doubts supported by deliberately negative misinterpretations of data have given rise to quite obvious false pricing. During this period the financial media, hand-in-glove with equity market-makers, constructed an alternative reality and between them they created a previously unknown state of being; simultaneously both woke and comatose…! This month it is a relief to be able to be able to report a long-awaited and very welcome return of common sense and economic reality. Hopefully this will now persist.

    As anticipated in our May report, Quotidian’s daily analysis indicated that we hit rock bottom of this recent extended downturn in June and since then US stock-markets (which are the standard bearers for and give a lead to global equity markets) had their best month for two years in July. And about time too.

    Whilst we are not completely out of the woods just yet, our renewed confidence and optimism for a return to normality and reliability in equity markets is supported by the Federal Reserve’s assurances that its plan for controlling inflation is on target coinciding with a raft of better than expected second quarter corporate results which were accompanied by largely positive future profitability projections.

    One major disappointment has been Meta (the company which used to be known as Facebook) whose latest results fell some way short of satisfactory. On closer examination, however, Meta’s main problem this year has been caused by a change in Apple’s privacy settings which have had a detrimental knock-on effect to the tune of $10 billion on Meta’s targeted advertising methods. This is now priced in to Meta’s equity status and its future projections are more positive.

    On 31st July 2022 the FTSE100 index closed the month at 7423.43 (a rise of +3.54% in the month of July itself) and it therefore now stands at +0.53% for the 2022 calendar year to date.

    By comparison, the Quotidian Fund’s valuation on the 31st July shows a rise of +17.94% for the month and it follows that the Fund’s year to date performance figure closed July at minus 31.75% (a vast improvement over the previous month).

    Regular readers will no doubt celebrate the brevity of this month’s report which is based simply on the fact that the transmission of good news (especially after such an extended period of negativity) does not require deeper elaboration, fanfare or further ado.

    Written by 

    Yet again, there was a continuation of incredible volatility throughout the month of June and investment performance fluctuated dramatically as a consequence (mostly on a positive note in the early part of June and which took us up by 6% at one stage in the month) only to end on another downbeat tone. Indeed, the last week of the month was relentlessly negative and we saw a steep decline again in just the final four days. The speed, size and similarity of these rapid intra-day movements is evidence enough of false pricing and of markets that are motivated by short-term fear, greed and guesswork rather than economics.

    The US Federal Reserve meeting in mid-June had been expected to deliver a further 0.50% increase in interest rates (and, indeed, Jerome Powell had already announced during its May meeting that that would be the case). In the event, however, he moved to an increase of 0.75% which was an unwelcome piece of news to digest. It was interesting to note that Powell had been called to a meeting with Joe Biden in advance of the Fed’s June interest rate statement and after that rendezvous Biden made a point of stating that the Federal Reserve was entirely independent from political interference. Why would he choose to say that other than to try to disguise such interference? Our cynical view suggests that Biden ‘doth protest too much’ in trying to cover his tracks.

    There is no doubt or argument that inflation has to be reined back and brought under control and that tightening monetary policy (by increasing interest rates) is the tried and trusted method to achieve that end. But doing too much too soon (thus inhibiting the amount of discretionary income left in the consumer’s pocket and, as a result, stifling demand) risks tipping the US economy into recession.

    The left-wing faction of the Federal Reserve Committee (perhaps with a little behind the scenes help from the incompetent Biden) seems now to have prevailed in their aim to rush through higher interest rate increases more quickly. In their one-eyed attempts to over-ride Jerome Powell’s less aggressive longer-term plan to bring inflation under control more gently, they might have made it a tad more challenging to achieve a soft landing for the US economy and thus avoid a recession. Equity market-makers, of course, have wasted no time in taking a negative view and this recession risk is now being priced in.

    Following the Federal Reserve’s surprising move on US interest rates in its June meeting Jerome Powell made an additional public statement on 17th June. Perhaps in an attempt to restore his authority, perhaps with a view to taking back control (where have I heard that phrase before) or perhaps simply to reassert who is de facto in charge of US monetary policy, JP confirmed that his commitment to restoring price stability was ‘unconditional’ and that he was prepared to “use all the Federal Reserve’s financial tools in order to “affect demand”. US prices (as measured by the Consumer Prices Index (the CPI) were up by 8.6% in May compared with 8.3% in April. In our opinion that relatively modest increase does not justify the extraordinary ‘red pen’ attacks that continued to be visited upon US equity prices throughout June. Mr Powell has proved himself to be both competent and trustworthy and we interpret his statement to mean that he will pursue a growth agenda for the US economy. This would be good news for investors.

    On 30th June 2022 the FTSE100 index closed the month at 7,169.28 (a fall of -5.76% in the month of June itself) and it therefore now stands at -2.92% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 30th June shows a fall of -15.99% for the month and it follows that the Fund’s year to date performance figure closed June at minus 42.14%.

    Of course, we appreciate that on the face of it these numbers look horrible but it is worth emphasising the fact that we have been in this same trading range for the past three months now and it is just an unpleasant coincidence that valuation day fell on a particularly low day in the markets. We should also add that this has been the worst six-month period in US stock markets since 1970; it has always recovered in the past and it will continue to fully recover and then go higher again in the future. Markets are currently being priced on fear and greed not on economic reality. As an illustration of that assertion you might recall that the US markets dropped very nearly 40% in the last quarter of 2018 but recovered and gave us a hugely positive year in 2019.

    No doubt over the next few months you’ll hear and read a great deal about recession in the UK, in the USA and globally. Much of it will be deliberately intended to induce fear. Let us set the record straight in advance of any misleading narrative on that subject too.

    There is no official definition of what constitutes an economic recession but the most commonly accepted description is that ‘a recession is a period of two consecutive quarters of decline in quarterly Gross Domestic Product (GDP)’. Essentially a recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion and expansion is actually the normal state of the economy.

    A recession is therefore a significant decline in economic activity spread across the economy, normally lasting no more than a few months. They are visible and measurable in data readily available for real GDP, real income, employment, industrial production, and retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

    The essential point to note here is that recessions are regular but infrequent, brief and short-lived, typically lasting for no longer than a month or two. They are not the end of the world and nothing to be fearful of. Indeed, the likelihood of recession in the world’s major economies has largely been priced in to equity markets in the turmoil of the past six months.

    Written by 

    We approached the last trading week of May having endured seven successive down weeks in US equity markets (and uninspired, directionless global markets too). Surprisingly, such a long, unrelenting and unbroken period of negativity has actually never occurred in American markets before and we had to call upon all our reserves of patience, will-power and determination just to maintain our investment positions. Indeed, we actually built on some of our holdings at advantageous prices.

    In the first week of May we improved our investment performance with a 5% uplift and were beginning to think that we might have reached the long-awaited bottom of this extended correction. But the middle of the following week saw the largest one-day markdown for roughly three years which dashed that hopeful but premature thought.

    Intra-month as a whole we then fluctuated between 42% down for the year to date at our worst point and 31% down year to date at our best (which was at month end). As you can imagine, price movements of this magnitude and irregularity confound rational analysis and are much more sentiment-related than economically driven.

    The one certainty that helped us to maintain our equilibrium was the knowledge and belief that stock-markets always bounce back and that the darkest hour is most often the one just before dawn. On 20th May we also noted a comment from J P Morgan that it now saw the US markets as oversold. Rich coming from them as the very people who had led the charge downwards from day one of 2022 and ever since.

    On the more positive front, we take reassurance and comfort from the fact that all bar one of our corporate holdings have now reported their latest results and (out of our 18 stock-specific holdings) 15 of them have issued positive surprises with their results being above market expectations. The three who fell marginally short (Google, Amazon and Activision Blizzard) are organisations that we still feel positive about and overall they haven’t actually caused us too much of a problem.

    We will learn a lot more when the Federal Reserve announces its next interest rate move (in mid-June). We expect to see another 50 basis points increase (although the clown on the committee who had predicted the need for a 75-basis point increase last month is still in full spate)! All we can say about him is that he’s a nobody… doubt motivated by wanting to be a somebody and drawing attention to himself outrageously to do so.

    Perhaps he is trying to be objective but it seems to us that he approaches every fiscal situation with a completely open mouth. There is a word for that type of self-gratifier and that word is not ‘scientific’. From his continual verbal incontinence, he gives the strong impression that he lacks the ability to think and speak at the same time.

    On 31st May 2022 the FTSE100 index closed the month at 7607.70 (a rise of +0.84% in the month of May itself) and it therefore now stands at +3.02% for the 2022 calendar year to date.

    By comparison, the Quotidian Fund’s valuation on the 31st May shows a rise of +0.80% for the month and it follows that the Fund’s year to date measurement closed May at -31.13%. Incredible volatility throughout the month only to end more or less in the same place that we started (and grateful for small but positive mercies after fully recovering from such a major mid-month one-day fall).

    The rationale behind this recent upward momentum in inflation around the world generally (and in the UK and the USA in particular) has been blindingly obvious for quite some time and that point has been highlighted in a number of our monthly reports earlier in the year.

    We have continually briefed that because the proximate causes of this period of rising inflation were relatively short-term so this current inflationary spike will likely be temporary too.

    However, economic data releases in the USA continue to indicate that consumer confidence and consumer spending remains strong even whilst inflation figures are increasing. Despite that, until the last trading week of May stock-market prices had been continuing to fall. Throughout the whole of the final week of May, though, US markets rebounded firmly upwards.

    There is, of course, a chance that last week was nothing more than a deliberately misleading bear squeeze but we have been waiting patiently to try to identify a bottoming out of this period of blinkered negativity in equities and we are minded to see this past week’s decisively upbeat and confident tone in US equities as that long-anticipated change of trend from negative to positive.

    The only caveat we would add in that respect is that our much more positive view now depends entirely upon the Federal Reserve continuing to follow its well-touted plan to contain inflation by raising US interest rates by only 50-basis points and just three more times between now and the year end.

    By happy coincidence the 29th May is the anniversary of the day that Sir Edmund Hillary and Tenzing Norgay completed their climb to the summit of Everest in 1953; the first to do so. This is appropriate and pertinent simply because Hillary, in his celebratory speech after this huge achievement is quoted as saying:

    “It is not the mountain we conquered but ourselves” (by which he refers to overcoming the doubts and fears that, as human beings, we are all occasionally subject to).

    For investors and investment managers alike, the past five months have tested our resolve, our patience, our courage and our beliefs. We’re still standing and still remain confident of a full recovery. It is only a matter of time.

    Written by 

    April was a month that opened brimming with a resurgence of stock-market confidence but ended with equity valuations caving in yet again in the face of determined negativity by a handful of secondary and less important Federal Reserve pessimists.

    The month’s initial confidence had been based on a speedy recovery in stock-market pricing in the last ten trading days of March. Having at one stage been relentlessly marked down intra-month through March to reach a low-point of minus 27% for the 2022 year to date, the last ten days of March saw the Fund’s prices recover very quickly in a positive direction to stand at just 14% down for the year at the month-end.

    The speed and volatility of those price movements perfectly illustrates the false and fabricated nature of global stock-markets ever since the first trading day of 2022.

    The Federal Open Market Committee (FOMC) comprises twelve members – the seven members of the Board of Governors of the Federal Reserve System, plus the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who each serve one-year terms on a rotating basis. As you will already know from earlier Quotidian reports, the Chairman of the Fed is Jerome Powell (a credible and reliable leader and a safe pair of hands).

    Despite the strong lead given by Jerome Powell however, it didn’t take long for loose tongues and mixed messages from lesser members of the Federal Reserve who, frankly, should have been more aware and known better than to create a renewed frenzy of phoney and artificial price mark-downs in global stock-markets (especially those in the USA).

    On many occasions over the past year Powell has reassured markets that he is fully aware of rising inflation (and the relatively short-term factors that have contributed to it) and that he has his finger well and truly on the pulse together with a dependable schedule of planned interest rate increases to counteract inflationary trends and bring them back under control. All this is supported by a background of economic recovery and growth in the USA.

    Despite Powell’s attributes, abilities and trustworthiness, what he cannot do is to prevent some of his lesser colleagues on the Federal Reserve Open Committee (FROC – the body that, under Powell’s direction, ultimately sets the USA’s interest rate policy) from polishing their own halos and seeking to impress themselves by hearing the sound of their own voices propagating their own opinions and guesswork (especially when their loose-tongued gossip is in direct contradiction of their Chairman’s well-established and publicly stated policy).

    Thus it was, on 5th April, that Lael Brainard (a left-wing democrat who had only been appointed by Biden in January as Powell’s underling) took it upon herself to express her opinion that the Federal Reserve could start to reduce its balance sheet as early as May (effectively reversing quantitative easing) and could be doing so “at a rapid pace.” She also indicated that interest rate increases could come at a more aggressive pace than the usual increments of 0.25 of a percentage point (her view being that the rate might even be lifted by 50 basis points).

