Recently published analysis by the senior European economist at Schroders confirms what I have suspected for a while: UK shares are relatively very cheap.
Markets
Slack, bang, wallop?
Another astonishing new share flotation in the US. A business messaging application called Slack (hardly a great novelty – I can recall various versions of such going back 20 years) has floated and immediately moved to a valuation, based on share price of 25 billion dollars.
This is a business that turns over 400 million dollars and managed to lose more money than its previous year’s turnover. As the BBC explainer on this says, losing money when you start a business is normal (easier when it is someone else’s money, I might add). The BBC refers to the few successes that became worth billions, but in recent examples the valuation is starting at billions, in effect completely discounting any chance to make money like that in the future. The sure fire winners are the founders, who have struck lucky.
The valuation is clearly totally detached from reality and the only other people who will make money are those who resell their initial allocation of shares to those who haven’t got them and want to speculate, at a nice profit. These people only invested to make this resell profit, like ticket touts. They don’t care in the slightest if the underlying business is any good any more than a ticket tout has any interest in the singing merits of Taylor Swift.
This sort of activity has not much direct relevance for investors in retail funds, but when it becomes the norm, one must worry. Why? Because if 25 billion dollars goes into a worthless business and is later lost, the investors in question will sell other assets to balance their books and those sort of sales have a significant negative effect on the market.
And that is not all – a crash in a certain segment of the market can be the start of a domino effect, because the market mood changes and FOMO (fear of missing out) is substituted by a rush for the emergency exits.
If you have big profits in tech funds, now might be the time to think about securing them!
When ‘insurance’ maybe doesn’t pay out.
I read today on the Bloomberg new service that the yield on US Treasuries (which is a quick way of summarising the price of US Government bonds) has fallen to a level that implies the US Federal reserve will CUT interest rates 3 times next year. That is not altogether what one might predict!
It seems that worries about trade wars and other factors are prompting big players to buy Treasuries, either to profit from such rate cuts, or because they think there will be a US recession, or both. Apparently there is a strong view that such a recession is on the way. If there is and bank rates fall then the ‘hedge’ might work and provide some compensation when equity prices collapse.
But the idea of a US recession is hardly good news. Much as we don’t rejoice in making an insurance claim when some disaster happens, we are unlikely to be happy to make a bit on our exposure to the US bond market if we are seeing our equity portfolios trashed.
What if US interest rates don’t fall? With very high employment levels and Trump’s tariffs likely to push up inflation, then there is some probability that they won’t. They may even go up more. In that case, the yield on Treasuries will need to rise and values will fall. That may also be bad news for equity markets and furthermore at some stage a recession will happen. So there could be a double whammy.
In that case investors will have to ponder the storm damage and realise that the insurance is not going to help.
I take the view that as political risk remains (unusually) the most significant and that means normal economic considerations are out the window, it is best not to bet on the direction of interest rates but to assume a revaluation downwards in equity markets as troubles build up. In that case, I prefer to hold cash.
The lies have it
Investment fund managers are usually well educated people and the best ones have talent and intelligence too. Sometimes it is interesting to read what they publish about their own research, which can be very wide ranging.
A fund I have known for many years, in fact even in forms before it got its current name, is the Jupiter Absolute Return fund. This is run by Dr James Cluney, who got his PhD researching the processes of stock market shorting in the UK and elsewhere. His fund tends to be a sort of parachute, slowing portfolio losses when things are really going wrong, but being a bit of extra weight to carry when markets are soaring away.
He correctly predicted the market sell off in 2018 and more or less protected his investors from losses. This year, he has lost money and although that is to be expected if markets go up when logically they shouldn’t, I wanted to see if he had commented on the reasons. Investors may be tempted to sell out if they just read the recent numbers.
I have not so far found a very recent article or interview but I did find a fascinating and indeed quite insightful piece into how share valuations are now influenced by what is a called the ‘narrative’ effect. Essentially this is the flow of news, both true and ‘managed’ (ie to suit the issuer’s purpose) that is available from both traditional sources and more often than ever, social media.
For example, he explains that he has been ‘shorting” Tesla shares, so he is one of the people Elon Musk hates. On every technical measure used by fund mangers, shorting Tesla shares is logical, but we know that Elon Musk does his utmost (including illegally recently) to pump up the Tesla share price by using media of all types, essentially trying to control the Tesla news narrative. We can’t him blame for that unless he wonders off into telling ‘porkies’!
Another example might be the floatation of Lyft and Uber. In the case of Uber, we even had the company complying with the law by stating it may never make a profit, but so managing the other ‘facts’ (most of which are irrelevant when examined carefully) that is raised billions of pounds from investors who may never get paid a dividend! That it stretching optimism to its limits and beyond.
As a cautious fund manager, whose objective is to preserve client capital, Dr Cluney has to take a view about whether he can afford to stick to his convictions based on real data and yet, at least for now, see share prices move in line with what is basically propaganda, or give up and ‘go with the flow’. I wrote another post recently about the option of momentum investing, for members.
In his article he expresses concern that as people follow the lead of the US president by manipulating the facts, telling straight lies and blustering, then it becomes difficult to make decisions based on facts, because there may be more information around that is pure ‘fog’ designed to hide the reality from investors than it is possible to see through. One might add that like many motorway drivers there are plenty of investors happy to carry on at full speed even though they have no idea what is a few dozen meters ahead of them.
As Mr Musk found out, blatantly ‘pumping’ a share price with a misleading announcement will be punished by regulators. However, there are techniques that may not be so easily spotted. According to Dr Cluney, algorithmic research tools read words in media content and make positive or negative judgements according to the words counted. But people working in the investor relations departments of businesses know that! So they can use their writing skills to fill up press releases, tweets and other social media posts with positive words, even if out of context (algorithms not being so intelligent) and get a share onto broker ‘buy’ lists even when the underlying truths was negative!
As usual, we can’t know what will cause the next market crash – it is usually one of the ‘unknown unknowns’. But I would have a small bet on fiction having at least temporarily defeated fact being major contributor.
Up, up and away?
Readers may have noticed that global stock markets, especially the US markets, seem very resilient to bad news. The stalling of talks on a US/China trade deal have whittled off part of this calendar year’s upside, but that is only some 3% against an 18% or so gain. There appears to be optimism in the US that the Chinese will cave in (but the Americans don’t really have an objective view in my opinion).
A comment from a trader quoted by Bloomberg today possibly reflects the attitude of some participants. To paraphrase – after a strong rise in markets a 7% or so setback is to be expected and investors need to focus not on the worries that caused the setback, but on what price is low enough for them to buy more of their favourite stocks.
That is frankly over optimistic (I put it politely). Of course, we know markets can move with momentum and that will usually push them both up and down beyond the right price relative to the value on offer. But momentum reverses and it is unwise not to remember that.
An interesting fact in the UK balance of trade data (the worst ever) published last week was that a larger than average chunk of the import balances was purchases of gold.
I have said before that if a significant number of investors with big money are not so confident about markets, it usually shows in the direction of the gold price. The relative balance of buyers to sellers is of course the main driver of that price, so maybe that bit of data is an indicator that in the UK a least, people are beginning to hedge their market positions more than they have been.
On reviewing the range of data I have seen of late, I can’t say I would want to rush in and top up my investments at current prices, or even at 7% lower prices. I have commented in other recent (member only) posts on options for speculating a little at the end of a bull market cycle, but the easy option is to hold plenty of cash and wait until there are rock bottom prices!