Markets

The same but different

10th March 2020 by Mark Potter Leave a Comment

I enjoyed an excellent brunch yesterday at a cafe/bistro in Bath called Same, Same but Different. If you are in Bath, I can highly recommend it. It inspired this title above.

The current global stock market sell off is naturally being compared with the financial crisis of 2007/8. The aspect that is the same is that many stock valuations were at stretched levels being sustained by momentum buying and idiotic ‘expert’ comments suggesting valuations where no longer dependant on profits and dividends . Some bad news that people don’t fully understand is enough to knock over enough dominos at the end of the row and that triggers a collapse that just keeps going.

The aspect that is different is that in the main the extent of the financial fictions created ahead of the last crisis were understood quite quickly and in fact were in the past – the consequences were easily quantifiable (and awful). This time, people are actually anticipating most of the possible (maybe probable) implications of a widespread epidemic impacting the global economy. That has not actually happened yet and really we don’t know exactly what course the virus outbreak will take, nor the full impact.

That is not to say that the pace of the market sell off is in any way surprising or inappropriate. When share prices head up into the stratosphere, the fall back will always be more drastic and rapid because of the volume of high pressure ‘gas’ (fake valuations) built into the market balloon. A ballon burst by a pin deflates much the same as one burst by a flame thrower. The cause is largely irrelevant at this stage – the issue is one of human behaviour.

If it is still bucketing down, you keep your umbrella up. When the sun has been out long enough, you can fold it away.

What to do?

The usual advice not too sell sell out of quality investments at silly prices remains as sound as ever. Hopefully my readers don’t have much money, if any, in fantasy land shares like Tesla or Netflix. So if you have a well thought out diversified portfolios and plenty of cash to meet your needs, sit tight – things will get better at some stage.

But what if you have surplus cash waiting on the sidelines? My view is that the as one cannot ever see the bottom of a market cycle in advance, it is best to wait until the underlying facts that caused the sell off change – ie the immediate trigger issue has been understood and will be worked around. That has not happened yet with Covid-19.

When markets start to pick up solidly, over consecutive days, because there is better news (maybe a vaccination or solid evidence of containment) and some rays of metaphorical sunshine, then the wise investor will start buying, but in a number of tranches to spread the short term timing risk that cannot be avoided.

What to buy might well be different to what might have looked right a few weeks back – seismic changes in the factors that influence investment selections are possible at times like this.

Do dead cats bounce?

3rd March 2020 by Mark Potter Leave a Comment

No idea, personally! The phrase ‘dead cat bounce’ can usually be found across the financial pages of assorted media at times like this. I hate the phase because I have a character fault of instantly visualising what words mean without thinking, so it makes me feel rather sad about a cat.

The phrase is getting an airing today because there have been promises from financial institutions, notably the IMF, to pump prime the global economy to avoid a Covid-19 epidemic induced recession. That meant markets jumped up a bit after their heavy losses, so commentators want to know if the issue is fixed (pretty obviously not!) or if this market pick up is just a short term trading behaviour – market players closing short positions, topping up holdings to lower average costs and so on. Or just not being very experienced – there as many duffers amongst investment traders as any other group of humans.

My experience is that one does not get a V shaped recovery from a set back caused by genuine, seriously threating negative events until the worst of the news and the consequent impact is more or less understood. Generally markets will move to well ‘oversold’ values (losses that are more than really justified) first and we are not in that situation yet.

Furthermore, any remedial action needs to be seen as powerful and long term.

I think neither of those two criteria are met: we really don’t know that the virus can be contained and will die out, nor have central banks got much scope to cut interest rates, buy bonds and so on. They have done all that already – the economic antibiotic/anti-viral of choice is not now so effective.

Governments have also spent their ‘rainy day’ reserve money on tax cuts and politician led (ie get me re-elected) spending in many developed economies, not least the USA and UK.

My view is that things will get much worse before they get better, but I never claim to be a prophet (I am too optimistic to be Jeremiah or Cassandra). I am looking at history and assessing probability.

