Small Cap Value Report (10 Aug 2016) - LOOK, RTC, SDY

In reply to A topper, post #4

Hi A topper,

I disagree. The market looks ahead, so it prices-in known future factors, and uncertainty.

We're still guessing as to what shape Brexit might actually take, but the reality is for most companies, it won't make the slightest difference - trade will carry on as before, and worst case there's a 3-4% common external tariff for exporters to EU to pay - which has already been more than recouped from sterling becoming more competitive.

I think the market is recognising that broadly speaking, things are going to be OK. That's why shares are going up. Also, with interest rates so low, where else do people put their money???

Regards, Paul.

The other sector that is getting walloped at the moment is construction. Lavendon (LON:LVD) for example is now trading on a P/E of 5.9 even though it has a good international presence now (although there may be uncertainty about how it might be affected in France and Germany post-Brexit). Although construction numbers haven't been great I still see a lot going on in London in particular with more houses still needing to be built. In the UK I wouldn't be surprised if the Government's autumn statement also announces more state funding for construction projects as a way of injecting a bit more into the economy and demonstrating the new Government will do everything to continue supporting UK PLC.

Paul, I think your point about where else do people put their money is absolutely right, that is what is keeping this bull market going imo.
Charles

In reply to cafcash49, post #10

Hi Charles,

Yes. I think particularly for pensioners, they want some yield from their money, and bank interest rates are now so low, it's almost forcing them to look elsewhere - which is exactly the point of putting interest rates that low.

Decent, dividend paying AIM shares are particularly attractive for wealthy pensioners too - since not only do some pay a nice divi, far more than available from banks, but also after 2 years they're free from Inheritance Tax - a fantastic, and often overlooked tax break.

Mind you, the danger of pensioners buying AIM shares, is if they don't know what they're doing, or have a lousy adviser, and end up in lots of speculative crap.

Regards, Paul.

Paul - I think Tosca are also large (largest?) shareholders in HSS which is a major competitor of Speedy. I don't think Tosca declare that in the letter

In reply to A topper, post #4

LOL - All but the most blind (including the BBC and those petition riggers) know it is happening

Mrs Merkel knows, Junker knows, and the rest of the world knows too

In reply to Paul Scott, post #8

Hi Paul, thanks for replying. I think you're spot on regarding the link between rock bottom interest rates and inflated share prices. Also agree that the market is forward looking and prices-in known future events. But the time horizon matters - near term events have greater impact on current sentiment and prices than events in the more distant future. My feeling is that what investors are pricing in for now is relief that Brexit looks like being a longer term, not an immediate, shock.

When it actually happens, I do think there'll be a huge amount of uncertainty which will cause companies to stop investing and consumers to spend less, even if trading rules remain broadly unaffected in the end.

In reply to Paul Scott, post #11

I agree Paul, that is the point of low interest rates, however it does produce behaviour that is causing asset bubbles, people who would have saved money in the banks, then buy shares or property, causing bubbles in these assets, at the same time the bans then don't have deposits as who is going to keep money in banks at these rates ? So the government has to have funding schemes for the banks. This doesn't seem like a healthy economic enviroment to me, the banks should have started raising rates years ago, at perhaps a half to one percent pa, sure house prices would be lower, and probably other assets, but would that have been such a terrible thing ?

K

In reply to A topper, post #14

Half the country voted to leave and most of them are not going to get whatever it was that they believed they would get when they voted (such as £350m/week for the NHS). That feels like a degree of political uncertainty that is probably not yet in the market.

Then there's jobs and wages. Neither look optimistic for UK-focused shares.

Then there's immigration. There's a manifesto commitment to reducing it and the PM is committed to that but many firms need immigrant labour (skilled and unskilled) and immigrants contribute more to the economy than they take out.

Then there's inflation (which I wrote about a couple of SCVRs ago.

The current bull run feels like irrational exuberance to me. OK for successful stock pickers but likely to be bad for the small cap market as a whole.

