Credit deflation and the reflation cycle to come.

[DurhamBorn]

13 minutes ago, MrXxx said:

Hi DB, 

so just to make sure my `financial education` (garnered from this site and other sources; thanks all!) and understanding is correct...

...Imperial are doing this as a) credit is currently cheap, and b) it reinforces their share price (as many companies have done in this cheap credit period) BUT this can be an `Achilles heel` as the cycle changes, interest rates increase, and the cycle becomes one of debt deflation = bankruptcy unless they can afford payments?...

...so why are Imperial doing the opposite of what they should be doing at this stage of the cycle I.e. reducing debt to make themselves fitter for the crash that we can all see that's coming?!

They are reducing the debt.All big tobacco companies took on lots of debt to consolidate the industry into a few big players and it was the right move.Thats why they have such pricing power.However going forward they now need to de-leverage.Remember though rates wont get high for a few years yet,and most of the damage will likely be around 2027,so they have 8 years to de-leverage + the fact the debt left will come off slowly over time.The key here (and to the likes of Vod/BT etc) is that they can retire that debt from cash flow as it comes off and not have to re raise the capital at the higher coupon rates.Imperial has already paid down around £3billion and owes around £12billion.They should de-lverage at about £700 million a year.To do this i expect at the next results they will remove the 10% dividend increase commitment and replace with perhaps a 4%/5% or RPI whatever is higher commitment.That would allow them to continue to de-leverage at that level.

BAT is more tricky,they have 40 billion of debt and £1.5 billion a year spare cash flow after the divi.I would expect them to cut debt in half nearly by 2027,but that will still leave 20 billion.The key then will be their debt profile and how that debt comes due and in what size.They might be able to retire most of it as it comes off.Someone here with the time might be able to work out Imperials and BATs coming due debt cycle.

There is hardly any chance Imps or BATs would ever default,but it could impact earnings per share and dividends.

[Democorruptcy]

29 minutes ago, DurhamBorn said:

The key here (and to the likes of Vod/BT etc) is that they can retire that debt from cash flow as it comes off and not have to re raise the capital at the higher coupon rates.

On the subject of telcos, I joined Three and am paying £20 a month for unlimited minutes, unlimited texts, unlimited data (tethering allowed so I'm streaming to my smart TV etc). I've also used it abroad recently where the unlimited data drops to 19gb a month (no tethering). Just checked and it's now £22 a month but half price for 6 months! I'm wondering about telco profit margins?

[DurhamBorn]

https://www.proactiveinvestors.co.uk/companies/news/223198/stagecoach-upped-to-buy-by-liberum-as-share-slide-leads-to-more-attractive-valuation-223198.html

I mentioned way back in the thread near the start the keys to a reflation cycle for some companies are inflation pushes up prices while depreciation stays the same ending up in big free cash flow jumps.This is why high capital/high owned assets companies do well in reflation cycles and struggle in deflation ones.Here is a broker starting to pick up on that.They dont understand why its happening yet,or the process,just that it is happening,

"Analysts at the broker said that while “strategic challenges” remain for the FTSE 250 firm, its 6.6% dividend yield was “supportive”, and management had been guiding for a “more moderate” capital expenditure and depreciation rate than previously assumed."

These depreciation rates will be over 10 years i expect,perhaps 7,but as inflation runs higher fares will be increasing while they remain stable.

[DurhamBorn]

3 minutes ago, Democorruptcy said:

On the subject of telcos, I joined Three and am paying £20 a month for unlimited minutes, unlimited texts, unlimited data (tethering allowed so I'm streaming to my smart TV etc). I've also used it abroad recently where the unlimited data drops to 19gb a month (no tethering). Just checked and it's now £22 a month but half price for 6 months! I'm wondering about telco profit margins?

CK Hutchinson could be a big loser in a debt deflation.They look like a Hanson trust of the 80s and have a lot of debt,some of hit probably hidden away as well with dodgy accounting.They will be forced to increase prices when China implodes, i expect by a lot.Classic end of disinflation stuff.

[Castlevania]

44 minutes ago, DurhamBorn said:

CK Hutchinson could be a big loser in a debt deflation.They look like a Hanson trust of the 80s and have a lot of debt,some of hit probably hidden away as well with dodgy accounting.They will be forced to increase prices when China implodes, i expect by a lot.Classic end of disinflation stuff.

Without looking at their balance sheet my initial thoughts are that I think they’ll be fine. All the overpriced property assets are now in a separate company, which largely leaves telecoms; infrastructure assets (mainly water and energy); ports and healthcare retail (they own Superdrug and Savers in the U.K. for example). Ports would get hit hard in an economic slump but the rest should be ok.

