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Quotidian Investments Monthly Commentary – January 2021

February 6, 2021

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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