Small Cap Value Report (Mon 5 Aug 2024) - HVO, CKN, SNR, WG., RLE

5th Aug by Paul Scott

124 comments 9826 reads

Good morning from Paul & Graham!

It looks as if we're in for a bumpy ride, as Bloomberg reports this morning,

"Global Rout Deepens With US Stock Futures, Asia Stocks Plunging"

The Japanese market has fallen around 11% today, and almost 20% in the last 5 days. Bloomberg reckons it's due to high levels of margin trading in Japan, reaching an 18 year high recently. There's also been a sell-off in many other global markets, as I touched on in this weekend's podcast. I'll leave it to others to analyse the reasons, I'm just flagging that we could be in for a bumpy ride here. Personally I'll be ignoring this volatility, as I'm in good stocks, and don't use margin any more, so I can ride out any market volatility.

Explanatory notes -

A quick reminder that we don’t recommend any shares. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps (usually) between £10m and £1bn. We usually avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech, investment cos). Although if something is newsworthy and interesting, we'll try to comment on it. Please bear in mind the "list of companies reporting" is precisely that - it's not a to do list. We typically cover c.5 companies per day, with a particular emphasis on under/over expectations updates, and we follow the "most viewed" list of readers, so if you're collectively interested in a company, we'll try to cover it. Obviously with the resources available, we can't cover everything! Add you own comments if you see something interesting, and feel free to discuss anything shares-related in the comments.

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Monty Carlo

5th Aug

And I guess I should respond on the bond market....(broadly, not today's moves).

Maybe it is just that familiarity breeds contempt (I spent a decade in fixed income), but I was never entirely persuaded that the bond market had a more accurate crystal ball than the equity market.

Yes, yield curve inversions precede recessions, but they've also reliably preceded something like 10 of the last 2 recessions....(the spikes/signals tend to drop out of the long term charts because they didn't last long). Also QE has brought in to question whether yield curves today are comparable to the yield curve analysis of decades gone by.

What is different is that fixed income investors have a very different perception of risk/reward - credit investors especially are much more concerned about downside. They don't get bailed out by the odd multi-bagger.

AcornInvestor

Hi Yiannos1. I was puzzled why bonds didn't rally today. They started to rally hard but then gave back all their gains. Are you interpreting today's equity movements as a prelude to recession and today's bond non-rally as a prelude to inflation? I would have thought that recessions were generally disinflationary as demand falls and supply remains too high. I'd also guess that commodity input prices generally fall during/ahead of recessions (which they have) and that this would also tend to reduce inflation. Finally, I'd expect central banks to reduce interest rates, which should increase bond prices on at least the short/medium end of the yield curve. So I'm surprised at the sideways movement in treasuries today (although tbf they rallied hard last week, so perhaps some profit taking into the rise?)

Harry Hindsight

Easier said than done but at least a bullet in the head, or a stab in the guts is not the most serious risk we face in our age, (well hope not as writing! - seems the inevitable civil disruption is reaching its nadir.

Dead cat bounce is what I want and into cash - sorry the optimists.

Lefty99

I am in two minds, but 10% on days like today, you would expect some to hit. I believe the best range is 15-20%, and I had mine set at 15%, but turned them all off yesterday. I felt it was just going to be market behaviour and not the individual stock. A couple would have been hit today, but bounced back a little. Last time I got all stressed when to buy back in, so I have decided to chill out. Hope it works out for you either way.

And thank you to Paul & Graham, for today's coverage - I've read it & I own one of them, even if my comments have been on other matters.

It's not much fun being an analyst when the market moves this much as people get distracted.

yiannos1

The only logical explanation is that this is just a deleveraging/overpriced valuation correction with further to go. If it was a growth issue the bonds would have rallied despite going up last week.

I wish I knew but usually at the end the logic prevails.

All the best

A possible answer (although we're in the weeds now) is perhaps the US Service industry PMI coming in hot today - leading bond investors to conclude that the economy may in fact be chuntering along quite nicely so that interest rates will not be slashed quite so dramatically after all.

There's little doubt that both the equity and bond markets are very jumpy, hence the recent volatility.

Plinkut

Great podcast on the weekend Paul many thanks, I now use these as an incentive to get out the house and go for a walk so I'm often straight out the door when they turn up and an hour is perfect for financial pondering while shuffling around the local park.

topvest

Don't panic! Agreed Harry. As long as you are not in the bubble areas (mostly US mag-7) or are leveraged!

