Bad News Rises as Market Does Also

Stock markets continue to rise when the economic news is generally bad. Is the market rise based on relief that it does not look like all our shares our going to become worthless, or relief that we have not yet caught the coronavirus personally? Although I know a few people who have – thankfully all recovering.

But companies continue to issue announcements of the kind that say “too early to tell the full impact” while reporting negative sales trends in the short term. Meanwhile the Bank of England is going to simply print money to finance government spending rather than raising debt in the gilt markets. If that is not a negative sign, I do not know what is.

A couple of companies are worth mentioning: 1) Speedy Hire (SDY), a company who rent out tools and equipment and hence are a good bellwether for the construction and maintenance sectors. They report “reduced activity levels” but they have “retained a substantial proportion of its revenues”. They are cutting costs, it is uncertain whether it will pay a final dividend in August and it “suspends all guidance until the position stabilises”. That does not sound very positive does it?

2) Diageo (DGE) also gave a trading update today. They give very little in the way of specifics about actual sales. They are reducing costs and are still paying the interim dividend this month, but have stopped the share buy-back programme. More information would have been helpful.

Those investors who rely on dividend income are being hard hit as many companies are cutting them out so as to protect their balance sheets due to the uncertainty of the economic impacts of the epidemic. Some of the big insurers are the latest to stop paying dividends and this has a very negative impact on their share prices as institutional investors who run income funds dump them for other shares. Private investors are probably doing the same.

But the really bad news yesterday, although not totally unexpected, was from NMC Health (NMC) who announced they expected to go into administration. The likely outcome for ordinary shareholders is zero. In normal times this would have been a headline story but almost all news is now being swamped by coronavirus stories.

NMC was valued at £2 billion when the shares were suspended but were worth four times that in 2018. So this will be one of the biggest stock market wipe outs in history, probably arising from some kind of financial fraud. I hope those responsible do not escape justice.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Taking Cash From ISAs and IHT Reclaims

If like me you have been selling shares in your ISA during the market crash, you may now have a lot of cash sitting idle in your ISA. Most brokers pay no interest to you on it but prefer to collect it themselves. But now we are into the new tax year, there is a solution to this. Take the cash out and put it on deposit into a high interest current account. You will get over 1% interest.

You can put the cash back into your ISA without losing the tax reliefs so long as you do it within the same tax year (i.e. before April 2021). It is worth checking with your broker or platform provider that their systems support this though – mine certainly does.

If you expect the market to rebound quickly, you may not consider it worth bothering to do this, but the economic news and company results are surely going to be depressing for the next few months. Or as an article in the Financial Times said today: “The UK economy is heading for a recession that is forecast to be deeper than the 2009 financial crisis and one of the most severe since 1900; the coronavirus pandemic has seen consumer demand collapse and many businesses forced to close or significantly reduce operations”. Government moves to stimulate the economy may help but it still uncertain when business will get back to normal so holding cash in an interest paying account makes a lot of sense until the picture is clearer.

There was another interesting point raised in an article in the FT today under the headline “Wealthy seek inheritance tax rebates”. There may have been a number of deaths of elderly and wealthy relatives when stock markets were much higher. Inheritance Tax applies to the value of assets at the date of death, but it can take many months to obtain probate and for an executor to realise the assets. Shares may now be at a lower value so the tax is excessive. But for listed shares you can claim a rebate from HMRC. There is a similar provision for property.

Readers who are exposed to this problem should read the FT article and take professional advice on the subject.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Extreme Weather Events – Are They a Problem?

Before the national media became dominated by coronavirus news, the most common news story was about global warming and how it was causing extreme weather events such as fires, heatwaves, tropical storms and floods. Fires in Australia and floods in the UK were the headline stories in the past year.

As investors it is clearly something that you need to be informed about. Such natural catastrophes won’t just affect insurance companies but the economy overall if such events are becoming more common. But are they?  The following note has been recently published by Paul Biggs, an environmental scientist and writer on the subject.

It shows that media coverage of national disasters makes for good news stories but the comments on it by journalists and broadcasters are often inaccurate. We probably have a lot more to fear from global pandemics.

