Quotidian Investments Monthly Commentary – September 2019
On 5th September the latest unemployment figures were released in America and showed that the US economy had added 195,000 new jobs in August, well above the 140,000 expected by economists. Well, what a surprise. Economists and analysts get their sums wrong yet again.
In the meantime, though, market makers had wasted no time in lowering the equity markets during August and all based on these false estimates. Of course, the markets rallied again in line with economic reality but it is tedious to observe the repetitive lack of accuracy from those who are relied upon and royally paid to produce valid assessments.
Most of September therefore was relatively positive in equity markets as supportive economic considerations guided the rebound in equities upwards both in the UK and the USA. However, in the final week of the month the dead hand of politics (accompanied by further evidence of market malpractice) intervened once again to temper the economic positivity.
Believe me, I don’t set out to write about politics but politics and its knock-on effects on equity markets has now become such an integral part of equity pricing that one simply cannot avoid it.
As we all know, the recent prorogation of Parliament in the UK led to politically motivated Divisional Court hearings in both Scotland and England. In each case the initial judgements were then taken to appeal at the Supreme Court in London.
This is the same Supreme Court that itself, in 2014, ruled that the Crown’s actions in Parliament were sacrosanct and “cannot be questioned”. In legal terms they were not justiciable.
How strange, therefore, that in their judgement this month in respect of the Crown’s prorogation their ruling now was completely the opposite. Whilst this judgement has to be respected, it raises uncomfortable suspicions that the ruling was politically biased. Fundamentally, the Supreme Court has driven a coach and horses through the long-established norms of the UK’s unwritten constitution.
By a process that raises more questions than it answers Boris Johnson has now been deemed to have acted illegally simply by virtue of an entirely new interpretation of constitutional law; an interpretation that didn’t exist until the Supreme Court created it three weeks after the actual decision to prorogue Parliament (it having been perfectly sound and legal at the point of Johnson’s action). In the circumstances, it is preposterous to claim that Johnson is a liar or that he has misled the Queen but that, of course, has not and will not stop his Parliamentary opposition from trying to make cheap political capital from it. Contemporaneously, the strange (one might even say biased) and eccentric actions of the Speaker with his expansive interpretations of long-standing precedents seem to have gone unquestioned.
In the opinion of the Lord Chief Justice and the Master of the Rolls in the Divisional Court hearing in London the matter was political and therefore not justiciable. A retired bencher and eminent QC with experience in constitutional matters asserted that the Supreme Court’s judgement “does not read as if it follows an argument to its reasoned conclusion but as if it is contrived to reach a desired conclusion.”
Res ipsa loquitur. In our interpretation from an investment perspective, it is difficult not to conclude that the Supreme Court’s stated rationale for arriving at their new interpretation of the law was but a thin disguise for an unprecedented seizure of power. Smash and grab (which I think is still a criminal offence but nowadays I can’t be sure) would be a more accurate and reasonable description of the Supreme Court’s actions.
There is no doubt that the repercussions will have a profound effect on the UK stock-market and on the value of sterling in foreign exchange markets. In the short term that reaction is most likely to be positive but in the longer term it might well delay or derail Brexit and so be detrimental to the UK’s future ability to establish profitable global trading arrangements (thus stifling economic growth and profitability).
We have long believed in the importance of free trade, low taxation, light but sound regulation and the avoidance of small-minded protectionist policies all of which are focused on supporting profitable trade with the growth areas of the world’s economies (rather than being locked-in solely to moribund economies like those of the Eurozone). If the luddites in Parliament succeed in keeping the UK tied only to the EU then the FTSE will revert to its relatively glum performance of the past 5 years.
On 16th September two current traders and one former trader on J P Morgan Chase’s global precious metals desk were charged with multiple counts of fraud and conspiracy to defraud which involved illegal manipulation of prices for gold, silver, platinum and palladium. This scam has apparently been running for at least eight years and involved thousands of illegal trades which have ripped off countless investors (including many of JPMC’s own clients).
A practice known as “spoofing” involves placing multiple trade orders (often huge) which the trader does not then execute but which, by fooling the market systems, still have the effect of moving prices in the trader’s favour. Only J P Morgan Chase has thus far been identified but it would be naïve to believe that they had a monopoly on this type of price manipulation. Similar practices have been prevalent elsewhere and across other asset classes.
In the same way that the judiciary has chosen to profoundly interfere with politics in the UK, the last week of September saw another attempt made to impeach the US President. It has all the hallmarks of previous unevidenced assertions. The CIA official (imaginatively known as “whistle-blower”) who initiated this complaint was not a direct witness to the event he complains about and he apparently comes from the same group who have complained and failed in their earlier unevidenced attempts to assert that the 2016 US Presidential election was rigged by Russian interference. Whilst “whistle-blower” has not been publicly identified he is known to the CIA Inspector General whose report describes him as “having a political bias”. Who would have guessed.
Since the time of his inauguration, the political left wing of the USA (the Democratic party and large tranches of its media) have been hell bent on finding something with which to achieve the impeachment of Donald Trump. Thus far they have dismally failed and the likelihood of impeachment and them forcing the President from office is remote.