I'm a dividend investor. What counts for me is my annual dividends which are doing very nicely. I only really get worried if a dividend cut is coming. In the meantime, if you have cash in your portfolio its time to start buying more dividend stocks. Gradually though, as we don't know whether this is a correction or full on bear market starting.

Alternatives are very interesting today. They are following the market down, but the 10 yr bond yield has reduced down to 3.9% in a matter of days which is a positive for valuations. With 7-8% yield on offer and high discounts, that's quite a nice proposition. Returns must be c10% per annum from here on the quality operators, which is good enough for me!

Financials that are not likely to cut their dividends are also very tempting such as Legal & General (LON:LGEN). It will probably go down further, but did very well in the GFC and is unlikely to blow-up this time around...it's not a bank!

As always in such situations, there are too many opportunities and you can panic into not buying anything as you watch the red screens. Purchased 2 holdings this morning and will start adding modestly on down days from here.....provided the dividends on offer are good enough!

Michael Tee

Thanks Tom Stokes

These 'one letter' situations are often when posters have moved beyond a discussion and into some kind of argument, so not worth reading except for a laugh. It is annoying to have to scroll for ages because a couple of people decide to have an argument and we all have to watch.

simoan

I listened to a podcast earlier this year with a specialist in Japan being interviewed and I found it interesting that Japan is the largest outside holder of US Treasuries with north of $1 trillion. So, apart from the unwinding of the carry trade and issues with the leveraging of it, which is scary enough, what happens if the US reduces interest rates as you have mentioned and the Japanese banks decides to sell down their Treasuries and buy their own domestic bonds?

Just curious as it’s beyond my pay grade.

6th Aug

It’s the most secure asset in the world.

I realise that, and that’s why Japanese exporters to the US have ended up owning so many Treasuries. I know $1 trillion is a relatively piddling amount in terms of the size of the market but as interest rates decline in the US and increase further in Japan as they seek to tame inflation, it makes less sense for the Japanese to hold them.

Anyway, looks like the Japanese market has bounced back hard overnight. Nikkei up 10%. Could all be a storm in a tea cup.

They are not investing

They are looking for safe heaven assets

The highest the rate the highest the probability of default

Just in case anyone is interested. Here is the podcast I mentioned. If you want to ignore all the fluff, the most interesting section is from around 20 to 40 minutes: https://behindthebalancesheet....

All the best, Si

I think you maybe need to understand it more from the Japanese perspective. I know it’s smaller than the US but it’s still the world’s third largest economy. The podcast I linked below is at least worth 20 minutes of your time.

It’s above your pay grade-you said it

No need to continue this conversation

Thanks for the put down, nicely dismissive. And you have the cheek to complain about Paul.

Maybe I understand more about what’s happening in Japan than you as it’s something I’ve followed closely for the past 18 months. What I don’t understand is the effect on the US bond market if Japan starts repatriating capital, hence my question. Even after yesterday my Japanese investments have done extremely well in that time. Here’s another podcast which discusses the changes in Japan. It’s a more interesting overall discussion from the turn of the year, main discussion of Japan started around 30 minutes in: https://behindthebalancesheet....

You are trying all the time to pick fights.

I have worked in the industry and I understand who is what and the knowledge they have in different financial instruments.

You asked a question saying that is above your pay grade. I answer to you at a time that I am very busy. You come back with something that it’s no interest to me trying to teach me whatever you think you can teach me??

But then you bring Paul in the conversation.

It was only on Friday that you were fully invested but suddenly on a crash on Monday you had cash!!

I’m not trying to pick fights. I asked you a genuine question as I do with others in these comments from time to time, but for some reason you felt the need for a put down. I used to work in the semiconductor industry with a particular emphasis on intellectual property, and when anyone asks about it I try and help them out and explain things. It seems that’s is beyond you other than to display your self importance and superiority over others. If you’re busy then there is no need to respond at all and certainly no need for put downs which are every bit as bad as the post Paul made on Friday.

As for your last cryptic comment: It was only on Friday that you were fully invested but suddenly on a crash on Monday you had cash!! I have no idea what you’re talking about. I did no such thing.

Small Cap Value Report (Mon 5 Aug 2024) - HVO, CKN, SNR, WG., RLE

"Global Rout Deepens With US Stock Futures, Asia Stocks Plunging"

Explanatory notes -

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Paul Scott

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