    This statement (especially coming from a person who normally favours loose policy and low interest rates gave added impact and impetus to concerns about the direction and pace of US interest rate policy (and added fuel to already blazing bonfire of the vanities). Her lead was then followed by another insignificant member of the FROC who opined that the interest rate could even be raised by 75 basis points. I was always advised that if you have nothing worthwhile to say then it’s best to say nothing on the basis that it’s better to let people think that you’re daft than to open your mouth pointlessly and remove all doubt. Obviously that little nugget of wisdom is not as well observed in the USA as it is in the UK.

    In the meantime, and having been blind-sided by Brainard’s announcement (which we can only imagine came as a very unwelcome surprise to him) Fed Chairman Powell reiterated his belief that the Fed can manage to effect a “soft landing” for the US economy. Too little too late, sadly; confected and unnecessary panic had been triggered again. It will be short-lived until economic reality and prices based upon factual information return to replace opinion and guesswork. Our view is that the Fed is unlikely to actually increase interest rates by as much as the market has already priced in. On 30th April 2022 the FTSE100 index closed the month at 7515.68 (a rise of +0.38% in the month of April itself) and it therefore now stands at up +2.17% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 30th April shows a fall of -19.82% for the month and it follows that the Fund’s year to date measure closed the first quarter of 2022 at -31.67%.

    To summarise the known and salient facts as they are today then:

    • At the beginning of 2022 we already knew about the forthcoming rises in global inflation rates and the various planned central bank strategies to systematically increase interest rates as a means of combating and controlling inflation.
    • Putin had laid the ground for an attempt to invade Ukraine and we would therefore suggest that a viable and credible explanation for the precipitous stock-market declines that have scarred equity pricing in the first quarter of this year can be found in the designs and actions of Vladimir Putin.

    It has been estimated by a UK economist of some note that the economic effect of the Russia/Ukraine war will be to reduce global GDP for the 2022 year from its anticipated increase of 4% to a rise of just over 3%. That same study suggests that the two countries whose economic growth in 2022 looks better now than it did at the beginning of the year are the USA and Australia. If that does indeed prove to be the case then 2022 from an investment perspective will not finish anywhere close to as badly as it has started.

    First quarter results

    Disappointing results early in the reporting season from the likes of American Express, Verizon and HCE Healthcare (none of whom are held in Quotidian’s portfolio) have nevertheless infected the Nasdaq index across the board. This is an absurd response by market-makers and is more akin to guesswork and pursuit of their own self-interest than to intelligent investment. It will correct itself when common-sense returns to the front line. In the meantime other results and market responses have included:

    Alphabet (Google)’s revenue grew by 23% year-on-year to an all-time high of $68 billion and you could be forgiven in thinking that this would be a creditable result and a cause for celebration.

    However, as a vivid illustration of the current market determination to find fault and negativity, Alphabet’s share price was downgraded by another 6% after their results were released, thus marking the company’s valuation down by 20% since the start of the year.

    The limp excuse offered by market-makers to justify their myopia was to say that whilst Google’s search engine business (which produces the vast majority of its sales) was up by 23%, advertising sales on Alphabet’s YouTube site were ‘only’ up by 14%. The fact that this figure apparently ‘disappointed’ Wall Street analysts seems to overlook the inconvenient fact that YouTube had suspended both the Russian state broadcasters from its site from March onwards.

    This negative reaction to perfectly decent results is also a proxy for a number of other highly successful companies during the first quarter of 2022; steep price markdown does not reflect the ongoing strength and success of Alphabet (and many other) organisations and it is only a matter of time before realistic equity pricing returns.

    Fundamentally, every one of our portfolio holdings are sound, solid and reliable companies who are not in any imminent danger of going bust. That being so, it pays to boost our holdings at grossly undervalued prices and remain patient until economic reality replaces the fear, greed and guesswork that is currently holding sway.

    Netflix – In its latest financial statements Netflix declared Earnings Per Share figure to be 21.50% higher than expectations; a welcome surprise on the positive side for investors. The market’s focus, however, then shifted to the fact that Netflix had ‘lost’ 200,000 subscribers over the first quarter of the year and anticipated that it would lose up to 2 million more in the next quarter. Again, in their enthusiasm to highlight the negatives, market commentators portrayed this in a deeply negative light without taking the trouble to balance the argument.

    Netflix had already announced at the beginning of Russia’s war that it had cut off 700,000 of its subscribers in Russia. To then declare in its financial results that it ‘lost’ 200,000 subscribers in the first quarter as a whole suggests by simple mathematics that, in fact, Netflix must have actually added 500,000 new subscribers during that quarter (700,000 Russians cut off but subscribers still only down by 200,000 in that three-month period).

    Of greater interest (but not in line with the negative narrative currently in vogue) Netflix has a total of 221.64 million subscribers and a fall of only 200,000 (even if that was accurate) is a mere drop in the ocean. In addition, Netflix revenue is already running at $7.90 billion per quarter (and its net income is $1.60 billion a quarter) and so to lose another 2 million subscribers would still barely scratch the surface of this long-term money-making machine.

    Netflix could quite easily ramp up its revenue generation by selling advertising space for the first time (which it has already mentioned as a potential expansion to its income stream) and by charging a small fee for its presently free ‘friends and family’ service which allows up to five additional viewers to ‘camp on’ to a subscriber’s account. It all points to a continuing bright future for Netflix despite the Wall Street defeatists.

    Apple’s latest financial results were also first class across the board and comfortably beat Wall Street estimates on every metric. Anyone who has followed Apple over the years will know that its CEO has a habit of understating the company’s short-term future expectations but, in actuality, it has a long-term and consistent history of exceeding them.

    High achievers habitually set themselves low targets in order that they can over-achieve them and enjoy the positive affirmation (both personally and corporate) of that repetitive and ongoing feeling of success.

    At the time of writing, thirteen of our current eighteen individual corporate holdings have now issued their most recent quarterly results and all but two of them have produced better than expected numbers. In the prevailing determination to interpret positive news as negative, however, the word ‘disappointing’ has become the most commonly used catch-all to maintain the predominantly negative market tone.

    In addition to that, we are reassured by statements from Jerome Powell (Chairman of the Federal Reserve), Andrew Bailey (Governor of the Bank of England) and Christine Lagarde (President of the European Central Bank) that inflation will reduce again by the end of this year

    The common themes to all these statements are that the rising inflation measures we have witnessed since the beginning of the year are linked to and controlled by:

    • temporary Covid-linked factors during the pandemic
    • continuing Covid-linked issues in China (and their effect on supply-lines)
    • factors linked to the Russia/Ukraine war (energy costs, supply line disruptions, food prices) which will also be temporary
    • strategic plans are in place to safeguard financial stability
    • measures of inflation will likely increase over the coming months but will moderate towards the year-end
    • consumer confidence will rise accordingly and help to enhance future growth

    Naturally, as a major investor in the Fund myself I am as fed up with reporting on this period of sustained, relentless negativity as you must be with reading it. I can only continue to reassure you that the equity markets will restore themselves to their previous highs (as, indeed, will the Quotidian Fund). It is only a matter of time, patience and the courage to hold on. The correct response to this typical and inherent stock-market volatility is to hold one’s nerve.

    Written by 

    Following Quotidian’s substantial upward momentum in July, our positive progress continued throughout the first two weeks of August supported by an influx of new investment monies into equity markets together with excellent official data releases which indicated that inflation in the USA might already have peaked. As a consequence, by the middle of the month Quotidian’s high point in August itself saw a performance uplift of + 10.25% for the month alone at that point.

    The annual US inflation figure announced late in July showed that Consumer Price Inflation had fallen from the 9.10% figure declared in June down to 8.50% in July; a notably positive indication that the Federal Reserve’s strategy to control inflation and bring it down to its target range of circa 2% is working.

    There was never any doubt that that would eventually be the case because the Fed’s plan is founded on a basic economic concept which historically has long been the most successful method of suppressing inflation. Very simply, by increasing interest rates (and thereby increasing the cost of servicing any outstanding mortgages, loans and debts) the central bank effectively reduces the level of discretional income available to the consumer. That, in turn, subdues the demand for goods and services (which are no longer affordable to those consumers now with lower spending power) and thus squashes demand and brings a temporary halt to the virtuous economic cycle.

    Ultimately, the result of this simple economic measure impacts negatively upon corporate profits. Nonetheless, this is usually intended as a relatively short-term measure and, according to the minutes of the Federal Reserve’s various recent meetings it aims to have inflation in its grip by the end of the year.

    However, the positive momentum was not to last. Three weeks into August equity market focus was manoeuvred towards a speech that Jerome Powell was scheduled to deliver to an audience of bankers and market-makers at what has become an annual economic symposium in Jackson Hole, Wyoming.

    This shindig is a skiing resort in winter and a camping/recreation resort in the summer and the “economic symposium” has, since 1978, been a watering hole fitting neatly into the change of seasons for those in the US financial world to impress each other and showcase their own “masters of the universe” brilliance. In our view, it’s level of seriousness and intellectual stimulation can be gauged against its local full-time residents (who include luminaries such as Kim Kardashian, Sandra Bullock and Ru Paul).

    Market-makers are obviously fully aware that the Federal Reserve’s strategy to control inflation is the correct one and will indeed eventually bring about the desired result. By turning the focus onto a relatively unimportant speech at an equally unimportant ‘end of holiday’ gathering they could (with a little bit of ingenuity) bend the narrative into something more useful to their own purposes. Indeed, that is exactly what they then did.

    Jerome Powell’s ‘keynote’ address was nothing more than a rehash of the song he’s been singing for the past two years or so in respect of inflation and how best to control it. His plan is demonstrably working and will continue to do so. There was nothing new in his address and nothing to disturb his long-standing central message. Quite rightly, he warned against complacency and emphasised the need to continue along the well-trodden path of interest rate increases and see the job through to its required conclusion. It is, of course, highly desirable (not to say essential) to avoid premature releasing and its close relative premature slackening.

    Sadly, that change of focus gave those with the deliberate intent of reintroducing negativity their opportunity to misinterpret the real message and mutate it into a reason to create another temporary market downturn. The focal point was therefore turned from a statement of common sense and re-presented as a call for ‘aggressive’ interest rate increases. When Powell rose to begin his relatively short speech Quotidian’s real-time performance stood at plus 3% for the month of August. By close of play later that same day market-makers had been hard at work with their red pens and marked prices down by 5% across the board. This is not real-world pricing and does not reflect real trading; it is yet another visitation to ‘planet fear’.

    Please remain aware that these repetitive mini-markdowns are nothing more than market-makers attempts to weaken our willpower and thus dislodge us from our asset holdings. We counter these continual and barely disguised endeavours to feather their own nests at our expense by continuing to resist their fear-based challenges.

    Market-makers (predominantly the major American investment banks) certainly have the power to move and manipulate markets in the short-term (through false narratives and fear-based false pricing) but in the end they cannot deny the positive momentum of economic reality and the successes consistently achieved by profitable businesses.

    Ultimately, by understanding their motives and tactics, we will prevail and investment performance will return to its previous highs. Obviously, equity market-makers are fully aware of that and so they continue to use fear to try and dislocate amateurs and mislead naïve professionals in order to then feather their own nests. Unwary investors who sell out when they should be holding on (or topping up their asset-based holdings) merely help market-makers to reap the benefit of market resurgence when it comes.

    The monthly uplift we achieved in July and the early part of August is proof positive that the tech sector of the equity market has been grossly under-priced. Inflation in the USA will be brought under control faster than market analysts may currently think. Market-makers, on the other hand, only think about inventing new ways to best enhance their own profits at the investors’ expense.

    On 31st August 2022 the FTSE100 index closed the month at 7,284.15 (a fall of -1.88% in the month of August itself) and it therefore now stands at -1.36% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 31st August shows a fall of -9.98% for the month and it follows that the Fund’s year to date performance figure closed the month at -38.57% (and still a big improvement over our low point for the year).

    One of the reasons for our cynicism in relation to market pricing over the course of 2022 is that the numbers simply appear to be too coincidental. For example, in the first two weeks of May the Fund’s performance was -11.38% yet in the last two weeks of May it was +13.74%. Those numbers are not quite identical but are too close for usual and typical comfort.

    Likewise, in June our performance was -15.99% yet in July it was +17.94%. And more recently, in the first two weeks of August our performance peaked at +10.25% yet in the last two weeks of the month’s performance fell to -9.98%.

