LON:FCCN | This Time It's Going To Be Different - Famous Last Words

14th Oct '20 by Phuntt

13 comments 2318 reads

I live and work in Belfast. This morning, the NI executive announced a significant increase in COVID restrictions for the next 4 weeks in an attempt to curb the rise in infections in the province. They are mainly focused at the hospitality sector (which is being completely shutdown) along with various other restrictions (including closing schools for one extra week) but importantly allowing general retail to remain open. I also watched Keir Starmer's speech yesterday and was surprised to see him finally adopt a position contrary to the government's position - i.e. a similar circuit break to what has been introduced today in NI. My conclusion from that speech is the political consensus in London is a) COVID is going to get much worse across the UK over the next few months and b) it's a foregone conclusion that the tory government is going to be forced to impose stricter measures soon. This is NI today but it is soon going to be UK wide. Even if it isn't, very soon most regions of the UK will be clamoring for "very high risk" Tier 3 status (see next paragraph for reasons why). Keir suggested a circuit break of 3 weeks. I believe the shutdown in Northern Ireland will last longer than the 4 currently outlined because the data we see is effectively 3 weeks old anyway - so even if the virus is stopped in it's tracks by these measures today, it will still grow over the next three weeks - is it realistic to imagine that in four weeks while the virus is at it's peak that we will go back to normality? Possibly but I wouldn't bet on it.

The reality is that in Belfast at least retail trade started to drop off last week and walking round the city center today it is completely empty. Although doors are open, the message is getting through to people and discretionary spending is reducing at a rapid rate both to curb the virus and because tough times are ahead (online will still benefit but not to the extent it did last time because people are going to be more worried about their finances). Let's be optimistic and say in city centers it stabilizes at 50% of normal trade over the next few months. Retailers could cut staff hours and use the job retention scheme but see their staff costs…

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Alex Meals

15th Oct '20

Good reading with explanation. Any ideas about Fuel stocks- like Royal Dutch shell, Chevron, Total, Exxon ? Any ideas about putting money in gold mining companies or gold trackers ETF?

lpreidster

16th Oct '20

Very good read, thanks for taking the time to pull this together.

Phuntt

No problem. I'm doing it more for me as writing it out forces me to think through my reasoning and positions (both macro and individual stock picks)

Hi Alex,

The piece above is looking at the immediate future for the UK markets and is meant to be short term - both of those sectors require a global view and some thought to at least where they are going in the medium term (1 year). I don't claim to have that expertise but if you are asking me about my ideas:

There are loads of interesting opinions in the threads here - I was rereading this one yesterday from mojo which has a really interesting discussion underneath (https://www.stockopedia.com/co...). Mojo's argument is that we won't be allowed to spiral into a debt/ deflationary cycle because that is a worse case scenario and the major world economies won't allow it to happen - they will choose door number 2. Leaving aside the point that while we obviously won't choose it, we may not have a choice I still believe that 2021 will be one of the most economically challenging years on record. The enormous disruption caused by CV19 has not actually been felt yet and will feed through from early 2021. So I think while it might not be a cycle, there is substantial pain to come as these things feed in - deflation at least initially is a foregone conclusion as far as I am concerned.

I think the markets are expecting another round of QE and fiscal stimulus in November and I certainly expect it from the US after the election (no matter who wins) and the UK and Eurozone. I listened to a fascinating podcast on "invest like the best" last week with Jesse Liver and how the markets respond to fiscal stimulus. From that mainly, I'm actually expecting a strong rally through to the end of the year in markets here (certainly I think the risk of a market correction I'm hedging for only occurs if the markets believe that stimulus isn't coming) and because of the inflationary risks introduced with QE, precious metals will spike then. Commodities are going to continue to rise as long as China keeps buying them so as long as their economic output keeps rebounding like it is the future is strong there. However, China is an export driven economy and if the dollar weakens because of that stimulus, I am starting to wonder who are they going to sell to in 2021?

