After the carnage of March we had something of a relief rally in April, or as I suggested last month the reflexive rebound stage which is quite common during bear markets. As a result the FTSE All Share managed to bounce back and provide a positive total return of 4.9% for the month. This does however leave it with a negative total return of 21.5% for the year and as you can see from the chart above, the UK market has lagged the recovery in other markets around the world. Some of this lag is probably explained by the make up of the various indices with Nasdaq obviously being helped by it tech bias and the FTSE 100 in the UK being held back in the main by its heavy exposure to more vulnerable sectors like Banks & Oil.
Talking of Oils and the headline on the chart about markets being detached from economic reality. I think we had a dose of that the other day as Royal Dutch Shell finally bowed to the inevitable and cut their dividend for the first time since the war. In addition results in the US from a couple of the market darlings, Apple & Amazon were somewhat underwhelming too.
Thus it looks like we may have seen the best of the rally for now and we might even be into the next down leg of the bear market or again as I suggested last month the drawn-out fundamental downtrend.
Indeed referring back to my FTSE ready reckoner that I shared in my recent webcast, with the Royal Dutch Shell dividend cut this week, this brings the 50% dividend cut for the market more into view and futures market is suggesting that too. This would also be in line with the worst case scenario foreseen by Link Asset Services in their Q1 2020 Dividend Monitor update. Thus the risk reward from where we were (briefly) above 6,000 on FTSE recently looks skewed to the downside I would suggest.
While it is worth remembering how bear markets pan out and there was a good reminder of that recently in a good post on the Real Investment website (see highlighted link above) that I recommended in a recent post and on Twitter. Below is their graphic on how the current one compares to the last two bear markets and the different phases discussed above.
Market Timing Indicators
As for the market timing indicators, which to remind you turned negative in February and were confirmed when the US Unemployment rate and other economic indicators indicated that a recession was coming in March. Despite the rally in April these still remain some way (about 12 to 14%) below their trend moving averages suggesting that one should still be cautious of the market from here. Indeed if you feel over exposed and didn't reduce before, the recent rally has probably given you a good opportunity to adjust if you don't want to ride it out for the long term.
With that in mind, on that same Real Investment Website mentioned earlier, there was a slightly alarming post about CSPA (crash statistical probability analyses) and Bull & Bear Tracker algorithms. These seem to have called the recent low and are now calling the end of the rally, as per previous bear markets. It is also making the following bold predictions:
Compound Income Portfolio
Which leads me onto the Compound Income Portfolio (CIP) based on the Scores, which as discussed last month is throwing caution to the wind despite the above discussion and continuing to invest through this bear market to see how that compares with the Market timing signal. So far one month into the experiment it is 1-0 to time in the market versus timing the market, but this is likely to be a marathon rather than a sprint and an easy win for market timing if the alarming post above is to be believed. As ever time will tell on that I guess.
So after March's record fall of 22.2% the CIP saw a record monthly rise or total return of 13.5% versus the 4.9% from the FTSE All Share. This meant that it had clawed its way back ahead of the FTSE All Share Year to date by 4.5%, but that just means it has produced fewer losses with -17% versus -21.5%. Since inception just over five years ago the CIP is now up 68.1% versus 7% from the FTSE All Share or 10.8% per annum versus 1.3%, which is nice. If you would like to see the full history of that in table form then click here or you can see a graph of that below.
Much of this months performance was accounted for by the unwinding of the under performance by Mid and Small Cap names, where the portfolio is overweight versus large cap names and which had driven the fall in the previous month. In addition 3 of the 4 purchases last month did pretty well with two up by over 30% and another up by over 10%. As I mentioned on the Blog during the month one of these was Jarvis (JIM) which has since reassured and then put out a trading ahead of expectations update - which I had manged to predict. So I'd say it is definitely worth focusing on individual names and see if you can see how they might come through this OK and try and avoid those that might not rather than getting too hung up on market level.
Against that 2 of the 3 sales I undertook last month didn't do much but one, Games Workshop (GAW) also went up by more than 30%. So you win some you lose some I guess. This was however on the basis that they were going to start selling on line again and despite some hefty downgrades which has now left it on over 30x earnings so I'm not sure I'd be buying that up here myself now. I maybe worried too much about the operational gearing on the down side. i also just wondered if all their customers would have as much disposable income to spend on their hobby and may even think more about spending their time on more important things like family and friends after all this perhaps? Any way fair play though to those that have held on, may you escape all your Dungeons and slay all your Dragons or whatever the hell it is that their games are all about?
