Small Cap Value Report (Tue 6 Feb 2018) - Market Crash?

Monday, Feb 05 2018 by
104

Hi, it's Paul here. I've just got back from a long weekend in Amsterdam, so am not yet operating at full mental capacity.

We're seeing rather dramatic volatility in the US markets, with a sharp correction underway. I'm sure members will want to discuss this here, as well as our usual small caps stuff. So please post away.



Hi, Graham here!

Paul needs a break after his trip to Amsterdam.

Let's see  what's happening in the markets:

5a798a8be8003Index_20180206.PNG

Following on from the FTSE's weak performance on Monday, which preceded Wall Street's biggest one-day drop ever (in terms of the number of points), the UK market is now firmly back within last year's range:

5a798b5b4e357FTSE_100_20180206.PNG

As you can see, we are still quite far from making any long-term lows. All that's been lost is the gradual progress higher achieved last year.

Most people (including myself) view the US as being the most overly extended market, so the correction should be the most dramatic over there.

Technical "support" for the FTSE is coming up soon at 7100. Below there, not much until 6500-6600:

5a7992ec0a9d5FTSE_tech_20180206.PNG


Investment-related companies are some of the biggest fallers today:

5a7993a2edfe3Fallers_20180206.PNG


What's going on?

Last week, the US posted rising average hourly earnings, firming up the belief that the federal reserve would raise interest rates another three or four times this year to stave off inflation.

Expectations of rising rates had seen the 10-year US bond yield on the march higher for the past few months:

5a7994ee9c257USD_10Y_20180206.PNG


The bond markets are much larger than the equity markets. If acceptable yields can be achieved in the bond market, such as 2.7% from a US 10-Year T-Note, then conservative investors would be much happier over there rather than in high-risk, overvalued equity markets.

Some people think that T-Note needs to hit 4% to be a serious drag on equities, but merely getting close to 3% was sufficient to create yesterday's huge sell-off.

Depending on how you measure it, we just had the second longest bull run of the last 100 years. Investors may have been lulled into a false sense of security by extraordinarily calm conditions in equities, where even a…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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167 Comments on this Article show/hide all

Trident 7th Feb 148 of 167

Pan African Resources (LON:PAF). (Gold producer generating cash and profits and dividends) According to Stockopedia looking at a forward PE of circa 4x.
Of course a few negative factors to consider, such as Rand conversion, and black activism on company regulations etc. But that looks pretty low.

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Samsgrandad 7th Feb 149 of 167

In reply to purpleski, post #103

Bioventix (LON:BVXP)

I'm convinced someone was hoovering up stock at below mid price last week so I took that as a sign for a turn upwards and bought more at 2208. The spread on dummy trades was 2186-2208. Then the big sell-off came but it's recovering well.

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Munday 7th Feb 150 of 167

In reply to CliveBorg, post #147

Thank you Clive,I would be interested to know how you think this market will develope now.
I did caution patience but have jumped in by investing more into XPP thinking now that is fair value.

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CliveBorg 7th Feb 151 of 167

In reply to Munday, post #150

I fear I'm not anywhere as good at timing the market as you've proven to be Munday, but for what use my thoughts are: I think the heavily reported record points drop in the U.S. markets ignores the fact that it actually represented a much less spectacular percentage drop, which means that the recent drop scarcely makes it amongst the top 100 in U.S. trading history. I think the markets are going to be even more flighty than usual for the next couple of months, given this recent drop, the historically high values of both the U.S. and British markets, how far off Trump really is from achieving his infrastructure spending plans, the inevitable fall-out when the crypto currency markets finally completely collapse, and the usual on-going worries about how the Brexit transitional phase is 'progressing'. But it's all general speculation - I think your analysis of the underlying trends in the moving averages and the bond markets seems much more objective in its approach. Best wishes going forward. Clive

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seadoc 7th Feb 152 of 167

Purplebricks (LON:PURP) My short got called in at close of play last night. The shares were called in by the owner. So what that means? Not wanted back at the price loaned out and wants to sell now? Someone desperate for shares at above market price?

Answers on a postcard please.

Seadoc

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Munday 7th Feb 153 of 167

In reply to CliveBorg, post #151

It is nice to hear of someone in agreement with ones thoughts. I go along with everything you highlited.
Thank you for your feedback.

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purpleski 7th Feb 154 of 167
1

In reply to simoan, post #76

Hi Simoan

Could you expand on your comment? I thought much written here was reasoned, interesting and helpful to P.I.’s especially those (like me) who have not been through a correction like this?

Graham wrote at length about the gyrations, shall we say, in the market both here and in the US and posters here followed up with a discussion.

I think that what Graham and Paul write at the top drives the comments down below and it leads to an interesting dialog. So I do think the “everyone would rather blow hot air at each other” is a bit unnecessary no?

