General Market

What now for GBP and UK equities -Will a Canada Minus Boris Brexit deal be done - Currency traders believe it will

Eur /gbp October 13 2019

The Euro/GBP is back to where it was before Boris Johnson took over as Prime Minister, from Teresa May, in July 2019. After 3 years of hell after the Brexit referendum where Teresa May was the custodian of the negotiations with Brussels, a lady woefully unprepared in leadership skills for such a difficult task. Three times she came to Parliament with her deal, featuring the Irish Backstop, and three times she failed. Her own backbenchers and ministers rebelled against her plans with a series of high profile ministerial resignations e.g. Andrea Leadsom and so on.

Three or four months on from the summer shambles in Parliament with seemingly no way to go, it looks like there is indeed light at the end of the tunnel. After the Benn Act in Parliament made it extremely difficult for Johnson to go ahead with a no-deal Brexit on October 31st.

A constructive meeting with the Irish Taoiseach, Leo Varadkar, seemed to change the tone with a new “pathway to an agreement”. Varadkar has been a kingpin in the EU stance. It appears the DUP (Democratic Unionist Party), have shifted their red lines to allow some sort of compromise and EU and UK negotiators are now sweating the details over the weekend. Things looked dire after a difficult phone conversation between Merkel and Johnson early last week and the pound moved down to historical lows, but Merkel, as well as the UK, needs a Brexit deal, given that the German economy is on the verge of a technical recession. No one in the EU, in fact, needs a hard crash out by the UK on October 31st, despite what Nigel Farage says that “it’ll be fine”. I believe it would be fine in the end but November and December would be horrible and probably longer.

The treatment of rebel Tory MP’s like Ken Clarke has been appalling, but it seems that Dominic Cummings and Johnson have had a plan all along to drive their deal through Parliament, “do or die”.

Who is Leo Varadkar ?

The modern position of Taoiseach was established by the 1937 Constitution of Ireland and is the most powerful role in Irish politics. The office replaced the position of President of the Executive Council of the 1922–1937 Irish Free State.

Leo Eric Varadkar (born 18 January 1979) is an Irish Fine Gael politician who has served as Taoiseach, Minister for Defence and Leader of Fine Gael since June 2017. He has also been a Teachta Dála (TD) for the Dublin West constituency since 2007. He was born in Dublin and studied medicine at Trinity College Dublin. He spent several years as a non-consultant hospital doctor, eventually qualifying as a general practitioner in 2010. In 2004, he joined Fine Gael and became a member of Fingal County Council and later served as Deputy Mayor. He was elected to Dáil Éireann for the first time in 2007. He later served in the Kenny Government, as Minister for Social Protection from 2016 to 2017, Minister for Health from 2014 to 2016 and Minister for Transport, Tourism and Sport from 2011 to 2014.

In May 2017, Kenny announced that he would resign as Taoiseach and Fine Gael Leader. Varadkar stood in the leadership election to replace him; although more party members voted for his opponent, Simon Coveney, he won by a significant enough margin among members of the Oireachtas, and was elected leader on 2 June. 12 days later, he was appointed Taoiseach, and at 38 years old became the youngest person to hold the office. During the 2015 same-sex marriage referendum, he came out as gay, becoming the first Irish Minister to do so. He is Ireland's first, and the world's fourth, openly gay head of government in modern times and he is also the first Taoiseach of Indian heritage.

What next for Brexit, the GBP and stock market?

The Euro has been falling heavily against the pound and expectations that this pattern will continue

@The Sunday Times October 13 2019

@The Sunday Times October 13 2019

It was quite a move by some of the Brexit sensitive companies on the FTSE on Friday. Lloyds was up 12% to 59, as the banking sector is particularly prone to the fall out from a no-deal Brexit and crash out on October 31. I am long the bombed-out Metro Bank (MTRO) for this reason. Housebuilders also rebounded strongly. FTSE futures are marginally up at the moment but all depends on the negotiations moving from headline-grabbing hysteria to action.