    Our scepticism and distrust of market-makers and the current quite incredible range and frequency of volatility in equity pricing stems from years of observing good news being quite deliberately mutated into bad news and the overall economic narrative suffering from metamorphosis in its reporting too. All done for the financial benefit of the market-makers themselves and against the best interests of the investor. Despite all that, equities remain the asset-class best placed to achieve medium and longer term gains and maintain pace with inflation (provided that one has patience, courage and an understanding of how equity markets actually work).

    One of our investors very kindly sent me a recent video of Warren Buffett (the well-known US investor) addressing a local audience with his take on some of today’s market issues. Sadly, at the age of 91 Mr Buffett is showing his age now but he still hits the target (particularly when he mentions fraud in the same breath as Wall Street).

    We’ve long observed that the majority of investors tend to buy liabilities in the belief that they are assets……and that truism is one of Buffett’s central themes in this address. Greed has a lot to answer for. It clearly affects the judgement of an awful lot of ‘amateur’ investors as well as that of some traders in the in-house departments of some famous investment names.

    In the long run, though, only those companies who produce products or services that have real value will be worth investing in which is why Quotidian’s fundamental investment strategy is to search out long-term value (and stick with it) rather than indulge in short term speculation.

    Written by 

    In our monthly report for January we made some rather pointed comments about equity market-makers in the USA and questioned the integrity of a number of them. For any readers who may have thought that we were suffering from a fit of paranoia and thereby being unduly unkind to that (less than) straightforward body of individuals and the investment banking organisation they represent, it was interesting to listen to an announcement from the Securities Exchange Commission (the USA’s financial regulators) on 15th February.

    The SEC announced that it intended to investigate the actions of Goldman Sachs, Morgan Stanley (and other market makers yet to be specifically named) in connection with giving prior warning to ‘favoured clients’ in advance of their placement of vast ‘block trades’ and the consequential severe markdown in equity prices (particularly in the tech-heavy Nasdaq market) which began on the first trading day of the year and has continued to dog US markets ever since. Clearly we weren’t alone in recognising a fairly blatant and obvious example of market manipulation.

    The SEC’s eventual findings will make interesting reading although, if any supporting evidence does come to light and guilt is proven then it will probably only result in eye-watering fines being imposed rather than a much more robust and effective regulatory regime being established. Until then, just another quiet day for the unscrupulous to earn a dollar in Wall Street whilst the concept of utmost good faith continues to be ignored.

    Much of this month’s report had already been written by the time that Vlad the Invader made his uninvited and unwelcome intrusion into Ukraine. As you would have seen, the immediate effect from the financial perspective was to send already-nervous and twitchy global equity markets in to a tailspin. We thought long and hard as to whether to include investment performance figures in this month’s report and, in the end, whilst we saw little virtue in providing numbers that are clearly based on entirely false markets, we decided to include them with the following caveat:

    As you can imagine, following the massive across the board falls in equity markets all around the world the figures as they currently stand are meaningless and not to be taken seriously. History clearly indicates that, after the dust has settled and the knees stop jerking, market prices will rebound within the following three months to reflect their more normal relationship with valid and authentic economics.

    As Theodore Roosevelt said at a time when the USA acted as the world’s policeman: the needful in order to get one’s enemies to listen and obey was to speak softly but carry a big stick. This dictum has worked for much of the past 70 years or so (with the exceptions of the lightweight past Presidents Carter, Clinton and Obama). Sadly, however, times have changed and the present incumbent Joe ‘The Wimpey Bar Kid’ Biden struggles to speak with any fluency, conviction or authority and instead of a big stick he gives the strong impression of holding just a damp squib.

    However, no doubt the world’s brighter, stronger and more compelling leaders together with NATO will waste very little time in making special arrangements to encourage the velocity of what (in his eyes no doubt) would be Vlad’s premature evacuation from Ukraine. In the meantime, the militant wing of the Green Party (ably supported by its massed battalions of woke keyboard warriors) have written in the strongest possible terms to Mr Putin to criticise his uncontrolled carbon footprint and demand a full explanation of the unthinking impact he has caused to global warming.

    On 28th February 2022 the FTSE100 index closed the month at 7458.25 (a fall of -0.08% in the month of February itself) and it therefore now stands at up +1.00% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 28th February shows a markdown of -7.68% for the month and it thus follows that the Fund’s year to date figure closed the month at -17.97%.

    Of course, no-one likes to see their portfolio go down (even just in ‘on-paper’ value) but, as you all understand, one of the fundamental truths of investing in equity markets is that at least once a year (and sometimes more frequently than that) share valuations will go through a period of correction before moving higher again. We attached historical data onto last month’s report to illustrate and validate that fact.

    As you also already know, a correction (particularly affecting US markets) this year was instigated by market makers and began on the first trading day of 2022; it is still ongoing as I write. This most recent markdown in global equity prices was initially generated by deliberately exaggerating inflation fears, then compounded by purposefully misinterpreting the US Federal Reserve’s suggested monetary tightening stance and latterly those anxieties now being further exacerbated by the Russia / Ukraine conflict.

    However, in my opinion, these issues have been nothing more than flimsy reasons or excuses used by market-makers to weaponize fear in order to justify excessive markdowns as a short-term means of cooling down what is still a de facto long-term bull market. Their aim is simply to frighten unwary investors into selling at ridiculously low prices in order that the market-makers themselves can ultimately profit from the needless panic they’ve created.

    With that in mind, if one considers the reality of long-term equity market investment two obvious thoughts stand out:

    It is somewhat naïve to expect that equity markets will always be on an uptrend and, conversely, it is equally unnecessary and unwise to think that a correction or downward valuation in stock prices represents a real financial loss. In fact, it is a relatively brief paper revaluation downwards only and not a lasting phenomenon. The current market situation should, with just a little rationality, lead one to conclude that this is but a short, synthetic interlude and it’s only a matter of time (armed with the courage to grit one’s teeth) before positivity returns. Indeed, it presents a buying opportunity not a mandate to sell.

    Consequently, it should also not matter what range of correction or downward valuation your portfolio is currently going through as long as it is broadly in line with what global markets trends are doing generally. The only reason to fret would be if your portfolio was invested in ‘fairy stories’ (ie. those organisations whose equity valuations are based on hope rather than economic reality and are held together with string and sealing wax. In other words, those companies which do not have a past history of strong and sound performance and have no clear pathway to future profitability either should be avoided.

    Rest assured that that Quotidian’s portfolio does not contain any such fly-by-night companies; it comprises only solid, durable outfits with a clear-cut and demonstrable history of reliable and superior performance and which can be depended on to sustain consistently above average performance in the foreseeable future.

    To add additional substance to that point it is worth noting that the first quarter reporting season saw financial results being issued by all 18 of Quotidian’s current individual portfolio holdings and, of those, 16 of them declared sales and profit figures that exceeded analysts’ expectation (a number of them well in advance of the anticipated numbers) and only 2 fell marginally short. These successes must and will be reflected in share prices when, in due course common-sense returns.

    Let me conclude by looking at what we can expect from to the Federal Reserve when it comes to raising interest rates and/or tightening money supply in March. Short-term we will clearly see increases in interest rates all over the world and equity markets may well remain volatile as a result. However, the gross over-reaction from market makers in anticipating and then exaggerating these interest rate moves is likely to mean that this fit of the vapours will probably be not as dramatic as is currently being priced in.

    It might also help to reassure you that my commentary is not based just on empty rhetoric. The genesis of what is now the Quotidian Fund saw the Richards family as its first and only investors. From those humble beginnings and thirty-five years later, the Fund has now grown to its current standing by attracting a much larger number of investors who have come to us almost entirely by recommendation from existing clients. We, ourselves, still remain the second-largest investors in the Fund. Thus, whatever is happening to ever-evolving equity valuations and investment performance is happening percentage-wise exactly the same to our own monies as it is to yours.

    Courage mes braves.

    Written by 

    “Time reveals all” is a little piece of homespun philosophy that is perfectly apposite to the long-term achievement of successful returns from stock-market investment.

    As we are all acutely aware, global equity markets have suffered a severe downturn since the very first trading day of 2022 but, thankfully, in the last two weeks of March there have been notable signs of a change to a more positive tone. It may be some time (if ever) before we discover the real reasons behind this short-term collapse in share prices (especially so in the USA’s tech-heavy Nasdaq market) but it is already clear that the excuses peddled by market-makers in their attempts to justify their steep down-pricing do not hold water.

    In our monthly report for January we made some rather pointed comments about equity market-makers in the USA and questioned the morality and integrity of a number of them. Since then (and as referenced in our February report) it was interesting to listen to an announcement from the Securities Exchange Commission (the USA’s financial regulators) in mid-February that it intended to investigate the actions of Goldman Sachs, Morgan Stanley (and other market-makers yet to be specifically named) in connection with having given prior warning to ‘favoured clients’ in advance of their placement of vast ‘block trades’ and the consequential precipitous markdowns in share prices.

    A block trade is an exceptionally high-volume share transaction that is privately negotiated and executed outside of the normal auction-based open market for those shares. Major market-makers often provide “block trading” services to their institutional clients, to sovereign funds (ie. to governments) and to extremely high net worth clients (ie. billionaires). Block trades are secretive, treacherous and, by association, certainly large enough to send normal equity market prices tumbling. The SEC’s eventual findings will, in due course, no doubt make fascinating reading.

    In the meantime, based on the reliable facts that have thus far emerged, we have (simply out of interest and for our own illumination) been trying to establish a viable rationale that credibly explains the substantial but somewhat curious falls in equity prices that have, rather surprisingly, been applied to a number of highly successful companies. Inter alia, reliable organisations such as Apple, Microsoft, Alphabet (Google), Amazon, Nvidia and others of similar high quality and standing have inexplicably and for no apparent economic reasons seen their valuations cut sharply. These markdowns will, no doubt, be temporary but it will be helpful for future reference to determine a plausible interpretation for the steep price-falls we’ve seen recently.

    On 31st March 2022 the FTSE100 index closed the month at 7,515.70 (a rise of +0.77% in the month of March itself) and it therefore now stands at up +1.78% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 31st March shows an uplift of +3.89% for the month and it follows that the Fund’s year to date measure closed the first quarter of 2022 at -14.78%.

    One of the few advantages of advancing age is that one has, over the years, occasionally witnessed the same or very similar patterns recurring in equity markets and an understanding of their proximate causes then helps us to determine in the future which events are seriously market-moving and what is just hot air that can safely be ignored. Indeed, one also has more experience of having occasionally been wrong in one’s historic interpretation of events and having learnt from it.

    I clearly recall having been invested in the US markets during the summer of 2001 and of having achieved a reasonable ‘year-to-date’ profit when, for no obvious motive or rationale, the markets suddenly and unexpectedly dropped like a stone. I remember sitting at my trading desk just a few days later when my screen focused in full technicolour detail on the co-ordinated 9/11 terrorist attacks on the World Trade Centre and the Pentagon.

    Some months later, time indeed did reveal all. In the forensic financial investigation that followed these attacks it became very apparent that sources in the Middle East associated with Osama Bin Laden had been heavily selling their very substantial US equity holdings in advance or 9/11 and (no doubt to emphasize their profits even further) had been selling short too in the full and certain knowledge of the atrocity that was about to occur and the profoundly negative effect it would have on US stock-markets.

    With that in mind we began to consider the non-economic events that have dominated the first quarter of this year and could possibly have a credible bearing on stock-market performance since the start of 2022. It is blindingly obvious that at the top of that agenda is the ongoing war between Russia and Ukraine. Equally obvious is that Russia (effectively represented by Putin and his small group of acolytes) has been the aggressor and its planning for this ill-considered act of invasion has clearly been long in its formulation.

    Some have questioned Putin’s mental capacity and others his strategic and tactical nous. Putting those opinions to one side, though, the known facts are that he has been dubbed “the richest man in the world” and he also has significant control over Russia’s extraordinary natural wealth. He therefore ticks the box for having ready access to the extremely high level of financial clout that would justify the use of block trading. Indeed, one could argue that he also has similar past form in this area.

    It might, of course, be entirely co-incidental but in 2014 (the year that Russia originally invaded and claimed ownership of Crimea) the US stock-markets suffered no fewer than three notable meltdowns and each substantial fall was to the tune of circa 7% (totalling, therefore, much the same percentage amount as we’ve seen reduced from share valuations in the first quarter of 2022. With the benefit of hindsight it is surprising that the financial conduct authorities saw no reason to investigate that series of events and so we are left merely with rumour and counter-rumour.

    Putin’s overtly aggressive actions at that time did, though, cause the Western world to impose a series of economic sanctions and so he would have been fully aware of the certainty that similar sanctions would be imposed as a direct consequence of his latest foray into and attempted land-grab of sovereign territory. It is therefore credible to suggest that ‘getting his retaliation in first’ in advance of sanctions being imposed could or would have dominated his thoughts. To summarise the known and relevant facts as they are today then:

    • At the beginning of 2022 we already knew about the forthcoming rises in inflation rates and the intended plans to increase interest rates as a means of combating them. These were already priced in to equity market valuations.
    • Putin had the means (exceptional wealth) and motives (funding his war and avoiding the financial effect of sanctions).