[Democorruptcy]

4 hours ago, DurhamBorn said:

CK Hutchinson could be a big loser in a debt deflation.They look like a Hanson trust of the 80s and have a lot of debt,some of hit probably hidden away as well with dodgy accounting.They will be forced to increase prices when China implodes, i expect by a lot.Classic end of disinflation stuff.

When I signed up to Three a few months back I had a look at who owned them. The 'holding company' and 'Cayman islands' was enough to put me off getting involved in the shares side of it. Though aggressive pricing now to gather more customers before future price rises doesn't seem a bad idea!

[0x80]

Nice twitter thread on EU recession/Lagarde/state of the banks:

https://threadreaderapp.com/thread/1147878009870983169.html

[DoINeedOne]

11 minutes ago, 0x80 said:

Nice twitter thread on EU recession/legarde/state of the banks:

https://threadreaderapp.com/thread/1147878009870983169.html

Was just reading that 5 minutes ago 

I'm slightly concerned about our companies bank account funds maybe i'm being a little paranoid

[Castlevania]

39 minutes ago, 0x80 said:

Nice twitter thread on EU recession/Lagarde/state of the banks:

https://threadreaderapp.com/thread/1147878009870983169.html

Interesting read. Thanks. I reckon most of the mentioned banks have absolute garbage on their balance sheets.

Ironically one of the banks that might be ok is RBS - all the fuss around their GRG unit ripping off customers misses the bigger picture, they knew the customers were in a dire financial state and got on with eliminating their exposure as quickly as possible. I get the impression a lot of other banks went down the extend and pretend route. Sometimes it’s better to cut your losses.

[Bricormortis]

20 hours ago, Barnsey said:

Thanks for your advice all, I've decided on 8 regular monthly investments:

Centrica, Vodafone, BT, Stagecoach, Go-Ahead, Standard Life Aberdeen, Imperial Brands and NewRiver.

Will stick lump sums into GDX, GDXJ, PHSP, and other value stocks when possible.

No Pharmaceuticals Barnsey ?

 

( investments... not your weekend )

[Noallegiance]

Interesting thought that people will run to the dollar. Whether or not they do will be a timing thing. Pre-US monetary jack-up? Sure. If EU and US are cutting and QEing at the same time?

Kaboom.

[Funn3r]

2 hours ago, Democorruptcy said:

When I signed up to Three a few months back I had a look at who owned them. The 'holding company' and 'Cayman islands' was enough to put me off getting involved in the shares side of it. Though aggressive pricing now to gather more customers before future price rises doesn't seem a bad idea!

I too have the "unlimited data for 20 quid a month" and stay with Three for that reason. Their coverage seems subjectively to be less good than other networks though. To my mind they would be left behind in a real telco recessionary price war. 

[harp]

In the theme of this thread, as a very new user of Twitter what are the best people to follow? So far I have David Hunter, Raoul Pal, Trump. It recommends people when you add, but I don't want to clog my twitter up too much.

[Eventually Right]

Good thread from Raoul Pal on European banks today:

https://threadreaderapp.com/thread/1147878009870983169.html

another reason to be long gold!

[DurhamBorn]

2 hours ago, harp said:

In the theme of this thread, as a very new user of Twitter what are the best people to follow? So far I have David Hunter, Raoul Pal, Trump. It recommends people when you add, but I don't want to clog my twitter up too much.

truecontrarian

Jim Rickards

 

 

[Sman]

On 06/07/2019 at 20:41, Barnsey said:

Thanks for your advice all, I've decided on 8 regular monthly investments:

Centrica, Vodafone, BT, Stagecoach, Go-Ahead, Standard Life Aberdeen, Imperial Brands and NewRiver.

Will stick lump sums into GDX, GDXJ, PHSP, and other value stocks when possible.

Hi folks,

 

So is the concensus to not buy shares in the above and wait in cash just now. I've nearly dipped in to buy in some silver . What would you suggest Durham Born?

 

 

[Long-game]

14 hours ago, DurhamBorn said:

Looks good enough to me Barnsey and regular monthly investments might work out very well.The key is to remember dividends as well.That portfolio will pay out a lot of cash,even with dividend cuts in a few of them.You could always roll the dividends every 6 months into an extra stock,maybe some of the smaller silver miners.