In reply to Paul Scott, post #8

As Mrs. T didn't quite say, there's no such thing as the market. There's just a lot of people making individual decisions and trying to bet according to the outcomes they expect. But people are subject to all manner of behavioural and cognitive errors. Adding those up doesn't confer any magical ability of the market to foresee the future.

Exec Chairman, just such a silly structure, I avoid them

In reply to JohnEustace, post #17

As long as investors arrive at their (often dubious) individual decisions independently AND there is a wide diversity of opinion, then the array of behavioral & cognitive errors surely cancel out?

This, of course, is not to say that what emerges gives the market 'perfect foresight'... given the prevalance of a potential huge number of known unknows & unknown unknowns.

I spoke to my bank manager about moving some cash, and the penalties etc. I said in passing that I would imagine a lot of cash is moving due to low interest rates and talk of negative rates.

H e then advised me the access saving rates were all about to drop in the next week or so. He said a lot of people will not risk their money in the market, and will still stick to cash.

I am not so sure he is wholly right, though inevitably some will fear the downside. I will retain cash, but am exposing a further % of cash resources to the market having benefited from investing in the post referendum turmoil. After a few initial wobbles I have seen one fund with US dollar Company exposure go up nearly 20% .

Strange times!

My Bank Manager rang me up pre Brexit and asked whether I'd meet with one of his colleagues from their managed funds arm. He said " if we can get your money to work pre referendum you'll be well placed to enjoy the uplift when EU membership is confirmed..."

In the 10 years or so I've known him he has come up with one useful suggestion, he suggested he reduce the frequency with which he spoke to me as I seemed happy to paddle my own canoe .

In reply to PJ0077, post #19

Surely the referendum is the prefect example of those errors not cancelling out but if anything amplifying in a feedback loop of conviction that Remain would win?

In reply to JohnEustace, post #22

Well, quite. . positive feedback loops imply that diverse & independent opinions are no longer prevalent.

The potentially wise crowd becomes dumb, and mis-pricing occur.

In reply to kenobi, post #15

Hi Kenobi,

I completely agree with you - post no.15.

However, as an investor/trader, I want to make money - so I accept Govt/BoE policy as it is, and seek to make money from it, whilst keeping close to the door (i.e. avoiding illiquid micro caps).

We seem to bein a semi-normal state of ultra-low interest rates. I agree this is complete madness, but that's where we are.

I suspect that sooner or later, inflation is likely to rear its ugly head again - what happens then, who knows? Normally interest rates would have to go up, but things aren't normal any more, the whole system has gone haywire. We're really in uncharted territory.

As regards equities - yes there are pockets of over-valuation, but overall I don't see the market as particularly over-valued. Not to the extent that some commentators are suggesting anyway.

Regards, Paul.

In reply to Paul Scott, post #24

Yes I agree, it's mad but that's the market we've got. (it's no good saying I wouldn't start from here if I were you, as the irishman said when asked for directions )

Interesting your point re inflation, I wonder whether unlimited migration has acted as a damper on wages (at least normal wages not directors etc), and now if we brexit and limit migration, which seemed to be one of the main reasons, might this push up inflation and start the unwinding of the current situation ?

There's a long trend of downward pressure on interest rates, even Carney was only suggesting that normal rates in the future might be 2.5% rather than the 5% we might have though of in the previous economic cycle.

I do fear for what will happen to get us out of this, I feel like I felt before the credit crunch, I knew it couldn't go on, it was crazy but I'd never heard of a credit crunch and didn't know what was going to happen.

K

If we carry on at such low interest rates, what will happen to all pension schemes? Stick to sensible investments, I say.

I have rarely read such rubbish abut the effect of Brexit from the liberal lobby who clearly all sit down when they want to pee. I am pleased that Paul (whom God preserve) has now seen the light and realises that there is nothing to fear except fear itself. Heck, we are the fifth largest economy in the world and we are full if energy and guile.

In five years time we will wonder why we were ever in the EU at all.