    We would therefore suggest that a viable and credible explanation for the precipitous stock-market declines that have scarred equity pricing in the first quarter of this year can be found in the actions of Vladimir Putin and his ability to place huge block trades via the usual Wall Street suspects. Indeed, time (and the findings of the SEC investigations) will reveal all.

    It has been estimated by a UK economist of some note that the economic effect of the Russia/Ukraine war will be to reduce global GDP for the 2022 year from its anticipated increase of 4% to a rise of just over 3%. That same study suggests that the two countries whose economic growth in 2022 looks better now than it did at the beginning of the year are the USA and Australia. If that does prove to be the case then 2022 from an investment perspective will not finish anywhere close to as badly as it started.

    Written by 

    The typical ebb and flow of equity-market pricing was much more pronounced than normal in the final two months of the year as market makers sought to construct flimsy excuses to cover relentlessly negative and ruthless interpretations of anodyne economic issues. Sadly, deviousness and self-interest posing as rational commentary and analysis seems to be more frequent in market-making circles nowadays.

    However, despite that and taking the 2021 year as a whole, Quotidian achieved eleven individual months of positive investment performance and suffered only one month with a negative return. Our overall investment performance was therefore pleasingly above average and nicely ahead of our benchmarks.

    On 31st December 2021 the FTSE100 index closed the month at 7384.54 (a rise of +4.61% in the month of December itself) and it now stands at up +14.30% for the 2021 calendar year in full. By comparison the Quotidian Fund’s valuation at the 31st December shows a rise of +0.89% for the final month and so the Fund finished up +17.54% for the 2021 year in total.

    The challenges that face us in 2022 include the economic impact of inflation, the possible negative effect of any potentially associated increases in interest rates and the likely damper of rising energy costs.

    We anticipate that inflation (particularly in the USA, in Europe and in the United Kingdom) will continue at its recent higher levels (or even move marginally higher over the next five months or so) but we expect it to fall back again thereafter. Economic history conclusively shows that accepting stock-market risk in the medium to long term has always beaten the absolute certainty of losing the real value of money through the erosive effect of inflation by ‘investing’ in cash, in deposit-based investments or by simply using tracker funds (which are the investment equivalent of “painting by numbers”).

    At the moment and for the foreseeable future the yield on stock-market investments still outperforms the returns available on typical savings accounts. We see that position continuing. More-so than ever, successful investment performance in 2022 will require consistent and intelligent stock selection combined with a reliable and proven decision-making process.

    Politics and political posturing will continue to have a strong bearing on economic performance and stock-market valuations and the lack of intelligence hand-in-glove with financial incontinence, decision-making weakness and economic incompetence that has been so evident as the hallmark of the current regime in the USA will likely linger until the mid-term elections later this year correct the balance of power in both houses of the US Congress.

    Meanwhile, in Europe (and, more particularly, in the UK) we would welcome less use of the terms “emergency” and “catastrophe” in describing the measures and outcomes of some misguided economic policies. What is required in replacement of Boris’s seeming addiction to spendthrift policies is a focus on stronger economic growth.

    This would require lower taxation, lowering interest rates again and lower consumer price inflation. That would lead to increasing discretionary income in the hands of consumers which, in turn, would increase consumer confidence and fuel an increase in demand for goods and services. The commensurate effect would kick-start an uptick in supply which would (or should) generate an uplift in corporate profits and, ultimately, in share prices.

    The question, quite simply, is whether the Chancellor is brave enough to support growth in the UK economy by reversing some of the unhelpful policies he has already announced (inter alia, increases in National Insurance, freezing personal tax allowances, substantial increases in energy costs) and going for growth.

    As we head into a New Year, therefore, all of us at Quotidian wish you and yours a joyful, healthy and prosperous 2022.

    In conclusion, I would like to take this opportunity to thank you for your continued support without which, quite simply, we wouldn’t have a business.

    Written by 

    As you may recall from our December 2021 monthly briefing report we entered 2022 with a degree of optimism for the New Year which flowed from the fact that the potential headwinds to stock-market activity and investment performance were clearly defined and seemingly under both political and financial control. In the event, and as you are probably aware, January turned out to be profoundly negative throughout the month as global equity markets (and especially the tech-heavy US Nasdaq index) were relentlessly marked down day after day to the point of wildness. Intra-day price swings of close to10% or more were commonplace and beyond any relationship to reason, logic or economic reality.

    As I stated in last month’s report (and is worth emphasizing again in respect of January): market makers sought to construct flimsy excuses to cover relentlessly negative and ruthless interpretations of what, in fact, were anodyne economic issues. Sadly, deviousness and self-interest posing as rational commentary and faithful analysis seems to be more frequent in market-making circles nowadays and, as a consequence, credibility in genuine market pricing is straying towards an all-time low. Let me expand on that theme.

    Again, to quote from December’s briefing note. We anticipate that inflation (particularly in the USA, in Europe and in the United Kingdom) will continue at its recent higher levels (or even move marginally higher again over the next five months or so) but we expect it to fall back again thereafter and the US Federal Reserve (at its meeting on14th/15th December) has stated and stood by its prediction that the US inflation rate at the end of 2022 will be back to their 2% target rate. With this in mind, the Fed intended to increase interest rates in baby steps three times in 2022 (indicating that the first of those moves would be in March) and then another three times in 2023.

    I have a great deal of respect for Jerome Powell (chairman of the Federal Reserve); he speaks with intelligence and clarity (unlike a number of his predecessors in that role) and does not seek to mislead or confuse. He has a record of doing what he says he’s going to do and, in my opinion, he sets out the Fed’s strategic plans clearly and honestly so that even you and I can understand them.

    It seemed as if Federal Reserve couldn’t have made its strategic points any clearer in its statement after its14th/15th December meeting (and well ahead of the traditional media blackout that precedes its next policy meeting, its first of the 2022 year, on Jan 25th/26th).

    Enter stage left our old friend Jamie Dimon, chairman and chief executive of the US investment bank J P Morgan. Dimon has an interesting history of his mouth having good ‘ideas’ before apparently consulting his brain. Indeed, as recently as mid-November he made a disparaging comment about the Chinese Communist Party and then felt the need to apologise (but, of course, the comment was well and truly in the public domain by then).

    Whether this happens by accident or design is open to debate although there often seems to be a hint of self-interest to the timings of his pronouncements. Let’s just call it disingenuous.

    Coinciding with the start of 2022 stock-market trading Dimon felt the need to share with the world his considered and confident opinion that the Federal Reserve would, in fact, increase US interest rates no less than seven times in 2022. That sort of comment (again whether by accident or design) from that sort of source is highly likely to send shudders through the equity markets and, indeed, that is what it did on the first trading day of the New Year and for the rest of the month thereafter.

    For all I know, the poor man may have an aural problem which makes it challenging for him to clearly hear strategic plans despite them having been repeated on a number of occasions. Strangely, though, the man doesn’t have an oral problem and rather seems to like the sound of his own voice. On the other hand, perhaps it’s the aural problem that leads to the oral instability. Bizarrely, however, wisdom only seems to come after the event. From my observations over many years past, my opinion is that Dimon is less of a prophet and more of a man with a self-interested eye for personal (or corporate) profit. Not to be out-done, his quasi opposite number at a senior level in Goldman Sachs joined in the fun but (no doubt to avoid a charge of plagiarism) expressed his view that US interest rates would be lifted a mere four or five times this year. Leaders of other US investment banks joined in the chorus (which could, in truth, could have done with a few more rehearsals and a pre-concert tuning). It seems that some of these individuals have missed a potentially more lucrative career opportunities as stand-ins for Laurel and Hardy.

    These people, naturally, are acutely aware of the market-moving power of their statements and, of course, they have a vested interest in promoting fear into the equity markets; it creates panic trading which they (in corporate or personal form) could benefit from. In the first week of equity-market trading, for example, $1.1 trillion was wiped off the value of the Nasdaq index. I wonder if all these events are somehow connected. These chaps couldn’t be feathering their own nests could they; that would be unethical and immoral. Perish that unworthy thought.

    Quite simply, I trust Jerome Powell and (until proven otherwise) am content to accept his ability to achieve the Fed’s strategy for US interest rates and the control of US inflation. Frankly, I wouldn’t take advice on crossing the road safely from the rest of this hall of shame who, to my no doubt cynical eyes, simply demonstrate the ongoing existence of modern American cowboys (but perhaps not as well loved as the originals).

    Now let me move on from that background setting to the actuality of stock market activity since the start of the New Year and its synthetic, confected and unreal nature. The first trading day of 2022 was Monday 3rd January and it is instructive to note that this was a Bank Holiday in the UK and so our markets were closed. The USA markets, though, were open and trading (and being relentlessly marked down).

    Day after day throughout January that same profound degree of negativity prevailed causing wild intra-day swings bordering on hysteria in equity prices. It did test patience and resolve (as no doubt it was intended to do).

    Mid-January, in the early part of the quarterly results season, both J P Morgan and Goldman Sachs issued their latest financial figures for the last quarter; in both cases the numbers were disappointingly short of expectations. Specifically, they both fell short on their predictions of trading revenue volume. How strange and one can’t help but wonder if both organisations have been more closely focused on addressing that weakness to generate future profitability.

    In the course of this simulated period of crazy pricing,Tesla issued its latest quarterly results and they were somewhat disappointing. Their shares dropped 25% (wiping $100 billion off the market value of the company in one day)! An amazing over-reaction.

    Similarly, Netflix issued its latest results which were largely above expectations with the exception of a relatively small shortfall on just one measure. In particular, their earnings per share beat expectations by 61% but their projection of future growth fell narrowly short of anticipations. However, the prevailing negative tone of the market saw its share price marked down by 30%, again in one day. This is a successful organisation with a demonstrable and consistent record of consistently generating profits. It beggar’s belief and defies logic to take markdowns of this magnitude seriously or as realistic and justified. We bought more Netflix at this knockdown price.

    On 31st January 2022 the FTSE100 index closed the month at 7464.40 (a rise of +1.08% in the month of January itself) and therefore, of course, it also stands at up +1.08% for the 2022 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st January shows a markdown of -11.15% for the first month of the year and it follows therefore that the Fund year to date figure also closed the month at -11.15%.

    Of course, I realise that these figures do not look pretty nor do they make pleasant reading but they reflect a period of typical market gyrations and we know that markets always bounce back; it is simply a matter of time before they shed the hysteria and return to upward momentum and their recent highs. Please see the attached appendices for vivid proof of that assertion.

    At close of play on Friday 28th January US shares, supported by the exceptional results from Microsoft and Apple (and another 5 other of our holdings all of whom reported glowing results ahead of expectations too), The closing summary from Bloomberg stated that “stocks roar back with their best day since June 2020”.

    Our remaining 10 corporate holdings will be reporting their results over the next two weeks and we expect similarly positive figures from them as well. It offers further proof that, ultimately, economic performance in the real world overcomes manipulated figures and manufactured negativity based on self-interest.

    That’s why we don’t panic, we don’t consolidate artificial and temporary paper markdowns into real financial losses and we only trade to buy more of our carefully selected holdings at unrealistically low prices. In that respect the ‘January sales’ season has been very kind to us.

    It is also very worthwhile to note that the Federal Reserve in its January strategy meeting held its federal funds rate unchanged and indicated, yet again, the probability of next raising the rate in March. So much for those wild, disingenuous and over-emotional predictions of multiple rate increases throughout 2022.


    Equity market volatility: Every year without exception stock-markets go through periods of ‘correction’ when equity prices are marked down at least once (and sometimes two, three or four times) in the calendar year. Often this is related to economic reality but occasionally it is synthetic.

    Markets always regain their poise and return eventually to their recent highs before going higher again; it is only a function of time, patience, belief and the courage to wait.

    I attach two spreadsheets, one for the Nasdaq index and the other for the FTSE100 (the two areas we are currently invested in) but the same rationale and behaviour applies to all equity markets.

    In column 1 you can see that every year has at least one market correction (and sometimes multiple markdowns).

    Despite that, as shown in column 2, the index invariably produces a positive investment return in the calendar year.

    As far as the Nasdaq is concerned, there have only been 9 negative calendar years in the past 37 (despite the multiplicity and regularity of markdowns).

    And as for the FTSE100, there have only been 11 negative calendar years since 1985 (again a period of 37 years).

    Markets are dynamic and negative corrections are inevitable. They are always overcome.

    I hope that this helps to reassure and put your mind at ease.

