As regular readers know I have a dual passion for investing and music and further to my last post which featured Supertramp and Crisis What Crisis, I thought I would inflict upon you some more of my Dodgy musical taste - they were a band too incidentally and apparently they are still going and even on tour soon. If that is of interest click the not at all dodgy link above to find out more.
So in the same way that Radio stations tend to do count downs of various musical genres on Bank Holidays to fill up their airwaves, like Radio 2 Beatles versus Elvis today I'll do the same with my blog. So with that in mind for a bit of fun I thought I would try and come up with my own count down of vaguely market / investment related music. So here goes in reverse order, click the highlighted links to watch / listen if you want to.
10. Staying Out For the Summer - Dodgy - which could relate to the old adage of sell in May and go away?
9. What Goes On - Velvet Underground - Starts What goes on in your mind - has to be a reference to behavioural finance?
8. Money - Pink Floyd - A classic track and what Investing is all about at the end of the day?
7. Wall Street Shuffle - 10CC - A classic tune may be about their investing experience as it was recorded in the 1970's?
6. Boom Boom Pow - Black Eyed Peas - A good description of what happens at the end of a market cycle?
5. Money For Nothing - Dire Straits - What people think they can get at top this stage of a cycle?
4. 48 Crash - Suzi Quatro - The original rock chick in her leather cat suit and the % correction you may get after a boom?
3. Down Down - Status Quo - The old geezers and what happens to share prices in a bear market?
2. The Only Way is Up - Yazz - Technically she sang about property but could refer to shares after a bear market?
1. Mr. Blue Sky - ELO - Could refer to those hyping loss making stocks and what everyone wants on a Bank holiday!
Have a good one - rock on and let's hope it doesn't turn into a Boulevard of Broken Dreams and we get a Green Day tomorrow and given how my mechanical Scores portfolio perhaps I should get someone to Wake me up when September Ends? In the meantime feel free to add your suggestions in the comment section if you are bored.
So that was the holiday month of August that was and if you have been away you may have come back to see the markets dramatically down and talk of a China crisis or some such. Which put me in mind of the album above and given the weather has been a bit patchy in the UK this summer - the cover could be a postcard from the UK if you had a staycation?
Any way getting back to the financial markets it was certainly a poor one for the UK headline indices such as the FTSE 100 and other mainstream large cap indices as these have heavy weighting in mining and oil shares which were hit particularly hard this month by the slide in commodities and the on going worries about China's growth rate.
Monthly Timing Indicators
Thus on the monthly timing indicators that I follow for UK markets the main indices FTSE 100, 350 and All Share have all slipped below their 10 month simple moving averages by 4 to 5% as a result of this months sell off. Thus this indicator is suggesting you should now be cautious of large cap stocks, although these indicators have done this 4 times in the last 12 months yet the indices remain above where they were a year ago as each time a rally has followed.
So a sign of caution perhaps, but if this proves to be just another one of those short term wobbles then I suspect these indicators will turn positive again if the market rallies further from here again. But with the normally volatile months of September and October still to come I guess it would be sensible to proceed with caution for now.
Having said that though it is noticeable that the Mid Cap and Small Cap indices remain above their 10 month moving averages by around 1.5% and as such would still suggest that they continue in a bull market and that you should remain invested. Again this probably reflects more the fact that there is less concentration / exposure in these areas to mining and oil and more exposure to the domestic economy which still seems to be doing fine. But of course it could be that institutions have just raised cash in the biggest most liquid names and haven't got around to selling mid and small caps yet. So if this does degenerate into a more generalised sell off / mark down then obviously Mid and Small caps would not be immune to that.
Compound Income Scores Portfolio
Which brings me onto a monthly performance update for this. As regular readers may remember this is a mechanical portfolio I set up back in April this year based on picking top scoring stocks from the Compound Income Scores. On the one hand this was to see how a portfolio based on top scoring stocks would fare and also to see how it compared with my own portfolio on the basis that models often outperform humans.
It is pretty heavily over weight in Mid Cap and AIM stocks and as such again benefited from the trends discussed above. Thus in August it saw a total return of -3.08% which compares to the -5.32% total return from the FTSE All Share. This brings a fifth consecutive month of out performance and leaves the portfolio with a total return of 6.34% since inception. This compares to -5.46% from the All Share on the same basis over the same time frame, so not bad but still early days.
Being a mechanical process I'm next due to review it and make changes at the next quarterly review at the end of September when I'm thinking of making a small tweak to the selection criteria which I think should enhance returns.
