Newsletter No. 13 30/06/2017


Good Afternoon,


The UK

This week the FTSE 100 has been fairly volatile and is now trading lower at around 7375. Sentiment has been affected by several factors however one particularly stands out; comments from the Bank of England regarding monetary policy.

Deputy Governor of the Bank of England, Sir Jon Cunliffe, tacitly expressed a preference for keeping interest rates unchanged. The move aligned the Deputy Governor with Governor Carney and confirmed a core alliance that will stand against those members of the Monetary Policy Committee agitating for an interest rate rise. However following this statement Mr Carney himself announced on Wednesday that the base rate may rise sooner if investment begins to rise and offsets weaker consumption. This comes only 2 weeks after saying it was “not yet the time” for higher rates after the close 5 to 3 vote by the MPC.

One feels Indecision may or may not be a problem.

This in turn led to a turbulent week in the FX markets. Sterling jumped around 0.3 per cent against the euro this morning touching 1.14 and moved to a six-week high of above 1.3 against the US dollar. If the Bank votes for a rise at the next MPC meeting in August I expect the pound to continue its move higher.




I would like to take this opportunity to point out that there seems to have been rather a lot of histrionics in the press over the latter part of this week regarding a “global bond sell off”. From where I am sat I can tell you that corporate bonds have actually tightened during the last month. Yes gilts have traded easier, but when the word sell off is printed everywhere you envisage carnage! Here are the figures that relate to the headlines; German 10 year Bunds now offer a rather heady 0.5% and UK 10 year Gilts are offering close to 1.25%. But this shouldn’t come as a surprise given the talk of rate hikes and the tapering of the current monetary policy.


Oil prices have rebounded slightly over the last week; in fact they had their longest winning streak in over a month with 4 consecutive sessions finishing in the blue. This seems to have been initiated in part by tropical storm Cindy which caused 16% of the Gulf of Mexico’s oil production facilities to be closed down last week. Hopefully the oil price can hold the ground it’s made up as the oversupply has left it teetering very close to bear market territory.

Definition; A bear market is a condition in which prices fall and widespread pessimism causes a market’s downward spiral to be self-sustaining. Price must fall 20% from their peak within a 2 month period.

Right now if I was holding small cap oil stocks I would be looking to move into the oil majors as they have the ability to absorb much more of the downside. Oil majors may not provide the same % upswing when the market is bullish however with a 6.5% dividend and well diversified portfolio BP would be my choice in this sector.




Troubled Bank;

The Co-operative Bank says it is no longer up for sale; it has salvaged its future following a £700 million deal with hedge funds.

Co-op Bank was forced to put itself on the market in February after it was unable to reach a strong enough footing to satisfy Bank of England regulations. But in June, it said it was in “advanced discussions” with a group of existing investors on recapitalisation. Now the bank says the plan has been “substantially agreed”.

Earlier this year, it reported its fifth annual loss in a row, although the £477m deficit for 2016 was an improvement on the £610m loss recorded in 2015. The Co-op Bank has four million customers and is well known for its ethical standpoint, which its board had said made it “a strong franchise with significant potential” to prospective buyers.

Note for any holders of the Co-op Bank bonds; we will be in touch over the next few weeks explaining how the deal relates to your holding.

The above story got me thinking…. How are these banks, that are in essence the engines of our economy, getting themselves into such a mess? Richard A Werner’s work may help you understand the complexities a little better.

Below is a section taken from his academic paper; A lost century in economics

4.1. Flaws of the financial intermediation theory

The financial intermediation theory argues that banks are indistinguishable in their accounting from non-bank financial intermediaries (Tobin or others have argued that reserve requirements, regulations of interest rates, and capital requirements are the sole distinguishing feature of banks).

Stockbrokers do not show their clients’ assets, even if invested by them on a discretionary basis, as part of their own balance sheets. The assets owned by mutual fund management firms and the assets of their fund investor clients are kept completely separately. Stockbrokers’ assets are boosted by their own investments, but not those of their clients. Thus an insolvency of a stock broker or fund management firm leaves client funds unencumbered: they are fully owned by the clients. But bank ‘deposits’ are owned by the banks and bank insolvency means that the client funds are part of the assets of the bankrupt firm. Depositors are merely general creditors, ranking ahead of shareholders (although smaller amounts may be covered by deposit insurance schemes, which is a separate issue). However, due to the new Bail-In regime agreed by the G20 in 2010, depositors may rank below other creditors. Thus a comparative analysis of stockbrokers (as representative examples of non-bank financial intermediaries) and banks reveals that banks are different from non-banks, because they do not segregate client assets (Werner, 2014c).

