My Portfolio had an absolute shocker last week, taking a hit of 3.6% which is very big for the kind of diversified and relatively low risk collection of Stocks I hold. It is typical that this comes just after a very good week and seeing my Portfolio pretty much at its highest level for 2019 so far – how promptly and viciously the Market extracts its revenge.
There were a few culprits with the main ones being a kick from Diversified Gas & Oil Corporation DGOC after a Bear Blog written by lord knows who, and a nasty drop on Somero Enterprises SOM on Friday after a Profit Warning mainly due to heavy rainfall in the US. The other kick came from my Short Positions on the FTSE100 and the S&P500 with the Indexes rising strongly but without a corresponding rise on my Stocks – it’s an unfortunately side of Hedging that the match with my Portfolio will never be perfect. I was also a bit lucky because it could have been even worse – Entertainment One ETO got whacked mid-week because there were fears that Mark Gordon was going to leave the company but fortunately ETO put out a Statement saying that this was not the case. It’s hard to believe my Week could have been worse !!
Regarding SOM it is very similar to something that happened about 2 years ago I think and in that case it turned out to be no big deal and SOM recovered nicely afterwards. However, as always we can never know how things will play out and Profit Warnings have a nasty habit of coming in 3s. Having said that, it is perfectly logical and believable that heavy rain does make the laying of huge Concrete Floors impossible but of course it is also about whether or not SOM has other issues that they are not telling us about. It is good to see that they are continuing with Site Expansion plans and they have a nice Cash Pile still which gives some support and increases the chances of the Dividend being maintained even if trading does worsen.
I am happy to hold on to SOM because I like the way it dominates the Market Segment it has and I like the potential of the new Products which appear to be making progress. Of course SOM is cyclical and if the US Economy and the wider Global Economy slows then this could be problematic – but as yet it is unclear that this is happening although Jobs Numbers in the US on Friday were poor. I am happy to hold SOM but I won’t be buying more. DGOC got really beat up after a Blogger somewhere wrote an article which in essence questioned the accounting policy for how they deal with the Expected Lifetime of Wells and the Depreciation they recognise in the Accounts each year. There has been huge excitement about this and the ‘Usual Suspects’ have been claiming that the Company is a scam and suchlike but I think it is all utter nonsense. The nub is that when DGOC bought Wells from other Companies in the many acquisitions, the Companies they bought might have said the Wells had a Lifetime of 20 years for example, but when DGOC has put them into their Accounts, they might have extended the Life a lot to perhaps 50 years. On the face of it this seems very dodgy but it doesn’t take long if you understand the Business to realise what is going on here. When DGOC takes ownership of the Wells they use their teams of Engineers and stuff to optimise the Output of the Wells and this has resulted in increased Production and it will increase the useful Lifetime of the Wells. In addition, DGOC recently acquired a Pipeline Network and this will also mean that Wells which needed Tanker Lorries to transport their Output may not now need them because they can be linked up to the Pipes which is far cheaper – therefore Wells that would have been uneconomic for Lorry transport are worth continuing with as the costs of Pipeline transportation are far lower. There are also benefits from Pumping Stations and more efficient use of Gas Compressors. Something else to consider is that if DGOC extend the Lifetime of a Well then it means that they are putting a smaller Depreciation Cost into their Profit & Loss Account which means that they will be overstating Profits. However, it is important to realise that this is not Cash – the Cash flowing into the Company is not the same as the Earnings which will be recognised (Depreciation is a Non-Cash item) so it does not affect DGOC’s ability to pay out chunky Dividends and that is a major part of the appeal of the Stock. Overstating the Profits could mean higher Tax payments though but this should all be in the forecasts. There was also some criticism of the Cost per Well that DGOC was allowing for Decommissioning the Wells when they get to the end of their useful Life – however, the Bear Blog failed to appreciate the efficiency