    Written by 

    In last month’s report you may have detected just the slightest scintilla of irritation when we were obliged to report an unnecessary, artificial and short-term markdown in the Fund’s investment performance for September. We clearly felt that this downturn was unjustified, gratuitous and far more related to market manipulation than real economic considerations.

    Using nothing more than common-sense and our own analysis and interpretations of the available data, we therefore saw no reason to exit or reduce our holdings and so we held tight. As October’s performance figures shown below can now confirm, market activity and pricing since the artificiality of those three synthetic days at the end of September has proved our cynicism and suspicions to have been well founded.

    Indeed, quite predictably and as we had highlighted at the end of September’s report, it was clear and obvious that the third-quarter corporate reporting season would not disappoint (and it didn’t) and equity prices have now regained their poise. Of course, by then, market-makers’ scaremongering had frightened unsteady and easily spooked investors to panic out of the market at artificially low prices and then buy back in again at higher valuations. All in a day’s work for the unscrupulous doyens of the market-making fraternity.

    On 30th October 2021 the FTSE100 index closed the month at 7,237.57 (a rise of +2.13% in the month of October itself) and it now stands at up +12.03% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 30th October shows a rise of +5.70% for the month and so the Fund is now up +16.11% to this same date.

    It is vital for investors to understand that market-makers in equity markets largely comprise global investment banks (in particular US investment banks) and to recognise the devices and techniques they use to mislead amateur shareholders. One can then better interpret the monotonous doses of propaganda, deceptions and misrepresentations emanating from them and posing as ‘serious’ analysis.

    All these ruses and contrivances regularly and tediously tapped by market-makers are underpinned by a bottomless pit of greed, arrogance and self-interest. Sadly, in the culture adopted by them over recent years it would seem that the long-standing virtue of ‘utmost good faith’ (that once was proudly the required and substantial foundation of equity markets) has been replaced by ‘devil take the hindmost’ (or the unwary).

    Treachery is seemingly now the common characteristic of equity market-makers and so a treachery of market-makers in the appropriate collective noun. In addition, political interference or influence is more apparent since the turn of the century than ever before. Perhaps earlier generations (politically and generally) were more intelligent or, perhaps, cleverer at covering their tracks.

    With the COP26 energy symposium currently holding court in Glasgow, world leaders are gathered to discuss energy consumption, future sources of affordable energy and its pricing mechanisms (and, above all, to signal their virtue) now would be an excellent time to capture an unlimited but short-term supply of hot air; no doubt in sufficient supply to drive the global economy for the rest of the year.

    Carbon, of course, has been demonised and has had such a concerted and contrived bad press that it’s use is being phased out in Western economies but, very strangely, the combined total of China and India’s continued consumption amounts to 34% of its global use. If we add Russia into that figure then we are fast approaching 50% of the world’s total carbon-based energy emission from just those three countries. Meanwhile, China and India continue to build coal-fired power stations at the gallop.

    The leaders of India, Russia and China (IRC) are too busy laughing at the Western world’s commitment to manufacturing and economic suicide to be able to spare the time to attend COP26 in person (and even if they did, they would no doubt pay lip service to whatever ‘agreement’ was cobbled together whist having absolutely no intention whatsoever of joining in with the Mad Hatter’s tea party. Increasingly, therefore, the world will split into an eastern block of coal and nuclear-powered manufacturing industries and a western-based technology and consumption-driven society.

    Under the stewardship of Donald Trump (a man who it would be difficult to confuse with a shrinking violet) coal consumption in the USA actually fell by more than 33% (shale gas fracking replacing it). To his credit, at least his expansive and plentiful rhetoric was matched by his actions.

    On the other hand, figures released in mid-October indicated that the use of coal at USA power plans has risen by 23% under the limp presidency of Joe Biden. That rather makes a joke of his self-professed green credentials which will no doubt be on full display again at COP26. In contrast to Trump (for all his failings) Biden postures and poses but he has already made it clear that his actions do not match his words; he is an empty vessel (particularly from the neck up). The irony of all this is no doubt lost on the dim-witted and hard-of-thinking ‘ordinary’ Joe.

    All this is relevant to investments in that the price of energy is, of course, a vital factor of production costs which, in turn, then has a direct impact on the pricing of the goods and services provided and so, ultimately, on future corporate profitability.

    Despite the self-congratulatory noises emanating from the White House (and sustained by a largely left-wing, tame and managed media) real support for Biden’s planned imposition of the anti-business lunacy of a global corporation tax rate (at a minimum starting level of 15%) continues to wane (as it becomes clearer that more and more countries have signed up with no intention of actually participating).

    All this whilst the woebegone and unimpressive ‘leaders’ of the world are busy impressing themselves and each other with empty rhetoric whilst achieving nothing more than copious quantities of hot air.

    Finally, a word of caution in respect of inflation:

    In simplistic terms, when money supply is loose (that is, when money is plentiful, cheap and easy to borrow) then equity markets head upwards.

    Conversely, when money supply is tight (when it becomes expensive and difficult to borrow) then stock-markets fall.

    In the USA the Federal Reserve has indicated its intention to taper quantitative easing (the printing of money) and use interest rates as a blunt instrument to ‘manage’ inflation. That these actions are taken from a position of economic strength may not prevent a short and temporary negative effect on stock-markets.

    Similarly, in the UK the Bank of England has recently expressed concerns that UK inflation is likely to increase to circa 4.50% in November and may go even higher in December. This has more to do with decisions taken by the government a year or so ago in its attempts to deal with the financial effects of Covid rather than what is happening in the UK economy right now.

    It would not come as a surprise to see a short correction in global equity markets as and when interest rate increases are eventually announced but this would likely be a temporary phenomenon based on real economic factors rather than confected market-maker manoeuvres. The underlying factors were temporary and so the inflationary effects are most likely to be temporary too. They will work their way through the financial system and their impact may be confined to specific sectors rather than across the board.

    Written by 

    The tone of this month’s report has changed from one extreme to the other in just the last three stock-market trading days of September. From a position of being nicely in profit on the 27th of the month, three successive days of extreme negativity (particularly in the Nasdaq index) saw equity prices substantially and unnecessarily marked down. As ever, though, on the final day of the month we are obliged to value on a mark-to-market basis.

    On 30th September 2021 the FTSE100 index closed the month at 7086.42 (a fall of -0.47% in the month of September itself) and it now stands at up 9.69% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 30th September shows a fall of -4.98% for the month and so the Fund is now up 9.84% to this same date.

    Yet again these price reductions in such a short space of time are unjustified from an economic perspective and are more related to the political opinions of two key figures in US financial policy making.

    As we stated in last month’s report, much of the volatility in equity markets throughout this year can be ascribed to confected ‘concerns’ expressed by analysts and market-makers in relation to the potential for upward spikes in future inflation (largely in their attempts to justify the irrational marking-down of equity prices) and they reflect ongoing differences of opinion between Jerome Powell (chairman of the Federal Reserve) and Janet Yellen (who was his immediate predecessor at the Federal Reserve and is now the Secretary of the Treasury in Biden’s government).

    These disagreements can best be illustrated by comparing the political beliefs of the two individuals concerned. Yellen was originally appointed to the Federal Reserve board by Bill Clinton and then raised to chairman by Obama (so is, broadly, left wing). She was dismissed as chairman of the Fed by Trump who then replaced her with Powell (conservative).

    On a multiplicity of occasions throughout this year Jerome Powell has stated that “if sustained higher inflation were to become a serious concern then the Federal Reserve Open Market Committee (FOMC) would certainly respond and use all its monetary tools to assure that inflation runs at levels that are consistent with our goal”.

    Despite this clear assurance market makers have continued to blame “inflationary concerns” as a limp pretext to manipulate equity prices and this same tired attempt at justification has been trotted out again this week. It simply does not stand up to scrutiny.

    The initial ‘explanation’ offered on 27th September to vindicate a 4% mark-down in the Nasdaq index was that the yield on US 10-year Treasury Bonds had spiked from its opening level on that day of 1.484% to a figure of 1.551%. Seemingly these ‘experts’ consider that a yield figure of 1.50% is a tipping point and any higher yield figure is deemed to be a negative indicator for shares.

    Strangely, on 31st March the yield on 10-year Treasuries had spiked to 1.763% but, stranger still, the Nasdaq index resembled a mill pond and equity prices remained unmoved. Obviously, we mere investors are not expected to have memories, employ logic or use the power of thought.

    At the same time as market-makers were citing concerns over “surging inflation” the Bank of England stated confidently that any spike in inflation would be “transitory”.

    We therefore see this severe mark-down as an injection of fear in the hope of dislodging unsteady or unwary investors (just before what is expected to be an impressive third-quarter results season). Yields on Treasury Bonds are dynamic and ever variable and, no doubt, before too long the 10-year yield will fall again below this apparently so vital 1.50% figure. We’ll see what happens then.

    Never one to miss the opportunity to pour petrol onto an already excessive blaze, Janet Yellen (a woman unencumbered by modesty and never guilty of over-thinking) felt the need to tell the world that the US Treasury would run out of money by 18th October and therefore that the USA might not be able to pay its bills and thus could default on its debts. Subtlety is clearly not her strong suit either.

    Her statement comes from the oft-used equity-market playbook of nonsense stories and, if nothing else, gives Edward Lear a good run for his money. However, one of the few advantages of advancing age is that one has seen and heard an awful lot of whoppers before but our political leaders don’t seem to believe that there are many people outside their political bubble who have the power of recall and who are not prepared to suspend disbelief or swallow fairy stories. When faced with dubious and politically based assertions my inner geek does tend to emerge.

    Like Christmas, this pantomime comes around on a regular basis year after year and, to date, the USA has never yet defaulted. As in so many years past a last-minute fix (much in the style of Errol Flynn) will be found and salvation will be clutched from the gaping maw of Janet Yellen.

    The first three weeks of October will see the release of third-quarter corporate financial reports. For those companies that currently comprise the portfolio holdings of the Quotidian Fund we anticipate a continuation of impressive performance figures and, if that indeed proves to be the case, then we expect the prices that have been artificially marked down in these past three days of short-term mayhem to be restored to their former glory.

    Written by 

    Traditionally the month of August is the main holiday season in the Northern Hemisphere (which is home to all the major stock-markets of the world) and market-makers abandon their trading desks in droves for a welcome and often extended period of rest and relaxation. At the best of times thin trading volumes leave shares open to volatility and it is a relief to welcome September and the return to what passes for investment normality as the leading players return to their offices.

    On 31st August 2021 the FTSE100 index closed the month at 7,119.70 (a rise of +1.24% in the month of August itself) and it now stands at up +10.20% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st August shows a rise of +3.90% for the month and so the Fund is now up +15.60% to this same date.

    One of the economic issues we covered in last month’s report was “The Biden effect” which related to his self-defeating attempt to impose a common global level of corporation tax. That proposal hasn’t survived its first encounter with economic reality but I have little doubt that this buffoon will persist with his blinkered bid to introduce a socialist tax agenda. Socialism, of course, sounds blissfully attractive in theory but has never actually worked in practice and it has a well-earned soubriquet as “the equal sharing of misery”.

    Biden has unmistakably shown himself to be weak, incoherent, incapable and way out of his depth but, not content with exposing his own naivety with this ill-thought-through stratagem, he took another false step (a wild lunge in the dark might be a better description) when, without prior consultation with his NATO partners nor with sufficiently early warning, he simply gave an artificially and unnecessarily abrupt period of notice to remove the nation-building and peace-keeping US armed forces from the potential powder-keg of Afghanistan.

    The New World Order ushered in following the Second World War saw the USA effectively appoint itself as the world’s policeman. We all know, of course, that with constabulary duties to be done (to be done) a policeman’s lot is not a happy one. This is especially so when the chief of police is a bumbling, incompetent idiot. Biden’s approach to this responsibility and duty of care can seemingly be summarised as “tell me what I need to know but don’t tell me what I don’t want to hear”. But, as a prominent and prescient Sixties philosopher once said; “living is easy with eyes closed, misunderstanding all you see.”

    Putting aside the potential consequences of this move in relation to global stability and peace, the longer-term impact on the global economy is highly likely to be profoundly damaging to the western world’s interests.

    Afghanistan is a rich source of rare earth metals (cobalt and lithium in particular) which are essential components for the politically motivated, proposed and fast approaching ‘green’ era of electricity replacing carbon-based sources of fuel.

    China already provides 85% of the world’s rare earth metals and, as it shares a land border with Afghanistan, it will no doubt seek to absorb unopposed a substantial quantity of that country’s natural resources too until it effectively achieves a monopoly.

    China’s obvious ambitions towards world domination will then be given even greater weight. Incidentally, as a light-hearted comment on that weighty note: a valuable recent study has shown that women who carry a little extra poundage tend to live longer than the men who mention it.

