Small Cap Value Report (9 March 2020) - Oil Apocalypse, OTMP, THAL, ORPH, VLG

9th Mar '20 by Graham Neary

116 comments 12201 reads

Morning all.

I feel privileged to be reporting to you on this dramatic morning.

Some key developments:

133 people in Italy tragically lost their lives to the Coronavirus yesterday. Lombardy and other parts of Northern Italy are now under a travel ban.
In better news, the number of new cases in China has reportedly collapsed.
The number of UK cases rose from 209 to 278 on Sunday.

Financial movements:

US Crude Oil is down 27% (not a typo) since Friday. Brent crude is down 26% at $33.50.
The FTSE is currently set to open at around 6065, down 6.3% since Friday.
The S&P is trading down 5% overnight.
The FTSE MIB (Italian equity index) is down 8% overnight.
US Government Bond Yields are hitting record lows, an indicator of bearish sentiment.

The US 10-year yield fell to less than 0.5% (it was 1.5% a few weeks ago), and the 30-year yield fell to less than 1% (it was 2% a few weeks ago).

This morning's price action is likely to be dramatic, for obvious reasons, in the oil sector. Also worth watching are transports, hospitality and financials.

Sector indexes worth a watch:

What I'm doing

I'm fully invested, so I'm not doing anything.

Actually, there is one thing I'm doing. The FTSE trade which I opened two weeks ago is currently showing a large mark-to-market loss, so I'm making sure that there is enough collateral in my trading account to withstand these temporary losses.

I'm also thinking about what shares I might buy, when funds allow. I love looking at contrarian ideas so I'd like to study Carnival (LON:CCL) at some point, if I can find the time.

What you should be doing

I only know what I'm doing, and can't speak for what anyone else should do!

In very general terms, I do strongly believe in having a plan. If you didn't already have a plan for what you might do in a bear market, then creating that plan now might not be the worst idea.

Even if the plan is "do nothing", at least you'll have certainty!

US Markets

Regarding the S&P, Dow and NASDAQ Indexes, it must…

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Gromley

9th Mar '20

This is media sensationalising and scaremongering.
What you are looking at is a proportionate response to the degree of risk and the resources available.
The numbers coming in are not huge. The number of infected people already in the country is huge.

Actually I don't think there is a lot of evidence to back that up. Whilst we haven't had a breakdown for the last couple of days, at the last count the majority of the UK cases were people with relevant travel or their direct contacts. This after they widened the test criteria in a number of hospitals nearly two weeks ago.

From tomorrow they will be extending the testing to "everybody who has a significant enough pneumonia or other respiratory tract infection to get into hospital at all."

Of course there is likely to be a pool of those with much milder symptoms, hopefully most of whom are self isolating. They are ready to ask those with even the mildest symptoms to self isolate should the evidence deem that necessary.

What's interesting is that despite the Italian numbers looking a little out of control - prior to the 'crackdown' (if it is really being enforced) numbers across the rest of Europe do not seem to be escalating, so I still there is reason to believe that the "soft" restrictions at this stage are working reasonably well.

Of course it is a developing situation, but at this stage I still do not see cause for mass concern.

MichaelFBS

Cmpeckham Thank you. Absolutely not rude, thank you for taking the time. Will study in detail tomorrow as too knackered this evening.

The main reason for the small position was to learn through doing! If I Iearn through the process and lose a few £100’s into the bargain I can live with that.

Agreed to some extent about the as good as useless but psychologically having some blue on the screen on days like day is some how helpful.

It was never my intention to hold for long periods, it was mainly an experiment. I am not sure we will have many up days, if any this week, but I will keep an eye on them.

Though I would like to learn a way to take some “portfolio insurance” for times like this.

That said I suspect the best portfolio insurance, if one thinks its time to “insure” is cash. I had started to go to build cash at the end of January (10% of pf) but was not aggressive enough to build to higher position. I just hope that that won’t prove to be to big a mistake. Cash is now 8.5% and gold 8.4%

Thank you once again.

