June-Oct 2022: Events, My Dear Boy. Events.
Politics: Started from Victoria, now we here;
CBs: Schrodinger's monetary policy;
Nobel judgement;
Portfolio Matters - Macro, Performance and my confusion
Excuses before Action
For the second time, I am back on the back of no demand whatsoever.
Please excuse the absence.
I have actually been busy which combined with my laziness and an inability to complete work without the pressure of a deadline make for a very dangerous combination.
No wonder my bosses hated me!!
All that time ago, when I started this blog, the main purpose was to enforce discipline/accountability to complete my "work". To that end and as much as I wanted to share my tuppoundes with all the events that took place, I did not feel it was justified while I had a backlog to clear.
I am not sure why not doing the work prevented me from talking about it - maybe I feel more accountable on the grounds that I enjoy what I do more than when people paid me to do it!
The deadline has come because now we are into Q3 reporting and low and behold my backlog has been largely cleared.
There is still a bit outstanding on the US, but I have the weekend!
At the same time, I have actually wanted to write this more to get events of my chest (both portfolio and current), which is why I am writing this before I have "marked" the books for the week.
Maybe I should just start tweeting about Politics but I hate it when I do and to be honest I don't need any more reasons to be obnoxious.
Apologies for the BoJo rants - at least anyone but Tory is going to be easy to get done. The natural contrarian in me will probably mean I end up sticking up for the Tories.
Politics - Started from Victoria, now we here!
Britain has obviously struggled with it's history and in a concerted effort to make amends, is trying its best to move from empire to emerging
BoJo was ousted (Yay!), Liz Truss came in (Boo!). BoJo might be back (Undecided)
I still wish our elected representatives (and the electorate) had shown Theresa May more respect when she tried to neither drive a truck through the economy, nor democracy.
I wonder if I will feel this way about BoJo.
I understand the market's preferred choice is Rishi Sunak to replace the fiscally incompetent wild party animals that are Liz Truss & Boris Johnson.
In other news, Rishi Sunak was fined for breaching lockdown rules & ran some of the largest fiscal deficits in peacetime.
FWIW, I don't think the budget content was that crazy.
I also think market participants did not expect the reaction it got (otherwise they would not have needed a bailout) because they would have prepared from the time Liz Truss was appointed.
But market participants as a group I think are pretty good at blaming events/other people for why they were wrong.
The budget did go against the established mantra of the World Economic Forum and The Great Reset -
Fiscal irresponsibility to support the supply side and let people build is tired,
Fiscal irresponsibility to throw money away to build back better - that's wired.
Very generous of the billionaires - I think The Great Reset is just some BS the WEF like to throw around to stay relevant (and collect membership fees!)
In other news, I sometimes see people hankering for higher unemployment to slow FED tightening (and I assume drawdowns).
Billionaires might have a conscience, but the market most definitely does not!
If I was a billionaire, I'd be getting pretty pissed about 20% drawdowns on my risk free investments & the low risk investment grade bonds!
I would have rather had a reformer in office than not and for all Liz Truss' flaws, I don't think she is stupid.
Clearly she hates people and wants them to die in their own cholesterol while they piss their money away on junk food advertised on TV.
In other news, KFC and McDonalds & Greggs have mobile apps that send you notifications and gamify "rewards". These apps have been deleted.
Separately, I think she was bullied by the media and while they are whining about how toxic social media is, I would like to remind them that it is they who made this acceptable.
Editorialising news is a very dangerous game and if I was a conspiracy theorist, I'd be licking my lips right about now, especially since the people with mandates have been booted out for the stability offered by an Economic Advisory Council.
Maybe the European Communist Bank party can second Mario Draghi to us.
Or I just find it natural to empathise with nasty people that are socially awkward 😅
As for inflation being a result of Putin's gas price hike, one year chart and chart from Mid Feb:
Central Banks & Govt Bonds - Schrodinger's Monetary Policy
Speaking of market participants who are good at blaming events/other people for why they are wrong
Bailey is clearly in a competition with the Conservative Party as to who can cause the most damage. Maybe there will be a tradeable spread between monetary & fiscal moron premia.
The FED - we are coming for your mark to market gains whether you like it or not - stay invested for the long term - time in the markets vs timing the markets - we dare you.
ECB announced interest rate rises and quantitative tightening and said they would buy government bonds too under certain conditions.
Is it QT on even days and QE on odd days?
