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Quotidian Investments Monthly Commentary – April 2022

May 4, 2022

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.

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