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Quotidian Investments Monthly Commentary – July 2017

August 11, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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