Sorry it isn't QE, but with all the riders being put in place around the core QT - not QT either.
Obviously, Chx Hunt and the economic advisory council have come in to save the day so everything is fine now with pensions and gilt markets.
In other news, the BoE is delaying the sale of long dated gilts - probably not connected.
Free marketeers don't control yield curves - markets are efficient (especially if the adults are are in charge).
Germany uses SPV issued debt to backstop energy supplies while ECB does QT not QT and market is like yeah - your balance sheets are under control (of the ECB Party of Europe).
UK does it - basket case emerging market without any natural resources.
Perhaps the best fiscal largesse would be getting Germany's Investor Relations / Public Relations team on the case.
I vaguely remember the financial crisis, off balance sheet SPVs/Leverage for all the big banks. Some doomprophets will tell you the next crisis is going to be a government debt crisis.
As for inflation being the result of Putin's gas price hike:
But seriously, the volatility in the bond markets is crazy and in my unconsidered view not sustainable.
I am shocked that they were able to handle the volatility for as long as they did & still do.
IIRC, short dated bonds are considered cash like in financial markets (which is why they are used to lever up).
Imagine if the cash in your bank account was written down by 10% (in nominal terms!!).
The system must be stronger than I give it credit for - excel has certainly come a long way!
In defence of Central Bankers - Bernanke Nobel Price
That last comment dovetails nicely with the most recent shared recipient of the Nobel Prize in Economics. For some reason the other two winners (Douglas Diamond & Philip Dybvig if anyone cares) seem to be getting a lot less attention.
Having policy makers that are going to do everything they can to avoid Bank failures is one of the reasons I am reasonably confident we won't have 80% (nominal) drawdowns.
Individuals having to sell their bank accounts for pennies on the debased $.
Guess it is nice for the guys who can buy bank accounts for pennies on the $ and use the full face value to buy defaulted mortgages from the same bank for pennies on the $, but I don't think those folk are students cleaning tables and pouring pints for a living.
I remember a client- customer of Lehman Prime Broker trying to avoid writing of their cash held with an off exchange "bid" - didn't seem a fun place to be.
Anyway, I look forward to a plethora of doctoral theses (using only 280 characters) explaining why Banks should be allowed to fail - good luck funding the Noble Prize though!
Portfolio Matters
Markets
Fear, fear & more fear. 24 months ago, you were yoloing your lifesavings on Cruise ships, airlines, Dogecoin and Gamestop calls.
Now, people are dumping govt paper at 4.5% because its value keeps falling - must be some sort of sentiment bottom.
But then, Blackrock attract inflows pretty much across product lines in Q1 & Q2 2022.
As it turns out, 10 trillion was the top!
Sentiment seems to be at the very bottom but positioning not so much??
Macro/Inflation
As much as I enjoy spouting my opinion about made up numbers that I don't understand, it is getting incredibly frustrating that more attention seems to be paid to what the interest rate & inflation print is than what is going on with demand, margins and balance sheets.
My cousin (in law) works for a Semi-Conductor company - he talked about excess inventory in channels & consumer demand - didn't mention interest rates or inflation even in passing.
Of course, my cousin is a business man whereas I am a market man and frankly, I am as confused as I have ever been.
Usually, I find it pretty easy to make a call based on the circumstances - not be right, but make the call nonetheless.
If I was to offer my view, I am minded to say that for long term investors, there are some absolutely fantastic opportunities with expected returns as good as they have been while I have had capital to invest.
And this applies whether you are a quality, growth, value - whatever label one prefers to help them sleep at night.
That said, in the period I have had capital to invest I have never seen as many signals of a regime shift that change the investment environment.
But is it really that bad - A few people lose their jobs, demand destruction with volatile food & energy rolling over - pivot is coming - buy the dip - you have been waiting so long for a proper dip.
But employment isn't rolling over, there are still jobs around and people are getting pay rises.
I understand a big part of the transitory argument (a while back - the transitory arguments seem somewhat transitory) was that in the west, we don't have to worry about commodity prices because the majority of the price we pay is employee costs (AND TAXES!).
In which case real wage cuts with nominal wage rises of 5% + does not translate into inflation of 2% (given food & energy is not core!)
Unless, profit margins come down, which will be great for inflation but not so much for capital values. No wonder "the Market" prefers that people just lose their jobs in stead!