Abbreviations: IPCC: Intergovernmental Panel on Climate Change, SREX: Special Report on Extreme Weather.

Weather Disaster Losses

Peer-reviewed science does not support any claim that disaster losses have been increasing due to climate change, man-made or otherwise (Reference 1).

Hurricanes and Tropical Cyclones

The detection and attribution in trends due to human-caused climate change in Tropical Cyclones, including Hurricanes, has NOT been achieved (1) (2).

Floods

UN IPCC AR5 concludes: “In summary there continues to be a lack of evidence and thus ‘low confidence’ regarding the sign of the trend in the magnitude and/or frequency of floods on a global scale.” IPCC SREX authors helpfully conclude that “the problem of flood losses is mostly about what we do on or to the landscape and that will be the case for decades to come.” (1)

Tornadoes

IPCC SREX: “There is ‘low confidence’ in observed trends in phenomenon such as Tornadoes and Hail…the data are suggestive of an actual decline in Tornado incidence..” (1)

Droughts

IPCC/SREX: “There is ‘low confidence’ in detection and attribution in changes in drought over global land areas since the mid-20th century. (1)

Extreme Temperatures

High temperatures are not a big driver of disaster losses. The IPCC says that there is ‘medium confidence’ that globally the length and frequency of warm spells, including heat waves, has increased since the mid-20th century. The IPCC believes that it is ‘very likely’ that human influence has contributed to these changes, but this relies heavily on climate models that are unable to pin down the exact climate sensitivity to CO2. The extreme 6C model known as RCP8.5 is now generally regarded by more rational scientists as ‘implausible.’ The range is now effectively 1.5C to 3C, with recent published evidence supporting a sensitivity below 2C. (3)

(1) The Rightful Place of Science: Disasters and Climate Change: https://tinyurl.com/yx5kfyos

(2) New WMO Assessment of Tropical Cyclones and Climate Change, Lee et al 2020: https://tinyurl.com/wgqoxm6

(3) Climate sensitivity in the light of the latest energy imbalance evidence: https://tinyurl.com/sawhd28

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Excess Optimism and 4imprint Reality

The FTSE-100 is up 3% today at the time of writing and the FTSE-250 up over 6%. That follows a rise of 7% in the S&P 500 in the USA yesterday. This is driven by some expectation that the virus spread is declining in some countries, or has ceased altogether in China. But I suggest this is pure excess optimism as the lock-downs in many sectors have yet to hit the results of companies.

A good indication of how bad it could be was the announcement this morning from 4imprint (FOUR) a supplier of promotional products to companies, mainly in the USA. The share price of this company fell to a low of 1320p on the 19th March after it reported sales were had fallen to 40% of previous levels. It has since bounced back up to 1830p as of last night.

This morning they gave even more bad news. Sales are now running at 20% of last year’s figures and their main distribution centre in Oshkosh has been closed. The message is quite obvious to see. Companies are axing their promotional budgets and aggressively reducing their marketing expenditure. When times get tough, marketing expenditure is a discretionary item that can be easily chopped. You will see how this can ripple through the whole economy and affect any company in the marketing sector.

4imprint may survive but this year’s results are likely to look quite awful even if there is a rapid return to work. But there is no sign of that and it could be months before business returns to normal, or to anywhere near last year’s levels. The last widely published profit forecasts suggest a fall of 10% from previous forecasts made at the start of the year, but still more than last year’s actuals.

Hopelessly optimistic in my view, even if I am still holding some shares in the company.

This seems to be a common feature of the market at present with investors piling into or buying back shares they previously sold. Far be it for me to ignore the wisdom of crowds so I have been buying some shares but only on a selective basis. But excess enthusiasm for some shares such as 4imprint seems rather too common.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Stock Market Bottom and IC Share Tips?

This morning (6/4/2020) the stock market bounced upwards on faint indications that the virus epidemic might be slowing. Have we reached the bottom yet? I am not so sure. A lot of companies in the worst hit sectors are closed for business and running out of cash. They are likely to remain closed for a long and unpredictable time.

We have also not yet seen in financial results news the impact of the virus on the general economy, other than the sectors more specifically hit. But with so many people now out of work there will be a significant impact in due course on companies higher up the supply chain, i.e. the businesses that actually produce goods and distribute them.

