Verdant Summer

Dear Friend

I do hope you are keeping well and enjoying the summer – all things considered! It is now turning into a very verdant summer – plant growth has been exponential with the heat and then the refreshing rain Spirits have even been lifted with lockdown issues hopefully looking far more positive and a few good sports’ stories (and the inevitable disappointments too). I shan’t comment upon Sunday though suppose there will be a certain irony I guess if England beats Italy now we are out of the EU – we couldn’t do it when we were within, after all!

We have been reminded too that for every 100 adults in the UK more than one has investible assets of over $1million, slightly down on 2019 but since that report was completed I am sure the markets have pushed them back-up again. This is not including houses and other assets so there remains much money ‘out there’ – and indeed it is suggested as much as £200billion of savings from frustrated consumers who could not spend and holiday last year. This excludes all those looking forlornly at their dismal bank, building society and National Savings’ investments too to try to find any return at all and realising there are superior alternatives to exploit. And don’t worry about the wealth inequality gap too much, as record numbers have now been sucked into the higher tax brackets too, amongst the highest marginal rates since Harold Wilson’s short-lived 98% surtax. Over 440,000 were dragged into the ‘additional rate’ alone compared to 2018/9 but even at the lower levels, more are being sucked-up into surtax rates as allowances remain suppressed (which is more reason to seek financial advice to see what you can do about it if you are included!). We are all paying too much tax but that will continue for some time despite Income Tax collected doubling in ten years to £200billion. And no, that’s not even touching the National Debt either.

A humbling testimonial

We were very humbled to receive a letter from one of our clients and a very long-standing acquaintance too who we met as an investment professional as he represented various Investment Trusts over many years. We helped him uplift his defined benefit pension scheme and manage it now. He discussed some of the components of his strategy which he had been pleased to see and how he remembered working with several of them too.

He has noted: “I was looking forward to your latest valuation to see your progress and I am excited at what you have achieved; it’s remarkable! Having worked in the investment industry and made my first investment aged eighteen, I know how tough markets can be and this has certainly been the case during the pandemic. Notwithstanding this, you have really excelled yourself so I write to say thank you! Thank you again and here’s wishing you and the team continuing success.”

Having that date-jog, I was reminded last week about what inflation is. The first modern £50 arrived in 1981. I remember that too well… the latest has now been printed, with Alan Turing upon it. If you still have one of those originals, it is now worth £11.54 in equivalent value. You have paid secret tax of £38.46. Don’t let inflation gobble-up your excesses held in cash at the bank, building society, National Savings and Premium Bonds or even under the mattress… had you instead invested that £50 in the ‘market’ it would have risen to £2,300! If you don’t ‘like’ risks, could you have afforded that risk with your £50 so it is now only £11.54 and not £2,300? I couldn’t. There are apparently around £80billion of banknotes circulating, making lots of interest-free inflation returns for the Bank of England which owes less in real terms every day for its ‘promise to pay the bearer’. £17billion of these are fifties stashed away… and many’ll never be redeemed as the criminal fraternity doesn’t know what to do with them now money laundering rules have tightened-up… (The 500 Euro notes are even worse in quantity and stashing terms by criminals).

Markets and liquidity

This is technical but needs to be realised. This is where investors can buy or sell a security without that transaction affecting the price in a major way. Well, such liquidity has been on the descent for over ten years now. Taking futures on the S&P 500 index, the world’s most liquid share future, liquidity measured by market depth has plummeted 90%.

What does that mean? The ‘depth’ reflects the market’s ability to absorb flows of buying and selling without significant impact on the price. At the same time, the number of volatility spikes (daily moves of 5% or more) in the ‘Volatility Index’ has rocketed. Between 1994-2007 there were nine. Since the 2008-9 financial crisis there have been sixty-two!

Adding to that, absence of liquidity (once provided by traditional finance houses, banks (now effectively barred by regulations) and long-term institutional investors) when you want it most is when it is even scarcer. So what else? More computerised, algorithmic programmes driven simply by percentage triggers in market movements help exaggerate flows. The surge of funds into passives has added to this – buying what is there just ‘because’ it is there and in the quantities based on an already bloated value given by all the other investors chasing the same thing. So, price movements for relatively small volumes are more likely and market makers widening spreads between buying and selling, increasing costs (and the more volatility then the wider the spread – as in spring 2020).

