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11/14 Hindesight UK Dividend Letter

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11/14 Hindesight UK Dividend Letter NOV 14 DIVIDEND UK LETTER Mark Mahaffey Ben Davies “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” Mark Twain OVERVIEW In October 1987, the Dow Jones Industrial Aver- In Views Ben Davies will explore why markets have age plunged more than 20% in one day, an unlikely experienced such sclerotic behaviour, citing what the 20-standard deviation event whose probability of oc- brilliant mathematician Mandelbrot once referred to currence is less than one in ten to the 50th power. Fast as the (mis)behaviour of markets. Ben suggests such forward 27 years and global devel- behaviour should be attributed oped stock markets experienced a to man. fall of 10 to 15% over a course of 3 WE’RE KEEN to to 4 weeks, with a rebound in some The Philae bounce is undoubt- markets as ‘stellar’ in magnitude as HUnt doWN edly another huge leap for the European Space Agency’s (ESA) stoCKS WHICH mankind as it could provide Rosetta mission success to land a confirmation that comets once robotic space probe on the surface BENEFIT not brought water and amino ac- of a comet. ids (protein) to our barren Earth onLY FRom to make life possible. But right On the 12th November 2014 - some here on Earth Ben writes about 10 years after it was launched - maRKET VOL- how we are experiencing anoth- lander module Philae which ac- atILITY, BUT er remarkable experiment which companied the Rosetta space- is highly ingenious in its unor- craft touched down on Comet 67P/ ALso THE GEO- thodoxy and will require careful Churyumov-Gerasimenko (67P). navigation for private investors. The on-board telemetry commu- POLITICAL faLL- nicated back to Earth some 28 Meanwhile Mark Mahaffey looks light-minutes away revealed that OUT... at 3 high dividend paying stocks the lander had bounced twice off to build out our portfolio. We’re the surface of 67P. The first bounce may have lasted keen to hunt down stocks which benefit not only from two hours and over 1 kilometre and is considered the market volatility, but also the geopolitical fall-out which largest space bounce in history which we would put comes hand in hand with such volatility. on a par with the incredible bounces in the US and Japanese stock markets! Lastly we look to introduce a consumer staple stock with both domestic and foreign exposure into our Hin- deSight Dividend UK Portfolio. HINDESIGHT DIVIDEND UK LETTER / NOV 14 Our three main investment ideas this month are: 1. IG Group 2. Kingfisher 3. Rolls-Royce CONTENTS Inside this edition of the UK Dividend Letter you’ll find: VIEWS (Mis)Behaviour of Markets & Men, by Ben Davies 3 IG GROUP Spread Better to Stock Broker, by Mark Mahaffey 5 INVESTMENT INSIGHTS Bubble Babble, by Ben Davies 8 KINGFISHER A ‘Defensive’ World Superstore, by Mark Mahaffey 11 WHAT HAPPENED? Market & Sector Analysis 16 ROLLS-ROYCE Defensive? ‘Yes M’lady’, by Mark Mahaffey 18 HINDESIGHT DIVIDEND UK Portfolio # 1 23 HALF.L ETN 25 APPENDIX I The Way We Think / Our System 26 APPENDIX II How We Think 27 HINDESIGHT DIVIDEND UK LETTER / NOV 14 52 VIEWS (Mis)Behaviour of Markets and Men by Ben Davies “ Of course, well-behaved price changes are not the only assumption underlying the standard financial model. Another is that each flip of the coin, each quiver of price, should be independent of the last. There should be no predictable pattern Ben Davies on which you could trade and profit. Alas for the financial establishment, this is also a fairy tale... Stock prices are not independent. Today’s action can, at least slightly, affect tomorrow’s action.” Benoit B. Mandelbrot Man’s ingenuity knows no bounds. We have to acknowl- This is not just sensationalist proselytising on my part. At edge the quite literally cosmic achievement of the Europe- Hinde Capital we have provided a very coherent dialogue an Space Agency, that of landing a probe on a comet. The over the last decade as to the follies of policymakers but ESA has far exceeded the epic voyages of discovery and others such as Gavyn Davies, the ex-Goldman Sachs chief feats of navigation by the Iberian economist and former chairman of trio of Columbus, Vasco da Gama the BBC recently upped his rhetoric and Magellan - the ESA scientists GoVERnoR when he wrote in his FT editorial: succeeded in effectively throwing a dart and landing it on top of the KURoda’S mon- “ Japan is now conducting a laborato- Empire State building. And this real- ry experiment...and Governor Kuro- ly understates the achievement. EtaRY EXPER- da’s monetary experiment has in effect morphed into a strategy of de- Whilst this