Five years of the Footsie

Given that the Footsie had been tanking lately, and many people have been talking about it, I thought it would be interesting to take a look at its chart over the last five years:

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The drop from A to B was 9.0%, making it a correction, nearly.

The drop from C to D was 19.5%, making it an actual bear market (nearly). So if you want to put a positive spin on things, we’re not in a bull market that started in 2009, but one that started in 2016. Doesn’t sound so bad when you put it that way now, does it?

The current drop from E to F has been 7.8%, meaning that it’s not (yet) even a correction. If the market drops another 2.4%, then the market will be below 7000, making it both a correction and below (depending on how picky you want to be with the maths) the peak of the market in 1999. So the Footsie has been in a sideways market for almost 20 years. Katsenelson talks about these kinds of markets in his book “The Little Book of Sideways Markets”. He showed that sideways markets can, indeed, last a long time.

The Dow is down yet again as of writing, by 1.6% to 24,500.

On the 5th Feb I posted on my blog, saying that I thought the Footsie would bounce on the 6th. I was alone in that prediction. As it turned out, everyone else was right, and I was wrong.

I did notice later on, though, that the Dow opened positively, and I figured that was the signal I was looking for. I actually placed a demo spreadbet at IG. It was the first spreadbet of my life, albeit only a fictitious one. I opened a long on the Footsie at 7227 for £1 a point (hey big spender) on 6th Feb after the US market opened.

The markets worked in my favour, and I moved into profit almost immediately. The momentum was lost, though, and I ended the day negatively. On the 7th I was back in profit again. As the day progressed I noticed that the market lost some of its momentum. I decided that the game was up on that one, and that a reversal would take place, so I closed my long at 7270.8 for a gain of £43.

Oh well, at least it was a gain, which I get to spend on virtual beer. It turns out that my feeling that the momentum was lost turned out to be correct, as the market is now at 7170. So I would have made a loss if I had held on.

Looking forward in terms of rewards and risks: if you look at the drop from A to B, that was 9%. It was a severe drop. We’ve already had a 7.8% drop from the recent peak. So, as an estimate, one could take 1.2% as a downside risk. On the upside, I think the Footsie should recover at least half its losses over the next week, for a potential upside gain of 4.2%. That gives a reward:risk ratio of 3.5, which is pretty good.

I guess the thing is to hope that the market tanks again tomorrow, and bet long again for an extra margin of safety. I’ll see how it goes. I’ll report back any decision for action I make.

Stay safe out there.

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Magic Hat: BKG in, STY out

The MHP (Magic Hat Portfolio) on Stockopedia (http://www.stockopedia.com/fantasy-funds/magic-hat-463/) is an experiment by me to see if a human can improve on a mechanical Greeblatt Magic Formula screen. I am trying to weed out “mistakes” that I feel the screening commits: unseasoned companies, scams, foreign companies (particularly Chinese), fishy accounting, and statistical quirks. Apart from that, I am agnostic as to the sector the company operates in, although I will try to avoid heavy concentration in any one sector. I will mostly apply “Strategic Ignorance”, by which I mean that I wont try to be clever in my stockpicking. My picking will be mostly mechanical. A summary of most of my Magic Hat articles can be found on the web page http://www.markcarter.me.uk/money/greenblatt.htm This will allow you to see, at a glance, what shares have been bought and sold in the past, as well as what shares have been rejected from consideration and why.

STY (Styles and Wood) leaves the portfolio by rotation, even though it still qualifies in the Greenblatt screen. It has a Stockopedia StockRank of only 68. So I wanted to eject it. Homebuilding and Construction Supplies company BKG (Berkley Group) enters the portfolio as it has a rank of 98, and is also a Greenblatt candidate.

I am quite happy with the way that the portfolio has been going. A healthy chunk of outperformance is due to the last year, though. I was reading a blog from Woodford the other day, and I get the feeling that value shares are well-placed compared to momentum. If that is correct, then we could still see a significant outperformance by Magic Hat over the year, given that it is tilted towards value.

Fingers crossed.

I looked at Stockopedia’s chart for the Footsie:

The market has taken quite a pasting recently, and I have drawn a support line. I think we’re due for a bounce tomorrow, given the heavy recent drawdown. We shall see. How things will pan out over the year, I’m not so sure. The market has had a good innings, so maybe we’re due for a down year this year.

I see on Stockopedia’s site that the S&P 500 is down 4.1%. Really? I’m astounded. It seems that only two of the stocks ended up on the day. Someone is having a laugh. The sell-off seems overdone in the short-term.

Stay safe out there.

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Follow-up on SDL

Six months ago I commented on Software & IT services company SDL, and promised a follow-up. Hence this post.

I wrote:

I am predicting that the share price will be lower in 6 months time than it is now. Stay tuned, and we’ll see how well that prediction worked out.

The shares were 497p at the time, a drop of 22% as a result of its half-year report. They are now 463p. I am pleased to report that my prediction was correct.

I made the following comments:

Stockopedia categorises the company as a High Flyer. Given the price action today, the categorisation should be ignored. The combination of high PE rating and bad market reaction would cause me to sell the shares if I held them. Its low ROCE does not help, either.

Stockopedia now classifies it as a falling star. Their system works!