In order to achieve that aim, Trump firstly has to be found guilty of improper conduct (usually defined as treason or bribery) and that decision then has to be ratified by both the House of Representatives (held by the Democrats and so more susceptible to voting for impeachment) but then also by the Senate (firmly in the grip of the Republicans) who are unlikely to unseat their own man (although he has plenty of enemies in his own camp). In any case, carrying the motion in the Senate would require at least 66% of the vote, an unlikely hurdle to exceed.
Unless a lot more real evidence emerges then this latest attempt to throw even more mud at Trump will go the way of all the others. As things stand today, the current assertion is just noise and fury but signifies nothing. If proper evidence does come forward then I will change my mind and we will amend our strategy accordingly.
As ever, in reaction to this false narrative the most extreme worst-case scenarios have been implemented by equity market-makers in the last week of this month and have again sent equity valuation downwards. Markets will bounce again when all this silliness calms down. A week ago we were up over 4% for the month but, 5 days onwards, as a direct result of this needless panic attack we close the month in marginally negative territory.
The Eurozone continues its economic decline. On 1st November, at the very point when the EU needs more than ever a person with a grasp of monetary policy, economics and banking, Christine Lagarde takes over from Mario Draghi as head of the European Central Bank. Draghi is no doubt on his way to a well-earned retirement with his many friends in Hamelin.
Mme Lagarde is not an economist nor is she a banker. Her training and experience has been in the law and in politics but, by EU standards, she is obviously seen as well qualified for her new position. Her role is to encourage the economic reform of the Eurozone. Good luck with that! Many have tried, all have failed.
And finally, our old friend the Sino/US trade war. Towards the end of the month news crept through that China had signed a 25-year deal with Iran for the supply of oil, gas and petrochemicals. In an act possibly (although specifically would probably be more accurate) designed to irritate the US, this deal was denominated in the Chinese currency (the yuan) as opposed to the long-established and almost exclusively used US Dollar based petrodollar system. Petrodollars were designed purely and simply to maintain the USA’s hegemony in the sphere of oil and gas and it will not take kindly to its domination and control in that field being challenged.
To add insult to injury, and in a move that will fly directly in the face of Trump’s affirmed intention to reimpose sanctions on Iran, in an integral part of this latest deal China has also committed to injecting $280 billion into Iran’s oil industry in order, apparently, to renew that country’s transport infrastructure.
China has a long history of manipulating its currency (naturally to its own advantage) and so we can expect the yuan to be manipulated to China’s benefit and to Iran’s disadvantage. In Iran’s current circumstances however, beggars can’t be choosers but from both points of view these countries will revel in pulling the US tiger’s tail.
To put it mildly, this is likely to complicate Sino/US trade negotiation (as if they weren’t already complicated enough). Strangely, however, trade talks are due to resume on 10th October and positive vibes have been coming from both sides in advance of this resumption. Perhaps its dalliance with Iran was all part of a cunning Chinese plan. We’ll see soon enough.
On 30th September 2019 the FTSE100 index closed the month at 7408.20, a rise of + 2.79% in the month of September and it now stands at + 10.11% for the 2019 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a very slight fall of – 0.52% for the month of August but the Fund is still up + 16.25% for the 2019 year to date. Despite the negative influences of the past three months, Quotidian remains well ahead of its benchmark and in double-digit profit for 2019 to date.
In periods similar to the past three months of unnecessary volatility and minor but irritating negative share pricing it is always useful to rehearse the basics of what drives stock-market performance and remind oneself of the simple things that ultimately determine long-term investment success.
The most fundamental of these is money supply. Quite simply, when money supply is tight (when it is difficult and expensive to borrow money) then stock-markets head south. Conversely, when money supply is loose (when it is easy and cheap to borrow) then equity markets rise. Currently money supply is loose and getting progressively looser. September saw the second cut in interest rates this year in the US (which accounts for 53% of the global equity market) and augurs very well for ongoing profitable investment in US equities.
Money supply indicates the appropriate timing and relative safety (or otherwise) of stock-market investment and is a guide to the relative attractiveness of one country or sector over another at any given point in time.
There are, of course, additional considerations when constructing the portfolio’s stock-specific holdings. Trading success leading to higher revenue and increasing profitability of each particular individual company is, of course, top of that list and encompasses the potential for it to maintain and improve future sales, further increase its future revenue and create higher profits.
Potential default risk is also high on this list of risk factors and leads to a judgement call on two particular issues. One has to determine whether a downward move in the equity price represents simply a typical market correction or an over-reaction to events. It could even represent a short-term liquidity problem or a long-term solvency concern. Obviously, the latter would most likely cause us to sell that holding whereas the former could be managed through any short period of difficulty.
The issues which have been causing this short period of uncertainty are very clear to see and still have far more to do with politics than with economics. The over-reaction to what can be seen as synthetic fake news, false narratives and bogus issues will retreat again soon enough.
You have seen all of our holdings and the likelihood of insolvency for any of them in the foreseeable future is remote. They are all blue-chip companies with huge future potential. If that changes for any one of them then we will change our strategy and tactics.
In the meantime, the US economy is demonstrably in good shape and with money supply set to loosen even further we anticipate a positive final quarter of the year. Unsurprisingly, this is where the majority of our portfolio is currently invested.