Trading Portfolio; Momentum update and the last hurrah

Almost two years ago now this real money portfolio was started in order to beat the S&P 500 index using a proprietary momentum method.

In this blog it is time for a relative return evaluation and secondly also some ranting and observations on the last hurrah of some UK politicians and on the last hurrah of old fashioned oil and gas.

This blog is for information and entertainment purposes. If the reader uses information in this blog for investment decisions, the reader will lose money. Holland Park Capital London ltd is in no way, shape or form liable for what the reader decides to do after reading this blog.

First things first; on the 1st of July 2020 Q3 the Trading Portfolio; Momentum strategy started with $50000 in investments in S&P 500 index companies. Now on the 26th of March 2022 the portfolio is worth $ 74387. Cash in the portfolio is still $42.12. Next quarter the cash dividend will be taken out of the portfolio again so let’s adjust the Trading Portfolio; Momentum worth downwards to about $74344.

So the absolute return has been fantastic, but that is not what is being measured here. How has the relative return versus the S&P 500 index fared? Because if the relative return underperforms, it would have been better to just put the $50000 in an S&P 500 ETF and sit back and relax. An S&P 500 ETF can be expected to modestly underperform the real S&P 500 index returns, because of the drag of the management costs of the ETF (the expense ratio etc.). The VOO Vanguard 500 index fund ETF was put in a paper portfolio with two portfolio tracking websites. On the SigFig website the paper VOO holding would now be worth $73653. In the Stockrover website the paper VOO Etf holding would now be worth $73408.

So the Trading Portfolio; Momentum outperformed the VOO Vanguard S&P 500 ETF by about 0.9% after one year and about 3 quarters.

Close to two years is still way too short to be able to draw any conclusions with some amount of conviction; time horizons of between five to seven years are needed for that. Still the early conclusion can be that so far the Trading Portfolio; Momentum was a waste of time and effort. For Holland Park Capital London for the Trading Portfolio; Momentum to be worth it long term the outperformance needs to be closer to 2% a year.

It is time to move on to the second part of this blog post.

There is a new 2020 and 2021 period peer reviewed article out in The Lancet;

Excess deaths per 100000 people of the population numbers;

Sweden about 77

The Netherlands about 66

United Kingdom about 130

These numbers are in line with our previous article on the topic.

While Sweden may have had higher excess death numbers than neighbours like Finland, Denmark and Finland in a European context the Swedish approach of no lockdown did not cause Corona Armageddon in Sweden in any way shape or form.

In below performance chart from stockcharts.com between the stock exchanges of the three countries the thesis that the countries with the highest excess death ratios would have worse stock market performance holds true as well. The stock markets in The Netherlands and Sweden did significantly better than the stock market in the UK in the 2020 and 2021 periods.

Lockdowns are also wonderful tools for decreasing the pie/economy of a country and therefore increasing poverty. In the UK the number of people on Universal Credit doubled in less than 1 year from 3 million people to 6 million people. That was despite the furlough scheme. So it could have been worse. The number of people on Universal Credit in the graph was already trending up before the arrival of the Corona virus and would have likely hit 4 million anyway by the end of 2020. Less social activity from social distancing and more fear and uncertainty would have likely added to the 4 million number even without a lockdown in the UK. Let’s assume that would have sent the number of poor people in the UK on Universal Credit to 5 million people. In that example the lockdown scientists and other lockdown fans would still have had to come up with pretty good reasons to justify sending 1 million people in the UK on Universal Credit.

Matt Hancock wrote an article in The Telegraph on the 14th of March 2022 called;

“We got the big calls right on Covid.”

It is a fantastic attempt from Mr Hancock at marking his own homework.

Clearly in the article there is not one word about the increase in poor people in the UK on the back of policy decisions. To go into a lockdown after all was a political choice and happily voted for by most MP’s in the current UK parliament.

After the alert from China that there was a new deadly virus doing the rounds China introduced some measures; lockdown, mask wearing, building of new hospitals for Corona virus patients only and initially a continuation of air travel. The UK copied the lockdown strategy from a communist country. The UK copied the obligation to wear masks during the pandemic at a later stage. The UK kept its airports open for a very long time compared to its neighbours without any checks or measures whatsoever. The UK did not build any new permanent hospitals for Corona virus patients.

