July Week 3 - Introducing Adjusted Inflation

Weekly Review Covering:

Everyone's favourite macroeconomic variable;

Reducing #GAW - because a punch in the mouth reminds you that you had a plan; and

Updates from #BOO, #AAZ, #SRC, #EMIS & #CLIG

Portfolio Review

Portfolio down on the week, in what has been a pretty grumpy market. 

As much as I don't like losses, I feel more comfortable if I am underperforming on the way up & outperforming on the way down.

The cash balance has built up as a result of "profit taking" in GAW (a euphemism for selling but whatever) and a small add, which is more administration than addition.

Not really a great week for risers and a number of fallers. 

Interesting that the risers are in general more defensive parts of the portfolio & fallers less so - assuming M/Cap is indicative of safety.

Quite strangely, none of the above had much by way of results - the ones impacted by newsflow seem to have been quiet on the whole - not the worse thing in the world.

Public Service

This week, a podcast from The Rest is History on

The East India Tea Company

Perhaps not the most relevant to business/finance, but very interesting nonetheless.

I am not sure the company would score highly on ESG metrics.

"The Anarchy" has been on my reading list for a while - think I will move it up a few notches.

Lessons:

Ideally, it wouldn't take a punch in the mouth to realise you had a plan!

 

Cursory Market/Macro Observations

Well, this week it was the turn of everybody's favourite macroeconomic variable - INFLATION

Clearly, there is a lot of pride attached to people's views on inflation, because very soon after inflation numbers dropped, we were introduced to Adjusted Inflation.

I expect this is the only industry where incredibly smart people take what is essentially a made up number, make changes to that made up number based on what I expect is a desire to support a pre-existing narrative & then argue about it.

Then again, why should Equity analysts have all the fun.

People say inflation is driven by inflation expectations.

As I understand those expectations can be changed at the cross of a meeting minute, its measurement most certainly can.

In more interesting news, below is a slide from the Blackrock Q2 Earnings presentation (what a fantastic company).

Read into it what you will, but what caught my eye was how institutional long term is moving out of passives & into active.

Having finished Terry Smith's book, I feel obliged to say that an "Active" strategy does not correlate to the level of "Activity" in said strategy.

US Banks also reported results:

Advisory business is doing well, trading is starting to slow down in a lower "vol" environment.

Lots of money is being made on reserve releases.

Deposits are moving up & demand for loans is not keeping pace, not great for Net Interest Margin. 

And choose your narrative. 

• Roaring 20s animal spirits should be accompanied by loan demand or
• Roaring 20s consumer balance sheets are stronger than ever.

For what its worth, I think stimulus is inflationary. 

I also think debt moving from the private sector (people/companies) to the public sector (government) will result in better capital allocation / fewer resources for the same output - deflationary or is it disinflationary.

I don't buy Banks, but if I did I would buy US over Europe in spite of valuation. 

I think they are better managed. and policy/regulation is more likely to dance to the tune of Banks in US, whereas in UK/Europe government/regulators will be the lead.

If I did buy a US Bank, I would buy XLF (or the Sterling equivalent). The biggest holdings are Berkshire Hathaway & BlackRock I think - personally I'd rather hold those over banks.

Transactions

Reduce GAW 

• A reluctant sale but I added very heavily when for some reason it was trading below £100 for literally technical reasons. This was intended as a trade for a 10-20% flip.
• Not often I engage in this sort of activity, but don't look a gift horse in the mouth as they say. 
• Further, I have a pretty big overweight to consumer cyclicals & wanted to maintain cash from the UPGS add.
• As markets pulled back, the less repeated cliche hit:
• Sometimes, a punch in the mouth reminds you that you had a plan!
• It still remains my number 2 holding as a result of selling a little less than a third of my holding.
• Amazing company - dangerously close to perfect - but I am still somewhat uncomfortable on the valuation.

Add UPGS 

• Not really an add - incumbent holding was in an ISA whereas the Salter subscription is not - administration.
• Mild add is because for some reason, I prefer the number of shares I hold to be round numbers & I was scaled back.
• Also (and at the risk of sounding arrogant), I think it makes more sense to keep cash outside tax wrappers & investments inside.

Portfolio Risers > 5% - this will be short

IXI up 5.88%

• No idea and not sure what the opposite of technical / profit taking is.
• Has been weak - expect there is support around the 70p given post profit warning hoohaa & Chelverton are buyers.
• Or it was down last few weeks & it isn't this week.
• HOLD

Portfolio Fallers > 5% - less short list but not much to say

FNX down 13%, BOO down 8.7%

SPSY down 6.31%, IHC down 6.02%, 

REAT down 5.83%, SDI down 5.53%, GETB down 5.14%

• No idea, but probably a continuation of the risk off that I talk about and they are very illiquid.
• SDI has had a very strong run with results upcoming so perhaps there is some actual profit taking - volume seems OK.
• REAT continues to be weak post results. 
• GETB, SPSY & IHC, no idea.
• FNX ditto on the no idea but new IPO falling in run up to maiden full year results on a fair amount of volume is a little concerning, but it is tightly held.
• BOO got hit by a US case (which was known as I understand) & announced a partnership in Middle East- the hit to M/Cap seems bigger than the size of the suit
• Then got hit again by Asos results, ASOS got hit hard.
• Of the above list, I would suggest BooHoo and Fonix are worth thinking about, ex I am not that interested in being a buyer at the moment.