    Meanwhile, as the West continues its idealistic (not to say naïve) march towards the well-meaning but daft and unrealistic goal of net zero carbon emissions by 2050 (and ultimate commercial suicide), China (closely matched by India) continues to prosper and builds hundreds of new coal-powered power stations whilst Western economies sleepwalk into windmills of confusion, tidal waves of uncertainty and solar rays of eventual economic upheaval, mayhem and calamity. Presumably, whilst politicians pursue their fantasies and virtue-signalling at our expense, the huge levels of carbon emissions produced by China and India will only exist in a parallel universe to the one the rest of us currently occupy.

    And finally, much of the volatility in equity markets this year can be ascribed to confected ‘concerns’ expressed by analysts and market-makers in relation to the potential for upward spikes in future inflation (largely in their attempts to justify the irrational marking-down of equity prices).

    In a speech delivered on 27th August, and for the umpteenth time in 2021, Jerome Powell (Chairman of the Federal Reserve, America’s central bank) stated that “if sustained higher inflation were to become a serious concern then the Federal Reserve Open Market Committee (FOMO) would certainly respond and use all our monetary tools to assure that inflation runs at levels that are consistent with our goal”.

    The message couldn’t be clearer but, no doubt, market makers will continue to blame “inflationary concerns” as a limp excuse to manipulate prices; their cynical actions are designed simply to introduce fear and uncertainty into an investor’s mind and they should be seen for what they are.

    Written by 

    This is the third iteration of our November monthly report (the first two drafts having already been shredded) and this state of affairs is simply a reflection of the fast-moving, rapidly-changing economic, political and investment scenarios that this month has challenged us with. Events and focal points which we thought were potentially market-moving earlier in the month have already been resolved and overtaken by an unexpected, and thus far unsubstantiated, occurrence in just the last twenty-four hours.

    Two weeks ago, equity markets were expressing concern about the possible impact of future inflation and market-makers were very keen to emphasize that, as a consequence, interest rates would likely need to be increased in the UK, in Europe and in the USA to counter that inflationary possibility. Yet again, fear was their communicative weapon of choice.

    In the event, at its November meeting the Bank of England held the UK’s headline interest rate at 0.10%. Likewise, the European Central Bank left its key interest rate unchanged and the US Federal Reserve announced that it too was holding rates steady at a range of 0 to 0.25 percent. So much for the road to Armageddon being predicted by self-interested commentators.

    One week ago, equity-market attention was firmly drawn to the impending decision from Joe Biden as to whether to retain Jerome Powell (a right-wing and capitalist member of the Republican Party) as Chairman of the Federal Reserve (the USA’s central bank) or to replace him by Lael Brainard (a left-wing and socialist representative of the Democratic Party). When it comes to decision-making, though, Biden has all the alacrity, vision and velocity of an arthritic snail.

    Powell was appointed to the top job at the Fed early in 2018 and we believe that he has done a very good job in an extremely testing economic and Covid-affected climate. He has proved himself to be a reliable and safe pair of hands. In typical Biden style though (lacking any demonstrable leadership skills, decision-making competence and having the courage of a shrimp) Biden fudged the issue by keeping Powell in post but appointing Brainard as his deputy. Even the Wizard of Oz’s lion had more oomph than this limp ‘leader’ of the free world.

    However, both of these very real concerns have been overtaken by the apparent discovery of a new variant of the Covid virus in the southernmost part of the African continent. As I write this (on Saturday 27th) very little to no reliable factual information has yet emerged but what has been said is full of maybe’s, might’s and could’s representing an entire lexicon of caveats has been in full spate. Hard evidence is in short supply and, indeed has been as rare as discovering an avuncular and selfless individual in the political or stockmarket-making arenas.

    With so little quality information to go on, it is hardly a surprise that market-makers have seen a golden opportunity to further enrich themselves by playing havoc with equity prices. At the opening bell in all of the European markets share prices were comprehensively slashed and it was the same story in the UK and the USA. At close of play European markets ended circa 4% down, the UK was down over 3% and the USA staged a late rally to finish with a fall of just 2%.

    In the absence of any real news and with a cynical, world-weary- eye it is hardly a surprise that on the run up to Christmas this new variant of Covid has suddenly emerged out of the blue (exactly as had happened last year) and the same fear-laden vocabulary is being employed to infer that it could be more dangerous than previous mutations, it may be more lethal and perhaps it might be immune to current vaccines.

    No facts are used to support these assertions because, as the UK government has had the grace to admit, it currently has no facts (scientific or otherwise) to work with. Its default position increasingly relies on ‘project fear’ as a means of controlling public reaction, ensuring compliance with governmental diktats and, possibly, as a timely precursor to another yuletide lockdown. Even for the bubble of self-adoration that increasingly is the disappointing Boris, that method of communication is placing him (not for the first time) as a hostage to fortune. His record of mind-changes gets longer by the week.

    Any further lockdowns would be a direct flight path to more economic pain, governmental guesswork ably supported by governmental inefficiency incorporating multiple changes of mind and directions of travel. From our present lack of knowledge and understanding we view the knee-jerk mark-down in equities as a short-term gross over-reaction by opportunist market-makers. If lockdown does become a reality then we will change our view.

    On 30th November 2021 the FTSE100 index closed the month at 7079.01 (a fall of -2.19% in the month of November itself) and it now stands at up +9.57% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 30th November shows a rise of +0.35% for the month and so the Fund is now up +16,52% to this same date.

    We learned from the actions taken by governments around the world in their attempts to control the original iterations of Covid and its economic impact that these measures were the results of ‘expert’ scientific analysis. Sadly, in business, in economics and in accountancy and actuarial analysis, those ‘scientific’ studies (based, as they are, on a series of assumptions) do not produce any consistent degree of accuracy. As any decent accountant or actuary will say when asked to produce an analysis: “what answer to you want to arrive at and we’ll make our assumptions accordingly?”

    One of the driving forces to describe the methodology behind this form of analysis can be simplistically summarised as “make an assumption; then prove that assumption”. The flaws apparent in that style of analysis are that it typically involves too many imponderables, thus requiring too many assumptions to be incorporated at the outset and, in addition, the consideration of different timescales produces significantly different results.

    The human element then muddies the water further in that the outcome of ‘analysis’ can become heavily biased towards the analyst’s own views and opinions. In short, the final ‘analysis’ is often little more than guesswork. Indeed, all too often throughout the Covid pandemic, that has proved to have been the case; and all too often there have been wild differences between ‘experts’ predictions and real-world actuality.

    Finally, we anticipate that inflation (particularly in the USA, in Europe and in the United Kingdom) will continue at its recent higher levels or even move marginally higher over the next six months but it is expected to fall back again thereafter and history clearly indicates that accepting stock-market risk in the medium to long term has always beaten the absolute certainty of losing money through the erosive effect of inflation by ‘investing’ in cash or deposit-based investments.

    At the moment and for the foreseeable future the yield on stock-market investments still outperforms the returns available on typical savings accounts. We see that position continuing.

    Written by 

    Simply on the basis of a handful of optimistic forecasts relating to effective Covid-19 vaccines becoming readily available on the near horizon, the first week of November saw substantial uplifts in global equity market valuations. The FTSE100 rose by 14% in that week alone (as if all the UK’s economic problems had been magically solved). In line with the age-old cliché of London buses, you wait for ten months with no sign of one and then four arrive together (Pfizer, Regeneron, Oxford/Astra Zeneca and Moderna) but we don’t know that they’ve yet passed their MOT’s.

    Naturally we all hope that this is indeed the case but to cram what would normally have been 10 years’ worth of research and development into a ten-month period and then produce and distribute an efficacious vaccine in global quantities does require suspension of disbelief on a heroic scale. At this stage it seems more akin to the triumph of hope over medical reality and appears to be based more on the wish being the master of the thought.

    The fragility of this so-called recovery can best be illustrated by looking more closely at the daily volatility of a few well-known shares (which, in turn, are a proxy for many others). On the 9th November alone:

    Activision Blizzard’s shares opened down 10%, recovered to minus 0.50% and then closed down 4%.

    Amazon opened down 6%, recovered to minus 1% and then fell back to minus 5% at close.

    Electronic Arts opened down 7%, climbed to +1.6% and fell again to close at minus 2%.

    Take Two opened at minus 10%, recovered to minus 5.6% and fell back to close at minus 9%.

    Netflix opened at minus 9% climbed up to minus 4% and fell again to minus 8%

    All this in intra-day trading on that one day alone and symptomatic of market activity around the globe. This has more of a relationship to gambling as opposed to investment.

    Many of the airline stocks, together with those in the travel and hospitality sectors also saw substantial single-day pricing upgrades (+30% to +40% was not uncommon during this short period of over-enthusiasm). Since 11th November, though, prices have reverted to being sideways to negative as over-optimism has waned.

    Of course, we recognise that equity markets are forward-looking and they price-in positive signals for the future but it may well be that some more alert investors (particularly those of a certain age) may have picked-up on a possible connection between Pfizer (whose other main product is Viagra) and its Covid vaccine and are hoping that the vaccine might introduce some rigidity into what have otherwise been limp 2020 global equity markets.

    A more pragmatic note from Morgan Stanley (not noted for an Alice in Wonderland outlook) in the last week of this month strongly suggests another 10% correction before a substantial rebound in 2021.

    On 30th November 2020 the FTSE100 index closed the month at 6,266.20 (a rise of +12.35% in the month of November) and it now stands at down -16.92% for the 2020 calendar year to date. The over-optimism apparent in the first week of November has given way to a more considered realism.

    By comparison the Quotidian Fund’s valuation at the 30th November shows an uplift of +0.42% for the month and the Fund is now up +33.05% for the 2020 year thus far. (49.95% ahead of the FTSE100 index and light years ahead of the yields available from Gilts and on typical building society returns).

    Throughout the interminable Brexit negotiations the EU has continued to lecture our representatives on the vital importance of a level playing field and of the EU having the final legal say in what constitutes this vision of economic paradise. As recently as mid-November Mrs Von der Leyen announced that Brussels needs enforceable guarantees of fair competition in areas such as subsidy law, taxation, environment and labour (employment) laws. She also demanded a long-term deal on fishing rights and a robust enforcement system (by which she means the laughably mis-named Orwellian construct known as the European Court of Justice).to oversee the deal. In other words, even at this late stage the EU is intent on keeping the UK firmly under its thumb.

    By strange coincidence, the EU also announced a number of financial handouts this month to various companies based in different parts of its realm:

    An extra 6 billion euros was given to Air France/KLM (on top of the 10.4 billion given earlier this year). We were assured at that time that it was a ‘one-and-done’ arrangement.

    A substantial rescue package presented in the form of a huge tax-break to the Tuscan bank Monte dei Paschi (the largest lender in Italy); it is not yet clear whether the bank will be required to amend its name to Monte dei Pesce as this tax device sounds rather fishy.

    Air Italia has also been recapitalised from EU funds.

    In Germany, Thyssen Krupp has been given 5 billion euros, Tui has received 1.2 billion euros and Lufthansa has benefitted to the tune of 9 billion euros.

    Spain has received 10 billion euros to support various parts of its economy via Cassa Depositi e Prestiti, its state-owned sovereign wealth fund. Euronext (its stock exchange operator) and Nevi (a payments business) have been among those to have already benefitted.

    On top of all these individual beneficiaries sits the recently agreed EU ‘recovery fund’ which comprises 750 billion euros to be used for assistance when and where required.

    The good news is that, naturally, none of this is deemed to represent state aid (which would of course, be illegal under EU legislation) and the EU would never break their own immutable laws would it.

    There does, though, appear to be rather a conflict of interests between the EU’s rhetoric (and the rules they wish to impose on its future dealings with the UK) and the ‘rules’ of their own making which they ignore at will when it suits their own purposes. Under the unblinking eye of the European Court of Justice, blatant breaches of its own firm and unyielding rules is de rigeur and therefore deemed to be perfectly allowable.

    I should confess that English is my second language and I sometimes get confused by its nuances; as a result I may perhaps have become perplexed by what the EU is up to (although somehow I doubt it). Fair competition and a level playing field? Baloney. There are none so blind than those who don’t want to see (or to be seen to be acting with the subterfuge that is second nature to and standard practice in the EU).

    Despite these financial interventions the Eurozone remains in deep economic contraction and, until its component parts would ever agree to debt mutualisation (which Germany never will) then it will lurch from one financial disaster to the next whilst printing money to cover its manifest failings (and its tracks).

    Finally, a little word about the UK economy and its current problems and future issues.

    In the past month it has been broadcast that the UK’s national debt has now risen to £2 trillion (unsurprisingly its highest ever level). Partly that is a function of the financial measures taken thus far to control the economic effects of Covid and partly the consequence of uneconomic but politically motivated vanity projects such as HS2, Crossrail and the Northern Powerhouse.