Aside from that, as suggested last month, I did make one switch intra-month where one stock Ramsdens (RFX) had, I felt, recovered far enough and with downgrades it was now on a rather high 20x versus a more normal 10x maximum or so and it is still not operating. Now while Pawn Broking & gold trading might boom on the back of all this I felt that the FX business, which accounts for 40% of their profits, might be missing in action for longer through all this as it seem likely that foreign holidays and air travel may be slow to return, but I could be wrong as it went up another 13% since I sold it!
To replace that I bought a more defensive counter in the food manufacturing sector that came up with a good Score and which was in the main (80%) still trading. This was Finsbury Foods (FIF), which hasn't done much yet since, so maybe I shouldn't bother with the intra month trading? Nevertheless it looks pretty good value to me on around 6x their likely earnings this year (June year end), although they too have withdrawn their profits guidance and latest dividend for now. I would however expect them to pay some kind of final and they should mostly be back up and running in their next financial year. It also looks pretty well invested and as a result does carry some debt, but they have confirmed that they have enough financial flexibility as things stand so shouldn't need to issue shares etc. Now it is not the highest quality operation but as I say it should be fairly defensive (bread and cakes to food retailers 80% and 20% food service) and as such I could see it re-rating back towards its more normal 10x or so and therefore I'd look for it to recover towards 80p to 100p levels from where it has come recently for a potentially decent return of 33 to 66%, although again I could be wrong.
In terms of the Monthly Screening a couple of semi-operative retailers came up as natural sales. One had not been as defensive as I'd hoped (although I didn't expect retailers to get shut down) and although it's not the highest quality, it is at least very financially robust so I was in two minds, but nevertheless let it go given the uncertainty surrounding when and how retailing might return. The other one had recovered more and is more exposed indirectly to housing activity and is more discretionary in nature in terms of the spend. So given the portfolio has a few names that are either directly or indirectly exposed to housing demand, which I think may well be weak going forward - I sold that one too.
Against those I purchased a couple of Companies in different industries that are still operating and which are in the main not that badly affected by the Global Virus Crisis. Any way subscribers to the Scores will be able to see the detail of these and all the other transactions in their Scores sheets and be able to follow the success or otherwise of these. If you would like to join them for less than the price of a cup of coffee per week then click here to find out and sign up for access if that is of any interest to you.
Summary & Conclusion
Well we are certainly living through unprecedented times as everyone keeps saying. As a result we have seen unprecedented falls and rises in share prices in the last two months and May has already started with a down draught. Thus I won't be getting carried away with the bounce back in the market or the CI Portfolio this month. This is because based on my experience and prior bear markets we are probably in or have just gone through the reflexive rebound rally stage. We may already be in or may soon enter the drawn out fundamental downturn stage.
The market timing indicators that I follow also suggest that it is too early to turn bullish too. While an article about some algorithms is also suggesting another down leg starting about now and being done potentially in double quick time again, which would at least tie in with the first two phases of the Global Virus Crash (GVC) a term I'm looking to coin after the GFC last time. Beyond that, if it comes to pass, we might then get a longer drawn out bottoming & recovery phase which could also include some sharp rallies along the way. One other depressing thing that has occurred to me is that west seems to be following Japan, but with about a 10 year delay, although I know this is not an original thought. So as the Japanese market is still below its bubble highs after 30 years, it is depressing to think that on that basis the FTSE might still be below 7,000 in another 10 years time.
Having said all that there are always opportunities for stock picking even in a bear market or sideways trading pattern, you just need to be active and nimble to take advantage of them, although I'm doubtful of any ones ability to perfectly time the market but I'm sure there are some exceptions out there who can claim to disprove that. Consequently I'm keeping the CI Portfolio pretty much fully invested throughout while trying to pick my way through the fall out from the GVC by trying to gravitate towards stocks that might benefit from it like Jarvis (JIM) last month and one of this months purchases.
Consequently it will hopefully be interesting to see how this plays out against the on going bear market and whenever the timing indicators / economic indicators suggest that it is safe to go back in the market. As I like to say, I guess time will tell on that. Talking of which thank you for taking the time to get this far and if you have as a reward or punishment (depending on your view of my musical taste) I'll leave you this month with a few more music tracks. Take care, stay safe and take your time in investing your cash I'd say if you have any to invest and good luck when you do!
Just a quick note to notify subscribers to the Scores that I have found what I think is a suitable replacement for the non operational stock that was sold last week. It scores well and although it is not the highest quality play, I think it is should be a reasonably defensive play which is still in the main operating. It does look good value assuming their earnings do not take too big a hit although they have pulled their interim dividend like many others and it does have some debt. It is however well invested and in a recent update they suggested that even though it has debt they felt they had enough financial flexibility to see them through, but again like others they were reluctant to give any guidance. So subscribers to the Scores should check out the portfolio and transactions sheets for details after today's update this evening after the market closes.