savings that DGOC will get compared to the previous Owners simply from using Dedicated Shutdown Teams and not using Contractors etc. Anyway, this is something we can monitor in the Accounts as time goes on so if there is a problem it will be easy to spot. I suspect most of the Bears on DGOC fail to realise that the previous Owners of the Wells do not want the Conventional Oil & Gas (they want the Shale Oil underneath) and for this reason they operate them very badly and DGOC can make considerable gains simply by using standard practices and existing Teams more efficiently. Something else that needs to be appreciated is that DGOC is actually bringing Shutdown or Dormant Wells back into production – this extends the Average remaining Life of the Wells. And don’t forget the opportunity for in-fill drilling in the future. The Markets had a good bounce last week after their recent drops and already there is a sense that euphoria and excitement are returning. I am not convinced that we are out of the woods yet and there are important Technical factors like the Bearish Candlesticks from May that suggest more downside and of course June has the reputation of being an extremely bad month (second worst only to September) and this has been even more reliable since 2000. It is also worth bearing in mind that July is often a strong Month but if June turns out to be unusually good, then it is likely that we will pay the price in July – Summer is rarely a fun period for Market Bulls and with all the various Political and Economic problems around the Globe, I see no reason for my Strategy of being cautious and staying Hedged to change. It would have been nice for me if the Markets had gone a bit lower in the recent drops and I could have got out of my Shorts – but it is what it is and I am happy to stay patient and wait for another opportunity. If Indexes do well leading up to Autumn then I might be tempted to Short a little more (with a strict Stoploss !!) and to get my Average up. Of course Brexit is hanging over us and this has potential to cause a right old mess in September and October and beyond – it seems very likely that the UK will escape the EU on ‘No Deal’ terms and this could turn out a bit messy. Another crucial Technical factor is what those 13/21 Day Exponential Moving Averages (EMA) are doing – I will look at the Charts further down this Blog and pay particular attention to these ‘Bigger Picture’ factors. Latest TPI Podcast Last Weekend (sadly not quite in time for me to include it in last weekend’s Markets Blog) we published the latest Twin Petes Investing Podcast and it has had a very pleasing response on Twitter. I am not surprised because when we did it I had the feeling that this was probably the best one we have done or certainly up there with the decent ones. If you have not had the pleasure yet, then you can find it on the ‘Podcasts/Videos’ page on this Website but here is a Link anyway: https://soundcloud.com/user-479955511/wheeliedealer-and-conkers3-in-stereo If you like this Podcast and have not listened to any of the previous ones, then you might find it worthwhile going back and listening to those if you have the time. We try to discuss several Stocks in each one and these could give you things to think about and we also try to incorporate a huge amount of educational stuff which means the Podcasts are fairly timeless. Gaydon Museum Meet-up You can find out details about this one on the ‘Events’ page and the crux of it is that I will be at the National Heritage Motor Museum at Gaydon just off one or other motorway (it’s a bit below Birmingham I think) on Friday 12th July. Again everyone is invited and you just need to pay the entry fee to the Museum but it is well worth going and we should have a good laugh. Come and join us. I am not too worried about knowing who is coming because it is a huge venue and a public place anyway. Generally these kinds of Meet-ups tend to be smaller with perhaps around a dozen people or so which means that if you are new to investing or anything then they can be a superb opportunity to meet up with the highly experienced and successful Investors who I know are coming along. It is well worth taking advantage of. WheelieBash 2019 You can find out more details about this on the ‘Events’ page which is on WD2 (there is a Button at the top of the main Homepage on the main Website and you are actually reading this Blog on WD2 even if you hadn’t realized so if you go to the top of the Page you should find the Menu to get you to the ‘Events’ page) and it is taking place on Saturday 7th September and I can confirm that it will be held at the same venue as last year - the White Hart in Winkfield