In other news, Primark have made the strategic decisions to not raise prices, Tesco margins are down from 4.5% to 3% and Nike is going to be discounting because they have too much inventory.
There are others but I am trying to avoid names that might hurt feelings!
For those Christmas shopping, Nike clearance will happen in their online store and they are going to do it early!
Portfolio Matters
I wish I had gone 100% cash at the start of the year - hell if I am wishing stuff I wish I had gone to 1000% cash at the start of the year.
Value destructive & trashy as it is, I do keep cash on the side in stead of always being 100% invested.
Effectively, the cash level is essentially an expression of how cautious or defensive I am.
For context quarterly cash%: Q0: 23%, Q1: 17%, Q2: 26.1%, Q3: 30.4%, Date: 24%
Q2 had an inflow & Q3 an almost equivalent outflow (different accounts and sales were necessary for the outflow).
Also, this is cash as a % of portfolio value - not sure if I am alone in this but the cash portion seems to go up even when I do nothing!!
I think I have said at various times, that 20% is the upper end of my cash allocation. Fortunately, it ended a bit higher than that at times.
The portfolio itself has ranged from declines in the low single digits to high single digits. I don't remember a single day when my YTD (on closing prices) has been below -10%. As it turns out I am very close to that level now and typically that has been at oversold times and there have been some face ripping rallies from those levels.
I have less hope this time (for me) because Moneysupermarket has been Amazon'd (One day after they upgraded guidance and were up like 15%!)
Still hold Amazon too & a little concerned that it might Amazon itself in the next couple of weeks!)
The cash provided some cushioning against a severe nut kicking but to give myself a bit more credit, I actually think it was the nutkicking that BOTB delivered that made me fearful of the nutkickings long term investors have to take.
That and having too many holdings and behaving like a cowardly fund manager who only cares about his job!
Of course, I did not have the great years so its basically like being a value investor - you don't participate as much on the upside and still lose on the downside!
No wonder value is dead - it is a shoddy business model for a fund manager!
My top 5 holdings (~25% of portfolio) at the start of the year & YTD:
BMY up ~10% - No change
TPFG down ~18% - Reduced materially
TATE down ~12% - No change
SUP down 70% - SOLD for ~32% loss including the trading profits, 50% otherwise.
This is a very illiquid stock and it had a pretty spectacular rally into 2021 year end. Some successful trading and the fact that it pretty much took my YTD from a negative to a respectable 6.5% (underperformance notwithstanding) created an emotional attachment to the stock as well as the whole I am a long term holder. FWIW, holders buying today I think should do pretty well out of it.
Partly it was a replacement for UPGS - I dare say long term shareholders in UPGS will do better than SUP shareholders.
The long term holder / never sell mentality is more useful when market is going through peak bear. During peak bull it is bull market BS
CLX up 13.3% - Reduced by 50%
My current top 5 holdings are (~21% of portfolio):
BMY - HOLD - would be an Add but already more than full sized.
TATE - HOLD - seems to have been hit by a broker downgrade - is exposed to commodity rollover whereas their customers won't reduce prices. Originally purchased as an income stock and when people got excited (and it stopped meeting its required income return, that element should have been sold). Greed!
BVXP - HOLD - Added what I had sold late last year. Broker will be happy! Materially ahead on FX + recovering market & since June 30th, that FX should be another 15% benefit.
BATS - HOLD - Small add on the back of the sale of SUP (vaping). Vaping is ESG (and smoking is the solution to the demographic timebomb)
VLE - HOLD - NEW - Net net - felt my downside was capped given Cash supported majority of M/Cap + buyback. Having sold PFD this was similar sector with some countercyclical benefits.
To the longer term holders here - anyone getting frustrated paying directors to hold cash on your behalf?
For those that are interested, returns (all modified dietz) are roughly -7.5% YTD, -7.1% 1Yr and -12.8% from 14th June 2021 (High watermark on modified dietz returns).
I don't want to be criticised for not posting performance during down markets (but do let people do whatever they want on twitter).
I'm so confused!!!
As I have suggested above, things are as cheap as I have ever seen (especially in the UK, emerging market without the natural resources notwithstanding) and really feel I should be fully invested but nutkickings hurt.
Cash works as a cushion and maybe even allows one to land a punch or two on the way to being knocked out.