    The real issue I am trying to highlight here is the ongoing cost of just servicing this current eye-watering level of debt let alone the very probable additional debts that are likely to accrue until the coronavirus pandemic is properly under control.

    Last week the Office of Budget Responsibility (yet another wonderfully evocative name that, in the real world, usually means the opposite of what it says) let the cat momentarily out of the bag by telling us that every percentage point rise in short-term interest rates will have a dramatic effect on the size of the deficit; increasing it by £6 billion to £12 billion (which represents 0.50% of the UK’s GDP); the effect of compound interest and geometrical progression are not friendly travelling companions when debt has been allowed to rise to such unsustainable levels.

    Written by 

    As you know, we came out of equity markets towards the end of July in order to consolidate and safeguard the profits we had generated during the first seven months of the year and, simultaneously, to remove ourselves from ongoing exposure to stock-market risk. Since then, share valuations have been extremely volatile and have lost further ground; even the US markets have suffered as a result.

    Of course, this downward momentum will be a relatively temporary blip in the longer view of things although it may be a month or two yet before the obvious short-term fiscal problems have worked their way through the economic system and new profit-making opportunities emerge again.

    Market makers, as ever, are keen to tempt investors back into equities and, included among their extensive and nefarious skill sets, they are masters of seduction. We have noted over the past three months a regular trend of tempting price mark-ups early in successive weeks (“the water’s lovely again, do come back in”) inevitably followed by the end of each week with a markdown taking prices back to their starting point (or lower). Market-makers are fully aware of the emotional pull of FOMO (Fear of Missing Out – a close relation to another emotional trigger – greed) on a high percentage of unplanned, unorganised and therefore unconfident and unsteady investors. We are thankful to have an unemotional investment process (unaffected by fear or greed) and have been happy to resist these siren calls.

    On 31st October 2020 the FTSE100 index closed the month at 5577.30 (a fall of -4.92% in the month of October) and it now stands at down -26.05% for the 2020 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st October shows an uplift of +0.03% for the month and the Fund is now up +32.53% for the 2020 year thus far. We are therefore 58.58% ahead of the FTSE100 at this stage of the 2020 calendar year and, of course, well ahead of inflation and the yields available on gilts or deposits.

    In a year where Brexit negotiations have, quite predictably, lurched from one impasse to another as both sides wearily performed their set-piece Viennese waltzes to see if the other would trip first (trip the light bombastic in Monsieur Barnier’s case), and as Covid has cast a long shadow over the global economy you might find it strange to hear us suggest that the most significant financial event of 2020 will arrive next week in the form of the US Presidential Election. The outcome of this poll will have a profound and a diametrically opposite effect on global stock-markets over the next four years.

    Dealing first with Brexit, there is little doubt that (despite all the politicians’ sound and fury, bluff and double- bluff) a free trade deal will be struck and both sides will proclaim to have triumphed (each for the benefit of their own local audiences). Led by Barnier, their knight in shining Armani whose regular statements of contempt would have been better replaced by some intent, the EU team (in the hope of reversing Brexit altogether) managed to string out talks that (with any good faith) should have been done and dusted in a matter of weeks. It remains to be seen what compromises will have been hidden away in the small print in order to avoid either side being accused of climbing down. The definition of a good deal, of course, is one that leaves both sides equally unhappy and we will only learn the truth when we have the perspective of time.

    As your even-handed and almost completely unbiased correspondent I do, of course, take great care to remain relentlessly neutral, equitable and unprejudiced and so, in the same spirit of good faith as shown by the EU throughout the four years of Brexit negotiations let’s hope it’s the Road to Rouen and perdition for the out-dated, undemocratic, inefficient, grossly over-regulated, protectionist and unchangeable EU project and the road to unparalleled success and sunny uplands for the UK….!!!

    Indulge me please for one more joke at Monsieur Barnier’s expense before we wish him a fond Eurevoir; he is undoubtedly a man of panache; his love of wine is well-known and over these last four years he has indeed proved himself to be a fully qualified plonqueur.

    Just for clarity let me add a little footnote to that section on Brexit. Everything in our monthly reports is written from the cold and unemotional perspective of economics, finance and investment. We do try to inject humour into the dry subject matter of the gloomiest science to lighten what would otherwise be just turgid text. Any ‘gentle’ barbs are aimed entirely at the pomposity and ineptitude of politicians or functionaries and certainly not at the peoples and cultures of each of the global countries themselves. No ‘Little Britain’ blinkers here. Of course, we do make an exception for Monsieur Barnier whose public persona is ripe for parody and whose arrogance and pomposity is a balloon ready to be pricked.

    In roughly nine short months we have all become experts on Covid-19 and are fully aware of the various fiscal devices used by governments around the world to deal with the short-term financial effects of the virus. Suffice it to say that we are in unchartered waters and as we do not yet know the ultimate length or depth of this pandemic we can only guess at the long-term cost to future governments and therefore to future taxpayers. In the short-term there is a high likelihood of a deepening recession in the UK and much wider afield; in the longer term it the direction of travel will depend upon each country’s response to adversity.

    Taking a positive view, the move to working from home in the UK and the demonstrable success of this initiative (both in efficiency and in cost savings) will no doubt flow through to corporate balance sheets and, necessity being the mother of invention, no doubt many other new and better methods of running business and commerce will emerge.

    Let us address now the salient point of this month’s report which, as indicated in the introductory paragraphs above is the US Presidential Election.

    To avoid this monthly report from rivalling Tolstoy’s War and Peace in its lack of brevity, we will write this as a separate addendum and attachment.

    Written by 

    Historically the months of August and September have usually generated the poorest returns of the entire year in equity markets and 2020 has mimicked this well-established trend. There is, therefore, very little of any enlightenment to present to you and so I will heed the sage advice given to me by my leader in my very early years of investment management:

    “If you have nothing of consequence to say then say nothing and let people think you’re daft rather than witlessly and pointlessly open your mouth and remove all doubt”.

    On 30th September 2020 the FTSE100 index closed the month at 5,866.10 (a fall of -1.63% in the month of September) and it now stands at down -22.23% for the 2020 calendar year to date.

    By comparison the Quotidian Fund’s valuation at the 30th September shows an uplift of +0.03% for the month and the Fund is now up +32.45% for the 2020 year thus far. We are therefore 54.67% ahead of the FTSE100 at this stage of the 2020 calendar year and, of course, well ahead of inflation and the yields available on gilts or deposits.

    In the covering letter to our August report I mentioned that the Japanese investment organisation Softbank (which has a well-deserved reputation for gambling rather than investment) had been active in its use of derivatives (options and/or futures) to the tune of billions of US dollars as a means of driving the prices of the main tech companies ever higher. This is a technique known as ‘spoofing’ which has the effect of confusing normal market mechanisms and Softbank seems to regard this as clever business…..we see it as market manipulation and there is a danger now that they have been driven upwards too far, too fast.

    On that theme, and simply to illustrate the lack of real and sustainable progress in equities over the past two months, it is worth noting that the Nasdaq index (which had been the only positive driving force for the global market throughout this year) has fallen by -8.08% since 2nd September, having been on a roller-coaster ride throughout the month.

    Thas has cast the pale shadow of doubt over global equity markets too. We continue to be happy to remain shy of equities for the moment until we see a genuine opportunity to obtain profits from any re-exposure to market risk. Better safe than sorry until a greater degree of clarity emerges.

    Towards the end of September the Federal Reserve stated that they anticipated interest rates in the US would remain at their current very low level until 2023. At the same time, the Bank of England suggested that its interest rate in the UK could well fall from today’s level of 0.01% into negative territory. Whilst this is unhappy news for risk-averse savers who rely largely for their income on gilt or money-market yields generated by their capital, it will have a positive effect on ‘risk-asset’ valuations and will likely cause more capital to be directed into equities (thus driving equity valuations upwards).

    Written by 

    On 31st August 2020 the FTSE100 index closed the month at 5963.60 a rise of +1.12% in the month of August, and it now stands at down – 20.93% for the 2020 calendar year to date.

    By comparison the Quotidian Fund’s valuation at the 31st August shows an uplift of +0.24% for the month of August itself and the Fund is now up +32.41% for the 2020 year thus far. We are therefore 53.34% ahead of the FTSE100 at this point in the 2020 calendar year and, of course, well ahead of inflation and the yield on gilts or deposits.

    The UK’s Gross Domestic Product (GDP) fell by 20.4% in the second quarter of 2020, its second consecutive quarterly decline in 2020 and the biggest fall in quarterly GDP on record.

    That represents the accepted definition of a recession and hardly comes as a surprise given the economic impact of Covid-19 and the measures taken by the government in its attempts to control the spread of that virus.

    Overall, productivity saw its largest ever fall in the second quarter and there were widespread contractions across all main sectors of the UK economy. For example, the services sector fell by 19.9% between April and June, output in the construction sector fell by 35% in the same period and, to complete an unwelcome hat-trick for the 2nd quarter, Industrial Production fell by 16.99% in the three months to end of June 2020. Another statement of the blindingly obvious was that the Hospitality sector was worst hit, with productivity in that industry falling by three-quarters in recent months.

    Perversely, the immediate reaction in equity markets on the day these figures were released was an uplift of over 2% in the FTSE100. Perhaps market-makers were expecting even worse numbers and so a sigh of relief was the order of the day. Reprieve, however, was short-lived and within three days that increase was wiped out and the market had returned to its bearish tone.

    Many UK financial commentators are suggesting that the local economy will struggle to move forward until late 2021 to mid-2022. We can only hope that these analysts are too pessimistic and error-strewn (as, indeed, they usually are). At the moment we see little investment attraction in Europe or the London markets in anything other than the UK smaller companies sector and, even then, only very selectively.

    Ever keen to add a note of joy to the world of investment, towards the end of August the government announced that UK debt now stands at £2 trillion (another record) and that debt now exceeds 100% of GDP. Strangely, bells and whistles were notable by their absence in the delivery, the content and the ambience of this news.

    In search of positive news with which to end this report, the UK economy began to bounce back in June with shops reopening, factories beginning to ramp up production and housebuilding continuing to recover. UK GDP grew by 8.7% in the month of June although, despite this, GDP in June still remained one-sixth below its level in February, before the virus struck.

    The monthly figure for May had also shown GDP growth of 2.4% and so, month by month, there is evidence of a gradual bounce-back. However, the level of UK output has not yet fully recovered from the record falls seen across March and April 2020, and has reduced by 17.2% compared with February 2020 (before the full impact of the coronavirus pandemic). The pursuit of positive investment returns continues but we are content to remain in cash for a while longer rather than make a premature re-entry to equity markets and expose ourselves to what would more likely be a period of return-free risk.

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

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

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

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

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

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

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

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

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

    Written by 

    The 2021 second quarter corporate results season has been in full swing through the month of July and this will continue for the first fortnight of August. Of the results issued to date, the figures reported have generally been better across the board than analyst’s expectations. Indeed, three-fifths of the companies that comprise the S&P500 Index have now reported and, in aggregate, they show a positive surprise of +17.75% above anticipations. Every market sector is positive, the lowest sector (Utilities) showing positive to the tune of +4.56% and the highest (Consumer Discretionary) being +31.01%.

    You will know from Quotidian’s earlier 2021 monthly briefings that this doesn’t come as a surprise to us; we have very little regard for what that self-regarding and dull body of analytical pessimists have been predicting since January and have continuously expressed our view that market valuations (especially in the USA) have not reflected the reality of the economic rebound and corporate successes.

    Two-thirds of Quotidian’s investment holdings have now registered their latest numbers and all bar one (the exception being Amazon) have been nicely above expectations and some (Google and Apple) have been exceptional by every metric.

    Despite this compelling evidence of strong economic performance (particularly in the USA) the global markets saw intra-month gains almost wiped out by a return to confected ‘concerns’ about global inflation, about regulation of technology companies in China and about the potential of rising interest rates. The result of these limp excuses for intelligent analysis and perceptive thought was the (temporary) reoccurrence of emotionally-based and pessimistic stock pricing in the last two trading days of the month (which saw 3% wiped off the gains made earlier in July).

    On 31st July 2021 the FTSE100 index closed the month at 7032.30 (a fall of -0.07% in the month of July itself) and it now stands at up +8.85% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st July shows a rise of +0.85% for the month and so the Fund is now up +11.27% to this same date.

    In the last two weeks of July there has been a great deal of selling pressure in the China stock-market. This has been motivated by a series of targeted crackdowns by the Chinese regulators who have specifically aimed their fire at the Technology, Delivery and Education sectors. In respect of the Education sector businesses Chinese regulators seem determined to turn them into “not for profit” organisations.