Updates & Results

BOO 

• Partnership with Alysha - operate Debenhams stores in Middle East & e-commerce - Arab/Gulf region
• Will stock BooHoo existing products in stores as well - build brand awareness - Debenhams well loved blah blah
• Can't be bad thing - M/Cap has dropped some £500m in last few weeks (> 100m Class Action)
• On operational basis, would suggest there is margin of safety & it is a firm buy (relative!), although the impact from returns stood out to me on the Asos results.
• Forecasts show lower EBIT margins so perhaps factored in.. 
• Legal can turn out to be a blow up risk - specifically, given current issues I would be careful of considering this a back the truck purchase.
• How many online malls can there be? Next talked a long time ago about how physical was a competitive advantage in online transition
• ADD to Hold - more on add given position size.

CLIG 

• FUM $11.4bn (8bn£), $3.9bn from Karpus acquisition, up on year from performance - net outflows in every strategy $774m total
• FUM all time highs in both business (strong markets) offset by re-balancing.
• Fees accruing at 74bps of AUM, O/heads 16.8m & Fixed costs 1.6m/month. Profit before amortisation & profit share £3.3m/month
• 27.2m FY PBT before exceptionals, Profits will be £17m, 39.4/38p diluted EPS, dividend 22p, up 10%
• What wonderful clarity - at 14x, this is expensive relative to own history, but with Karpus more diversified & costs spread over larger business
• The rebalancing / CEF / EM nature mean there is capacity constraint for growth (unlike other asset managers than have a fairer wind)
• Active pipeline across all its major CEF strategies - did they close down the "Other" - frontier could be interesting area for them
• One sentence re business development doesn't speak to lots of ambition, although with new CEO/Acquisition, maybe things will change.
• SOLID HOLD

EMIS

• Trading slightly ahead of expectations in spite of pandemic continuing challenges - Revenue & Adj Profit ahead of PY & 2019
• EMIS Health - delivering GP IT Futures contract - more normalised - less hardware & more software - should be better for margins
• EMIS Enterprise - double digit growth in recurring & non-recurring revenues (patient facing services, analytics & pharmacy) - supported Vaccine rollout.
• A number would have been nice.
• improving margins & positive signs on Enterprise - which if successful & same profitability - could be an interesting growth area.
• Contrast the clarity & details versus CLIG!!!
• ADD TO HOLD - Erring to Add on any tantrums

AAZ

• $13.7m generated in cash - production 16,740 - up slightly under 10% on quarter. Zafar report to be released in August.
• Full year guidance retained, $33.6m cash at year end + inventory of $8m vs $160m M/Cap - selling at higher average prices - production down slightly
• I get the general idea - but given sector competence probably shouldn't hold this - if I want exposure, do it with a fund!!
• Serves as a reminder that I do not want to own any other miners (directly) - despite all the twitter boohaakey
• HOLD to SELL - certainly sell eventually - does pay a decent dividend

SRC

• Reverse takeover (fancy talk for mother of an acquisition financed by shares) of Nordkalk a Limestone owner/processor business in Scandinavia/North East Europe.
• I thought this was as cyclical as it gets, but it is used in food production & water purification - learn something new everyday! 
• On the face of it looks OK & at reasonable valuation but it is big
• Cynic would say if Nordkalk can add so much to the board why can they also sell a business that this board can improve.
• Given the size of the issue, seems they did not have much difficulty placing the shares & market reaction the following day was certainly favourable.
• For me, one of the key benefits is access to new markets, in particular with the GreenBloc product.
• Very interested to see the terms of the new LTIP to go with this - director participation small in context of size of raise
• That being said, all the previous reasons  to hold (from portfolio perspective) still apply (and have probably strengthened). 
• Excluding acquisition risk, this reduces (diversifies) geographic risk.
• HOLD to ADD - see how the details play out - Step change in business. 
• Information before Action!!

And Finally

I was going to rant about politicians, freedom day, them/us.

I then remembered, that in the last week I was retweeted by Jonathan Ferro & then got the RhomboidMF1 (would love to meet in person at one of the events now freedom is within grasp) red pen treatment, so I feel I should be more careful about what I say. 

But, I have never been particularly good at keeping my mouth shut:

Do politicians (of all stripes) have no pride - to repeatedly go on national Television and look idiotic - all for the sake of sycophancy, collective responsibility, party lines or to just be different.

I wonder if they watch themselves on the Marr show on iPlayer & think - oh that Minister is a so & so.

Apologies for ending on a grumpy note.

I will be back to being positive next week - looking at how the week has started, positivity will be helpful!

Adieu