While I think we may potentially be approaching resistance and a possible reversal to what I would view to be a bear market rally, who knows - I could be wrong. In addition as I'm supposed to be seeing how the portfolio does against the market timing signal which went to negative / sell recently - I shouldn't really be trying to time the market!
Talking of markets and levels etc. I mentioned someone that I follow in a recent post so I thought readers of this might find the following sources useful in this regard:
1) John Mauldin who I've followed since the early 2000's I think it is. He does an excellent weekly e-mail focused mostly on Economics and markets which comes through on a Saturday in the UK and you can find his latest thoughts here and sign up to get that for free if that appeals.
2) An associate of his at CMG Wealth called Steve Blumenthal who I've followed in recent years also does a great weekly piece called On My Radar which covers economics, market valuations and technical outlook etc. which is delivered with a nice personal touch too.
This week he also referenced the legendary hedge fund manager, Ray Dalio who has also been generous in sharing his thoughts on Big debt crises and the rise and fall of empires etc, in relation to that more recently and is someone worth following too.
3) Lance Roberts at Real Investment Advice who seems to be quite good on the technical and valuation calls. His latest piece is called Is the Bear Market Rally Over - and makes for interesting reading too.
Any way I'm sure that is enough to be going on with for now. Mind how you go out there, stay strong, stay patient and healthy if you can, this will pass - we will get through this.
Just a quick update post my recent webinar and post about the Crash & Timing Indicators etc. In that post, given that I was ignoring the timing indicator sell signal I said: "I'll also reserve the right to perhaps make some intra-month changes rather than the usual monthly screening given the market conditions. "
With that in mind I have made one sale today of a stock at the smaller end of the market cap scale which is not currently in business and has had a decent rally off of its lows, although still sadly down a long way from its highs. Subscribers will be able to see the details of this when the sheet is updated after the close tonight so I can't give any more details here.
I will keep the proceeds in cash for now which will take the portfolio up towards a 4% cash balance. The reason for this is I feel that the rally has now possibly extended as far as it is likely to in the short term, although as ever I could be wrong on that. What did give me more confidence in this call is not only the history which I covered in the webinar but this excellent recent post from a guy called Sven Henrich called Just one chart. This is well worth a read in my opinion and you can follow him on Twitter. I'll leave you with just one chart from his post.
I did a webinar yesterday with the good people at Private Investor World who do Investment videos for Private Investors & Company Videos etc. I have included a link to it below if that is of any interest to you.
Just worth noting that there is a bit more optimism around today as there seems to be a drug from Gilead in the US which in early testing seems to be effective in treating Covid-19. Here's to hoping that is the case, but in the mean time stay strong and safe if you can.
A quick note for subscribers in these difficult times. On the Scores sheet in addition to the usual Scores measuring financial security, operational quality, dividend cover, & estimate revisions amongst other things. I am planning from today's update to add the underlying data points for these to the sheet to help you with monitoring and filtering stocks financial health, earnings changes and resultant dividend cover etc. more directly as the crisis evolves and we start getting more financial updates and guidance from Companies. I would recommend looking in particular at the interest cover column at the moment as anything less than 3x here could well indicate a company that may get into financial trouble from this or be in need of extra funds depending on how badly their business is impacted.
Secondly just to note that one of the stocks that was added to the Compound Income Portfolio this month, Jarvis Securities (JIM) when I said "Bought on Score as still operating & probably benefiting from more client trading, looks very cheap compared to HL. & AJ Bell & has cash rich balance sheet.
The CEO has put out a reassuring letter to shareholders. In this they suggest that they will still pay an interim dividend on or around 11 June 2020, to shareholders on the register at 22 May 2020, in line with the Company's dividend policy and a further announcement will be made when this dividend is declared. He also added that, as I suspected would be the case, that they had seen a pick up in trading activity post the election and since the virus outbreak, in common with other financial platforms. More encouragingly and something I was concerned might hit them he also claimed that he believed the reduction in the Bank of England base rate should have a negligible effect on interest income.
So all in all good news and it has cash on the balance sheet and the CEO finished his letter by saying; "Finally, I would like to reassure Jarvis' shareholders and wider stakeholders that despite the seriousness of the current situation globally and the effect this will have for the economy we are not seeing a detrimental impact on the Jarvis business model at this time."
Just be aware though that it is right at the bottom end of the market cap. size that I normally invest in and has a small free float so as such it is not terribly liquid and therefore the spread can be quite wide too. See the graphic below for a comparison on Jarvis with Hargreaves Lansdown & A.J.Bell. Take care, stay safe and enjoy the rally in the market while it lasts.