But in the meantime this months events in markets have brought home to me the attractions of a mechanical screening based selection process which is carried out on an infrequent basis as this forces you to take a detached view, not worry too much about market swings along the way and then deal in a dispassionate way when the time comes to re-screen.
So doing things this way has a lot to recommend it as you can then get on with your life and enjoying yourself and not get too hung up on the day to day minutiae. For me this is becoming apparent at this early stage as the Scores portfolio has also outperformed my own portfolio over this initial period, so food for thought there for me about how I might do things going forward if that trend continues. Cheers - have a great long bank holiday weekend, if you are in England and Wales and if you liked the music at the top of this post - then look out for a Bank Holiday Music Special I am planning as a bit of light relief from markets.
and getting next to nothing in interest on your cash savings? Then here is a dull ideal for you to receive a 6%+ yield which is expected to go up in line with inflation while hopefully maintaining the capital value. In brief the fund concerned is called The Renewable Infrastructure Fund (TRIG) the largest such London listed fund which reported interim results today. You can click the highlighted name link to visit their website and learn more about it.
in summary it invests in a portfolio of renewable energy assets such as on shore wind and solar pv farms and the revenues from these pay the dividends. These are expected to grow in line with inflation given the inflation linking built into some of the renewable incentive schemes. This latter point, after this years budget in the UK, highlights one of the operational risks which they highlight as being - the periodic energy yield, the level of future energy prices, and government support for renewable energy.
Therefore it is not without its risks but if they manage to achieve their aims of delivering the real yield plus reinvesting surplus cash flow over and above that to help maintain and potentially increase the asset value, then it could be quite a nice little earner (as Arthur Daley might have said - RIP George Cole) - in a dull green kind of way.
Timing wise doesn't look too bad as you'll pick up the 3.08p dividend announced today and the shares have come back to their issue price post the budget and the recent sell of in the market. This also means they are currently trading close to NAV which is unusual for this type of fund in recent months. It is also unusual for this one as they have been able to issue new stock in the last year thanks to the shares standing at a premium. So there you go a dull idea for you to get a decent real yield and help save the planet too if you don't fancy being a super hero in these markets!
Well may you live in interesting times as the old Chinese saying goes which I guess is appropriate given that people are now calling this the Great Fall of China. Indeed it is falls in the Chinese stock market which seems to have started this panic, although that had been going on for a while as the Chinese market is unwinding from a debt driven speculative rally.
More significant for Global economies and markets is the suspicion that China is slowing and perhaps not even growing as fast as they have suggested as no one seem to trust their economic data. Talking of which I read an interesting blog called Beijing Blunders: Bull in a China Shop which looked at this and relative valuations by Professor Aswath Damodaran.
The problem has been exacerbated by the fact that China and emerging markets now make up a much larger share of global activity. So whereas in the past slow downs or a crisis in the Far East could be easily managed the chances are now that it will have a much greater impact on the global economy and hence markets. Presumably the Chinese will do their utmost to keep control and keep growth going, but I guess the concern could be that their whole building boom etc. could still end in a bust in the same way they have lost control of their stock market.
As for the UK market, the FTSE 100 crashed through the 6200 support level and closed below 6000 after a couple of terible days and after a run of 10 down days which in itself is a pretty rare event. Thus with the worst of the panic out the way in the short term and some signs of stability in the Far East this morning it looks like the FTSE might be able to sustain a rally today, but it will be interesting to see how long this lasts and if 6200 and 6500 now act as resistance on the upside.
Longer term however, apart from the oil majors, miners and companies which serve them then most UK companies should not be too badly hit by a slow down in China unless they are exporting a lot of product going into that region. Indeed for a lot of consumer facing businesses in the UK for example, things should still be fine as the fall in energy prices and likely further delay in interest rate rise should continue to bolster real incomes.
So food for thought there when rummaging through the wreckage from this recent savage sell off but probably best to let the dust settle rather than rushing in just yet. If it helps I have updated the Scores to reflect last nights closing prices, although the fundamentals have not changed just the prices and ratings!
Finally if all these market shenanigans are getting you down here's a poster and website about Happier Living - enjoy!
As it cannot of escaped your attention that markets have been having a rough ride this month on the back of the slow down in China, collapsing commodity prices and liquidity flowing out of emerging markets. In addition this has all happened before the US Federal Reserve may or may not start raising interest rates next month or are investors trying to force them not to? It is also interesting that the Chinese have moved on from copying Western products to copying their financial policies with their own market manipulation and plunge protection squad, although they don't quite seem to have got the hang of it yet. I noted with interest that the markets were the lead story on the BBC News at 10 last night and Robert Peston was trotted out in a report and live in the studio.