I was in Tesco last night getting the bargains (£36 worth for £9) and they over charged me on jersey royals so i went to the customer service area for the refund.Nobody there just the guy and i noticed behind him the locked up fag counter as usual and next to that all the vape products.They had the one from BAT tobacco,one from Japan Tobacco and the Myblu from Imperial and one other.I asked the guy do you sell many of those myblu things.He said they sell "bucket loads" of them,and he himself smoked the my blu and now had 1 box of fags every 3 days and my blu the rest of the time.Whats interesting here is that although vaping at the moment is mainly vape shops and those big mods etc,big tobacco is squeezing everyone else out in the big retail stores.Its highly likely we end up with 4 or 5 vape brands on those shelves and the smaller players squeezed out,perhaps simply becoming niche players.Big tobacco makes more profit on a vape pod than a box of fags (once investment equity taken out) yet they are 30% of the cost to a consumer as a box of fags in the UK,40% to 65% in other markets.Throw in the fact its highly likely we will be seeing cannabis pods at some point and the present prices might prove a gift.The only worry is they have far too much debt going into a rising rate cycle.They need to keep de-leveraging as fast as possible,but iv a feeling they will be considering share buy backs at these levels,especially Imperial.

Hi folks,

 

So is the concensus to not buy shares in the above and wait in cash just now. I've nearly dipped in to buy in some silver . What would you suggest Durham Born?

 

[macca]

On 04/07/2019 at 21:34, DurhamBorn said:

If i was buying a house i would buy one where i live tomorrow and enjoy life.If i was down south i wouldnt touch one until at least 2022/3.

 

Wish I could have waited that long.. but with a £1300 rent a month for A run down death trap shitbox It was not good for my kids..

135’000 deposit and 230’000 mortgage is £1000 per month on a 10 year fixed.. 

Its only a 3 bed so I’ve been raped.. I still struggle to sit down.. 

but I hope with overpayments, if I keep my job, I can get the mortgage down before it all goes to hell! 

My outgoings are:

company pension matched 225+225 

company shares, buy 3 get 1 free

gold and silver

a dabble with some shares mentioned on here..

cant afford much else.. 

[macca]

On 05/07/2019 at 10:42, Noallegiance said:

Allowance is part of the problem.

If gov and CB didn't interfere in the first place we'd have due diligence and market forces as standard.

To learn these kinds of lessons people need a financial spanking.

But the rich won’t learn anything.. only the poor get punished.. 

[Barnsey]

11 hours ago, Bricormortis said:

No Pharmaceuticals Barnsey ?

 

( investments... not your weekend )

Got price alerts set up for the biggies in the crash as they'll just be lump sum investments, but definitely a great reflation trade methinks. Astra looking particularly parabolic atm.

[DurhamBorn]

7 hours ago, Long-game said:

Hi folks,

 

So is the concensus to not buy shares in the above and wait in cash just now. I've nearly dipped in to buy in some silver . What would you suggest Durham Born?

 

I suggest starting to buy in ladders with buy points between 5% and 8% below each buy point.5 ladders usually.Nobody knows the bottom or top,but you do know if something that the next cycle will give a tailwind to is already down 40%+ from highs.If all my ladders hit the shares in my portfolio will be down by around 67% from their highs and il be down around 12% (outside of my PMs that are up strongly),or about nothing if i count dividends.If they fall through the bottom ladder points of course il be down.Even then the dividends might outrun the falls.If the market went down 80% though i could suffer a 30% fall.In that scenario id be back working and putting 100% above the tax allowance into my SIPP.Losses never concern me in the short to medium term,they would bother me by 2027,but if im still alive to be bothered that will do just fine.

[Lightscribe]

3 hours ago, Barnsey said:

Got price alerts set up for the biggies in the crash as they'll just be lump sum investments, but definitely a great reflation trade methinks. Astra looking particularly parabolic atm.

I would certainly like to add the big ones like Astra and Glaxo, but in 2008 they didn’t see massive drops (this may of been due to the price back then of the sector taking a hit due the fallout of the volunteers for the test drugs nearly dying etc).

The pick that seems like it may have value in the sector is Vectura. As far as I understand the outgoing CEO has made steps to reduce debt and increase cash flow. Admittedly it isn’t an area that I’ve done extensive research on, so would be happy to take the advice of the more knowledgeable on here.

[DurhamBorn]

3 hours ago, Barnsey said:

Got price alerts set up for the biggies in the crash as they'll just be lump sum investments, but definitely a great reflation trade methinks. Astra looking particularly parabolic atm.

I worked for Glaxo for 10 years.Fantastic money making machine for everyone,who works there,terrible for shareholders since the mid 90s when accountants took over from the scientists.The industry will likely see a lot of mergers soon though.

[MrXxx]

3 hours ago, macca said:

But the rich won’t learn anything.. only the poor get punished.. 

No, I think its those inbetween (the financially cautious) that get punished via misappropriation of their taxes, these used to enrich the rich further by socially funding the financially illiterate.

[CVG]

4 hours ago, macca said:

company shares, buy 3 get 1 free

You probably know this already, and not to diss your employer because I don't know who they are anyway!, but never let your Employer shares become greater than 10% of your equity portfolio. The investment world is full of stories of employees being wiped out when their employers went bust - not only taking their jobs but their savings too.