Paul Scott

Urine is sterile, so it's not unhygienic to pee and go.

Allan Collins

What we have seen today and over the last couple of weeks is very hard for investors - decent profits which have taken months and years to build up have been wiped out in a handful of trading days.

It is still, however, not nearly as bad as the October ‘ 87 crash nor the 1972/1974 bear market both of which I worked through as a retail broker.

That bear market was one of the worst and sentiment was on its knees - double digit inflation and a Treasury stock issued with a 15% coupon. No wonder small business struggling to make a tiny profit margin sold out and bought that gilt.

That was arguably the start of the great bond bull market; and equities ‘turned on a sixpence’ at the bottom.

The big difference today is that there is so much more instant information and many more leveraged products. So, everything is compacted into a much shorter time frame. If this is a new bear market, the worst of it should be over in a relatively short space of time. I certainly hope so!

mojomogoz

Oh what a day....

So, I went into the new year negative in that I felt US valuations and growth expectations were too high and frothy. US was most overvalued it had ever been (using median stock rather than weighted average...IMO median a better measure). I expected a meaningful correction and for this to ricochet through RoW as US sets short term risk appetite...but COVID19 and oil war is fuel to the flames.

My view was to ride the wave as felt comfortable in terms of value and growth with my holdings. I still do but obvs riding a tsunami is tricky so some significant damage (at least short term maybe longer term...time will tell and I still feel its former but with a few potential holes in some lower weight higher risk positions that might struggle to be whole again without significant aid ie share issuance).

Got to deal from where I'm at. Today I bought mega cap UK banks when 10% down. I believe they will be great long term investments from here and the price today is a give away. Their risk of balance sheet damage from current (US growth not global systemic) wobble is low. They may go lower....

But today feels like capitulation and falls should at least decelerate from here for a time anyway....Friday was already quite acute and indiscriminate in panic...and then we got the extra help from Russians and Saudis over the weekend, Its true that if COVID19 rips thro world like, say, Wuhan or Italy and we are passive about it that the economic and financial market damage will accelerate again from here. I think this further unchecked acceleration is unlikely to be allowed to run without v significant firebreaks. Forget the Fed and interest rate cuts....I mean the US closing the stock market and all financial transactions (inc bank finance and payments) for 2 months as full on virus containment is carried out.

Not all bear markets are the same. I've been an investor through 2000 and 2008. I've also worked and invested globally including a lot in some messed up places - Argentina, Brazil, Japan, China, etc. I have seen how others see the world and its often different from the bubble and blinkers of western hegemony. I do not think this is an event like either 2000 or 2008 but 2000 is a better template for price action than 2008. I think we will see significant price dispersion and rotation through this bear phase. US may be expensive but many places are not...and if the USD aint gonna get all strong and mean then the RoW can find some escape....particularly if China continues to provide leadership...this as gone quietly lowly noticed. Note that futures at the moment suggest RMB flat with USD and Chinese equity markets holding up. This is interesting!!!

I bet that sounds extreme and a bit crazy....but its not when the fear of debt deflation cycle is factored in. The world cannot stomach an aggressive debt deflation cycle. All possible policy tools will be employed to stop it. Everything done to make prices rise in nominal terms. Rules bent, norms subverted. Debt deflation is the end of civilisation as we know it given our complex globalised economies, debt levels and unwillingness to accept and view as acts of God severe downturns like we did before the Great Depression.

With a great deal of unease and anxiety I feel that the right route through our current situation is to be quite fully invested. I have about 15% cash, 30% gold miners (I like for hedge plus favourable capital cycle dynamics independent of goldness) and then another 30% that has either very low valuation (but safe IMO), asset backing and/or high cash levels. Its not a rocking fashionable growth sort of portfolio although the names did attract decent interest in the last leg of bull market late 2019 early 2020.

