We have had full year results today from Lloyds Bank (LLOY) - which you can read the full 62 pages of if you so wish by clicking the link in the name. These seem like a decent set of numbers as you would expect with low unemployment and steady if unspectacular growth.
The shares trading this morning at around 60p are at a modest 13% premium to their tangible book value of 53p which seems justified by their 12% of so return on that equity. While the dividend was increased by 5% to 3.21p, this was slightly shy of forecasts of around 3.3p, but does leave them on a yield of 5.35% which is a lot better than you can get on money in a bank "savings" account!
They suggest in their commentary that they hope to get their return on equity up to between 14 to 15% this year which by my reckoning could justify a share price in the range of 64 to 80p, thereby offering potentially some modest upside on the current share price in addition to the 5% plus yield. Of course it will not be without its risks if we do end up in a post BREXIT / Global recession later this year or next, but for now it seems like a reasonable value, if slightly boring banking stock, but then you probably don't want a racy or exciting banking stock.
Meanwhile having had some success with holdings in Moneysupermarket (MONY), which had result recently, both personally and for the Compound income Scores Portfolio, I am tempted by price / value comparisons between this one and one of its competitors Go Compare (GOCO). On a cursory inspection this may be explained by differences in the balance sheets, cash v debt, assets v negative assets etc. and a better earnings revision trend at MONY perhaps.
Nevertheless GOCO does seem cheap on the face of it and it may be a good time to check it out further as there are some potential catalysts coming up. Firstly they have their own full year results due on the 28th February 2019 & we already know that MONY traded and continues to trade well. Plus after that they have a Capital Markets Day scheduled for the 20th March 2019 too, all of which I guess could help generate some renew interest in the shares perhaps, as they trade on less than 10x with a well covered 2.5% yield and are on a big discount to MONY. See the comparison below from Stockopedia between the two below, while I note they label them as Balance, Mid Cap, High Flyer versus an Adventurous, Small Cap, Contrarian - which seems to sum up the situation well.
A catalyst seems to be needed as GOCO shares, in contrast to MONY, are trading near their lows for the year, but they do seem to have formed a nice base from which they could stage a recovery if the results are OK and they can break out of their recent range between about 65p and 82p. As ever you pay your money and take your choice or not as the case may be - always do your own research and Go Compare and see what you think?
For what it's worth the Compound Income Scores suggest there is not a lot to choose between the comparison companies, but they are definitely scoring better than Lloyds Bank. So don't forget if you would like to see how these three compare on the Compound Income Scores and see daily updates to these and 500+ other UK stocks, then do check out the Scores page for more details of how you can do this & go compare if that is of any interest to you.
UK Markets & Compound Income Portfolio
First the good news, although it's not news by now that January proved to be a better start to the year / first quarter for investors than the dreadful fourth quarter of 2018. The FTSE All Share delivered a total return of 4.2%, which was slightly ahead of the 4% from Small caps. The stars of the show were the Mid Caps. which produced a 7.1% return on the month.
That may be encouraging as the old saying of, as goes January goes the year or something like that. I guess time, as ever, will tell on that, although it certainly worked last year after a poor January in the UK led to a poor year.
The Compound Income Portfolio also bounced back well in January, in fact it had its best ever month (see table above) with a total return of 8.8%, making up for all of last years loss in one month and beating the FTSE All Share by 4.6% in the process. This takes the total return since inception in April 2015 to 67.9% versus 19% for the FTSE All Share, which equates to 14.5% per annum versus 4.7% per annum respectively.
This just goes to show the perils of market timing and why, in the main, I have tended to adopt a fully invested approach most of the time on the basis that it is to better to try and benefit from time in the market & compounding rather than trying to time the market. This months strong bounce back seems to reinforce that view as I guess it would have been easy to have been spooked into raising large amounts of cash in the last quarter of last year, which I know some people did. That's fine if it helps you sleep at night, fits in with your risk tolerance and investment objectives, but what do you do now? Do you buy back in at higher levels potentially or are you able to stay patient and wait for a better opportunity to present itself. I'm sure there are many different views on this.