I certainly won’t be buying many shares until a clear upward trend is apparent and where the financial results of a company are clearer.

There were a couple of companies which were tipped in this week’s Investors Chronicle as “BUYS” which are worth commenting upon. Diageo (DGE) the drinks company was one. I don’t currently hold it but did so until a few months back. The current share price is now significantly lower.

It’s interesting to look back at the forecast p/e and yield when I purchased an initial holding in November 2018. I always keep a sheet, printed out from Stockopedia, when I first take a stake so that I can look back at my good or bad decisions. The p/e was 22 and the dividend yield was 2.4%.  It’s now on a forecast p/e of 20 and a yield of 2.8%. It’s not really become much cheaper.

Analyst’s profit forecasts have come down but not by much. The company did give a Trading Update on the 26th February. It said this: “Public health measures across impacted countries in Asia Pacific, principally in China, have resulted in: restrictions on public gatherings, the postponement of events and the closure of many hospitality and retail outlets”. It hardly mentioned the impact on the rest of the world probably because on that date the epidemic was mainly concentrated in China.

We really do need more information on the sales status in Europe, the USA and South America to have any idea on the likely impact on profits for the current year. The Investors Chronicle gives positive comments about the company’s “brand power” and “global reach” but I will be restraining myself from jumping into another holding before the picture is a lot clearer. The same applies to many other companies.

Another share that IC tipped was Polar Capital Technology Trust (PCT) which I currently hold. The article included some interesting comments from fund manager Ben Rogoff. He said “We are focused on maintaining a portfolio of high-quality growth companies with secular tailwinds, and have a strong bias to those with clean balance sheets in areas we believe will be less impacted by an economic downturn and are likely to emerge stronger once this challenging period has passed. Companies with high levels of recurring revenue and strong balance sheets should be able to withstand a couple of very challenging quarters”.

He also said “We have rotated away from most cyclical areas, including travel, payments, small business and advertising, industrial/auto and associated robotics, and semiconductor stocks”.

These seem eminently sensible comments. The company’s share price has recovered from a dip in mid-March when both private investors and institutions were dumping stocks regardless and moving into cash. But after the share price bounce this morning, PCT shares appear to be at a premium to the Net Asset Value. In other words, it’s not cheap either. So another share not to rush into buying I suggest until it becomes clearer what the impact on the companies it holds in the portfolio will be. If there is a general economic recession in major countries there will be nowhere to hide.

DGE and PCT may both be quality operations but they are not great bargains I suggest at present. The only companies whose share prices have fallen a long way are those where their businesses are either closed or may be suffering in a big way. Until we have a clearer picture of the impact on the general economy, these are not ones to buy either I suggest.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Bank Dividends and Fundsmith Performance

The bad news for many private investors is that most of the major listed UK banks are suspending dividend payments, even ones already announced. This is after they received a letter from the Bank of England requesting that they do so. The dividends are unlikely to be resumed before the end of the year. This is surely a prudent measure as the banks will undoubtedly have many requests for loans from companies to tide them over the virus crisis, while other companies will default on loans already made.  Bank balance sheets are always on a knife edge which is one reason I don’t hold shares in them.

Another investor who does not invest in banks is Terry Smith of Fundsmith. He has just published a letter to investors about the year to date performance of his Fundsmith Equity Fund. It is down only 7.9% when the fund’s benchmark MSCI World Index is down 15.7% and the FTSE-100 is down 23.8%. See www.tinyURL.com/tfjuzno for more information. As I hold the Fundsmith fund, it’s probably made my portfolio performance better than it otherwise would have been as a number of small cap stocks I hold and investment trusts have fallen further. I have not been selling the Fundsmith Equity Fund so that may be one of the few wise decisions made of late.

Terry Smith’s has another go at “value stocks” in his letter. He says they don’t protect you in a market downturn mainly because they are lowly rated for good reason. They are often cyclical, highly leveraged, have poor returns on capital or face other challenges. He could be referring to banks!