Nevertheless, I've still take a decent hit with some moves today quite blistering! But, perversely, today strengthens my view that the thing to do it be pretty fully invested. I plan to invest more in coming weeks and take cash down. My hunch (based on a combination of historic reading and some scenario thinking) is that holding cash will become dangerous. Probably not a confiscation thing but an opportunity cost thing relative to assets that (whatever it takes) forced higher...and a want to punish those that don't hold (a bit like QE intention on steroids).

I'm sure the above perspective seems out to lunch....but its where I'm at and thought I'd share. And remember...

DEBT DEFLATION IS INTOLERABLE.

Always remember that particularly as you peer into the abyss

mojo out

Mark Carter

A couple of observations on your excellent table: the recent drop qualifies for your list. The second observation - and the most worrying one - is that top falls do not occur in isolation, but occur close together. So this might not be the end of the gut-wrenching plunges.

But today feels like capitulation and falls should at least decelerate from here for a time anyway....

I agree with the last four words at least.

Frankly I have no idea what today was all about. I do get the argument that the low oil price could disruptively take out some of the shale frackers (I will not weep) but sure not withstanding this a low oil price is an economic stimulus (of the type everyone was saying the central banks didn't have the ammo to provide) .

However, I don't think we have even begun to assess the short term economic impacts of covid-19.

I am actually quite bullish about our medical and social ability to counter the threat, but even with that I think the economic impacts could be pretty profound, so personally I'm nowhere near calling the bottom here. Not that I think that's a rational thing to try to do any way.

I have been hedging the market for a couple of years now, so I'm a bit miffed to find myself down about 2.5% over the last couple of weeks - but that was always a risk.

I am starting to think that there are some selective bargains around now, but you still have to be prepared to be wrong for 12-18 months imho. I'm not yet (very) tempted to act as I'd rather catch the trend (even if late) that to call the bottom.

I'm not calling a bottom.... I wouldn't dream of trying that....but I do think it may now be possible to pick stocks. And whatever havoc COVID19 can cause uninterrupted will be stalled by massive policy response as we cannot tolerate debt deflation.

I shorted 2008 and made money in 2008...it was visible. This is a different beast. I feel that all that short significantly should be cautious. QE was just a tester. We will get a full war like policy response if COVID19 is as bad as could be.

BUT I really don't know and I'm just following my vibe. The scope to be wrong is huge

john652

Hi Dscollard,

Premier Oil (LON:PMO) - the hedge fund that owns lots of their bonds, opposes the proposed bond refinancing, holds the majority of the short positions. I don't know the strategy.

Hi Trident,

For Premier Oil (LON:PMO), do you have the figures as to what percentage of production is hedged? I believe most vary the amount hedged.

so this is good, but depends on how much at this price.

The PMO1 retail bonds are at
PREMIER OIL PLC (PMO1) 6.5% 2021
Sell:£74.41 Buy:£81.00

So thats a massive yield but I cant find any info on the non retail bonds to know if this is just a big drop as its the retail mkt.

The scope to be wrong is huge

Not if you watch patiently - then you'll only be late! ;-)

(I'm not feeling especially brave as you might realise)

...and my dissonant and perhaps erroneous point is that being late may be costly as the game will be rigged as hard as possible to ensure the market reopens after an extended close with a super gap up (if COVID19 has taken us to a crescendoing negative...which is looking possible)..a bit bonkers but I’m certain that debt deflation must be avoided at all costs as it’s a cost society cannot bear...so the market will be stopped from delivering this message. I’m naturally inclined to see the bearish side but for a few years now I’ve felt the bearish perspective would be intellectually right but factually wrong and the ‘hedge’ is being invested in real counters

I’m not trying to brave and my least angst causing position is to own stocks thro the volatility

mark1308

10th Mar '20

This may be accurate but surely it's not a great thought to be touching items that have other people's piss on !!

peterg

Provided you don't have a urinary tract infection. I'm not clear if it's possible for a Covid 19 infected person to pass virus in their urine. Likely not, but I'm happy not to take the chance!

jwebster

Agree, the govt. actors will not side on the sidelines. Trump has an election to win. New boss at the ECB. Boris needs to make some runs. They will drive rates down and run QE infinity, I expect the seeds of MMT to start the rounds too. Big fiscal spending plans afoot. Deficits are imaginary now.

