Previously on Sharpfokus
Working capital 💰 Sharpfokus111
October 13th, 2019
⏰ 2 minute read
⏰ 2 minute read
18 days
We wrote about October already last week, but we can’t get over a slightly obsessive thought that this particular October could be a month of even greater significance than any other October. For markets, it could be one of the greatest Octobers in recent history. As we’re already half way through, this means specifically the next 18 days. Here’s the 3 things we’re looking at.
Sentiment
Trade War
The first is simply the technicality of sentiment. The US China trade war has got to be one of the most overblown stories of the century. It’s used as an excuse for any problem, almost anywhere. But it now looks like it’s about to become a non story almost as quickly as it became a big story; & it’s absence will boost sentiment.
Apple
Also helping sentiment is that stocks are making new highs. Apple just made a new one on Friday & is solidly back above $1tn. Apple has almost retaken the lead from MSFT. This is bitter sweet for us as there are now 2 US listed companies which are bigger than the whole Indonesian economy, as of last 12 months to 2Q. But hopefully when our 3Q GDP is announced we can be higher again.
Index
The stocks should be a leading indicator for the whole market. It’s been a while since the Dow made a new high, but it’s close. It’s been 18 months since the JCI made a new high! We’ve been going sideways since early last year. If the Dow follows AAPL, the JCI will be close behind. New highs will significantly boost investor sentient & accelerate buying.
Exit
Growth
The second event is incredibly exciting. We know that the major concern of markets at the moment is economic growth. There’s an easy way to fix that... For much of my more grown up life, the UK was the fastest growing economy in the world. This was true from 1979 up to 2000. But from then to now, the UK has become the slowest.
Stocks
You can argue about Brexit until the cows come home, but the data is hard to argue with. The more the UK went into the EU, the slower growth became. If you don’t trust that data, even more stark is the stock market performance. The FTSE was close to 7,000 in 2000 & is close to 7,000 today. Out of the EU & all that can change. The FTSE can quickly make a new high & then it’s off to the races.
Bonds
It’s not only stocks. No growth means 0% bond yields & the UK has had the biggest fall in yields of all the majors. Take a look at a chart of the 30 year gilt yield decline post 1990... it’s amazing. Fortunes were made there. An October 31st Brexit will therefore move the bond market most quickly of all. That prospect & higher rates last week are starting to strengthen the £. Higher bond yields mean a weaker $.
Cash flow
Negative
A weaker $ means a stronger rupiah & a stronger rupiah means lower interest rates here in Indonesia. The next couple of weeks should see the rupiah back below 14k again & some major strengthening to follow. A stronger rupiah & lower rates means lower costs for companies which means better cash flows... & negative cash flow is the biggest thing holding our stocks back.
54
Over the last 12 months or 4 quarters... the Sharpfokus Saham 54, soon to be 55 companies we cover have in total a negative cash flow. Investors get paid with cash flow so negative is less good. The 54 stocks are about 9% of the market & come from a wide variety of sectors. 24 have positive cash flow & 30 negative. The total cash flow of the top 50 is still positive... so it’s only really 4 companies responsible for the negativity (80:20 rule).
Working capital
Those 4 companies have a total negative cash flow of a whopping minus Rp46tn. One is because of an acquisition, so we will take that one out. The other 3 are still 75% of the Rp46tn negative cash flow & amazingly all of their negativity comes from working capital. This negative working capital is what’s holding back the market. But working capital is short term.
Wall
This October we will get the 3Q results & this is what we expect to see. First the negative working capital recovering & turning sharply positive. Second, an overall improvement in all cash flows. Suddenly investors will be looking at getting paid again, rather than having to put money in. This is the magic ingredient which will drive stocks crazy. New highs & then far beyond. It’s going to be an amazing month this October.
Be a great investor.
Sebastian
We wrote about October already last week, but we can’t get over a slightly obsessive thought that this particular October could be a month of even greater significance than any other October. For markets, it could be one of the greatest Octobers in recent history. As we’re already half way through, this means specifically the next 18 days. Here’s the 3 things we’re looking at.
Sentiment
Trade War
The first is simply the technicality of sentiment. The US China trade war has got to be one of the most overblown stories of the century. It’s used as an excuse for any problem, almost anywhere. But it now looks like it’s about to become a non story almost as quickly as it became a big story; & it’s absence will boost sentiment.
Apple
Also helping sentiment is that stocks are making new highs. Apple just made a new one on Friday & is solidly back above $1tn. Apple has almost retaken the lead from MSFT. This is bitter sweet for us as there are now 2 US listed companies which are bigger than the whole Indonesian economy, as of last 12 months to 2Q. But hopefully when our 3Q GDP is announced we can be higher again.
Index
The stocks should be a leading indicator for the whole market. It’s been a while since the Dow made a new high, but it’s close. It’s been 18 months since the JCI made a new high! We’ve been going sideways since early last year. If the Dow follows AAPL, the JCI will be close behind. New highs will significantly boost investor sentient & accelerate buying.
Exit
Growth
The second event is incredibly exciting. We know that the major concern of markets at the moment is economic growth. There’s an easy way to fix that... For much of my more grown up life, the UK was the fastest growing economy in the world. This was true from 1979 up to 2000. But from then to now, the UK has become the slowest.
Stocks
You can argue about Brexit until the cows come home, but the data is hard to argue with. The more the UK went into the EU, the slower growth became. If you don’t trust that data, even more stark is the stock market performance. The FTSE was close to 7,000 in 2000 & is close to 7,000 today. Out of the EU & all that can change. The FTSE can quickly make a new high & then it’s off to the races.
Bonds
It’s not only stocks. No growth means 0% bond yields & the UK has had the biggest fall in yields of all the majors. Take a look at a chart of the 30 year gilt yield decline post 1990... it’s amazing. Fortunes were made there. An October 31st Brexit will therefore move the bond market most quickly of all. That prospect & higher rates last week are starting to strengthen the £. Higher bond yields mean a weaker $.
Cash flow
Negative
A weaker $ means a stronger rupiah & a stronger rupiah means lower interest rates here in Indonesia. The next couple of weeks should see the rupiah back below 14k again & some major strengthening to follow. A stronger rupiah & lower rates means lower costs for companies which means better cash flows... & negative cash flow is the biggest thing holding our stocks back.
54
Over the last 12 months or 4 quarters... the Sharpfokus Saham 54, soon to be 55 companies we cover have in total a negative cash flow. Investors get paid with cash flow so negative is less good. The 54 stocks are about 9% of the market & come from a wide variety of sectors. 24 have positive cash flow & 30 negative. The total cash flow of the top 50 is still positive... so it’s only really 4 companies responsible for the negativity (80:20 rule).
Working capital
Those 4 companies have a total negative cash flow of a whopping minus Rp46tn. One is because of an acquisition, so we will take that one out. The other 3 are still 75% of the Rp46tn negative cash flow & amazingly all of their negativity comes from working capital. This negative working capital is what’s holding back the market. But working capital is short term.
Wall
This October we will get the 3Q results & this is what we expect to see. First the negative working capital recovering & turning sharply positive. Second, an overall improvement in all cash flows. Suddenly investors will be looking at getting paid again, rather than having to put money in. This is the magic ingredient which will drive stocks crazy. New highs & then far beyond. It’s going to be an amazing month this October.
Be a great investor.
Sebastian