which is just outside Windsor. There is a link on the Events page to the Pub and everyone is invited but please contact me somehow if you are coming because I need to keep track of the numbers - we are allowed 60 People and it is pretty likely we will get that I think - the List is filling up fast with 20 confirmed attendees already and a lot of people at Mello said they are interested and will let me know (and that was not prompted by me). Blog Slate It feels like I had a very busy week doing stuff for the Website although of course much of that is because the Hotel Chocolat HOTC Stock Idea blog needed a fair bit of work – although I actually enjoyed doing it. Part 1 went out on Friday and I think HOTC is a very interesting business and I am particularly attracted to the history of steady year on year progression and it seems to me to be very well managed. I do not hold HOTC yet and I want to do some more checks but I can see myself buying a small ‘Starter Position’ to get my foot in the door in coming weeks but I don’t want to commit heavy Funds to anything until I am happier with the outlook for the Markets and Brexit and stuff. HOTC is very expensive and if it suffers a decent Drop, then that might tempt me in more. My plan is to issue Part 2 of the Blog later this week but I have a lot on socially so I might not get the chance to do this – if not, something will be published I suspect and the HOTC Blog might slip a bit. I also issued a short Blog which is a Review of the Ian Botham autobiography and I have shoved the Book into the ‘Non-Finance Books’ page. I really enjoyed this one and that is despite me barely having seen any Cricket for about 30 years but luckily I remembered enough about those days to help me know what was going on. I note the Kindle Version is crazy cheap at something like £2.49 at the time of writing this so if you want something to read on Holiday or in the slow Summer Days, then this could be worth grabbing. I have several more Book Reviews to publish and these will probably trickle along in coming weeks when I find the time. Of course we did the Podcast that I just mentioned and I know I need to update the ‘Weekly Performance’ for May – if I get a chance I will do it this week but to be honest I can’t see that happening. I promise to do it the following week but the HOTC Blogs must take priority. Once the HOTC ones are done I have plenty of ideas for new Blogs and I intend to move the ‘Videos’ to their own Page but that is not a priority. I won’t go straight into another Stock one but chances are I will do a Stock one in coming weeks as I am sure Readers like them and I find it very useful to structure my Research. The Dim and Distant Past revisited As always for this section, I was slowly scrolling down through the ‘Blog Index List’ on WD2 (yes, I use the Website just as much as you lot !!) when I tripped over this one. I had actually forgotten about writing it and when I scrolled down through the text it started to ring some bells and the Comments at the bottom reminded me of the feedback I had got for it on Twitter as well. It is well worth re-reading: http://wheeliedealer.weebly.com/educational-blogs/the-appeal-of-long-term-investing OK, let’s look at them charts……… S&P500 As always my images are taken from SharePad which I subscribe to and if you click on them they should grow a bit bigger so you might actually be able to see something. First off we have the Daily Candlesticks for the S&P500 and my Black Arrow is pointing to a nice White Up Candle that we got on Friday and this looks bullish although note it closed a little off its high of the day at 2884. In fact, it closed pretty much bang on the 50 Day Moving Average which is the Darker Blue Wavy Line and there is clearly a lot of Resistance not far above at 2900. If it can get through this, then it sets up the All Time High from a few Weeks ago which is at 2954. If it can get through 2954 then next up is the important psychological level of 3000. Note how the Price managed to get through Resistance from the Blue Line marked by my Blue Arrow that I showed last week. To the downside now the strong Support will be where my Green Arrow is at 2728. My Red Arrow is marking a Bullish ‘Golden Cross’ between the 50 Day Moving Average and the 200 Day MA (the Light Blue Wavy Line) – these are not great predictors but of course it is a positive thing in the Big Picture.
In the bottom window on the image below we have the Relative Strength Index (RSI) for the S&P500 Daily. On a Reading of RSI 53 where my Black Arrow is this is a neutral level and it is not Overbought or Oversold but the direction is Bullish and that is about all we can say.
