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Quotidian Investments Monthly Commentary – March 2022

April 5, 2022

“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.

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