So more bubbles are likely to appear and they will be more exaggerated and then bigger troughs when they burst so the greater the opportunities (and the more assured and fatter the profit) for those buying during the pessimism – for the courageous who can overcome the discomfort I suppose. Maybe a partial solution is that quoted companies need to have the permanent power to buy-in and cancel (or hold in ‘Treasury’ for reissue) their own shares if market prices plummet – that will create fantastic extra profits for the remaining shareholders as well as providing the liquidity required. Regardless, it does say ‘watch-out’ to all investors in momentum assets (we have very few) as those are the ones which will be the most affected; liquidity in most ‘value’ and smaller situations dried-up years ago and the participants know that already perhaps!

Maybe it is prescient to share a few more facts. American markets have been scaling new highs – drive again by ‘tech’. Microsoft has broached $2trillion for the first time – how amazing(ly frightening). Facebook has just punched past $1trillion too. Add in Alphabet, Apple and Amazon and those alone have seen their share values increase by $1.3trillion this year alone. Big US Tech has outperformed the main US indices again this year so far. There are head winds however – from Joe Biden’s plans to supertax these entities, the world’s plans for minimum global taxes and also State controls like those China imposed to drive-down Alibaba and Ant last year. Alibaba has slumped by 30% since last November and is worth a ‘mere’ $600billion despite being lauded as a contender for the ‘biggest company’ stakes so watch-out, it can happen and big time too. Just to remind us all too but Americans have been piling into their expensive stockmarket with ‘funds’ enjoying a net $189billion of flows since only February. Indeed, a Bank of America study suggested that investors have swamped global share markets with $580billion in the first half of 2021, the most ever and fuelled by the colossal State spending and liberal lending (which many use to invest). It is said that if the pace continues, then 2021 will attract more money than in all the last twenty years combined. The global markets are now valued at $117trillion, dominated by the US. Instead, we’re looking to trim mainstream exposures again to consider adding gold which had been drifting back from recent buoyancy (having its worst month since November 2016)… Will it prove to be the case again (sadly ‘as usual’ as shown by history) of people buying at the peak after selling at the trough in March 2020? These will be the same ones selling in the next down wave when it is too late, driving prices down significantly, mark my words.

Short Sellers

Had to have a wry smile on the Morrison’s bid as several institutional short-sellers of the stock were caught with their trousers down. They decided to scramble to buy-in stock they didn’t own to cover their loaned positions. Allegedly they lost £86million in the process of trying to push Morrison’s shares downwards; one of the bigger ones had doubled its minus position in the days up to the bid – ouch. Funnily enough the stuff these guys should really be shorting are the over-priced things but they pick-on out of favour stocks and sectors where buying interest is low and that in itself does add a problem to the company in being able to manage its capital needs sometimes. The year, with vast recovery, has been hard for short-sellers (who aren’t doing it to take positions as hedges against other things). Losses have run into billions of dollars this last year or so. However, don’t feel too sorry for them – they made $1billion on the collapse of German Wirecard but then, fraud was involved in that company as we all now know.

Stop press – my guarantee to clients who have our ‘balanced’ strategies – Vectura has enjoyed a new bid today so the price goes up some more and Morrison’s themselves have also enjoyed a bidding tussle! We have had exposure to these two for a long time, waiting patiently but I guarantee there will be more such bids. Not every client will have every one but the bids are bonuses for clients for free as we select holdings because they represent special value in the first place. This is one of the ‘extras’ from pursuing a ‘Value’ investment remit and not ‘Growth’, as well as being far lower risk overall as the investment is valued fundamentally cheaply in most instances.

Local Hotel investment

So why do people do it. A local closed hotel has been up for sale for ages and no takers. Why not? Because the owners who we believe bought the wreck for £1.2million made a tidy profit selling-off hotel rooms on leases – almost £5million’s worth at up to a mere £100,000 a pop. The bank repossessed the freehold and now in my view, the Place is unsaleable as who would want to buy it with prospective leasehold interests which you’d be likely to have to fulfil if you redeveloped it! It’s unmortgagable and unsaleable in our view and all those ‘fortunate’ investors have running sores which are also ratcheting-up costs on them and a semi-derelict property they can’t visit as it is too dangerous. If they don’t pay up their proportionate charges they could forfeit their leases too! There is talk that a Court may agree to close the leases for 22p in the Pound so that the freehold can be tidied and then the site sold without encumbrance but the ‘investors’ may end-up with nothing instead – and how much would such Court action cost? Please don’t laugh either but this is the advert to sell the rooms – still ‘current’ on the worldwide web!