There was the Nightingale attempt, but these 7 Nightingale hospitals were temporarily and unsuccessful mainly thanks to lack of staff, far away locations creating transport problems and patients required more complex care than was available at the Nightingale hospitals. The kingsfund.co.uk website has a good blog on this and staff who worked in the Nightingale hospitals mentioned a flexible working style, rapid learning and improvement of systems. It is widely accepted knowledge that people that specialise in a skill get better at that skill. Of course the UK politicians decided it was better to continue to spend billions of pounds on the continuation of the test and trace system, but to close the Nightingale hospitals down rather than paying NHS staff working in the Nightingale hospitals a 6 figure salary to increase the staff pool.

Paying nurses a 6 figure is crazy I hear you say?

Not as crazy as spending £18 billion on the not working test and trace system. Oh and the test and trace system has another £10 billion budgeted in. £37 billion is the total budget for the NHS test and trace system in its first two years.

The highest estimate for building brand new hospitals in the UK is around £600 million. If we add another £400 million for paying staff properly it is fair to assume the £37 billion for test and trace could alternatively have build 37 brand new UK hospitals.

The Kingsfund blog concludes though;

“Unfortunately there is no magic NHS staffing tree to shake”.

If you continue to pay minimum wages in a crisis NHS staff will leave. The number of qualified people willing to work as NHS staff will not increase if you do not incentivise their wallets as well can be added to that statement. Clapping is for free. There will always also be a “show me the money” involved in order to motivate workers.

In the early stages of the coronavirus crisis, there was a sharp increase in UC claims. In the four-week period ending on 9 April, 1.2 million people in Great Britain started a UC claim – around a million more than the usual volume of monthly claim starts – and a further 1.1 million started in the five weeks ending on 14 May 2020. Overall, the total number of people on Universal Credit in Great Britain surged from 3 million in March to 5.2 million in May and has since gradually increased to around 6 million people on Universal Credit.

The daily volume of new claims peaked at 135,900 on Friday 27 March 2020.

In 2021 the number of people on Universal Credit started to slowly drift lower again. Still the numbers are very sticky. Once people are down and out for a period of time it is very hard for those people to manage to lift themselves out of poverty again. In the beginning of 2022 the number of people on Universal Credit was still around 5.6 million people in the UK. That is nothing to be proud of. Homelessness numbers as well have gone through the roof and charities that run food banks have reported record numbers of people depending on their services in order to eat. The UK is certainly no social security paradise. Most people do not ask for Universal Credit for fun, but because they ran out of options and are so poor that they really need help.

UK’s latest inflation number came out at 6.2% (the highest level in 30 years). Mr Sunak just came out with the spring statement. Universal Credit payments were not inflation adjusted. In fact the planned “National Insurance” tax hike on employees and employers goes ahead as planned. So Mr Sunak decided to take a bigger piece of the pie and as a result he will end up shrinking the pie as workers have now less incentive to put in more hours. Experts predict the number of people on Universal Credit in the UK will soon be hitting new all time highs again.

Mr Sunak can borrow money with the Treasury for the next 30 years at bargain rates.

Why is he not using that trick instead of the endless tax raising exercises?

Boris came to power with the promise to “get Brexit done” and the implied promise of remaking the UK into the land of “milk and honey”. Camilla Tominey in the Telegraph newspaper yesterday rightfully pointed out that by some estimates Mr Sunak has raised taxes more in two years than Gordon Brown managed during his 10 years in charge of the Treasury.

It took the UK’s politicians 30 years, but with UK tax pressure at the highest since 1945, the Thatcher positive tax legacy has been destroyed. Camilla Tominey pointed out that UK taxes are set to rise to the highest levels as a fraction of national income since Clement Atlee was Prime Minister. In order to better be able to compete with the EU after Brexit one could be forgiven to think that the UK would have lowered taxes by now.

Instead the UK is starting to resemble France.

