(B)(N) The Brexit of Champions

Doggerland Circa 10,000 BC

Drama. Alas, Great Britain has left us again. The last time that happened was about 10,000 years ago when “Global Warming” and the rising waters of the Atlantic Ocean (yet to be named) wiped-out the land bridge between Doggerland and Doggerbanks and Europe and Northumberland.

All Hail Britannia for the Brexit of Champions because the British economy has been moving like a whirling Dervish and the stock market (the FTSE 100) is up about 16% this year after suffering losses of (-14%) and £300 billion last year even as the corporate revenues and earnings are continuing to shrink and the losses are continuing to pile-up; please see the summary charts below for today’s Brexit Special.

All of this is quite transparent for the simple reason that “money” needs to find an income or it too will be swallowed-up by the ocean in due course and the British government (and, therefore, the taxpayers) has refused to pay more for its debt and it is still thoroughly confused about what Brexit Nexit, so to speak (Reuters, October 25, 2016, Bank of England to hold rates next month; staying in EU best for UK trade – economists).

Hence, if “money” has nothing new to invest in, it will buy whatever might produce an income and in Britain today, short of owning the companies, that’s the stock market which is pushing-out more than 200% of its earnings to support a current aggregate dividend yield of 3.7% plus the opportunism of capital gains due to an anxious market which is currently paying an extraordinary aggregate of [P/E] 56x earnings for a chance to play.

We don’t know how the Brexit will work out and Britain has 60 million people and a diverse industrial economy that produces about USD$2.8 trillion and $44,000 per capita GDP (the British £ (GBP) trades for about USD$1.25) but the Perpetual Bond (please see below) is currently willing to hold only about half of the companies in the FTSE 100 (and we bought them at much lower prices than today) and that number is down from almost all of them in 2013 and 2014; please see Exhibit 1 below for more details.

The Prime Directive

The full market (B)-class portfolio is a “Perpetual Bond” because its fundamentals and performance are closely linked to the economy of the country by its stock market, in this case the FTSE 100, as representative of the money (savings and investment capital) and the industrial and productive capacity of the country to trade and prosper.

However, the apparent “desperation” of the British investors (as above) has pushed the Free Market Yield to a wildly “inflationary” 8.6% per year that is not supported by the fundamentals or the expected GDP growth (about 2% per year) which depends largely (about 80%) on the “services industries” in finance, insurance, and banking, followed by manufacturing, including auto manufacturing, and aerospace defense and engine sales, and they’re also running a “food” trade deficit of about £20 billion a year (£300 per capita) which was much worse for hundreds of years before the 19th century.

The Prime Directive

Into this chaos, we bring the (B)-class portfolio which has the “Prime Directive: Thou shalt not lose any of our money” and that’s easily enforced if we’re prepared to jettison the decades of provably absurd cant knowledge and scuttlebutt about “investing” and “risk” that is still floating around in the World capital markets.

The fact is, nuncle, that real investors don’t take any risk although they will sometimes gamble if they can afford the loss or if it’s your money and not theirs.

For example, we provably expect that the (B)-class portfolio in any market, whether as a Perpetual Bond or just a portfolio of stocks, will get a return of the current aggregate dividend yield (3.7% in this case) plus twice the normalized annual volatility (9.9% per year) of the market with no risk to our capital and that’s +23% per year in dividends and capital gains in the FTSE 100 which is our “market” in this case – and that’s what we got – an average of +23.7% per year for five years running net of all our expenses and we earned dividends and capital gains of +185% since 2012 which has nearly tripled our money due to the “float” that is created by the daily stock price volatility of investor anxiety.

However, at the present time, we’re cash rich and invested in less than half of these companies and that’s a requirement in order to maintain our performance metric, and the Prime Directive, in this market no matter what they throw at us next; please see Exhibit 1 below for more details (and click on it and again to make it larger as required).

Exhibit 1: The Brexit of Champions – Fundamentals and Cash Flow Summary

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy and The Coal War which is heating-up again now; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.