Small Cap Value Report (Mon 16 March 2020) - More Pain, Airlines, Leisure, FIN, ALY, DIA, BST

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16th Mar '20 by Graham Neary

128 comments 12809 reads

Good morning!

This is the placeholder for the SCVR, for your early comments.

On Sunday, the Federal Reserve cut interest rates to zero and announced a $700 billion QE program, alongside other measures.

The markets are taking it as a sign to get worried. US equity futures are currently trading limit down. We are primed for another week of volatility in the markets.

I'm a little overwhelmed with all of the news at the moment. It's hard to know where to begin.

To put some order on proceedings, here are the broad topics around which I'll organise this report:

Macro news flow
Airlines
Leisure stocks
Small-caps

These are exceptional circumstances, so I think it's reasonable to devote portions of this report to areas it would not normally cover (which Paul has been doing, too!)

Large Cap View - I have written another article with a large-cap focus, this time the headline is:

FTSE-100 Yields Go Through the Roof

It's fairly self-explanatory. Looking at the yields on offer in the FTSE-100, I examine whether there is some value to be had in the blue-chips!

Macro news flow - more pain for investors

I made some comments last week about Mark Carney's interest rate retreat at the Bank of England.

Central banks are coordinating their actions and now the US Federal Reserve has cute its main benchmark rate, the federal funds rate, to near-zero.

This is a huge rate cute of an entire percentage point, in one move. Unscheduled, emergency rate cuts in the past have typically been 50 or at most 75 basis points (i.e. 0.5% or 0.75%).

The radical announcement has been accompanied by other major new policies:

The Fed is going to buy an extra $700 billion in Treasuries and mortgage-backed securities.
The rate at which banks can borrow directly from the Fed has been slashed by 125bps, almost to zero.
Bank reserve requirements are now zero, i.e. they don't have to keep a certain amount of customer deposits at hand and there is no limit to the amount they can lend.
Cooperating with other central banks, the rate on international dollar "swap" loans has been lowered.

From CNBC:

The actions by the Fed appeared to be the largest single day set of moves the bank had ever taken, mirroring in many ways its efforts during the financial crisis that were rolled out…

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chrisgb

16th Mar '20

Any amount of herd immunity helps. It's simple maths. Suppose the average transmission rate is 10 people. If 10% of the population have immunity then one of those 10 has immunity - effective transmission rate of 9. If 50% of the population have immunity then 5 of the 10 has immunity - effective transmission rate of 5. If the precautions - self isolation, etc - reduce the transmission rate to 2, then a 50% herd immunity reduces it further to 1. The reason why medics keep on throwing numbers like 95% herd immunity is required is because they are thinking about measles which is incredibly infectious.

Berksbee

Really thoughtful argument. I know the Gvt has tried to get this message across. What struck me as new in yours was your point about "the wall of the herd" and the strong protecting the weak. Think the Gvt needs to weave this more into their message. Am fairly new to Stockopoedia (joined in January) - subscribed so I could make more money - failed in that regard so far! but IMO the fee is worth it for the quality and objectivity of the views - yours being a prime example.

CremeDeMenthe

This was the rise from the low not the starting capital.

I put all of it into housing and banks.

Taylor Wimpey at 10p (from memory) and banking preference shares at well below par helped.

In this crisis Airlines and Hotels are going to bring big returns especially those who can ride out 6 months of low sales.

peterg

One of the issues with seaonality with flu is humidity. It's dry conditions it can't survive, and of course we tend to get more of those in the summer. Too early to tell if the same will be true here, but it could explain why warm humid places like Singapore have been affected.

herbie47

Singapore only has about 240 cases which is quite low, considering it was one of the first outside China to get it, Iran is not that humid so I'm not sure. Malaysia is humid but is only just getting cases. Some of these countries will be getting hot and very dry soon such as Iran, Spain, Bahrain, Saudi Arabia so we will see. Then others will be going into the wet season around May and June. I think humidity has something to do with it but it does seem quite resistant to different climates. Problem is our summers are much colder than many countries winters.

Anthony Ashworth

i don't agree that the entire travel and leisure sector is now worth nothing. The inference of that is that for several years the majority of people will cease going on holiday, eating out or participating in entertainment and social events. It's likely that some companies will fail within the sector but the remaining ones will recover.

Mark Carter

There's an interesting video here: https://www.youtube.com/watch?v=f131BXX8ZZU

One comment he made is that there were problems when LTCM went bust back in 1998, and that it's now like the whole market is one big LTCM.

It seems that part of the problem is that volatility is seen as an evil, and that central banks have intervened to cap it. The markets have set up instruments on the assumption that volatility can't happen. As the saying goes, "it works until it doesn't."

Nassim Taleb has been warning about this kind of thinking for years.

Risk in an inherent part of the system. It's in there somewhere. Attempts to cover it up introduce tension into the system. When it blows, it blows big. In other words, instead of having small blowups that cause limited damage, we've created a system where we get one big blowup that destroys everything.

So to summarise, financial instruments exist which "sell volatity", i.e. they assume low volatility. It's the classic "picking up pennies in front the steam-roller". Now that volatility has returned, there will now be a massive unwinding of positions. It certainly seems to explain why there has been no rebound in the markets despite colossal and rapid falls. The purpose of intervention appears, therefore, to be to reduce volatility and thereby stabilise the system.

Whether this will work in the short term, I don't know. But it appears that the whole endeavour of stabilising markets was a fundamentally flawed idea in the first case. Our cure for the bad idea is to intensify seems to supply more of it. Hmmm.

