The Ingham Analytics Weekly Letter on Sunday - 29 November 2020

Sunday, 29 November 2020

Welcome to another Ingham Analytics Weekly Letter on Sunday in which we aim, inter alia, to take a step back to see wood for trees, in South Africa, and around the world - not too seriously, there is enough of that about.

The US celebrated Thanksgiving on Thursday and many have taken the opportunity to have a long weekend with it. The US markets were shut on Thursday and the NYSE cash equities market closed at 1pm on Friday. Traders mostly squared off positions on Wednesday.

Black Friday originated in the US in the 1950s to mark discount sales after Thanksgiving and has since spread around the world, for better or for worse. The term appears not to have a definitive origin but is generally considered to refer to retailers turning from red to black in their books during the festive season shopping spree. This pandemic year, Black Friday seems to have been a week-long affair in the US for retailers.

On the topic of retail, S&P has an index called S&P Retail Select Industry. It went nowhere for five years and fell sharply through March. However, the index has zoomed up of late - rather like Zoom Video Communications.

The top constituent of the S&P Retail Select Industry is GameStop, a small-cap headquartered in Grapevine, Texas, which is a video gaming and allied electronics retailer. GameStop shares lost almost 90% of their value over five years in what was a steady descent year after year. In another example of the peculiarities of COVID-19 mania, the stock has gone from $6 in January, followed by a low of under $3, to a close of $16 on Friday. GameStop reported an adjusted net loss from continuing operations in Q2 of $91.2 million, compared to a net loss of $32.0 million in Q2 2019, and a loss of $195.1 million for six months. Q2 sales reduced by 13% like-for-like. This small matter did little to douse enthusiasm. Making a profit is so out of date.

British Chancellor of the Exchequer Rishi Sunak delivered his spending review on Wednesday. It made for sober reading with government responses to combat the COVID-19 pandemic delivering a hit to the UK economy and finances. Mr Sunak is a popular politician who previously had an illustrious career in business but today serves as the Conservative Member of Parliament for Richmond in Yorkshire. He has earned himself the nickname of "Dishy Rishi" which his wife Akshata Murthy apparently finds very funny. "My wife has more chuckles about it than I do" Mr Sunak was quoted as saying in a recent interview. A chuckle is what we all need at times like this.

The Bank of Japan has an enormous balance sheet, a product of bond-buying stimulatory measures over several years. The Japanese central bank this week released its financials for 30 September. Assets are 690 trillion yen or $6.6 trillion of which 530 trillion yen or $5.1 trillion (77%) is in Japanese government securities. However, what struck us was the relatively small but not insignificant holding of 40 trillion yen or $385 billion in ETF's and other equity assets. In five years, the value of the BOJ's portfolio has risen five-fold.

Central banks don't normally dabble in the stock market but the Bank of Japan has been at it for a decade now and this year increased the annual allocation for investment in ETF's to 12 trillion yen, double the previous ceiling. What has happened is that the BOJ scooped up beaten-down stocks after the COVID-19 panic selloff and is now sitting on a big unrealised gain of almost 6 trillion yen, the largest in two years.

So, we have a new Berkshire Hathaway on the block in the form of the Bank of Japan. Perhaps Mr Buffett could subcontract some portfolio management to Mr Kuroda, the central bank's governor.

Whilst on the topic, Tesla's market value of $555 billion overtook that of Berkshire Hathaway this week. Pending inclusion in the S&P 500 has sent volumes skyrocketing with both trackers and retail investors through platforms like Robinhood piling in. Mr Buffett is surely bewildered.

The VIX or CBOE Volatility Index slipped under 21 on Friday, the lowest in six months. At the height of the March selloff it hit 85, a level never previously reached as investors sold out in panic. US equity markets ended the week firmer with the Dow Jones back to where it was early this year but the STOXX Europe 600 is still down for the year as is the Hang Seng in Hong Kong.

Conversely, gold weakened to around $1,790. This week we issued two notes on gold, "Added weight" and "A blemished trading jewel?" which had both positive and cautionary messages on the precious metal.

On the positive front, we pointed out that the S&P GSCI and Bloomberg Commodity Index have increased their weighting in gold for a second year. This we believe is because gold is the most effective commodity investment and is underrepresented in commodity indices. S&P goes from 3.73% in 2019 to 6.27% in 2021 whilst the BCOM increases from 12.24% to 14.65% in the same period. Data on gold-backed ETFs show a record high for tonnage and value.

However, on a cautionary note, we had already called a top to the gold market when the price hit $2,000/oz and with gold now having broken through the $1,840/oz neckline this past week we think it is feasible to go below $1,700/oz. Gold share prices have already moved down since August but it must be said that the P&L of gold miners is sensitive to movement in the underlying price of the commodity so a 10% downward move in gold has a disproportionately greater impact on earnings if that prevailed for a length of time.

Also, on a weakening trend is the US dollar with the ICE US Dollar Index at 91.70 on Friday compared with a high of 102.99 in March during the stock market selloff. That is a 10% fall from the high and the lowest since 2018. This is not surprising as a post-COVID future starts to emerge from the gloom. Of course, any number of pundits are now calling for the dollar to fall further, 5%, 10%, 20%, pick a number. Currency forecasters at banks and other financial outfits are almost always wrong and even if they are occasionally right it is usually for the wrong reason or by happenstance.

In the US, the outgoing President is planting landmines for the President-elect. On Wednesday, newly minted Supreme Court Justice Amy Coney Barrett cast the deciding vote in a 5-4 vote blocking New York from imposing strict limits on attendance at religious services to combat COVID-19. Justice Barrett adds weight to the conservative wing following the passing of Ruth Bader Ginsburg in September.

We used to naively believe that a good effort should be well compensated. How wrong we were, the wages of failure (indeed sin) are far richer.

Executive compensation - the word typically used is emoluments as mere workers get wages or salaries - is increasingly divorced from shareholders' returns. We suggest the word reparations be substituted.

The previous Friday we had the depressingly surreal Sasol AGM which was a ringing endorsement of failure and destruction of value. This Wednesday it was the Woolworths AGM.

When 82% of shareholder votes are against endorsement of the remuneration implementation report and it is blithely ignored because it is non-binding you know we are in a world where governance is so much lip-service, let alone tick box. The erstwhile CEO who presided over the expensive failure that is David Jones in Australia and a precipitous fall in the Woolies share price was granted a gargantuan payoff that would keep mere mortals in a comfortable lifestyle their entire lives without having to lift a finger.

And finally, Alexander Graham Bell will be delighted to learn that Zoom fatigue is resulting in a renaissance in the use of the landline telephone in the US. That may just be the signal to go short ZM stock.

The Bank of Japan is the big deal for us this week.


Bank of Japan headquarters in Tokyo designed by architect Tatsuno Kingo in 1896

Thank you all for visiting us.

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