Best wishes
Michael

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Timmytrump 7th Feb 155 of 167
6

Hi Simoan (and certain others)

Agree with you that there has been an awful lot of 'hot air' spoken over the last 2 days. The problem, I think, is that the discussion threads are available to everyone, not just the Stockopedia subscribers.

Personally, I follow certain persons comments, such as yourself, and try to ignore others.

I have posed to Stockopedia that there should be discussion threads that are only available to subscribers and will be interested to find out if there is support for the idea from them and persons such as yourself.

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Timmytrump 7th Feb 156 of 167
2

Looking at my portfolios today, I see that those shares that went down yesterday have recovered virtually all their losses and those few that went up yesterday have gone down today. Logical, i suppose!

Wish I had had the courage to buy more H & T (LON:HAT) (H&T) as they, for some unknown reason, went down 7% yesterday and are back up today. Especially when they are a hedge against volatile conditions holding lots of gold.

Funny old world!

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simoan 7th Feb 157 of 167
2

In reply to purpleski, post #154

Could you expand on your comment? I thought much written here was reasoned, interesting and helpful to P.I.’s especially those (like me) who have not been through a correction like this?

Hi purpleski,

Firstly, this is supposedly a small cap company blog. Far be it for me to remind others (I'm the least jobsworth type person you're likely to meet) but there were small cap companies still reporting and issuing trading updates yesterday that got lost in the noise of the "market crash". I think anyone that's been investing for long would know that yesterday was "a mere scratch" as the Black Knight would say. It was nothing, a healthy blip down, and certainly not worthy of all the words written.

If people want to speculate and exchange views about bitcoin or "market crashes" they can easily start their own thread on Stockopedia and there were some other active threads that people could have used to discuss the "crash". FWIW I didn't find the discussion at all enlightening and having read 75 posts containing very little of interest, I felt the need to say something, which I now regret as I'm having to explain myself. I will just bite my tongue next time and bugger off somewhere else.

All the best, Si

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purpleski 8th Feb 158 of 167
1

In reply to simoan, post #157

Hi Si

Yes but Graham started the column with:

“Let's see what's happening in the markets:...”

That was all he wrote about and people followed on from his lead IMO.

I think it would be a very narrow and boring column if day after day Paul and Graham just discussed the trading updates issued that day by small caps. This is what they do probably 240 days out 250 a year but occasionally they diverge and the column is all the interesting for it. Besides what has taken place in the market over the past few days has implications for small caps and is worthy of discussion.

Not to write about and discuss other areas that will likely impact the main topic (small caps) in a substantial way would have been myopic and the large number of comments and reads would tend to indicate that this what most people wanted to do that day. Normal service was pretty much resumed on the SCVR on Wednesday.

Further you write “I think anyone who had been investing for long would know that yesterday was “a mere scratch”. But as wrote in my question my implied criticism of your comment was in the context of the comments and columns helpfulness towards relatively inexperienced PI’s like me who have not been through a correction like this.

But did you mean the recent falls are a mere scratch or a mere scratch in the sense of the market is about to get it’s arms and legs chopped off? I for one certainly do not “know that yesterday was a mere scratch” of either type and have absolutely no idea where the market is heading, which is why I have stuck to my philosophy off sitting on my hands and doing nothing when Mr Market has a fit.

I watched the sketch only two days ago (I am currrently reading Dreman’s book) and we all know what happened subsequently to the Black Night after his “mere scratch” - he got cut off at the knees and only he thought he was unscathed. So do you think that this is just a mere scratch in the real sense or in a Black Night sense?

Kind regards
purpleski

PS I think it would be a shame if you held your tongue and buggered off somewhere else as so much of what you write is interesting and inciteful. I just disagreed with this particular comment :-).

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timarr 8th Feb 159 of 167
2

In reply to purpleski, post #158

"Black Knight".

The last few days are indeed a mere scratch in the long history of the stock market. Take the worst UK bear market in living memory - the 1973-1974 crash. The market declined by 74% and there were half a dozen 10% corrections in 1974 alone. This time we haven't even got to 10% (yet).

By the end of the crash, when even Jim Slater was telling his followers that the only sensible investment was cash and all the "sensible" investors had piled into gold, the market rallied 50% in a matter of a few weeks with virtually everyone sitting on the sidelines nursing their losses. The aftermath was that most private investors permanently deserted the market, which is one of the reasons we are so poorly looked after today - it was nearly 15 years before private investors returned in any volume by which time institutions had filled the void.

My first introduction to market downturns was Black Monday, 1987. The market fell 22% in 2 days. Private investors piled into the stocks that they'd been pumping up beforehand and learned the hard lesson that just because something has halved in price it doesn't mean it can't fall another 100%.

So a "mere scratch"?  Oh yeah. 

timarr

P.S. You're right of course that the tone of the comments are set by Graham or Paul's commentary.