The FTSE 100 has been at the centre of this with its heavy exposure to international Oil and Mining companies which have been hit hard by these developments. Thus as you can see on the chart above it has collapsed down towards lows seen late last year and earlier this year having pierced 6300 this morning before rallying slightly above that level again at the time of writing before the US opens and it has become oversold on the RSI. Thus 6200 would appear to be a support level of sorts for the index for what that is worth and with the market getting oversold, if this is just another wobble in the on going global struggle for growth then it might be time to buy again? I note according to Stockopedia that the Median PE for the UK market is a fairish looking 14.4x with a median yield of around 3% so why panic?
Well on the other hand, given we have had a 6 year bull market fuelled by Central Bank Liquidity and Global debt levels are now probably higher than they were in 2009 in some cases, maybe we should fear some tears if this proves to be the end of the line before the world goes into debt rehab and if it is the start of the breakdown. Now looking at the chart again, while I'm no great chartist, I guess some could come up with some kind of wedge between 7100 and 6200 which has just been broken by the plunge below 6500. This might suggest a downside equal to the height of the wedge and therefore target levels of 5600 or so but I wouldn't bet the house on that happening but may be worth bearing in mind if 6500 acts as resistance now and 6200 does not hold this time.
The other thing one can do as an investor is to ignore the macro noise as Warren Buffet recommends and quite frankly, unless you are investing in trackers, the index level other than as an indicator of sentiment and how the market has been doing is not that relevant. Therefore at times like these I usually like to go bargain hunting in the stock market to see if I can find anything which has been reduced to clear by the volatility or for other reasons. After all I don't get worried when I go to the supermarket and see some fillet steak reduced to clear - no I think ooh a tasty bargain I'll have some of that.
So with that in mind I was tempted to treat myself to some damaged goods in the stock market in a stock which has certainly been reduced to clear by quite some margin. It is a stock I have written on in the past and traded successfully despite my reservations about it. The stock concerned is Utilitywise (UTW) which has collapsed recently as their year end update disappointed and led to 7 to 8% earnings downgrades as their expanded sales force failed to deliver enough sales growth this year. After these and the 25% fall in the share price since then (see chart at the end) this one now trades on just 7.6x next years earnings with a forecast yield of 4.5% on the back of some more strong growth forecasts. This suggests that the stock is either cheap or that the market does not believe the numbers or that the growth will be achieved.
Talking of which the main concern with this one is the accounting, so I have been taking a closer look at that in their report and accounts for last year. I note that their are some large accruals in the accounts which is often a sign of accounting irregularities and therefore maybe the market is onto something with this one?
From a closer inspection of last years accounts I note:
In relation to the commission recognition where they book 85% of the revenue up front even though the contracts can last up to three years. I see they provided some sensitivity analysis in note 2 talking about what happens if the customers usage is <>15% out and say that could have a "material" impact on reported revenues and profits. They also say a 1% change in commissions would hit revenues by £420,606 which seems very precise! They also use a discount rate which could also be a swing factor if this goes up or down.
I guess as most of the commission comes from (presumably) a few of the big energy suppliers not too much of a worry, but as the CEO of another competitor company said yesterday it is a bit of an unknown with SME's but this would be more so in a down turn probably. See this article for more details on that. I also note that >50% of their 2014 revenue came from 2 customers (see note 5) as far as I can tell, but I presume these are big energy suppliers so probably OK, but clearly a risk if these play hard ball on commissions or decide to use others as well as or instead of Utilitywise.
The other thing I wonder about is the resignation of the deputy CEO who apparently was previously FD. My concern here could this be due to a bust up between him and the CEO? Especially as he was previously FD could he have been arguing for changing the accounting policies perhaps but being over ruled and therefore could this be an example of a charismatic / dominant CEO getting his way and the other guy going as a result? I could be completely wrong but that would be my conspiracy theory.
Any way despite those issues and my reservations I did decide to take the plunge and pick up a small holding yesterday in the hope that if they can address some of these concerns then maybe it can recover somewhat, however I must admit I'm feeling a bit uneasy about it, but sometimes they turn out to be the best investments. The other point to note on the shares that as well as being listed on AIM it is only a £126m market cap. and only has a 19% free float after taking into account directors holdings and a long list of quality institutions headed up by Woodford Asset Management who increased their stake again recently to 26%. This might help to explain why it moves in such mysterious ways.
So there you go one example of reduced damaged goods in the stock market sale, but as I always say you pay your money and take your choice, but as ever make sure you do your own research as I guess this one could still go horribly wrong from here - phew must go and do some exercise now, have a great weekend if you can given the weather forecast hopefully I might get some cricket in if I'm lucky.