Where does all this meandering lead me? Markets relatively strong to end of 2020 (with minor risk of correction if stimulus disappoints). General decline in 2021 with extreme volitivity as national economic figures filter through, china output declines in second half, deflation at least initially, US/ Euro/ Sterling all depreciating together.

So a play on gold makes perfect sense to me (hence continuing to hold Centamin (LON:CEY)). Based on my experience with Centamin (and Highland Gold Mining (LON:HGM) which I held before Centamin (LON:CEY) and managed to sell at what I thought was a decent profit but a few days before they announced the bid on the company), I can certainly understand the idea of using an ETF here especially if it simply a play on gold prices and have been looking at £GDXJ over the past couple of days. I have always been a stockpicker at heart though and haven't pulled the trigger yet for only that reason.

On oil companies, in the medium term I am worried about another run on the price because if world economic data starts to stumble, it will be first hit. I also can't pick which way OPEC will choose to jump - either cut prices and attempt to sell off as much oil as possible over next 10-20 years or raise prices and extract money necessary to fund their countries (and lifestyles) for the next ten years. Add to that, BP/ Shell/ Chevron can say all they want about switching to being environmental focused suppliers but they have huge balance sheets made up of oil fields and the write downs there and expenditure in new clean projects is astronomical. Too difficult and risky for me to consider them right now...

The Phoenix

Hi would you mind pasting the link re Livermoor thanks

http://investorfieldguide.com/...

Good reading for newbie investor like me.

I have checked a lot of Super investor portfolios and i notice that all of them have 20-35% in Financial stocks, like bank of America, wells fargo, bank of new York, capital one.

I have checked also Fred total assets charts- https://fred.stlouisfed.org/se... , especially watching a behavior of 2008 crisis.

And compared these chart with stock value charts for these banks. Banks value flight up very quickly in compare with 2020. Why in 2020 is so big delay in their value growth? Why 2020 is different and do super investors are smart, investing in banks?

I feel that it will be the same scenaio like in 2008-2015, when money is pumped in economy slowly each year after year.

For myself- i did put all money in Gold price tracking ETF, because i do not have enough knowledge to find better solution. Will move to £GDXJ after will make better research about correlation between gold value and stock market .

timarr

It's an interesting post and I think the logic on most of the stock picks is good - apart possibly from Persimmon (LON:PSN). House prices are heavily correlated with changes in unemployment - it's the uncertainty that prevents people from making the financial committment - and unemployment is rising steeply.

Where I'd disgaree is the discussion around the future market movements - those are essentially unknowable no matter how persuasive some commentators may sound. What we can predict, however, is the course of the pandemic - it's a respiratory disease, we're headed into winter with cases rising and we don't have a working track and trace system or much trust in the government. Both the CSO and the CMO have unequivocably stated that the proposed measures won't be enough.

So things are going to get worse before they get better and regardless what the government wants to do they will end up being dictated to by the numbers of people in hospital and ICUs. Allied to that we have rapidly rising unemployment and what will probably be quite a sketchy Brexit deal (or possibly no deal at all) and a doubtless rough end of year following the US election - you have to wonder what a lame duck Trump would do in the last two months of his presidency.

You don't need a crystal ball to recognise that we'll see a continuation of the trends of the last six months with the added kicker that the longer this goes on the more the changes in behaviour become normalised. Some changes will be permanent, some will be temporary.

Trading this isn't hard:

Face to face businesses = bad: many look very cheap, but they're essentially options on a binary future. If you have to trade this buy portfolios not individual stocks. Luxury goods companies are probably the safest bet.

Online businesses = good: the problem now is that many of these look expensive, although the warehouse REITS still look good value.

Volatility will continue: spreadbetters are a great way of playing this - although I don't like Plus500 (LON:PLUS) very much, their hedging policy is suspect. Gold is a very useful hedge, although keep an eye on the gold: silver ratio, silver can be a very lucrative trade.