How much longer does it take in the UK for more than 50% of the population to be either on benefits or work for the state? Can the last person to leave the UK please turn off the lights? In 1976 the UK had an IMF bailout. Some voters in the UK in the last general election were afraid of the policies of Mr Corbyn and voted for Boris instead. Sadly Boris has introduced policies since then that would have made Mr Corbyn proud. Finance ministers need to choose between maximising tax receipts and maximizing the tax rates. Finance ministers can only have one of the two as we learned in the nineteen seventies.

Why does this blog bore you with so much politics you might be forgiven to think? Politics have an impact on every aspect of people’s lives. Just watch Leonardo’s latest movie “Don’t look up” and pay attention to the end of the movie. Sadly politics have an impact on people’s finances and retirement saving plans as well.

GDP growth is strangely not correlated to stock market returns so there is still hope for the UK stock market. A shrinking pie/economy however is much worse for the currency the £ than a growing pie/economy. So Holland Park Capital London is going to be more hesitant to make new investments in the UK stock market going forward.

On top of that property rights worldwide are not being respected. Money will always leave from unfriendly places and flow to places where people are nice to the money. Canada was the first country to disrespect property rights because some people dared to protest against a policy of the Canadian government. Geopolitical events caused both the UK and the US and others to sanction the Russian central bank. Holland Park Capital London does not believe in sanctions. Cuba sanctions are still in place and have achieved what exactly? Sanctions will make the Russian people more nationalistic and Holland Park Capital fails to see how that would help a diplomatic settlement. Russia in turn did not respect the property rights of the owners of their leased air planes. So capital will leave these places, but it is less clear where the money will flow to.

Jumping to the United States then; since President Nixon ended the $ convertibility into gold in 1971 the world has been on a petrodollar system. Oil transactions settle in $ and the oil exporters take those dollars and re-invest them in the United States. After all the United States is a deficit country. This allowed the United States to export dollars to the rest of the world. That petrodollar system is finished now as well thanks to the move on the Russian central bank. Other oil exporters will have paid attention and will have started to repatriate their overseas gold holdings to within their own borders. Talk about going local. So just when the FED has finished its latest round of quantitative easing the international demand for dollars and US treasuries will dry up. Maybe just maybe this means that deficits will start to matter again soon.

The US annual inflation of 7.9% at the end of February 2022 effectively means paper money has defaulted versus real assets like commodities. The upside of that is that money will get a price again when the central bankers start hiking interest rates. Money with a zero percent interest rate on it effectively signals that the fiat paper money is worthless. Hopefully central bankers will learn now that that experiment could only ever have one unhappy ending. Inflation will keep going up this year on the back of the troubling geopolitical situation. Hopefully 2023 is the year when inflation normalizes and hopefully we are not in a full blown recession by then.

The upside in the meantime is that old fashioned gas and oil prices are at high prices. Simple economics suggest that that will reduce demand for those commodities which should be great for mother earth. Even better a high energy price will turbocharge the investments in sustainable energy projects. Sustainable energy will be used more and will get more scale and more use will lead to more technological breakthroughs which in turn will lower the prices of sustainable energy even further. In a couple of years the more uncompetitive old fashioned polluting energy will become economically uninteresting to get out of the ground. Geopolitics has really brought forward the last hurrah for coal, oil and gas. This too shall pass.

Hopefully we will not only see enormous new capital investments in sustainable energy and storage, but also profitable investments in that space. Too much capital chasing to too few investments can be a bad thing for investment returns.

Talking about returns; the forward P/E ratio of the S&P 500 index is now around 18. A back of the napkin estimate would divide 1/18 for a future yearly return of 5.5% for the S&P 500 index. One can see why with an inflation rate of 7.9% this is nothing to get excited about. Clearly inflation needs to come down before investors will be confident enough to pay for higher valuations. So the best thing investors can hope for in the meantime is upside surprises in the earnings of the companies in the S&P 500. Here is for hoping!

Anyway thanks for reading and good luck!

The blog is not advice on what you should do with your money and was written for information and entertainment purposes only. When you invest in the stock markets it is possible to lose money. Please do your own research. If in any doubt what is best in your individual situation, please hire a licensed financial advisor. Good luck on your investment journey.

Holland Park Capital London hopes you enjoyed the information in the blog. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long most of the stocks in the S&P 500 index and is also long the S&P 500 index ETF. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. Make your own decisions please. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.