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Quotidian Investments Monthly Commentary – July 2018

August 3, 2018

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.

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