Good morning!

I added a few more sections to yesterday's report last night, so to recap on that, please follow this link. In particular, a very interesting turn of events has occurred at Richoux (RIC), which I reported on.


Sterling remains the pressing issue of the moment. At the time of writing it's dropping further, and we're down to £1 = $1.228, or £1 = E1.105 .

There's a good article here, with Lord King welcoming the weaker pound. Economist Vicky Pryce emphasises the inflationary pressures that will be caused by weaker sterling. It's certainly going to make UK industry much more competitive, which is surely exactly what we need when facing all the uncertainty from Brexit?

My main worry is for margins at importers (e.g. retailers). They have no choice but to substantially raise prices next year, but consumers are going to push back against that. We don't know how it will all pan out, but I reckon margins are bound to be hit hard at retailers next year. That will really sort out the wheat from the chaff. Companies like Next (LON:NXT) are likely to sail through relatively unscathed, in my view. Whereas the poorer quality (in terms of operating profit margin) retailers on low margins already could be seriously harmed. I wouldn't touch any low margin retailer at the moment, as performance could seriously deteriorate next year, maybe even into losses. Then the apparently low PER will go out of the window.

So broker forecasts should be treated with great caution right now, or even ignored completely. When circumstances change significantly, a formulaic approach to investing, relying on broker forecasts, can go disastrously wrong. It needs a human being to reasonableness-test things at times like this, to dodge the banana skins as much as possible.

Small caps feel strange to me at the moment - lots of sudden, erratic price movements. It feels as if the market is trying to work out which stocks deserve the big gains that we've seen since July, and which ones have been taken too high on speculative froth.

On the flipside, I'm also seeing signs of life in some really bombed-out small caps. Companies which disappointed have been slammed so hard of late, that I think people are out bargain hunting now perhaps, amongst the wreckage? There could be some nice trades to be done…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here