@IG Oct 13 2019

@IG Oct 13 2019

Given Currency and bond traders often know the score better than most, and the fact that sterling has moved out of a bearish range and brokers like Deutsche are saying things like,” the latest Brexit developments are a potentially pivotal moment. We cannot recall a tine during the process at which Irish gov raised expectations to this extent ....we are no linger negative in the £”.

David Frost, UK Brexit neogitator

David Frost, UK Brexit neogitator

Negotiators from the UK and EU are having what has been described as "intense technical discussions" in an attempt to agree on a new Brexit deal. About a dozen British officials, including the UK's EU adviser David Frost, are taking part in the talks at the EU Commission in Brussels. The first public announcement on the talks may come on Monday after the EU's 27 ambassadors have been updated on the progress so far.

On Friday, Donald Tusk said he had received "promising signals" from the Irish PM, before adding: "Of course there is no guarantee of success and time is practically up, but even the slightest chance must be used". Boris said it is not "a done deal. The best thing we can do now is let our negotiators get on with it."

Speaking on BBC Radio 4's Today programme, Culture Secretary Nicky Morgan reiterated that "lots of details" needed to be worked out between both parties but said the "mood music" on negotiations "seems positive".

@bbc

@bbc

It is going be a very exciting week next week for currency and equity traders in UK stocks. GBP/Eur, GBP/USD, GBP/CHF as well as retailers, banks, financials and other economically sensitive stocks will be highly volatile as negotiations go on. Johnson, it seems to have a “super Saturday” vote on October 19th, after the EU Council summit on October 17th this week. MP’s will be given a choice of a Johnson deal or another delay in the exit day. Very intersting…could this finally be the beginning of the end of the Brexit hell?? It would be great to move onto something else!

US third quarter earnings season kicks of October 15 2019 and it doesn't look pretty

The US third quarter 2019 earnings season kicks off on October 15 with companies like JPMorgan Chase and Johnson & Johnson.

Expectations continue to worsen as Brexit worries, Trump administration trade wars, slowing Chinese growth and a possible technical recession have hit confidence.

Consensus for revenues is stable with a 0.3% drop in the quarter, which would be the first since Q1 2018.. Companies listed on the STOXX 600 regional index are now expected to report a 3% drop in third-quarter earnings, worse than the 2.2% fall expected a week ago and compared with growth of 14.4% in the same quarter in 2018.

Commentators now believe it could be the largest quarterly fall since Q3 2016. As Goldman Sachs ’ David Kostin said “Margin compression is behind much of the decline, and sectors with high international exposure, like energy, technology, and materials will likely take the biggest hit.”

Whilst average EPS will fall, the median company is still expected to produce 3% earnings growth because big names in certain like Apple (AAPL), Pfizer (PFE) and Exxon Mobil (XOM).

The outlook for the fourth quarter and into 2020 will be interesting and I don’t believe it will be a pretty picture. After a bull run since 2010, earnings growth is running out of steam and there are many clouds on the horizon. Expect a continued rotation out of growth stocks into safer havens which can continue to raise prices and profits in a tough market.

The forward 12-month P/E ratio for the S&P 500 is 16.5. This P/E ratio is below the 5-year average (16.6) but above the 10-year average (14.8). Not a cheap market when earnings are stagnating.

Stock market update October 6th 2019 - surely time for the market to reverse

@ The Times

The S&P500 index rose 1.3 per cent on Friday, as investors digested a relatively strong US non-farm payrolls jobs report, with the headline unemployment rate falling to 3.5% versus the 3.7% consensus. The numbers were the weakest since 2010 but US unemployment is the lowest since 1969 driven by Trump’s tax cuts and business friendly measures, at the expense of fiscal prudence. The Treasury Department data showed U.S. government's public debt is now more than $22 trillion — the highest it has ever been!

But the jobs data certainly had some disappointments.

  • Private payrolls came in at 114,000 vs. 120,000 consensus.

  • Non-farm payrolls were at 136,000 vs. 145,000 consensus.

  • Average hourly earnings were flat vs. 0.3% consensus.

It is expected that US third quarter corporate earnings growth will be zero, with earnings season kicking off October 15 with JPMorgan.