If I am wrong no one will be upset as they see their portfolios revalue back up – me included.

However, if you rush out and buy stocks or funds now and I am right, and I do think history is on my side, you will be disappointed. You would lose out twice – on the devaluation of your holdings and because you have no money or less money to buy much cheaper holdings later.

In summary my personal view is that this is merely a sinking market grabbing a plank that can’t carry its weight and the risk of drowning has not gone away. Time will tell, as ever!

Good news for portfolio builders – a market crash

25th February 2020 by Mark Potter Leave a Comment

That headline might sound a bit strange at first. If stock markets lose 4% in a day, as they did yesterday, it makes a big dent in our asset values for now.

Long term investors will know that such setbacks are absolutely normal and may continue for a while and if they have diversified portfolios because they have looked for risk control, some of the damage limitation will have kicked in anyway. For them excellent and in fact rather surprising gains at the start of this year will have been wiped out, but long term returns will still be looking pretty good.

Many of my readers are building new portfolios. It makes me nervous when people have to do that in a constantly rising market as even phased purchases are at an ever rising average cost and if a setback happens towards the end of the process, there has not been time to build a profit ‘cushion’.

So for me, a setback from what I have felt for a long time are ‘momentum’ driven values, detached in many cases from fundamental logic, is a good thing. Portfolio builders can phase money into markets at lower prices and thereby lower their average portfolio acquisition costs.

Even long term investors who read my ramblings may have raised cash over the last couple of years and if the market setback turns into a proper ‘bear’ phase, they will have liquidity to pick up some better value assets.

Monday mashup – the pale horse rides out

24th February 2020 by Mark Potter Leave a Comment

A reference that those of you with a religious education will recognise as apocalyptic, the rider on the pale horse of Revelation dispensing Plague amongst the weapons of Death. An idea that has not dated much in 2000 years.

I have been preparing material for my March newsletter but all the reference material I have on hand was researched by people looking at data for the last quarter of 2019. There is no doubt useful evidence about the usual changes of direction is asset allocation to be reviewed, but the story that overwhelms all that is obviously the Covid-19 outbreak. The question for the moment is not where to invest, but do we want to be invested in global markets at all?

I am nervous – there are strong headwinds for equities

As a teaser for my March newsletter (subscribers only), I can tell you that the basically sceptical political opinion that I have referred to in the past which in essence is that the US wants a war with China is now being adopted as an economic argument by a well regarded economist. Add to that the locus of the virus outbreak (and the unsurprising propaganda that this is CIA sponsored germ warfare – being tested outside the US for a change), one has to be concerned about the potential impact for markets that are priced on the basis of everything going well or even better than it has been.

In such a situation, I am asking myself, do I want to buy equities with cash on hand? No, to be honest. Do I want to sell existing holdings to secure past gains? A little bit, but I know very well the risks of being out of the market and being scared of getting back in until the best gains have passed one by – I am no less human than anyone else. As long as I have plenty of cash, I am happy to let the portfolio take a hit short term.

What is new is that for the first time in my long investment life I am investing in physical gold, not the actual raw metal, but using exchange traded commodity shares. These are a specialist and potentially risky asset, so not recommended for non-professionals, but there are other ways to access commodity price movements if you see the logic of using that as your diversifier on this occasion. Using funds that invest in gold miners is one way – that also has pros and cons. Something to think about?

Subscribers can call me to discuss this in more detail.

Perhaps the virus will die out quickly like SARS and MERS. I suggest you watch your portfolios more often than usual and if you are using an IFA, get their take on the issues raised. Not my standard guidance and not something that will be good for your neves as a permanent strategy, but these are unusual times.

There is some good news in that the main central banks and political powers appear willing to pump credit into the system. We will pay for that later!

Monday Mashup – runaway train?