I must admit that I have some sympathy for those who have raised cash, particularly given the current economic and market circumstances. Indeed as I have grown older and my net worth has multiplied, maybe I might become a bit more cautious myself given that actuarially speaking I probably only have about 20 to 30 years to go, although I'm hoping to live to 100. So that still means I probably have a long enough time horizon (hopefully) to be able to ride out another downturn, but despite my reservations about market timing, I can see also that in an ideal world, it would be great to step aside from a bear market to a certain extent and therefore preserve more of ones wealth in the shorter term, although if you are younger and newer to investing you should probably view setbacks as opportunities rather than threats as you will have time on your side and will presumably be investing new money each month or year regardless. Any way having said all that this brings us nicely onto the next topic.
UK Market Timing Indicators update.
Now for the bad news, which is despite this months recovery this did not change the signal from these as they all remain below their respective moving averages, albeit to a lesser extent now than they were, with all of them being around 4% below at the month end when they are calculated.
The US unemployment rate has by coincidence ticked up to 4% this month, which is pretty low historically and means that after matching its 12 month moving average last month, it has now moved above the moving average. So what you might be thinking? Well this is the key indicator I have been using to either turn off / ignore the signal from the market timing indicators or turn them on / pay attention to them.
This move therefore suggests that we should now be paying attention to the timing indicators. As they remain negative, this suggests we should be reducing risk / hedging as the market is in a negative trend and a US recession may lie ahead. So more on that a bit later, but in terms of what it means, the table below shows the history of what has happened in the past when US unemployment has turned higher. While the middle chart shows this matching up with recessions and the second graph brings that chart up to date and shows the recent uptick in unemployment - if you have good eyesight.
As you can see it has been a surprisingly timely warning of impending recession in the US with anything from 0 months to 8 months lead time and an average of 3.45 months which is why it was chosen as an indicator to focus on in this regard. The market setback and near bear market in Q4 last year may also have been an early warning sign, although the US Federal reserve at their recent meeting seemed to do a U-turn on their tightening plan in light of the market sell off and seemed to imply that they could even be done on tightening.
While this has helped to further the rally that we have seen since Christmas and means that the S & P is now starting to challenge resistance levels and may seem like a reason to expect a resumption of the bullish trend. I note in this weeks update from Steve Blumenthal at CMG that the S&P typically peaks after the Fed is done tightening. So equally the Fed's halt to raising rates could also mean they see bad things coming out of the statistics that they watch perhaps?
So while it seem like everything might still be OK, especially as ISM indices are still generally above 50, and the yield curve has not yet inverted, there does seem to be plenty to be concerned about what with Trump's trade war with China and the resultant slow down there plus slowdowns / recessionary conditions in Germany, Italy and of course Britain with all it's BREXIT fiasco.
My only caveat is that perhaps the unemployment statistics might have been distorted by the recent US government shutdown perhaps? With that in mind I'll wait for one more months data to see if the unemployment rate remains above its average and to see if the stock markets remain below their moving averages next month too before implementing any hedging arrangements for the Compound income Portfolio based on these combined market timing indicators. At the time of writing the All Sahre for example is just 1% below its average now based on last nights closing value.
In light of that I've decided to skip doing any trades for the portfolio this month, as a couple were quite marginal and a bit suspect given lack of recent news, while the one clear sell is a pretty stodgy, cheap defensive any way. Thus as there may be a lot of turnover required in the next month or two if I do implement some risk reduction moves I thought I would save on trading cost this month ahead of that.