There is an important lesson here: when there is a significant drop on news, high flyers on hefty valuations, it often pays to cut your losses.

I notice that one are that SDL specialise in is “language translation technology”. At the risk of receiving a lot of flak, this strikes me as “goofy”. It reminds me of HP’s acquisition of Autonomy, the latter of which specialised in the “analysis of large scale ‘unstructured big data'”. It turned out to be a mess.

Stay safe out there.

463p

 

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So, how did my prediction on the pound do?

A year ago, I read an article in the Independent with the headline “Pound sterling slump: The key moments in six charts – and how low it could drop”, with the dire prediction:

Most economists expect the pressure on the pound to get worse, increasing the volatility across the broader market

At the time, the pound was at $1.24 against the dollar. Brexit, innit.

I had this to say about the sky falling:

Personally, I think Sterling will bottom shortly … on the basis that:

  1. it’s at a 35 year low
  2. the majority of economists expect the pressure on Sterling to continue.

I work on the simple premise that economists basically have no idea what they are talking about, so when they say things like “and it can only get worse”, you have a big contrarian indicator.

They say that nobody rings a bell at market bottoms … but, well, sometimes they kinda do … and the people ringing the bells are politicians, economists and experts. They may not necessarily sound like bells, but they are bells nevertheless.

So here’s the crunch question: did I call it right?

Well, GBP/USD is now $1.39, up from $1.24. So the answer is “yes”.

And how much money did I make on this brilliant insight of mine? Why, the same amount of money I made on the realisation that when Gordon Brown was selling off our gold, the gold market was likely at a bottom, of course. Which is to say, I made no money at all. C’est la vie.

I was right, though: politicians, economists, experts and alarmist headlines are often good contrarian indicators.

Stay safe out there.

 

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MOSB – Moss Bros – the broader picture

MOSB (Moss Bros) issued a trading statement today, sending its shares down 15% to 76.4p. In one breath it said that it “continued to make progress”, but in another it refers to “lower footfall than anticipated”. The full year profit before tax is therefore expected to be slightly below current market expectations.

We are confident of our ability to continue to deliver enhanced returns to our shareholders

Sure. Whatever.

I am aware that some investors out there have made a lot of money in MOSB, so who am I to judge? Whenever I have taken a look at the numbers, I have always figured that MOSB is basically a “lifestyle business”. In other words, it brings in sufficient money to keep the directors and employees in gainful employment, but there’s really not much in it for investors. Perhaps if the directors were more skilled, the company fortunes would make a better showing.

To illustrate what I mean, MOSB reported revenues of £124m in 2003. For 2016, that figure was £128m. It has been bumping along at around those levels in between. It has even eliminated dividends.

Meanwhile, socks and pants retailer NXT (Next) has seen revenues rise from £2516m to £4097m. It has reduced its share count significantly, and its dividends per share has risen from 35p to 158p. That’s not to be sniffed at.

MOSB is on a PE of 15 (before today’s fall), which I would have thought was “high enough”. It pays a chunky dividend (which is uncovered, though), and has net cash. So there’s that. It has a Stockopedia StockRank of 91, but I’m finding it difficult to become excited about this share.

Just my 2 cents.

Stay safe out there.

76.4p

 

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CLLN – Carillion followup

Six months ago I wrote about CLLN (Carillion), and promised to do a follow-up. Hence this post.

I said this company should be avoided. Since then, the share price has fallen from 126p to 20.9p. I’m pleased to say that I called than one right. I notice that the shares are down 13% today.

A terrible company.

I wrote a small post about CLLN in August 2017, saying that in the trading statement of 29 September:

you ain’t gonna like what you’ll read

And indeed you wouldn’t. Although revenues were flat, net debt increased from £291m to £571m and

Full-year results to be lower than current market expectations

In their strategic review they note:

Business refocused on core strengths and markets

I’m going to be uncharitable and say that the business has no core strengths.

I also provided a link to John Kingham’s article “What you need to know to avoid the next Carillion” . It is worth reading.

Stay safe out there.

20.9p

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Follow-up on DEB and NXT; plus MTC

Six months ago, I wrote about hight-street retailers DEB (Debenham) and NXT (Next). I had made a note to myself to write a six months follow-up. Hence this post.

DEB was 42.75p, is now 29.56p.

NXT was 3890p, is now 4953p.

I was bearish on both of them. So I was half-right.

DEB seems to have gotten itself in a bit of a financial mess.I have always thought DEB merchandise to be too pricey.

MTC (Mothercare) announced its results today, causing its shares to drop 28%. Obviously not a good sign. I do not really see how MTC  has any reason to exist. Its UK L4L sales declined 7.2%. Its online sales also declined, as did international sales. It seems on a long, slow, painful decline to irrelevancy.

I just read that MTC has introduced in-store cafes. This is not new, though. The idea goes back to 2012. A quick Google revealed that in 2015, the Telegraph reported:

Mothercare scraps yoga studios to put in play areas

I recall that HMV introduced cafe stores in a bid to keep punters in the store longer. Perhaps setting up cafes in-store is a sign that a chain is reaching. Yoga studios seems just bizarre. It is a sure sign of utter desperation.

MTC must surely be toast. It’s just a question of time.

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