    These central government actions emphasise the essential difference between a command economy (as operated in China) and a free-market economy (as typically operated in the western world).

    We can best illustrate the effect of these crackdowns by confirming that two of the major investment funds focused on China have very recently seen their values fall as follows:

    In the month of July the Fidelity China Special Situations Fund has fallen -15%. Similarly, the J P Morgan China Growth and Income Fund has fallen by -24% in that month too

    These equity mark-downs remain localised to Chinese companies and there is no clear and obvious reason why these self-inflicted woes should infect other major global markets but we well recall that the last three ‘shock’ global stock-market sell-offs have each had their genesis in China. We remain vigilant.

    The Biden effect… corporation tax

    Despite all the evidence contradicting his preferred political viewpoint, Joe Biden is still fighting dogmatic, left-wing economic arguments that were lost over 60 years ago. It’s an old cliché that a sure sign of madness (or sheer stupidity) is to keep on doing the same things but expecting to achieve a different outcome. Buffoons like Biden and his coterie still believe that taxing the successful and subsidising the indolent will produce a vibrant economy.

    The latest idiocy in a long string of mis-steps and error strewn ‘policy’ since his inauguration is his misguided attempt to impose a global minimum level of corporation tax (initially set at 15%) which was unveiled at the recent G7 leaders meeting in Cornwall (an ideal location where the abundant hot air met the economically open mouths and empty heads of the delegates). With the full confidence of their own economic ignorance they all voted in favour of this destructive nonsense.

    A few years ago and a little further around England’s south coast an equally empty-headed monarch called King Cnut (not a man wracked by self-doubt) convinced himself that by his own sheer brilliance and perfection he could turn back the tide simply through the medium of his own status and greatness. This plan (which had all the hallmarks of Biden’s blinkered taxation proposal) was eventually aborted at the very moment that Cnut’s head disappeared beneath the waves. The same fate will befall Biden’s ill-advised scheme. Governments generally (and the UK’s in particular) would do much better to rein in their spendthrift ways and, simultaneously, look very closely at controlling waste and making desperately needed economies in state-sponsored organisations. History clearly shows that taxing success and subsidising failure has never worked.

    Indeed, just a matter of days after the G7 leaders had gone back to running their candy-floss stalls and local Punch and Judy shows (same cast, different story) and the army of journalists and TV cameras had decamped and returned to their castles in the air, the cracks in unity began to appear. Ireland opted out as soon as its representatives had returned home and packed away the sun-tan lotion whilst the UK immediately sought out an exemption for the City of London from this proposed new tax.

    With that in mind, it is interesting to note that the City of London generates approximately 22 per cent of the UK’s GDP and that the UK financial services industry paid £76bn in tax in 2020 (equivalent to 10.1% of the total tax contribution to the UK).

    As ever, the EU took a while longer to wave the white flag but by the second week of July it too had shelved plans for a sweeping new digital tax whilst Biden’s plan to coerce another 139 nations into agreeing this flawed approach also fell short.

    Whilst all this was taking place in Wonderland, Apple (a company that really knows how to run a business successfully and, as a result, has more cash than the US Treasury) issued its latest set of accounts which showed that it had paid dividends of £600 million to its Irish parent company in September 2020 (a sum which was closely followed by another £120 million in December of that same year).

    Apple, rather like King Lear, is more sinned against than sinning. Its contribution to the Irish economy helps to keep that whole unsteady ship afloat. Profit-shifting is perfectly legal and will continue for as long as the grass is green and the sky is blue (and for as long as the deluded, brainless and self-harming wishes of Biden and his ilk try to tax them out of existence).

    Pensions Lifetime Limit

    The concept of a “Lifetime Limit” on pension funds was first introduced in 2006 by Gordon Brown and the limit at inception was set at £1.6 million (and index linked). With indexation, that limit grew to a peak of £1.8 million by 2014. The Chancellor at that stage (George Osborne: never one to miss a sleazy, well-disguised taxation opportunity) then began to reduce the “Lifetime Limit” in successive years since then and it has now fallen to £1,073,100 for the 2021/22 tax year.

    The latest statement from the Treasury the week before last suggests that this figure will be reduced yet again, and the hint was that it would now be set at £800,000. When this was mooted in its announcement, a senior figure at the Treasury was quoted as saying “Our job is to keep people out of poverty not to enrich the middle classes”…..!!! The arrogance and ignorance behind that statement is breath-taking. Does the UK really have a Conservative government at the present time or is the country actually being run by unelected, left-wing civil servants?

    As a result of this blinkered and un-conservative thinking there have already been some extremely unhelpful side-effects. For example, the medical profession has already seen a mass exodus of doctors retiring early or leaving the profession altogether (or moving abroad) as a direct result of the tax bills they’ve already received in relation to (unknowingly) having exceeded the pension lifetime limit (or from fearing that they will be unable to avoid exceeding it in the future). To penalise the responsible and successful in order to reward the irresponsible, the apathetic and the indolent does not seem to be a well-thought-out strategy. I question whether this is indeed the intended Conservative policy?

    Given the unseemly way that successive governments have continued to lower the Lifetime Limit it is highly likely that even very modest pension provisions currently will indeed be likely to exceed the maximum limit in the future…..and any pension value above that lifetime limit will be subject to tax at 25%. It gives rise to a very serious question as to whether investors should now avoid UK pension schemes as the main vehicle with which to save for their retirement. It also begs the question (yet again) as to whether the UK currently has a Conservative government?

    Northern Ireland protocol

    I am obliged to Dr Martin Parsons for the following piece of intelligence relating to the Northern Ireland Protocol which continues to bedevil long-standing and profitable trade between two component parts of the United Kingdom (two parts of the same singular nation state):

    The 1970 UN Declaration on the Principles of International Law states that “Any attempt aimed at the partial or total disruption of the national unity and territorial integrity of a state or country or at its political independence is incompatible with the purposes and principles of the UN Charter. Interference with a country’s internal trade is also prohibited by Article 1 of the International Covenant on Civil and Political Rights (which all EU countries have signed up to). Despite that, the EU continues to justify its deliberate weaponizing of the NI protocol to make it extremely difficult (if not impossible) for the people of Northern Ireland to buy the produce of its own nation in its own nation. The financial and investment relevance of this to our monthly report is the negative commercial, economic and opportunity cost effects it is having on the British economy.

    This is a quite absurd situation which (apart from its profound security and social implications) is proving detrimental to the profitable economic interests of the United Kingdom. The EU’s actions are clearly in breach of the legislation outlined above but the UK government seems unwilling to take more robust action; I wonder why.

    Mifid 2

    In April the government strongly hinted that it intended to repeal MIFID 2 (Markets in Financial Instruments Directive), the legislation introduced in January 2018 by the EU as a means of regulating the financial services industry). Mifid 2 built upon and replaced its elder brother Mifid 1 which originally came into force in 2007.

    As with all EU legislation Mifid was over-fussy, grossly over-complicated and simply had the effect of stifling the financial services industry in pointless, unproductive and expensive red tape. Our monthly report in April 2021 set out a more comprehensive explanation of where and how Mifid 2 contributed to the joy of nations.

    In the last week of July, the FCA confirmed that a new UK regime would come into force on 1st January 2022 (effectively replacing Mifid). This new system is called the Investment Firms Prudential Regime (IFPR) and will impact all UK investment firms currently authorised under Mifid.

    Joy unconfined; except that, at first blush, far from replacing the overwhelming, counter-productive idiocy of Mifid 2, IFPR appears to maintain everything that made Mifid 2 pointless and then add even more meaningless, needless and futile bureaucracy to it. So much for the government’s supposed intention to repeal Mifid and replace it with something purposeful, worthy and useful. The UK government’s words do not match its actions.

    Another opportunity lost for making the UK’s financial services sector more competent, efficient and competitive globally. This is particularly relevant given the Memorandum of Understanding on Financial Services Regulatory Co-operation between the UK and Singapore having been signed in July.

    Conservatives have a hard-won historical reputation for being business-friendly and financially prudent not for being financially incontinent. Reputations take years to establish but can be lost in short order through inattentiveness, being taken for granted and taking one’s eyes off the ball. Boris caveat……or should that be caveat Boris.

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

    In the early part of January the positive momentum generated during the last quarter of 2019 continued to drive equity markets upwards. Out of the blue though, in the final ten days of the month, we have all become experts on a new strain of Asian flu that has emerged without warning from one city in China.

    This fresh species of a coronavirus-based illness has created a level of concern bordering on panic that nowadays seems to be the default setting for any renewed outbreak of flu-like symptoms.

    From the detail that has been released thus far, the medical profession has already stated that this type of coronavirus is not as strong and not as dangerous as the outbreak of Sars (itself a version of coronavirus) which also emanated from China in 2003 and created similar levels of hysteria.

    Despite that, within the first ten days of its appearance, the World Health Organisation has declared a global coronavirus emergency. However, to put that into perspective, the WHO has declared a global health emergency on six other occasions in the past 10 years but, strangely, the world has not yet ended. No doubt it works on the basis that the more times it presses the emergency button then the more chance it has of getting one right.

    Naturally, this scaremongering has caused doubt and uncertainty across global stock-markets and, of course, market-makers need no encouragement or excuse to take a red pen to equity prices. The positivity of early January has therefore been temporarily stopped in its tracks.

    On 31st January 2020 the FTSE100 index closed the month at 7286.01, a fall of -3.40% in the month of January and, of course, it also stands at -3.40% for the 2020 calendar year too. By comparison (despite the sell-off which began on 24th January) the Quotidian Fund’s valuation at the 31st January shows an uplift of +2.37% for the month of January and it follows that the Fund is up +2.37% for the 2020 year thus far.

    This outperformance as measured against the FTSE100 and other global markets is simply a function of our oft-stated aim of trying to be in the right sectors of the right global markets at the right time. The US markets continue in the vanguard of global equities and it remains apparent that the technology sector shows the way.

    In vivid support of that assertion, the 4th quarter 2019 results season is in full swing and 12 of our 19 individual company holdings have reported their figures so far. Of these, 11 have declared better than expected performance and we anticipate similarly positive returns from the remaining 7 who will be reporting in February.

    Even in face of the coronavirus-inspired reductions elsewhere, share prices in these organisations have been based on solid growth figures and continuing positive profits and have remained largely resilient.

    For the past three years we have been holding shares in a number of Biotech and Healthcare companies and they have done well for us. Recently, however, they’ve gone off the boil and so we’ve sold those holdings and taken a breather on that sector.

    A factor in our decision-making is that the US Presidential election is on the horizon (November this year) and historically biotech and pharmaceutical companies have had average to poor performance in election years. In the belief that they will be appealing to the large number of US voters who are paying high prices for unnecessary medicines, US politicians tend to ‘promise’ that if they’re elected then they will cap drug prices and regulate pharmacological companies. The inevitable result of these politically motivated pledges is to cause volatility and a downward shift in equity pricing in the biotech and pharma sector

    Until real evidence emerges to disprove our view that the latest appearance of a coronavirus is yet another temporary discomfort to the human race then we will continue to regard it as an economic inconvenience which will have only a short-term effect on share valuations.

    What little evidence we have at this early stage allows us to make comparisons with similar over-hyped health-scares in the relatively recent past.

    For example, the Sars outbreak in 2003 also began in China (as did swine fever and bird flu) and all were treated at the time as world threatening events. Ebola, originating in Africa, was similarly over-stated.

    The reality is that from a world population of 6.36 billion people in 2003 there were 8437 recorded cases of Sars infection from whom (in the entire world) there was a grand total of just 813 deaths. These figures come from the WHO. (who, as ever, had led the charge in describing this as a global emergency).

    In 2020 the world population is now 7.79 billion people and, as I write this, there have been 14380 reported cases of coronavirus infection and 304 deaths (only one of which has been outside China….in the Philippines).

    During and after the Sars outbreak it was calculated that there was a period of 6 months between infection and containment and so we have no doubt that the figures for infections and deaths from this coronavirus will continue to rise. However, the mortality rate from coronavirus infection has been calculated to be just 2% and respected figures in the medical profession have announced that a vaccine has already been developed (in record time) to counter this incidence of coronavirus and it will be in production shortly.

    Whilst we see the commercial effect of this coronavirus epidemic as being short-lived there is no doubt that it does and will continue to have an impact in economic terms. The limitations being placed on transport and travel (not only in and out of China) will have an adverse and disruptive effect on industrial supply chains and their “just in time” usage requirements. Restrictions on travel will also cause a suppressive effect on consumer activity. In spite of that we believe that the markdown of equity prices has been over-done and normality (together with commn-sense) will return to equity markets in the near future.

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    “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

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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).

    Written by 

    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.

    Written by 

    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









    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.

    Written by 

    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.