Home working is here to stay: bad news for commercial property companies, bad news for transport companies, bad news for businesses reliant on the commuter trade. Good news for home entertainment, online delivery and remote working / cybersecurity companies.

Healthcare and hygene will be higher priorities: likely to be a permanent change - governments won't treat epidemics as a remote possibility again for a long time.

Travel restrictions will be in place for months and perhaps years to come: bad news for airlines, hotel chains, consumer FX related companies and travel agencies.

Rising unemployment will crush consumer discretionary purchases: big ticket items, especially houses, cars and expensive home items will be off the agenda for many people. More likely they'll spend their limited income on smaller treats - home delivered pizza, Netflix, etc.

In the middle of this we're seeing some extraordinary movements in technology company prices. Some of these are ridiculous - valuations that outstrip the value of the addressable market in some cases along with the typical fin-de-siècle phenomena of the "new" valuation metrics that "justify" the prices. For the most part that's now a sucker's trade, which won't end happily. However, as we've seen with Loopup (LON:LOOP) and Novacyt Sa (LON:NCYT) the pandemic is throwing up genuine opportunities as some companies are just in the right place at the right time.

Eventually restrictions will start to ease permanently - either because we get effective treatments or because the virus becomes less dangerous (which is what happened with Spanish flu after three years or so). At that point companies in sectors which are out of favour but which have survived will bounce heavily. Short-haul holidays will be insanely popular and so will a lot of low price hospitality - bowling alleys, hotel breaks, restaurants, cinemas. The challenge with those is a) picking the survivors and b) deciding when to make the plunge, because it could be dead money for a long time.

There's going to be a lot of volatility along the way. Personally I prefer to ride it out - ultimately earnings dictate share prices, not sentiment. The market can do what it wants but as Richard Feynman observed, when reporting on the string of human errors that led to the Challenger Shuttle Disaster, when you're dealing with science no amount of political posturing can change reality. Or in his own words:

"For a successful technology, reality must take precedence over public relations, for nature cannot be fooled".

timarr

I’m only talking here about UK stocks, rather than US. I know nothing about US stocks or banks. I know from watching UK bank stocks that the market has abandoned them over the past 6 months. My common sense tells me that there will be winners in the UK banking sector but picking them is an almost impossible task for a private investor. Their balance sheets are impossible to decode (I wasted 2 days of my life trying to understand HSBC recently and finally gave up - it is really impenetrable) so we are left with trying to look at the evidence of our eyes.

They are granting lots of government backed loans, they are withdrawing mortgage availability even when the house market is at least mini-booming due to stamp duty decreases, they are making massive write downs already for bad debt they know they will be on the hook for, they are being threatened with negative interest rates by Bank Of England (interest rates directly determine banks profitability), those with international trading arms are front and centre of the Brexit battle currently going on, they have all stopped paying dividends.

Do I believe UK banks are currently horribly undervalued? Yes. Do I believe some UK banks will be massive success stories over the next few years? Yes. Can I make any sort of judgement as to where to invest? Sorry, no. There are just much better risk/ reward options for me available that at least it’s possible for me to form a judgement on.

Thanks for commenting timarr. I’ve been reading these threads for only six months and I greatly respect the wise well reasoned tone you bring. On your minor counterpoints:

I hope it’s clear from the original post that Persimmon (LON:PSN) is easily the pick I currently have least conviction on myself. It’s hard to predict UK economy doom and gloom (which I’m definitely doing) and also recommend a UK house builder. However, my read is also there may be another month or so until the chickens come home to roost here (and I want to see what happens if there is further stimulus, it should be felt strongly here).

On £Plus, for those that don’t know timarr is referring to the fact that unlike other spread bettors, Plus500 (LON:PLUS) often don’t lay the punters bets off on the market but take the other side of them themselves. They had an RNS a while ago when they had to announce to the market that they had a bad loss which doesn’t help. Besides being a little dubious (how can you trust your bookie to give you the correct information?) this obviously makes them vulnerable to losing bets. However, for me their operating margin is consistently better than competitors (roughly 10% than IG, almost 20% better than smaller CMC) which I read as this works for them. Remember, most people lose money spread betting and Plus500 (LON:PLUS) is aimed at newbie players. Distasteful? Yes. Risky? Possibly. Profitable? It seems so.