Another wise comment he makes is “What will emerge from the current apocalyptic state? How many of us will become sick or worse? When will we be allowed out again? Will we travel as much as we have in the past? Will the extreme measures taken by governments to maintain the economy lead to inflation? I haven’t a clue”. Comment: I don’t either, but like Terry I believe that investing in good businesses remains the best strategy.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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What To Do Before You Die, and Avoiding Doing So

Many of the readers of this blog will not be in the springtime of their lives. They therefore might be susceptible to the coronavirus. I thought it was worthwhile therefore to cover how you can prepare for that eventuality. This is not a “bucket list” of things to do before you die but how to ensure your family and executors are prepared for the eventuality. As someone who has had a serious medical condition for many years, this is a subject I have spent some time on so probably have some expertise in the matter.

First make sure you have drawn up a will, and that it has been updated since there have been any changes in your life – for example new partners or offspring. Also check the appointed executors are still able and willing to act. It’s very worthwhile using a solicitor to help you draw up a will or revise one rather than trying to do it yourself. It’s one of the few bits of legal work that are usually low cost.

But there are several other additional documents you need to prepare. A “Letter of Wishes” for how you wish your personal chattels to be disposed of will be helpful to your executors. This can help to ensure that items of particular interest to your partner or children go to the right home. It can also be useful to cover what happens to cash in joint bank or deposit accounts to avoid any doubt.

One problem that is relatively new is what happens to “digital assets” such as internet accounts and associated log-ins. So it’s also helpful to provide a “Letter of Wishes – Digital Assets” that says something like this: “I hereby grant my executors under my will the right to access such digital asset accounts by using the log-ins and passwords mentioned and assigning the rights to use those assets to any person they see fit, or in the case where the accounts contain assets of value they are to be bequeathed under the terms of my will”. Obviously you also need to tell your executors where they can find all the account details and passwords.

A common problem for executors is actually locating all the assets of a deceased. You should therefore also provide a document that covers “What to do when I die” that spells out where they are. For example which brokers/platforms or banks hold the shares and cash or where the share certificates are held. This should also indicate what immediate cash can be accessed if your partner will need that in the short term, and perhaps what should be done with any share holdings, i.e. whether they should be liquidated or who will manage them going forward. In addition it should tell your executors where your will can be found.

The above covers the really bad news, but there are other things you should consider putting in place in case you don’t actually die but are incapacitated for some period of time. A “Lasting Power of Attorney for “Property and Financial Affairs” and for “Health and Welfare” are worth putting in place. These enable a partner or anyone else you appoint to financially administer your affairs and make decisions about personal care if you are unable to do so.

It is also worthwhile putting in place an Advance Medical Directive (Living Will) covering medical treatment. For example it can ensure that where there is little chance of survival or you may end up mentally incapacitated that medical treatment is halted rather than pursued. Tell your partner or offspring where the aforementioned documents can be found. In reality the chance of a Living Will being needed to be considered is relatively low and with the current state of the NHS they may not want to spend a lot of effort on keeping you alive, but you never know.  There are template Advance Medical Directives available on the internet.

Of course, one essential thing to do is to avoid catching coronavirus if you possibly can by self-isolating and avoiding contact with any other humans. One way to avoid meetings is to use conference calling facilities. I attended a discussion group meeting of investors last night using Zoom and it worked quite well. The group were generally rather pessimistic for the economy but they are often are. They had few new investment ideas with a number moving into cash. The difficulty is that it is not at all clear how long the epidemic will last and many businesses have closed down for the duration. The economic impact could be enormous and Government money creation and debt raising is of major concern. It could take some years for the economy to recover, with possibly higher taxes required.

US listed Zoom is just one of many video or telephone conference services, but according to one tweet I saw this morning, its stock market valuation is now 50% more than all listed US airlines! With EasyJet (EZJ) grounding its entire aircraft fleet today, you could probably include UK airlines in that calculation also. A UK competitor for Zoom is LoopUp (LOOP) in which I hold a very few shares. I have not done a detailed technical comparison of the respective products. Zoom certainly seems to be popular and has been growing rapidly as businesses move to video conferencing from telephone conference calls. These are relatively low-cost products but there is also Skype which is free. That works relatively well for one-to-one or small groups but I often find it not easy to use. It has a confusing user interface and is technically unreliable.

In summary, try to stay alive!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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