Surely with the US market up 18 per cent YTD, it must be due a reversal! China worries, geopolitics in the Middle East, elections etc, no earnings growth. Does the market really justify being close to all time highs. The S&P 500 (SPX) climbed hit an all time high of 3,000 points on July 11, surpassing the record it set on July 3. The index lost 6.9 percent in 2018. It is the longest bull run in history! Inverting yield curves, trade wars and so on must eventually out gun cheap money and ultra low interest rates.

October S&P 500 performance during US pre-election years

1987 -21.8%

1991 +1.2%

1995 -0.5%

1999 +6.3%

2003 +5.5%

2007 +1.5%

2011 +10.8%

2015 +8.3%

The SPY ETF is near All Times highs, up at 294, versus 250 on January 2nd, up 18 per cent.

The SPY ETF is near All Times highs, up at 294, versus 250 on January 2nd, up 18 per cent.

Market summary Week ending Sep 27th 2019

Courtesy: The Sunday Times

Courtesy: The Sunday Times

The week featured :

  • The collapse of Thomas Cook Group with a £500 million bill to repatriate 150,000 holidaymakers

  • Profit warnings from the likes of IAG, Imperial Brands

  • Fall in Sirius Minerals shares below 3p as options for financing remain bleak

  • Fall in US markets as President Trump threatened delisting of Chinese stocks from US exchanges

How to play the stock market for short term returns

sheep with tongue hanging

After nearly 23 years of investing, especially in AIM small caps and oil and gas companies, here are the Contrarian Investor lessons for first time investors which have been put together from the highs and lows of investing. I’ve made lots and lots of mistakes over the years and I wish I knew then what I know now! But by taking the lessons from my blunders and the wins, here are some things you should think about if you are new to the investment game. Make your own decisions, and I am not offering financial advice. I would love to hear from other investors about their experience and tips, particularly those who play small caps.

Do your own research (DYOR)

Its your hard earned money so don’t rely on others to do the hard work for you. Take the time to research a company and appraise it before buying in and as a result don’t buy too many companies as it’s difficult to keep track of 10+ investments. If you don’t have the time to do some basic due diligence on your investment, use external advice, but the right one. There are plenty of bozos out there, who will take your money, and offer lazy or incorrect advice.

“Buy and research”, not, “Buy and Hold”

Many fund managers used to advocate the principal of “Buy and hold” investing, the best know example being the “Sage of Omaha” Warren Buffett. The approach still has its merits for a long term, steady approach. If you want to turbo charge returns with a higher risk profile, then “Buy and research” is a better style of investing in my view. Choose companies to put your money in carefully, monitor them and take action if expectations fall short.

Assess the fundamentals

Its not rocket science to make the effort to fully assess a company’s financial view, even at a top line basis. For example, what is the bank balance and debt. Is a placing of new shares likely at a discount in the near future which would impact the share price? What sort of funding vehicles are the company using - placings with institutions of discounted shares, bank debt, structured debt faviltiiees using firms like YA (Yorkville Associates)

Is the company healthy or likely to suffer a “Thomas Cook” or “Xcite Energy” moment i.e. too much debt, debt due in the short term.?

Placing are par for the course for a small cap share on AIM, but anticipating the impact of them is important. Better to buy in after a share placing at a discount then just before. How likely is a very dilutive placing likely to happen in the coming weeks and will it be linked to forthcoming news flow.

Follow directors

Big director sells of their shares are a red flag and buys are a mighty good thing. Remember that most company directors in listed companies get discounted share options which vest a particular price in the years ahead. If directors take part in a institutional placing, that is a really good sign e.g. Union Jack Oil.

What is the track record of the management team? Have there been a series of catastrophes in previous positions, or success?

Anticipate significant news flow

This is so important with AIM shares in particular. Money sloshes around from share to share as short term traders place their bets and their trades are often driven by anticipation of an important RNS. Look at the projected news flow for a company, especially Oil and Gas. When will a rig arrive, spud date, projected target depth and initial flows etc. When will a CPR (Competent Persons Report) be issued which converts resources into reserves?