I mentioned Hargreaves Lansdowne as a company similar to Buffett buying Wells Fargo/AMEX. I knew I would take a nutkicking and am virtually certain that as a long term investor, it will provide a very acceptable return.
Thesis one is well and truly confirmed, thesis two less so!
This whole 100 baggers have drawdowns of 40% BS - that is true - usually those drawdowns are because of events & its journey from the 40% drawdown to the 100 bag is a result of events.
Didn't the same person say "cash is trash" (until it isn't) & "those that live by the crystal ball eat shattered glass!"
Opportunities galore:
One other issue I am having - I invest very much on the base of required return & what is hopefully downside protection (at the portfolio level).
Think it assisted with limiting FOMO against the Tesla & Cryptobros and limiting schadenfreude now. (See side rant below)
Side Rant:
Other than the disappearance of prominent Fintwit personalities (which doesn't really bother me), one of things I notice on various channels is a willingness to either blame for their losses or alternatively, take pleasure where people who are more speculative / less fundamentally driven / value conscious are taking large drawdowns.
Austrian School Goldbug wingnuts - curmudgeons that secretly want the world to end so they can sell their Gold to buy income generating assets (that's me by the way) - Gold down 10% YTD.
My erstwhile value brethren who are rational fundamental investors and are suffering from drawdowns only because the market is not rational as them (and probably didn't participate in the upside because the market is not as rational as them) are you really all so irrational as to believe that paper losses are not real losses.
Better not whine about inflation though - after all, paper losses aren't real losses!!
Opportunities galore cont.:
But for most of my time investing, there have not been that many good opportunities so finding companies that meet your required return (given cowardice) was pretty restrictive.
Now, there are a lot of opportunities!
Further, failed value investor notwithstanding, the risk reward from value opportunities is also as good as I remember.
I think a strong argument could be made to say that the risk reward (over a period that is shorter than my investment horizon) is better for buying a fair business at a wonderful price than buying a wonderful business at a fair price.
The thing I am really struggling to answer is, whether this is a function of style drift or bear markets and drawdowns (subconsciously) shortening my investment horizon.
Usually my investing time has been characterised by BTFD - this whole sustained losses for 9 months and longer if we dart throwing monkeys end up with the median performance as opposed to the M/Cap weighted performance is creating all kinds of fears about further nutkickings.
There are alternatives:
When you add the risk//reward style drift with the asset allocation decisions, the decision making difficulties are getting compounded.
The Q3 withdrawal went into a 2 year savings account paying 4.6% - I was so excited, that I couldn't hide it.
I was about to lose control and thought I'd like it!
I am pretty sure my first investment/savings product, a 3 year regular monthly saver I opened around the anniversary of my 1st adult job, and very soon after the start of my 2nd adult job paid 5.5% per year.
As it turns out, it matured in 2009. I put the proceeds in my Dad's brokerage account to buy Goldman Sachs around $135. My Dad being a rabbit sold it for $150 a few months later.
Guess it is easier to be a long term investor when you haven't had to watch your portfolio fall 40% over 24 months.
Add in the fact that Britain is going to hell via hell with a long stopover in hell and seriously what does one do.
So there you have it - I am confused and part of the reason I have not been writing is my confusion.
This is also why the cash levels are higher than they ought to have been - DEER IN HEADLIGHTS!
Having cleared a lot of my backlog, I need to really start looking at my portfolio (and asset allocation).
I dare say with changes, market moves and other stuff, it is probably starting to look as confused as me!
One thing that I need to act on - if I do want to hold cash, it will be held outside of broker accounts or in cash equivalents.
Holding cash with brokers is turning into a real drag as the broker results indicate.
Life must be hard for billionaires!!
P.S.
The same person who made me delete the fast food apps told me that my repeated use of the term nutkicking is sexist because (most) women do not have nuts.
So in the interests of equality, please feel free to use childbirth in stead.
And Finally,
Her Majesty the Queen
I was genuinely saddened by her passing and knew I would be. The people's Grandmother maybe.
I was genuinely saddened by her passing and knew I would be. The people's Grandmother maybe.
I am glad that the latest sh1tshow our political leaders are putting us through is happening after her reign ended.
What I am most grateful for is during a period when our elected leaders have acted like children (and I dare say we have too), Queen Elizabeth II acted with dignity & grace.
In doing so, she represented the country admirably.
The country may well have declined during her reign but her influence and impact most certainly did not.
Thank you for representing us Ma'am.
Adieu
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