Since non-bank financial intermediaries, which can also gather deposits, have to follow the Client Money rules and keep customer deposits off their balance sheet, deposited safely with custodians, an equal treatment for banks would mean that banks would also have to conform to Client Money rules. As a result, bank deposits would not appear on the bank’s balance sheet. In reality they do, however, appear on bank balance sheets with their creation, contributing to the phenomenal growth in bank assets in the recent decades. Thus the critical distinguishing feature of banks is their exemption from Client Money rules and hence ability to control the accounting records of customers’ deposits, enabling them to add fictitious deposits when extending a loan (Werner, 2014c). A rigorous application of basic accounting and financial regulation would have provided ample notice to supporters of the financial intermediation theory, so dominant over the past half-century, that this theory has always been a non-starter, since banks could not possibly be financial intermediaries: how else could the rapid growth and massive scale of their own balance sheets be explained? Alas, it seems researchers in banking, finance and economics have woefully neglected basic accounting realities and easily observable facts.

Here is the link to the rest of this fascinating paper;




The euro climbed to a fresh peak for 2017 on Wednesday as investors started to anticipate withdrawal of economic stimulus measures by the European Central Bank. The markets focused on Mr Draghi’s remarks that “deflationary forces have been replaced by reflationary ones” as a signal that the ECB will reduce its bond buying in the coming months as the improving economy requires less monetary easing.

The strong performance of the euro has had an adverse effect on the continental exporters as their competitive edge is eaten away.

Below is a chart highlighting this year’s movement of the Euro vs US Dollar.

A little fact for you; Market slang for EUR/USD is Fibre.

The name fibre derives from the much older currency pair GBP/USD which is named cable. Cable refers to the old telecommunications line that connected the UK and US, transactions between the pound and dollar were executed via transatlantic cable. The Eur/USD currency pair is considerably newer so traders named it after the much improved “fibre” connection.





Share analysis


Last time I talked about using moving averages to spot momentum/trends. This week I am revisiting fundamental analysis and taking a closer look at Return on Equity (ROE).


What Is ROE?

By measuring how much earnings a company can generate from assets, ROE offers a gauge of profit-generating efficiency. ROE helps investors determine whether a company is a lean, mean profit machine or an inefficient clunker. Firms that do a good job of milking profit from their operations typically have a competitive advantage – a feature that normally translates into superior returns for investors. The relationship between the company’s profit and the investor’s return makes ROE a particularly valuable metric.


You can find net income on the income statement (or google); if you type the company name followed by “net income” into Google it provides the information without having to search through company financials.




Shareholders equity is located on the balance sheet –




The above is a section of United Utilities balance sheet from 2016, I have circled two figures, and you will notice that shareholder equity is the same as total net assets. It is by no means a sure fire way to find winners but used with other analytical methods I have shown you it can add clarity to your investment decisions. If you have the time take a look yourself and try and find the figures you need. As with most analysis it is important to only compare companies in the same sector as comparing a high growth tech firm with a utility company just won’t give you the desired comparable figures.

It pays to invest in companies that generate profits more efficiently than their rivals.


Be Aware

Because a company can increase its return on equity by having more financial leverage, it is important to watch the leverage ratio when investing in high ROE companies. ROE is calculated with only 12 months data. Fluctuations in company’s earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.

Just to note the only reason I have used United Utilities is that I was analysing utility companies at the time of writing.







ITV has been trending lower since its special ex dividend of 9.8p per share in April; this has been due to several factors, namely CEO Adam Crozier’s departure and a slowdown in advertising revenue (which is industry wide). Now appears the right moment to buy TV stocks as advertising revenue starts to improve and June should mark the low point as year-on-year comparisons get easier. I also expect some positive news flow in the next few weeks regarding a new CEO. Morgan Stanley announced last week it was upgrading ITV, giving them a Buy rating and 230p target. With a dividend yield of 3.6% and a consistent history or paying special dividends ranging between 5 & 10 pence per share (altogether a yield of around 6.5%).


Enjoy your weekend, thanks for taking the time to read my newsletter!


Kind regards,



Karl Townsend ACSI


For and on behalf of

Arnold Stansby & Co. Limited

Telephone: 0161 832 8554   Fax: 0161 834 7710

Members of the Stock Exchange

Authorised & Regulated by the Financial Conduct Authority



A word about some risks: Investing in the bond market is subject to certain risks that fixed income securities will decline in value because of changes in interest rates, and the risk that the manager’s investment decisions might not produce the desired results. Bonds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks such as liquidity, interest rates, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

This message (including any attachments) is confidential and is for the intended recipient only. If you are not the intended recipient, please inform the sender and delete any copies from your system. Internet communications are not secure and therefore Arnold Stansby & Co. Ltd does not accept legal responsibility for any of its contents (including any attachments) and any view expressed by the sender as these are not necessarily the views of Arnold Stansby & Co. Ltd.

The contents should be used as guidance and not investment advice, for advice that is specific to your risk profile and investment goals speak to us directly.