But, listen to the bond market. US 10's below 1%. The bond market is large and deep with long-term players. They say the US is in for cyclical deflation? Seems so.

How to square this off. Perhaps the USA is the last to go, and slides into zero rates and zombie economy, joining Europe and Japan. That would align with the bond market's view. Stagnation is awful for stocks. It means the stock indices go nowhere although stock picking is still game on. SCVR will be gold. Stay here.

Stocks now? Perhaps a bounce on news later today, Trump's going to announce payroll tax cuts etc. UK budget tomorrow, lot's of spending there. Europe will be piecemeal but they will join the party. Virus will hopefully die off a bit next month with the weather.

I have a list and starting to buy, albeit only large caps as they have liquidity to exit if I'm (likely!) wrong. Also some of my small caps didn't drop much and look like top up options. I am 85% cash right now, so can't sit forever. Time in market.

I suspect the market could do with a scalp (think Lehmans). Something like Shell as the surprise for a big default would be an interesting event. HSBC looks weak too. A big name many retail and large funds own getting excited about the high yields but ignoring the fragile balance sheets and top line. Reset for the next leg up and a tidy excuse for govts. to spend willy-nilly.

Rusty2

I don't agree with most of that.

1/2) Yes if held over a long term say 2+ months then compounding will eat into your profits, the examples I have seen have been extreme examples, markets don't go up and down 4% daily over a long period.
3) You don't need to hold for long periods, I have just closed one today which was for 1 week at 38% profit, yesterday it went up 24%. I have closed all my shorts this morning, all were well in profit.

I would not hold them for long periods, after a large fall I usually sell and then see what the markets are doing.

You can control losses or profits by using stop losses, after a large rise you can move your stop loss up.

xcity

11th Mar '20

Urine is sterile, so it's not unhygienic to pee and go.
Provided you don't have a urinary tract infection. I'm not clear if it's possible for a Covid 19 infected person to pass virus in their urine. Likely not, but I'm happy not to take the chance!

Probably had to touch handles etc to enter the loo.

So should probably wash hands thoroughly before urinating as well as after. Easier if you can restrict the potentially infected area to your hands only.

I think this is an error in interpreting the information available.

We know that only some infected people will get tested. We know that symptoms start on average 5 days after infection. We know that the UK test has so far taken 48 hours for results. Most people with symptoms won't be offered testing unless their symptoms become more severe or very characteristic of the virus - and most sufferers won't even think to ask. Will be earlier for those who have returned from areas with high rates of infection or are known contacts. So the published information is only a very partial sample and with a significant lag (my guess would be around 10 days).

There are two sources that give us a more accurate picture of the current situation. One is the progression in similar countries at an earlier stage - Italy, France, Germany, Spain etc.

The other is to look at the actions and statements of those who have access to earlier stage information. The NHS knows about the numbers and locations of tests and calls to NHS 111 etc. They also know how many seem to be in country infections. They will be using the totality of this information to model the likely true state of affairs. Relying on positive test numbers would mean that they were always reacting to the situation ten days too late.

Both of those sources suggest that there will be a significant ramping up of numbers over the next week or two and that containment is no longer possible except, maybe, in some local areas.

Johnsy

7th Jul '21

Interesting to read these posts in the light of the new wave of coronavirus. Who fancies their luck going on a cruise now?!

The Phoenix

In hindsight you were spot on Allan, Mojo also

Small Cap Value Report (9 March 2020) - Oil apocalypse, OTMP, THAL, ORPH, VLG

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