Anyway, I am way out of my depth on this one. I'm just trying to piece together the jigsaw as best I can.

To quote the sage but always-ignored words of Friedrich Hayek: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

DRallan

how kind of you to say berksbee, thank you. Of course, I’m not a finance expert and indeed like you am new to investing.

iggs58

They’ve recently been slower to provide end of day valuations of funds. For Friday 6th, they didn’t provide closing valuations until Monday am.

john652

Lets hope all the talk about the virus peaking in a few months is true, and that there is really 10x the number infected than reported, but if it isn't to peak soon, and Italy has tenfold at 250,000 cases, these numbers are still tiny compared to what is to come.

I had a go at them about it too. I asked them about whether they would provide an auto authentication facility in their app: they replied they were working on it, but , obviously, with no date for completion given.

To avoid it in the short term, close your savings account.

Gromley

There is of course a risk that many rather than some will fail. Not because demand fails to recover, I'm sure it will but there could be a lengthy hangover. Rather, many are at risk of failure because they will become insolvent in the meantime. Ordinarily, emergency fundraising to stave off insolvency is hugely destructive to existing equity.

However, in this case I wonder if there will be some global government effort to resolve this?

One of the arguments against bailing out the banks back in the GFC was "moral hazard" - I don't really think this applies in this case.

Macron this evening apparently said "No business, regardless of size, will be allowed to fail".

That smacks of illegal state aid surely?

Unless everyone agrees to do it.

This is probably totally stupid (I really haven';t thought it through) but if all of the global governments agreed to print money in order to provide low cost bridging loans to troubled companies then perhaps this could work?

The usual problem with printing money of devaluation would not apply if everyone were doing it.

However there would - very quick guess - be winners and losers in this game.

The losers would be those sectors that didn't need the bailout. Also existing lenders who would essentially see their debt assets devalued by inflation.
The winners would be those countries that don't need to do much bailing out. If everyone agreed to print roughly the same amount of new money, these countries would have excess cash to be able to buy up foreign assets.

As I say, probably a crazy idea and I haven't thought through the consequences.

The key thing though for me is that there is potentially a sizeable restructure of the global economic balance as a result.

That might be too alarmist, but I can see many businesses that could easily fail without some significant intervention.

That makes my head hurt!

FreakNomad

Now that volatility has returned, there will now be a massive unwinding of positions.

The fact there have been falls in gold and crypto, which I expected to rise, shows that many are selling to cover their other positions.

This is scary because it means that the price of gold and crypto are supported by all the debt in the system.

This is scary because it means that the price of gold and crypto are supported by all the debt in the system.

Interesting. I hadn't thought of that.

Although maybe it was like the time that there a problem with Volvo (??). I haven't tracked specifics, as this happened a number of years ago. There was a bid for Volvo, or something, and traders had to buy shares to cover their Volvo shorts, or something. The price of Volvo went up. Massively. Traders had to sell their other positions to buy Volvo. So there was a strange situation where Volvo shares shot through the roof, whilst the rest of the market fell heavily.

It was something like that, anyway. No doubt I am wrong in many respects.

So it could be that gold is facing a situation like that. As far as crypto is concerned, I've always felt that it was all a load of hooey, a modern-day tulip bulb. It's collapse wouldn't surprise me at all.

What is interesting is that the video I linked earlier gave a scenario of devaluation of currency. IF (and admittedly it's a collasal if) that scenario were to play out, then we may discover that gold, oil, property and other real assets are cheap.

We've had low(ish) inflation for years. But I've seem historic charts by Nassim Taleb that shows that inflation can suddenly appear out of nowhere.

I'm not saying this will happen. I've barely got a mental grip on what's going on. Quite possibly nobody really does. There's really no telling what surprises there might be in store. We're clearly going through some real and financial crises. It seems the rulebook has been torn up.

In other news ... the Dow closed down 12.93%. That its second-biggest fall on record percentage-wide (https://en.wikipedia.org/wiki/...). I presume that means that the UK markets are going to get hammered again tomorrow.

IGotPoesJacket

Well done anyone who shorting finablr after the recent Travelex fiasco. Almost certainly a zero.

I strongly suspect certain individuals in those two companies will never be able to set foot in a country with a UK extradition treaty ever again.

JGG

I merely offered this (held for editorial review piece) as a contribution to real world understanding - surely an important weapon in the small-cap investor's armoury. Furthermore, the letter is non-political.

jonesj

Much of Thailand has been sunny and very dry, with peak daytime temperatures mostly around 30C for January & Feb. Despite being near the top of the list of countries with Covid early on, it has not yet spread like in Europe. However, I gather it has been raining recently, although with even higher peak temperatures of ~35C.

Iran has been much colder and has obviously had a problem.

Here, we're not even guaranteed a proper summer.

TheArb

17th Mar '20

I really hope Paul is ok, the moves in many of the holdings he recently listed are so violent they look like they have been driven by margin calls.

peter100hr

My first post on here... yes, I bought some Silvania Platinum today as it collapsed towards 30p

Yes it because I have savings accounts with them which I’m beginning to regret now, just thought it would easier regarding the interest for tax returns but most are fixed term so I can’t cancel them. I may contact them say I’m not going to not renew unless they change their policy, I can understand extra security but this gone way too far, there is no need to log me out every 5 minutes.

Small Cap Value Report (Mon 16 March 2020) - More pain, Airlines, Leisure, FIN, ALY, DIA, BST

Macro news flow - more pain for investors

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Graham Neary

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