Old songs which have stood the test of time always seem to have the best lyrics.  When thinking of a suitable title for this blog the following seemed relevant :

Men grow cold
As girls grow old,
And we all lose our charms in the end…

There may come a time
When a hard-boiled employer
Thinks you’re awful nice,
But get that ice or else no dice.

He’s your guy
When stocks are high,
But beware when they start to descend.

It’s then that those louses
Go back to their spouses.
Diamonds are a girl’s best friend.

These simple lyrics encapsulate marriage, unemployment and what happens when the money dries up.  All timeless themes relating to life, the business cycle and bull & bear markets.

I have targeted this blog at the UK private investor (whom I believe is far more intelligent & sophisticated than generally given credit for).  Terms which may be unfamiliar are expanded upon in the ‘Glossary’ articles which, when they are written, are published on Tuesdays.  Articles covering markets, sectors and commentary on FTSE 100 stocks are published on Friday mornings.  Commentary on likely turning points in the Dow, S&P and FTSE will be published when dictated by market movements.  Do not expect much to be published during the school summer holidays & Christmas holiday periods as I do like to take a holiday or two.

In general I try to write commentary which is a bit more level-headed and longer-term in nature than other commentary which can be found in newspapers.  Newspapers have to write something about the markets every day and much of their commentary inevitably focuses in great detail upon reporting current events.  I try to step back a little and focus on what the market may do over the longer-term and not worry too much about whether a share price has moved 10% up or down recently.  I firmly believe that the greatest advantage the private investor has over institutional fund managers is that the private investor can take a long-term multi-year view and is not bothered about how their portfolio has performed relative to the fund manager’s in the office next door at the end of the next quarter.  Hence I will tend to be more optimistic when markets are low and more cautious in my commentary when markets are high.

The general idea, after all, is to buy low and sell high.  Buy during panics and sell amidst euphoria.

What is Ebitda?  Whilst the acronym stands for earnings before interest, tax, depreciation & amortisation; ebitda can be thought of as essentially as the cash flowing into a company.  Capital expenditure (capex) is the extra item that needs to be subtracted from ebitda (as well as interest, tax, depreciation & amortisation) in order to arrive at earnings which remain to pay down debt and also be divided amongst shareholders as dividends.  Any money left is kept by the company as retained earnings and goes towards boosting the company’s Net Asset Value.

With the next bull market due at some stage, the focus will surely move away from absolute return products.  Is this the real reason why the Wellcome Trust is currently trying to sell its £3.5 bln private equity portfolio so as to be able to re-invest in equities and/or corporate debt in time for the next upswing?  They have found a plausible excuse with Sterling’s recent collapse from $2.00 to $1.50, claiming that they are trying to lock in a currency gain on their dollar-denominated private equity portfolio…

This bear market will end one day and hedge funds have not provided much protection from the bear.  The key idea behind hedge funds is wonderful (actively-managed funds which aim to beat the return offered by a savings account) but maybe Warren Buffett was right when he concluded that they were compensation structures first & foremost.  In order to participate in the next bull market you do not want to be stuck in a fund which may not fully participate in the upside (due to past scars from the bear they may not dance fully with the bull) and is going to take away 20% of that upside in fees anyway.

Note :  In theory hedge funds which suffer a decline in NAV are not paid their (typical) 20% fee on profits until the fund’s NAV exceeds its prior “high-water mark”.  Therefore investors who choose to stay aboard for the potential ride back up would not suffer 20% of the upside being taken away from them in fees.  However in practice what tends to happen is that hedge funds which perform badly close down and investors then have to invest any money they may be lucky enough to get back in a different fund which then takes 20% of the upside.

Always pay special attention when the market rallies on bad news.  One of the clues that a significant rally is about to kick-off comes when the market rallies after bad news is released.  This indicates that the market had already priced in the bad news and that the news release failed to spark enough fresh selling to push the market lower.

Yesterday the monthly US employment report was released for November 2008.  It was bad news – the FT ran the headline “Shock US job losses…” and a notable economist was quoted describing the 533,000 jobs lost in November as “almost indescribably terrible”.  For the first hour of the session the Dow did indeed sell off and broke briefly below the 8,141/43 lows posted earlier this week.  However that was the end of the selling and the Dow then rallied 7% to close above yesterday’s high on the highest volume of the week at 346 mln.  The S&P ended the day up 3.7%, outperforming the Dow which closed net 3% higher.  The odds now favour a rally but these hopes will be extinguished with a Dow close below yesterday’s intra-day low of 8,118. 