Atlantic Bay Hotel, Woolacombe

Guaranteed 10%pa, guaranteed developer buy-back at 125% of the cost, great occupancy… thank you Gavin Wodehouse and his ‘Northern Powerhouse Developments Ltd’. Please don’t be tempted by such ideas where you have no or little control. It was NEVER an ‘investment’.

Passives’ costs

Yes, we know about the cheap index trackers in which you just stuff your money and leave it. We don’t do that but that’s a long story. However, an entertaining analysis has shown that passive investors in the US market (so most people with a global passive, so most people!) have lost 0.41% as a result of Tesla joining the index at the end of 2020. Why? Because ‘everyone’ knew it was going to happen so the market pushed the price of the stock up to headier levels than the already inflated levels at which it had been trading, as they knew index-trackers had to buy it come what may! Since then, Tesla’s trim to lower (but still inflated levels) has cost investors 0.41%. We didn’t lose that because we didn’t have any of it nor the passives tracking it. I bet the average passive aficionado won’t tell you about this little nuance, this extra hidden cost (more than the whole ‘management’ fee for a year in many cases), which will catch you every time a big company joins the index like that. They won’t tell you about the extra brokerage and spreads suffered during enforced trading when markets are volatile either will they, like in 2020 (an extra cost of up to 0.6% according to the Telegraph report), as it upsets their ‘blanket’ cause. Interesting… and yes, we understood these things and could and can always take account of them in clients’ strategies.

Managing Coal

The main media hasn’t noticed that the oil price is ratcheting-up but then, so are coal and gas which have seen highest prices for thirteen years, doubling in one year. These will feed-through to higher prices not only of fuel but things which use them to make and service everything else. Shenanigans with our political relationships with the Russians don’t help either and the Ukraine is accusing Russia of cutting gas supplies – the EU and the UK too rely heavily of Russian gas. If the political sanctions don’t work then try the economic ones and Russia is in that driving seat… Russia also wants approval for another pipeline (Nord Stream 2) under the Baltic Sea… Coal prices troughed at $50 in August last year and are now $134, a 168% increase. Oil is still roughly one-third of the world’s primary energy source.

There is a number of reasons for this but one of the others is the kneejerk reaction against carbon fuels which will cause short-term problems in the supply chains and thus potential for rapid and severe price rises – capital for production, exploration investment withdrawn and companies having to respond to latest ESG pressures which are hitting revenue, costs and profitability so price rises must pay for that. Even insurance for carbon fuel companies is becoming difficult, so much so that the big projects are going to Indian, Chinese and Russian underwriters for reinsurance and there are happy takers there. None of us denies the need for change but if it is threatened overnight then the consequences and the pain for the world will be worse than the issues the changes are designed to tackle. How much oil, gas and coal do you have in your portfolio… or are you in the band where managers have been ditching companies with even a whiff of these, to satisfy their own virtue signalling in many cases, whilst still consuming just as much of the stuff to satisfy their own comfortable lives… it is an interesting point! I suppose it makes sense to say that ‘some’ of these has to be a wise move, investment-wise and watch too how these energy companies will have an undue influence on the major world indices going forwards and passive investments which do not differentiate. and concerns about the ESG bubble:

NHS Compensation

Whilst I very much sympathise with those who become victims of the very rare cases of ‘negligence’ in the NHS, there is a part of me that says that if you want treatment, that you have to accept financial thresholds on compensation against unintended or undesired things happening – or/and buy top-up insurance if anything else is a worry. Last year, lawyers were paid an immoral £1billion fighting negligence claims and the compensation itself totalling a further £2.1billion, money I’d prefer seen spent on care for everybody. ‘NHS Resolution’ has set aside £83billion more for claims it believes will be made in the future -how ludicrous. That’s not how I want my taxes spent either!

Risk Warning

Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!

If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.

Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.

My best wishes

Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers