DIARY OF A FUND MANAGER - Numbers game 04.08.20

In this week’s Diary a review of the numbers we use in order to understand the world around us. From huge government support packages to miniscule interest rates, they all matter. Also, some highlights from the companies that have been issuing reports in recent days.
Markets went their separate ways last week. US equites and bonds moved higher. Elsewhere the trend was lower for stocks. The dollar weakened against all major currencies and gold pushed on towards $2,000 an ounce. Although a surprise to nobody, the severity of the setback in the second quarter of the year was shocking. US economic activity declined by 33% with Europe down 40% on an annualised basis. Recovery will take quite some time.
Words predominate in these Diaries, but this week numbers feature more than usual: both big and small. A good place to start is with governments where the numbers are enormous. A few months into the largest stimulus ever, more seems to be needed. In the US income support of $600 per week has ended and a new package is needed by millions of unemployed Americans. A trillion dollars is regarded as mean and so more is anticipated. Most of us find it hard to comprehend what $1 trillion means, but we do understand time. If each dollar was converted into seconds then a million is the equivalent of 11 days, a billion is 32 years and a trillion stretches out to 32,000 years. We have started a huge experiment with the use, availability and value of paper money. The end result is no more than conjecture.
At the other end of the scale central banks have reduced interest rates to zero or less, with no plans to move back to previously ‘normal’ levels. Unintended consequences are crashing around a financial system designed for positive interest rates. Pensions, insurance premiums, risk calculations and economic theories; the list goes on. It is a bit like the transition from Newton to Einstein. Easy to understand concepts like universal time just don’t apply when you approach the speed of light. Negative interest rates are having a similar effect on long-held beliefs.
The company results season is also about numbers. So far 63% of US companies have reported and 84% have exceeded expectations. Good news apart from the fact that average earnings for the second quarter were 36% lower than in the first three months of the year. The gap between the winners and the losers is stark. The technology giants are coming through this crisis in fine shape. Alphabet (Google) reported earnings growth of 30%, Apple 18% and Facebook 29%. Given that Microsoft, Apple, Amazon, Facebook and Alphabet represent 23% of the US index, these numbers matter. On average, share prices of these five companies are up 30% so far this year. The other 495 members of the S&P 500 are down 9%.
Of course many other companies in all parts of the world are also delivering value to shareholders either through dividends or at least by surviving this crisis. Mining, oil and utilities are all sources of income and so are valuable in a world where cash doesn’t provide a return. The Quilter Cheviot analysts have been working overtime to understand all that these companies are telling us about the present and the future.
The breadth of knowledge that is needed is impressive particularly at times of change. A couple of examples plucked from the avalanche of information illustrate the point that detail matters. The manufacturers of artificial hips are suffering at the moment because of the cancellation of elective surgeries, but should survive. Whether those who own outdoor advertising space where revenue is down over 60% will ever regain market share from digital is another matter? Many judgements need to be made.
Numbers are by turn used, abused and misunderstood, but so are words. Both have multiple meanings and should be treated with caution. Attaching too much confidence to either is a triumph of hope over experience. Understanding uncertainty is more valuable than precision at all times, but even more so now.
These Diaries are composed of words, about 250,000 and counting, a few numbers and as far as I can remember I have never included a formula. Words can, however, be measured for clarity. In 1975 the US military commissioned some research into the readability of its technical manuals which eventually resulted in the Flesch- Kincaid scale. Janet and John stories or the Cat in the Hat score close to 100, whereas academic papers tend to be in the low teens. I am pleased to report that a randomly selected Diary scored 65 and so should be understandable by a 13-15 year old. Just as spurious numerical accuracy is dangerous so are unnecessarily complicated sentences.

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