In addition addition to Steve Blumenthal's piece above the other thing I would recommend is The Investors Podcast which featured Jonathan Tepper this week topically discussing bear markets and how they can differ depending on the circumstances in which they take place. His comments about the early 2000's one and the ability to shelter in old economy value stocks certainly resonated with me as I remember doing the same back then myself. The 2007-8 one was much more painful and widespread as far as I recall, unless you were smart and brave enough like Mr Tepper to be shorting US sub prime etc. or of course to have spotted the trouble in time and gone to cash in a big way early on. The other point he made which resonated with me was that in addition to sheltering in value you can also ride them out in quality stocks and obviously avoid the financially challenged etc. which is the type of stocks that the Compound Income Scores seek to identify.
The only thing I would add to that, from my own personal experience, is to also be wary of momentum in a downturn as when I worked at JP Morgan we had momentum as part of a quantitative investment process along with value, growth and quality factors, and suffered big draw downs and gave back a lot of prior out performance as momentum stopped working and crashed during downturns and through the trough until it then started working again. So any followers of Stockopedia stock ranks might want to take note of that and beware if we have or do eventually enter a bear market. However, I would stress that in the long term momentum seems to be a powerful factor but worth being aware of the downside in a downturn.
Summary & Conclusion
We have seen a decent recovery in markets and the Compound income Portfolio since Christmas and this has been spurred on recently by the U-turn from the Federal reserve in terms of halting rates rise and varying hopes that there may be a resolution to the US/ China or Trump trade war. Whether this proves to have been a short lived correction without a recession occurring remains to be seen and it was certainly of the right kind of percentage and duration to have been a correction in an on going bull market.
This conundrum may be answered in the next few weeks and months ahead if markets can continue to climb and break back into positive trends and challenge the previous highs. This view would be supported by the fact that ISM indices still remain above 50 which generally suggests on going growth is likely and valuations, especially in the unloved UK market, are not as expensive as generally perceived and therefore also supportive of gains in the longer term.
The alternative view would be that the market and Fed's move may be the harbinger of something worse or a recession ahead perhaps as the market and economic cycles remain extended and possibly overdue or perhaps may have even started on a path to correct excesses via a recession. The indicator that I have been following to indicate this (US Unemployment) has now triggered and suggests that the US could, if the past is any guide, be in recession this year. I have been following this and using it as a trigger for taking avoiding action in a mechanistic way.
So if it remains like that next month, I'll be looking to put some hedging in place for the Compound Income portfolio to protect against possible downside from a potentially serious bear market that would result from a US recession occurring. This does however go against my natural inclination to stay fully invested and benefit from time in the market, but does dovetail quite well with the fact that the Compound Income portfolio is designed to be a mostly rules based / mechanical system based on picking shares from the top quartile of the Compound Income Scores to demonstrate their efficacy at picking decent growing dividend stocks. Thus by doing this too may also help to demonstrate whether the timing indicators in conjunction with US Unemployment has any merit or not. If you are interested in the back ground to this then check out this incredibly detailed post from Philosophical Economics where I got the model from originally. If I do implement it I plan to put 50% into cash and or hedging type instruments & retain 50% in CIS type stocks to see how these two elements fare if we do end up in a bear market or to see how much it costs the portfolio if it turns out to be a false alarm.
Thus my head says everything may be fine and one should stay fully invested versus my gut which tends to suggest that this cycle is quite extended and that we are overdue a correction as there are quite a few straws in the wind being kicked up by the bulls. While as ever for most people it will come down to greed versus fear as to which way they want to jump or not as the case may be. Whatever happens it will be fascinating to see how this all develops in the months ahead and where interest rates end up if we do enter a downturn.
Thanks for reading if you got this far, well done and don't forget if you want to shelter in quality growing and financially secure stocks then the Compound Income Scores can help you identify potential candidates, as I believe this is a good pond in which to fish. This is as per the final graphic that I shared on twitter recently and which I'll leave you with today.
This is why I focus on dividend growth & other factors as well as yield. Picture shows: Average Annual Returns and Volatility by Dividend Policy in S&P 500 (1/31/72–12/31/17).