leap for mankind could IMEnt Has IN valuation plus financial repression.” provide confirmation that comets EFFECT moR- once brought water and amino ac- I will touch on Japan shortly, but for ids (protein) to our barren Earth to PHED Into A anyone who wants to comprehend make life possible, we are about to the extent and impact of financial find out the extent of another re- stRatEGY of repression please read our pres- markable experiment but this time entation at the website home page right here on Earth. DEVALUatIon or click here for the full speech. Except this experiment far from be- PLUS FInanCIAL In October 1987, the Dow Jones ing a source of celebration as some Industrial Average plunged more dismal scientists (Krugman) would REPREssIon. than 20% in one day, an unlikely have you believe could be highly 20-standard deviation event whose destructive to the well-being of man. It is already prov- probability of occurrence is less than one in ten to the ing so - with wealth inequality continuing to rise, which in 50th power. In September 2008, the Dow once again turn is primarily a function of the accumulation of housing dropped significantly, declining by more than 7% in one stock as well as unsound public and private structures day, a probability of 1 in 50 billion. Under conventional not being allowed to fail. It is this experiment that helped financial theory such as the Efficient Market Hypothesis propel many global stock markets back to new highs in (EMH) these sharp drops in the stock market were not recent weeks leaving a growing gap between financial supposed to happen. markets and economic realities. This alarms me. Fast forward to October 2014 and the global stock mar- I refer of course to an experiment which I believe is unpar- kets fell precipitously over a three to four week period alleled in financial history. It is one of the most ingenious from mid-September to mid-October whereupon many but crudest methods of coordinated economic destruc- markets exhibited a selling climax and a ‘V-shaped’ re- tion ever attempted, although the opposite outcome is covery. Most developed stock indices such as the FTSE intended. Central bankers globally have been dialling up 100 and S&P500 initially fell 10 to 12%. unconventional monetary policy, which when it ends will be known posthumously for what is - unashamed coun- Some markets roared back whilst others merely wit- terfeiting of a nation’s currency, otherwise known as mon- nessed a dead cat bounce and have since resumed their ey printing. It has the potential to bring untold economic falls below the October lows. misery beyond the inequality of riches it has already be- stowed upon nations. HINDESIGHT DIVIDEND UK LETTER / NOV 14 53 Source: Variant Perception The FTSE 100 has subsequently managed an impressive NIKKEI 225 (2013 – 2014) rally covering 75% of the initial fall whilst the S&P 500 has rallied to make new highs. The frequency of such declines is an occurrence which happens on average about every two years. So it’s fair to say it’s within the Gaussian sta- tistical norm as compared to the rather stellar events of the ‘87 and ‘08 sell-offs. What was less normal was the rebound to new highs. If one was sitting upon the Tokyo Stock Exchange, the Nikkei 225 fell 12.4% from the high of 16,410 in mid-Sep- tember to the mid-October low of 14,369 only to rally new highs at 17,521 by the 13th November. A rise of 21%. Source: Bloomberg Astounding! The recent behaviour in global stock markets down and then back up is a sign all is not well. It should be a clear By comparison if one was sitting aboard the good ship signal that government spending and fiscal dominance Euro Stoxx 50 index - the Eurozone’s leading blue chips of central banks sows the seeds for tectonic disruptions, from 12 EU countries - the 15% decline was deeper than as monetary largesse grinds against the plate of falling the UK and US blue chip stock indices and the subse- growth from industries which once experienced exces- quent bounce barely covered half the decline. sive credit infusions. The recent talk of a slowdown in the worldwide economy In the later section titled ‘Bubble Babble’ I will observe - which is very real - is not because we are witnessing some of the potential reasons for the differing fortunes government spending inspired ‘austerity’, rather that most of these markets. states have spent TOO MUCH! The Eurozone has seen a 3% rise in public spending as a % of GDP to nearly 50%, an increase in spending of some €300 bn yet industrial production in countries like France and Italy has been col- lapsing. Italy itself has just posted a new Post Lehman IP low.
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