Note :  The US markets also closed higher after last month’s employment report (7 Nov) but that performance was less noteworthy as the markets had fallen 10% over the prior two days and the rally was on comparatively lower volume of 246 mln.  It looked more like the dead-cat bounce which it eventually proved itself to be as the Dow fell below 8,000 later in November.  Also note that economists are experts in the subject of economics as opposed to stockmarkets.

There are many listed investments which are currently trading at the equivalent of 20% of NAV (“20 cents on the Dollar”).  An old salesman friend of mine once pointed out to me that in his experience, when things go wrong, securities always seemed to bottom out around 20 cents on the Dollar.  This thought came back to me when I looked at the recent results statement of MAB (Mitchells and Butlers).  Incidentally with lots of listed securities trading at such steep discounts to NAV, the logic of investors cashing out of hedge funds (at NAV) to re-invest in such securities cannot be faulted.  The same thought process should steer investors wishing to invest in commercial property towards REITs rather than commercial property unit trusts. 

MAB’s recent results showed adjusted EPS of 31.5 pence putting them on a p/e of 4.6x at 145 pence.  Lets be kind and ignore the fact that they actually made a loss due to the cost of closing out financial hedges and taking an impairment charge of £206 mln mostly against pubs & bars hit hard by the smoking ban.  The pub property portfolio is valued at £4.7 bln; subtracting net debt of £2.735 bln and using 405 mln shares outstanding of implies NAV of 485 pence.  In July 2008 MAB signed a £600 mln three-year unsecured debt facility maturing in Nov 2011.  Their lenders committed MAB to reducing its borrowings by steadily lowering the amount of credit made available to £550 mln in Dec 2008, £400 mln in Dec 2009 & £300 mln in Dec 2010.  As MAB had drawn down £514 mln on this facility at 27 Sep 2008, they had no room to pay a dividend.  Their strong cashflow needs to be diverted towards paying down this debt facility over the next couple of years and this means no dividends due until late 2010 (the next dividend is likely to be declared in Nov 2010 and actually paid in Jan 2011).

MAB do have two big shareholders – Elpida Group own 14% but the Magnier/McManus modus operandi involves selling out to a bidder (c.f. Manchester United) and not taking over the target company themselves.  Similarly Joe Lewis, who picked up a 22% stake at 130p (via his Piedmont vehicle) when Tchenguiz’s stake was liquidated following the collapse of Iceland’s banks, is an investor rather than a bidder.

There is undoubtedly long-term value in MAB but it will be a long wait until the credit becomes available for any future bidder.  In the meantime I like to be “paid to wait” in the form of a regular dividend income stream and MAB have just cancelled their dividend payments.  Consider switching out of MAB into other shares which currently trade at similar valuation levels but which are still making dividend payments.

What are Secondary Highs and Secondary Lows?  Secondary Lows are more common – what often happens is the stockmarket will post a low and then, a few days or weeks later, it will re-test this low.  A “Secondary Low” is created if this retest takes the form of breaching the prior low briefly during the day but the market subsequently rebounds and closes above the prior low.  This type of price action is associated with flushing out weak longs (who often place their stop loss orders just below the prior low) and the market often embarks upon a sustained rally without the weak longs being on board for the ride higher. 

A good example of a Secondary Low can be seen on the S&P earlier this year : The first low was created on 23 Jan 2008 (intra-day low of 1,270.05).  The market then rallied up to 1,396 on 1st Feb and then worked its way lower once again, breaking the 23 Jan low on the 17th March.  On this day the S&P traded as low as 1,257 intra-day before rallying and closing at 1,276.60 (still net down on the day but crucially above the prior 23 Jan 1,270.05 low).  This marked the start of a sustained two month rally which took the S&P above the 1 Feb 1,396 high to a high of 1,440 on 19th May.

There is an example of a Secondary High on the Dow earlier this year too (the first high is on the 2nd May & the Secondary High is on the 19th May) but this example is less clear-cut as the second high only broke the prior high by a few Dow points – both days were failed attempts by the Dow to break above its 200-dma (daily moving average).