Don’t get too greedy - “Greed isn’t always good”!

greed is good gekko

Jim Cramer, the US stock picker, has coined the phrase, “Bulls make money, makes make money, hogs get slaughtered”. This is such an important thing and even recently I have succummed to too much greed. On Hurricane Energy and UKOG (in 2017) I failed to sell at the top, despite very large profits, because “greed isn’t always good”.

Read sentiment and momentum from bulletin boards and social media

Bulletin boards like LSE can be a useful gauge of investor hype in a particular share. I look at the LSE top bulletin board chat volumes to see where the action is. I never make an investment decision on bulletin board posts, but if there a lots and lots of posts, this is indeed a good sign that a share is hot. Useful info can also be gathered about future news flow, rumours and so on.

Use Twitter to monitor news flow and opinion for your shares using # e.g. #UKOG. Follow opinion leaders and news sources e.g. FT.

Don’t over commit

With leverage products like CFDs (Contracts for Difference) and Spread bets, its tempting to over leverage yourself and take excessive risk. The recent changes to the rules governing these leveraged products is welcome as it is easy for novice investors to lose huge amounts of money. Profits and losses are super sized. In the old days, you could leverage 20:1 on a small cap and a short term move could wipe you out. I remember a huge swing in Rockhopper shares (falkland oil) on rumours of a “well duster” which proved to be false - the shares collapsed and bounced back in minutes.

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Don’t use electronic stop losses and don’t fall in love with a share

A floor in the share price is often helpful to have in your mind to sell off a share in the case that it doesn’t work. Don’t get sentimental about a share. If it’s a dog sell it. Many investors in small cap shares have a love of them and don’t want to sell them, even in the face of horrible risk e.g. Sirius Minerals.

Don’t keep averaging down

You buy a share. Its share price falls, you buy more. It falls again, you buy even more. Before you know it, you have way too much. Some averaging down can help build a position, but be careful not to go mad.

Build a position over time

If you like a company buy shares over a series of trades rather than going in fully at one price. I like to use CFD’s with small blocks of shares to build a larger exposure. This can take several days or even weeks. The average price is the key. Then I take profit as the price moves up on some blocks and buy more if the share price moves down, without overdoing it.

Think about the big picture

Think about broader economic, political and social events when buying a company’s shares. Is the consumer shifting behaviour, is the government likely to change the rules, is a fundamental change happening in the market place? A great example is Thomas Cook which was hit by the change from offline to online travel bookings (as well as too much debt and other issues).

Be patient

Sometimes news flow can take time. If future news looks exciting, don’t be afraid to hang on but take some profit on the way. Don’t be a hog!

Play the contrarian card

I love out of favour shares with good news flow to come. A recent example was UKOG, where the price fell from the highs of 10p in 2017 to less than 1p in July. At a 1p, the downside risk was small, the upside high, with anticipated drilling news. There are many nuggets out there in AIM.

Become a specialist and do your homework

Learn a sector like Oil and gas and know it well. Technical terms, jargon and so on. Understand your investments. Do you know a CPR, a spud, BOPD etc. if you invest in Oil?

Quite a turnaround for markets as US data boosts confidence - time for the Fed to tighten?

Dow Jones Industrials august 28 2015

Dow Jones Industrials august 28 2015

Yesterday the Dow Jones Industrial Average rose a further 2.3%  or 369 points to close at 16,655 and the S&P 500 closed up 2.4%  or 47 points, at 1,988. For the week, the Dow is up 1.2%, the S&P is 0.9% higher, and the Nasdaq is up 2.3%. The CBOE Volatility Index VIX dropped 14% to 26.1.

European markets were also strong with the FTSE 100 up 3.5% to 6,192 amd Euro Stoxx 50 up 3.5% to 3,280.

Screen Shot 2015-08-28 at 08.09.17.png

Oil futures moved more than 10% following a report in the Wall Street Journal that Venezuela has formally asked OPEC for an emergency meeting.