Next we have the Daily Heiken Ashi Candlesticks – these are totally different to the ‘Normal’ Japanese Candlesticks. Where my Blue Arrow is we have a Big White Bullish HA Candle and this suggests more upside – but you must appreciate it is a ‘slow’ Indicator.
Next up is the 13/21 Day EMAs which I mentioned in the textual waffle at the start of this Blog as being an extremely useful Indicator. On the Chart below where my Green Arrow is the ‘faster’ Black 13 Day EMA is turning up but as yet has not crossed the Red ‘slower’ 21 Day EMA Line. This means that the Bearish Crossover from where my Blue Arrow is is still ‘in force’ and this suggests more downside until we get the Bullish Cross. If we are to switch to Bull Mode, then it could happen in the next few Days. If you follow me on Twitter, no doubt I will be looking at this and Tweeting out around 10.30pm each Night.
If you look at the Red Arrow this is an example of the Bullish Cross we need and look how it predicted a long run of gains.
Next it’s the ‘Normal’ Weekly Candles. My Black Arrow is pointing to a Big White Up Candle and this looks Bullish.
Next it’s the Monthly Candles. Where my Blue Arrow is I want you to totally ignore the White Up Candle because it is for June so far and is not valid until the last Day of June is done. On this basis, if you take away the White Candle then we have an ugly Black Down Candle for May and this is Bearish in the Big Picture.
Remember – longer timeframes dominate over shorter ones in Technical Analysis stuff – so a Monthly Candle has more credence than a Weekly Candle, which has more credibility than a Daily Candle etc. Bearing this in mind, it is very possible to have a lot of Bullish moves on Daily and Weekly timeframes but still to be Bearish in the Big Picture.
Next it’s the Daily Candles with the Pink Zone marking the Upper and Lower Bollinger Bands and where my Black Arrow is note we are right up at the Top Band. It might be able to keep rising and to ‘hug’ the Upper Band but more likely is that it drops back or goes sideways.
FTSE100
All Major Indexes tend to move as a group and the FTSE100 largely did the same as the S&P500 last week. My Red Arrow marks a nice Big White Up Candle from Friday which in a similar way to the S&P500 fell away from the day’s High at 7347 by the Close and Closed pretty much at the 50 Day MA (the Dark Blue Wavy Line). Note it managed to get through Resistance from the Green Line (marked by my Green Arrow) and my Black Arrow is marking the Peak from a few weeks ago at 7528 and this will be tough to get through. There seems to be quite a bit of Resistance just below 7400. To the downside the Market turned with a beautiful example of a Hammer Candle on Monday with a Low at 7079 where my Blue Arrow is. Like the S&P500 there was a 50/200 Day MA Golden Cross recently but these are not hugely reliable I find.
In the bottom window on the ScreenShot below we have the RSI for the FTSE100 Daily. On a reading of RSI 52 this is neutral but the direction is bullish.
Next it’s the Heiken Ashis. My Red Arrow is pointing to a Big White Up HA Candle from Friday and this is Bullish.
Next we have the 13/21 Day EMA Lines and I have had to zoom in quite a bit to see what is happening and where my Red Arrow is we are near a Bullish Cross but it has not yet happened. We could get a Bullish Cross in the next few Days so we need to watch this closely.
Next the Weekly Candles for the FTSE100. My Blue Arrow is marking a Big White Up Candle and this is Bullish.
Now we have the Monthly Candles for the FTSE100. My Blue Arrow is pointing to the Big Black Down Candle for May and this is Bearish. As on the S&P500, we must ignore the White Candle which is only part formed for June.
Finally we have the Daily Candles for the FTSE100 with the Pink Zone showing the Upper and Lower Bollinger Bands. My Black Arrow is pointing out how we are at the Top Band and this could limit gains from here although it can sometimes ‘hug’ a Band higher. It is most likely to drop back or to go sideways now.
That’s it for this weekend – I hope everyone has a great week !! Cheers, WD.
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