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purpleski 8th Feb 160 of 167
1

In reply to timarr, post #159

Hi timarr

From that perspective I entirely agree a mere scratch in the context of the long term ups and downs of the market but in Simoan’s comment I could not work out whether he thinks this is a mere scratch before a blood bath (the arms and legs getting cut off) and therefore time to sell and buy back after the 75% fall to come or a mere scratch! But because I don’t know I am doing nothing.

Anyway probably enough of Monty Python for now.

Kind regards

Purpleski

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simoan 8th Feb 161 of 167

In reply to purpleski, post #158

Yes but Graham started the column with:

“Let's see what's happening in the markets:...”

That was all he wrote about and people followed on from his lead IMO.

So if Graham or Paul suggest we all jump off a cliff, what do we do? I though we were all grown ups, not lemmings, and could make our own decisions? Not discussing small caps is optional in the comment section, regardless of what Paul and Graham wish to write about! There are other avenues for discussing macro stuff and pontificating on the future direction of the markets. I was too busy watching the market and picking off some quality cheap small cap stocks when everyone else was busy discussing stuff that adds no value whatsoever. If you think understanding VIX is going to help, then God help us all! The only time I use the VIX is when I've got a sniffly cold. 

Further you write “I think anyone who had been investing for long would know that yesterday was “a mere scratch”. But as wrote in my question my implied criticism of your comment was in the context of the comments and columns helpfulness towards relatively inexperienced PI’s like me who have not been through a correction like this.

It's not a correction... yet. I'd say a correction is 5-10% and a crash is >20% but what do I know? It's just semantics. I've never experienced a stock market crash when the world economy is in such good shape but there's always a first time for everything. People just got reminded this week that the market can go down as well as up, and it's come as a bit of shock after a prolonged period of low volatility. That's all, no biggy.

 So do you think that this is just a mere scratch in the real sense or in a Black Night sense?

But the point I was trying to make is that I don't know. And I'm prepared to admit that I don't know and as such I see absolutely no value in discussing it. If I've learnt any important lessons about life in general and investing it's to be honest and admit when you don't know something. How can anyone know the future? Only stupid people think they do, and I might be a lot of things, but I'm not stupid. Don't watch the talking heads on Bloomberg TV would be my top advice. They are nothing but highly paid charlatans!

In Rumsfeldian terms I see no point in discussing "known unknowns". I come here to discuss "known knowns" (results and trading updates) in the hope that jointly we can remove as many "unknown knowns" as possible to make investing decisions that allow us all to make money from small cap shares. IMHO everything else is just noise.

Perhaps this blog has just become a victim of it's own success? I've seen it before with BB's where the noise of the crowd gets too high, the value decreases, and the best contributors lose interest and leave.

All the best, Si

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Ramridge 8th Feb 162 of 167
9

In reply to simoan, post #161

" Perhaps this blog has just become a victim of it's own success? I've seen it before with BB's where the noise of the crowd gets too high, the value decreases, and the best contributors lose interest and leave."

... and perhaps the information value of someone's post becomes inversely proportional to its length?

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simoan 8th Feb 163 of 167
1

In reply to Ramridge, post #162

... and perhaps the information value of someone's post becomes inversely proportional to its length?

I agree entirely and this whole blog is a great example, of which my post is just the latest. Sometimes very short and information-free comments get the highest number of thumbs up. However, I was referring to something that actually happened on The Motley Fool that purpleski may not be aware of i.e. Pauls board got so noisy it had to split into three different boards and then everyone got bored and left. Including Paul.

All the best, Si

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timarr 8th Feb 164 of 167
4

In reply to simoan, post #163

Hi Si

I don't think that will happen here. Tuesday was just one of those things - Paul called a sickie, Graham filled in with some market colour on a day when for a lot of people they got their first taste of what a pullback looks like. Cue a lot of noise and not much signal - rabbits in headlights, baby chicks looking for someone to follow ... pick your metaphor :)

In the end Paul or Graham set the agenda, and can moderate the discussion here as they see fit. If they go walkabout then you'll get a lot of blather, especially when markets drop. But it's a different setup to TMF - for a start Stocko actually appear to take an interest in the discussion forums :-/

timarr

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Timmytrump 8th Feb 165 of 167
1

Stockopedia have confirmed that the discussion threads are open to everyone and they are looking into providing threads open only to subscribers.

Other subscribers may wish to register their support for the idea.

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Howard Marx 8th Feb 166 of 167
2

In reply to timarr, post #164

“When the eagles are silent, the parrots begin to jabber.”

Winston Churchill

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simoan 8th Feb 167 of 167

In reply to timarr, post #164

Hi timarr,

I don't think that will happen here. 

I really hope not!  It would be a big loss given there are no real alternative places to go if you want to discuss and make money out of small cap shares. It's just a bit of shame when the noise levels end up drowning out the signal. I probably shouldn't have said anything and won't in future, so at least there'll be a little less noise :-). 

All the best, Si

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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