20th January 2020 by Mark Potter Leave a Comment

My reading of assorted public and specialist media over the last week or two has revealed that many commentators see the current valuation of many US shares in particular as too high on normal valuation bases. I read an article saying a new valuation basis may be needed. The last time I heard an American fund manager talk about a ‘new paradigm’ in stock market pricing was ahead of a market crash so that sort of viewpoint rings warning bells.

But as my readers will recall, I was saying this sort of thing a year ago and yet 2019 was a really good year for equity investors. So maybe this time things are really different?

The end of any bull market is different to previous ones, that much I would concede!

What other actual facts are worthy of examination to help explain what is happening? Markets are going up when really they should not. Here are a few for you to ponder on:

Markets will always be cyclical – but inversion points are only obvious after the event

The US Government is about to issue 20 year Treasury stock for the first time since the mid 1980s. This reflects the fact that the US debt is astronomic and tax cuts are being paid for not by GDP growth or public sector savings but by borrowing. That is like you and me maxing our credit cards to give the money to our rich uncle. We know where that would end up.

In a world where populism is rampant, central banks are so afraid of recessions that they will use every tool in their nearly empty box to keep money circulating. This means that they are beginning to own more and more debt securities. This is good for bond prices as there are forced buyers in the market.

In a very simplistic analysis, we can say that Governments are issuing bonds (borrowing) and their own central banks are immediately buying them up. This could be argued to be money printing with no interest cost! Like you borrowing money from your grand-kids piggy bank.

As was proposed by eminent economists when the idea of quantitive easing was first proposed, the eventual consequence of this sort of policy has proved to be inflation in asset prices, so those with assets have become richer. The weakness of labour forces, even in a full employment market plus the application of technology (the real new paradigm) and the globalisation of manufacturing has for now kept the lid on inflation. This is good for equities.

For investors, who own assets (both bonds and equities), this would appear to be very good news – policy is feeding the asset price machine with lots of money and the pipes directing it to benefit the bulk of the population are all closed.

True, if there are hints of the banks wanted to start taking money back out of the system, people get scared pretty quickly, as in mid 2018. But banks trashed their reputations 15 or so years back and no-one objects when they concede to populist government pressure to bump up global credit limits.

It is even possible that some world leaders, fearing elections or even revolutions, are doing what the people that keep them in power (in the media and at the top of the wealth range, or in charge of/supplying their armies) would like them to do, irrespective of the long term consequences – no need to name names.

As long as this continues, investing in equities and bonds will be a nice earner. But I fear that much as happens to the person who pays off one credit card by drawing on another, something that works for many years, the end consequences are bankruptcy and the selling off of assets.

In the global scenario that could actually accelerate the transfer of political power from West to East. It is interesting to note which countries are running surpluses and quietly buying up the assets of debtor nations. If you have grand children, encourage them to learn Chinese.

I have to concede that we probably should stay in the markets for the ride, but if there are any signs of it becoming a train wreck, bailing out sooner rather than later would be essential. Excuse the mixed metaphor!

Of course, asset diversification and hedging risk with adequate cash reserves would be as useful a defence as ever. Personally, I am still retaining a very heavy cash element in my asset base.

Translation service

6th January 2020 by Mark Potter Leave a Comment

I wrote some time back that I would occasionally explain in ordinary English the industry specific jargon and clichés that you may see in newspapers or other media reports. Here are a couple that are doing the rounds at the moment:

Markets are climbing the wall of worry – there are a great many reasons to expect markets to fall back from overly confident price levels, but momentum is keeping them climbing and that is how it will be. This one makes me think of Humpty Dumpty!

Bull markets don’t die of old age – there is no fixed period for the optimistic, raising prices (bull) stock market cycle. Although there is no doubt a cycle, it does not occur in neat sine waves with evenly spread peaks and troughs. The current bull market might be a longer one than usual – that is the hope. This one makes me think of The Who’s song My Generation (‘I want to die before I get old’) and the 75 year old Roger Daltrey!

My cynical observation is that when you see these phrases in regular use, people are looking for reasons not to be rational about obvious risks. Geo-political risk just got more serious.