Weekend Rebel Review 14th October 2023

Rolling tops, gloom and reasons to be cheerful

This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, Everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required. Well the rain has killed any hope of doing anything meaningful outside today so time for a weekend review again this week.  There’s a fabulous feeling about the market currently imo, tho many may not feel it. When investors/traders sell off just because they cannot take anymore, when they just want ‘pain relief’ or 5% guaranteed from gilts looks attractive compared to fluctuating equities that may fall at times and not even pay a yield, you know there’s a lot not participating long in this market.  So why do I feel bullish (apart from the fact that I am always optimistic and often get called a perma-bull) ?

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Good morning and hope everyone is jabbed up as much as they want to be as winter approaches.

They say the market climbs a mountain of worry but I wish it would get it’s crampons on and put in a call to Sherpa Tenzing.  This has been a tough market and you’ll have done well to make much money over the past year or two even.  A few weeks ago I pointed out the rolling tops forming which are basically the exact opposite of a bowl.  These are playing out and look screamingly obvious now.  Here is the CAC French index and the DAX German index.

If I had been Jean or Fritz I would have been nearly all in cash a month ago. Both look like they have 5-10% to fall before they hit their long term support. The prolem with bowls and roll overs is you can clearly see them starting but you cannot tell when they will end, although long term chart trends do help.

If you look at both these indexes they had already way outperformed the UK’s FTSE250 and AllShare – here is the CAC again compared to the FTSE250 in mauve, since Covid and Brexit.

Has France really done so much better than the UK since 2020?  Britain dealt with Covid as far as business goes, every bit as well as France did imo. Oh but we had Brexit too and that has been disastrous for the UK right?  Well if you had listened to all the press the past few years you might believe so but actually the OFS (Office for National Statistics) had been using faulty data, which they admitted a month or two ago and actually the UK has outperformed all the major European economies in that time as far as GDP  goes.

What has made a difference has been that the UK Government recognised we had to start to pay for all the debt we have racked up through Covid and Ukraine.  The way the UK dealt with the energy spike was different to France and Germany, rightly or wrongly and this affected our inflation reaction which meant we lagged Germany and France in seeing it fall too.  What the UK has done is bite the bullet sooner on paying the debt down by raising corporation tax and this definitely had an effect on share price performance imo. So there is some genuine reason for the250 under performance but the scale of it has been far too great and that is because of sentiment imo.  Sentiment drives markets and investors move en masse like huge plains of sheep following each other to the greener grass.  What does happen tho is reversion to mean and the DAX, CAC and FTSE250 tend to track each other over the longer term.  Here’s the CAC, DAX and the 250 over the past 10 years – has the UK really done so much worse, looking at the Growth performance above or has misplaced sentiment from Brexit played a big part?

It’s only over the past year this has happened and bearing in mind the reversion to mean that tends to happen with these indexes I do wonder how long before is gap narrows. 

In a couple of years our contributions to the EU end which boosts our coffers and hurts the EU. Another issue is going to be EV’s and the green agenda imo.  The EU is far more reliant on EV’s than the UK.  I think a lot of the recent roll over is the realisation that this EV mania is starting to see its bubble burst. The UK has finally started to realise that it’s all very laudable to be wanting to get to net zero by 2050 but you can’t bust the economy to achieve it.  China is pumping carbon into the air for fun while selling us EV’s! See the irony? That’s like getting the UK to pay for the hotel while China has a weekend there with the UK’s wife.   There’s so much wrong with EV’s from the cost to buy (30-40% higher than combustion engine cars), range that is restrictive and based on figures relating to cars with no passengers, no luggage, and no spare tyre.  The range starts to recede from day one too as the batteries start to degrade with use.  Then there is the insurance which is soaring as insurance co’s discover the cost of repair, many doubling or some cars like Teslas being refused.  Then there’s the resale value which is a fraction of the new price. These things are sitting on dealer forecourt for months while they depreciate at an astonishing rate – which in turn is reducing the resale value further.  Then there is how do you charge them if you live in a flat?  We haven’t even mentioned the fact that they can’t recycle these batteries yet and  we are going to end up with chuffing battery mountains if these things do take off. 

I could go on about them not being green either and the dangers of fire but we’ll leave it there. suffice to say we are about to see a huge rethink of EV’s imo and Germany is going to have more pain. Meanwhile all those that complained the UK was slow to embrace manufacturing of EV’s here or that Brexit had prevented a lot of co’s coming here to produce them may find that wasn’t such a bad thing.  I am sure we will end up with EV’s being the future but the rush to introduce them has been too great.  I’d avoid investing in anything that has a significant connection to EV’s and anything of a premium priced in for it myself.  

This rethink might be where part of the reversion to mean in the indexes happens so for that reason I am a lot more comfortable with the UK indexes here.  Over the last 3 months the UK has been at the upper end of the performance between the three.

So where are markets going?  I have to say I genuinely don’t know.  Currently markets are focussed on two things – inflation and interest rates and as data comes out the market reacts.  Bond yields are attractive at 5% but there are stocks yielding far more.  If rates look like the next move is down then equities likely soar. If rates look like they have further to go then equities will likely spook.  The low of last October look like obvious big supports on the charts. Big falls tend to end in a capitulation or a big sell off in volume.  That’s never a smart place to sell as that is usually a significant bottom.

Fear/Greed has moved back up to 38 this week so less attractive to buyers than when it was in  Extreme Fear of 23 a week ago but capitulations usually take fear well into extreme fear so there’s no telling whether we’ve hit the lows in fear.

The positive point is that a week ago during the kick off in Israel the market opened on the Monday and the S&P rose for the day.  I think if the US had really wanted to sell off and go through the recent support it had the perfect excuse to do so then but it never. That was very positive.  US inflation data has been a tad firmer than the market would like since then and so things have been weak but there hasn’t been a major sell off.  UK and Eurozone inflation data on Weds will be a closely watched piece of data.

If you are a long term investor I’d be inclined to ignore all the noise if you are a good stock picker.  When you get these falls it’s the good stuff that bounces biggest and best after being dragged down with the dross.

It’s been a quiet sort of week but I did mention MRK last weekend and it would be remiss not to follow that up after their trading update.  The co announced 24% sales growth which is fabulous in this retail market. However it did say H1 margins would be squeezed due to their expansion. They have bought £1.2m of vehicles and brought all their delivery and fitting staff in-house. It’s disappointing that margins are squeezed but this is a company doing the right thing imo – your average Aim co wouldn’t bring the staff in-house, they would be focused on keeping short term margins, keeping the share price as high as they can and ditching some share options they had got for zilch.  I think the short term margin reduction is disappointing and is forecast to reduce earnings forecast next by 10% but I suspect this  is an aggressive reduction in order not to disappoint again.  This co is seeing huge take up of it’s free next day delivery, 7 days a week and for a premium you can have them fit the washing machine or fridge or TV same day.  They are growing this at a pace:

“Rapid growth in our premium next-day service offerings with integrated, gas, electric and television installation services achieving over 7,000 installation orders in the first half, vs. 2,500 in the prior year (+180%), and over 11,000 freestanding connection services vs. 5,000 in the prior year (+120%)”  

Customers clearly love the service, just look at the astonishingly good Trustpilot reviews they get

https://uk.trustpilot.com/review/www.markselectrical.co.uk

If you are investing in a growth company you want them to be doing the right thing for growth, not taking short term decisions that keep margins high for now. I think these are well worth keeping on your watchlist imo.

A few with updates this week, worth watching out for

G4M    interims

ROO     trading update

DNLM  trading update

GBG     trading update

IGR      trading update

Enjoy the weekend

Rebel