On giving market predictions, I couldn’t agree more. I strained to not do this in the original post, even though my opinion was obvious. That’s why I thought a better route was to outline what I was currently doing in my own portfolio. But I certainly fell into the trap replying to Alex below. I already regret it lol.

17th Oct '20

Hi Phuntt

On Plus500 (LON:PLUS) if I remember correctly their recent trading update waxed lyrical about their revenues but utterly failed to mention profits. It's not a great sign. The margin question has always been interesting - with Patissiere Valerie their abnormal comparative margin was the canary in the mine. It's not sufficient to accept it - we need to explain it.

PLUS has a bigger turnover of players than the others, who make more of their money from sophisticated and sticky users. That's a cost to the business. The counter to that is that PLUS supposedly have better technology - but that only takes you so far. Best guess - and it is only a guess - is that their lack of hedging is the main reason and that means that the margin advantage is illusory. At some point their customers will win big.

But I don't like Israeli tech companies anyway - everyone has been through Israeli national service and most tech companies are founded by people with a miltary tech background. No problem with any of that but it tends to mean the culture is a gigantic old boys club that tends to be run for the benefit of the founders rather than shareholders. With PLUS the directors' sharedealing timing has been spectacularly good.

So for me the margins are a reason not to buy. Meanwhile Cmc Markets (LON:CMCX) has tripled since the March lows - Peter Cruddas has serious skin in the game there. Ig Group (LON:IGG) has been more pedestrian - a mere 40% gain - but their hedging policy is rock solid. These are serious gains that come accompanied by restful nights. although there's the ever present possibility of further regulation. But the valuations reflect that, I think.

Each to their own, of course.

On your comment on banks - totally agree. They're now quasi government institutions, it's impossible to value them effectively.

timarr

It’s so interesting how we all come with our perspective. I’ve never had a negative experience with investing in Israeli businesses so maybe am not wary enough of that connection - I know a lot of UK investors have those concerns though.

I totally agree that the last update was stunningly ambiguous and incredibly frustrating as a shareholder. However my read is that they don’t want to drive the price up while their buyback scheme is still in effect. When that expires, I’m hopeful that we will get another amazing update (and an even larger share of dividend proceeds from the special divi I think we will see this Xmas). I’m the first to admit I might be over thinking this.

I’ve been in and out of CMC twice this year (and done well) just selling them actually after their last RNS as part of my cash drive. I also bought IG earlier in the year but horribly mistimed it and managed to get stopped out - ho hum.

18th Oct '20

In 35 odd years in investing I haven't come up with many hard and fast rules, but I reckon most of the scandals that have occurred in that time have been associated with issues of corporate governance. As Plus500 (LON:PLUS) are now main market listed and signed up to the Combined Code my concerns are probably irrelevant and historic. Still don't like the hedging policy, though.

Generally there are a few things to watch out for:

AIM listed - the standards of corporate governance on AIM are nortoriously weak and directors aren't as accountable to shareholders as main market companies;
Overseas domiciled - it's much more difficult for shareholders, auditors and non-executives to hold managers to account, plus corporate culture can vary significantly;
Dominant shareholders or founders who use the company as a personal piggybank and/or engage in related party transactions;
Any of the above with even a trace of something odd about the accounts.

Note that a main market listing isn't a guarantee of everything being fine - for instance Nmc Health (LON:NMC) were FTSE 100 listed when suspended - but of course, they are domiciled outside the UK. Also worth noting that the NMC accounts were first called into question not by its auditors but by the activist short seller Muddy Waters.

In the end we have hundreds of companies to invest in, most of which are well run on behalf of all stakeholders. Why bother with anything where there's even a bit of doubt?

This time it's going to be different - famous last words

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Phuntt

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