Broomer's Blog

One of the Few Promises that I Shall Make

I don't make many promises, but one promise I regularly make to clients is that I will not be calling the top or bottom of markets with accuracy. Every rule has an exception and I seem to have fluked calling the peak of the Bitcoin bubble with timing that can only be described as exquisite. I blogged in early December last year as the price rise turned parabolic about my fears for this market. This warning turned out to be within a couple of weeks of the top of the Bitcoin market. The price is currently trading around $5,500, a fall of 70% from the peak.

Continue reading »

It's not Friday 13th but...

Financial advisers are understandably running scared of the conventional gilt market. Instead many have turned to the indexed linked market seeking safety from growing global inflationary risks. For me this is liking watching the victims of a horror film trying to scramble away only to place themselves in ever greater mortal danger. The index linked gilt market has a scary duration that leaves it extraordinarily sensitive to changes in real interest rates.

Continue reading »

A Treasure in Treasuries

Government bonds come close to the ideal complement for equities in a balanced portfolio. They provide both a steady income and the potential for capital appreciation at times when equities might be stumbling. Indeed few, if any, other assets provide this sort of diversification benefit. However, with gilts currently trading on such paltry yields, managers of balanced portfolios have been left in a quandary, since UK government bonds now provide little in the way of income and scant potential for capital return if the economy slumps.

We estimate that 10 year gilt yields need to be close to 2% to ensure that they will buttress a portfolio meaningfully in the event of a recession. Of course, we could look to the more sensitive longer dated issues, however, these bonds are extremely vulnerable to any revival in inflation and so compounds the asymmetric risks inherent in such rich valuations.

Continue reading »

Outlook Sept 2018

The FTSE All Share has drifted this year but decent money has been made from international stocks. The MSCI World has been driven higher principally by the performance of US stocks which in turn have been driven by the ecommerce stocks. The US economy is responding to Trump's spending package and earnings are benefiting. EPS growth is exceeding 20% yoy, a little less than half of which came from Trump's tax cut. Encouragingly, corporate revenues are up 9.5% over the period, well ahead of nominal growth rates. Speculative hunger appears to be significant: those who only lost half their shirts on cryptocurrencies, now have the chance to lose the rest in cannabis stocks. Piling into Facebook and Amazon is far more rational in comparison and who are we to stand in the way of such momentum. Expectations of 10% EPS growth next year sounds demanding but could be possible as a virtuous circle of confidence, spending, investment takes hold.

We were right to fear tightness in the oil market as we did at the beginning of the year. The oil industry needs continual investment to maintain supply and the freeze on development has had an inevitable consequence once the stock overhang had been dealt with. We highlighted last quarter about some of the secular changes that could worsen the inflationary outlook. Now CPIs are ticking up globally as energy prices work their way through. The effects of the trade tariffs are yet to be reflected.

Continue reading »

Brexit Survey

Ahead of the outcome of the Brexit negotiations, Square Mile are reviewing UK equity options in our Managed Portfolio Service and considering funds sensitivity to the potential outcomes.

Accordingly, we surveyed the managers of the 48 UK equity funds with a Square Mile fund rating (an indication of the best fund managers in the sector) to investigate their opinions of how Brexit might impact the market and their portfolios. The questions and responses are as follows:

Continue reading »

Knowing What You Want

Einstein was once asked that if he had one hour to solve a problem that would save the world, how would he go about it? His advice was to spend 55 minutes defining the problem, to leave a comfortable 5 minutes to arrive at the solution.

This may sound a bit geeky but the more I think about this, the more I like it. For example, I recently was in discussion with a consultancy client who was in a quandary about which fund should be selected to replace an underperformer. The answer only become clear once we had clarified exactly what role the existing fund had within the wider portfolio.

Continue reading »

Hey Genius, You’re Worrying about the Wrong Deficit

The trade deficit dominates President Trump's attention and by some reports, he has been fixated on this subject since the late 80s when Japan seemingly threatened to take over the world. Clearly that episode did not end well for the Japanese economy, yet Trump has persisted in wailing about unfair trade practices with his main trading partners. To be fair, Trump's ultimate intention is to engineer freer trade is reasonable but is this really worth the risk of igniting a trade war to reset the balance?

Meanwhile there has been surprisingly little comment about the cost of his tax cuts. It may be more correct to consider these not as tax cuts but merely deferred taxation measures. Most of the personal cuts are earmarked to end by 2025 but even for the permanent corporate ones to be sustained, the money needs to come from somewhere. Otherwise it will necessitate cuts to expenditures. Trump reckons that the Laffer Curve will come to his rescue as the greater growth will lift tax revenues, but as this stage of the cycle this appears rather farfetched. Even using the fanciful assumptions in the White House projections, these tax cuts do not become self-funding over the next decade. While Trump believes that his policies will spur economic growth, there are good reasons to suspect that they won't.

Continue reading »

The more I scream, the faster they go

Investment is a difficult discipline but there lies some very simple tenets at its heart. One of these is that the more you pay for an investment, the lower the return. As we approach the final stages of this long bull market, profits are approaching a cyclical peak and investors are paying a hefty multiple for these earnings.

It is common in late stages of bull runs for 'market darlings' to emerge. These stocks seemingly are impervious to rain or shine and behave magically as both performance drivers and havens for investors during market corrections. That is, until one day, they don't, often sounding the death knell for the bull market.

Continue reading »

Outlook June 2018

Geopolitical events invariably cast a shadow over markets, but it is relatively rare for them to manifest into something that affects the economic cycle. Events that alter the secular trend are even more exceptional but this is not to say that they don't happen. Thatcher's deregulation drive of the 1980s and FDR's 'New Deal' are examples and we suspect that Trumponomics may be another. Labelling Trump's policies as Trumponomics is unhelpful since it hints of an underpinning philosophy, which is entirely absent. Political direction rests with a demagogue.

For decades, economies and markets have quietly benefited from freer movement of goods, capital and labour. This is a trend that has not only been halted but sent into reverse. The direct impact of $20bn of tariff costs on a $20tr economy will be trivial but adds unwelcome grit to the running of the system. It will be interesting to observe voters' reaction as the repercussions are felt. Already, mid-Western soybean growers are grumbling as soon might the blue collar shoppers of Walmart where 70-80% of goods are sourced from China.

Continue reading »

The Beauty Parade

Keynes famously used an allegory of a beauty contest to describe how markets behave in the short term. He posed the question of how you should go about betting on the outcome of a beauty contest. To be successful, you should not bet on who you think is the most beautiful contestant but those who you think the judges will consider to be the most beautiful. His point is subtle but distinct.

James Montier at GMO recently highlighted some apparent inconsistencies in the results of the Merrill Lynch Fund Manager Survey. He points out that a significant majority of fund managers now believe the US market to be overvalued,

Continue reading »

Pages: Previous1234567NextReturn Top

Archive