WTI crude for delivery in October moved 10.3% or $3.96 higher to $42.6 a barrel, the largest % gain since March 2009 having moving below $39 on Monday. Brent crude increased $4.4, or 10.3%, to $47.56 a barrel for the biggest percentage gain since December 2008.

brent augu 27.png

But with the Middle East oil countries seemingly in no rush to cut output it seems unlikely that Saudi Arabia is going to curtail its production ambitions to drive oil prices higher. The big rise seems to be traders closing their shorts after the dramatic falls in the last 2 weeks.

So its been quite a turnaround to say the least. The S&P 500 fell more than 10% in the last two weeks and had its first correction since October 2011. The market has now come back more than 5% so for those buying at the depths its been a healthy return particularly in the energy and commodity space given oil's dramatic rise yesterday.

The reason for the further claw back after last week's and earlier this week's dramatic fall was a healthy assessment of the U.S. economy. Worries about China have been largely forgotten for now!

A big upward revision to U.S. GDP showing a growth of 3.7% in the second quarter of 2015 was much better than expected

So what's going on?

The U.S. is in good shape, hence all the talk of a Federal Reserve interest rate rise. Durable goods orders, non-farm payroll data is all positive. China is the problem with the country struggling to maintain its previous break neck GDP expansion. The country's 7% GDP growth target this year is proving tricky with the government forced to cut interest rates, reserve ratios, pump in $200 billion into the economy and devalue the currency.

Durable goods goods orders in the US went up 3% last month better than the 2.6% consensus estimate and GDP was up an annualised 3.7% better than than the initial estimate of 2.3%.

Last week and early this, the markets were melting down but we are not in 2008/2009 financial crisis with the US economy doing pretty well and in Europe Germany and the UK also far from recession territory. 

The sooner the Fed raises interest rates by 0.25% the better. Markets hate uncertainty. Everyone is frightened of rates going up, but with the American economy on sound footing, a small increase is warranted even if inflation is nowhere to be seen. Once Janet Yellen acts in a cautious but sustainable way, sentiment will recover. Fear of an interest rate rise is overblown in my opinion.

Global stock market volatility continues as US markets jump

wall street

After dramatic falls last week and early this week which lasted 6 days the main US indexes finally closed with their biggest gains November 2o11.

S&amp;P 500 august 26th 2015

S&P 500 august 26th 2015

The Dow Jones Industrial Average was up 4% or 619 points at the close of trade to 16,2856 with all 30 members higher and 25 of the 30 components rising 3% or more. The S&P 500 closed 73 pts or 3.9%, higher at 1,941. The Nasdaq Composite was up even more with a 4.2% gain or 191 pts to 4,6978.

A big part of the rebound was comments by William Dudley, president of the New York branch of the Fed, said the argument for a September rate hike seemed “less compelling to me [now] than it was a few weeks ago”. Pretty obvious really given the collapse in share prices and confidence over the last few days triggered by worries about China.

The S&P 500 is still down 7.7% cent this month, but had been down as much as 11.2% before yesterday's rally. 

The CBOE’s Vix volatility index, or “fear index”, fell to 30.7, a fall of 16%.

Last week and early this week the Dow Jones Industrials had a dramatic plunge.

dow jones industrials crash august 2015

Oil was weak with a 2% fall on Wednesday after a big drawdown in U.S. crude stockpiles was offset by a larger-than-expected build in gasoline and distillates, which include diesel. U.S. crude's front-month contract closed down 71 cents, or 1.8%, at $38.60 a barrel. It is trading a little higher in recent Thursday trade at $39.47 with Brent Crude up around a $1 at $44.57.

The front-month in Brent, the global oil benchmark, finished down 7 cents at $43.14, after initially trading higher right after the EIA data.

Crude inventories fell 5.5 million barrels in the week to August 21st the biggest one-week decline since early June according to the Energy Information Administration (EIA). The cause of the drop in inventories is seen to be driven by a fall in imports but forecasts are still for a rise in inventories in the coming months as U.S. refiners shut for seasonal work and the driving season ends.

wti august 27th
brent crude august 27th 2015