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Friday, July 30, 2004 | 5 comments »

Who writes this and why is it about investing?
I'm Rawdon Adams, raised and educated in Barbados, the US and the UK. I now live in France and write Capital Chronicle from near Grenoble. Why Grenoble? Click on the image above for one of the local views.

What do you know about it?

I have a broad background in financial analysis covering both quantitative and qualitative risk analysis in business operations, company financials and investment markets.

Why publish?

Writing was initially a means of testing an idea - publishing, and its attendant potential for embarrassment, encourages logical rigour (usually). But along the way the writing itself has become an important pleasure.

The blog was recognised in 2012 as one of Onalytica's 200 Most Influential Economics Blogs.

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Any questions or comments please ask or fire away. And I hope you will keep up with new postings via one or the other of our subscription services.

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Friday, July 30, 2004 | 0 comments »

Capital Chronicle is a niche site with unique hits in the low thousands per week and typically 50%-75% more page loads than that. Its page rank oscillates between 3 and 5.

It was recognised as one of Onalytica's 200 Most Influential Economics Blogs in 2012.

Readership is international (40% US, 35% European Union, 25% Rest of the World) and split roughly 60% private, 30% professional finance and 10% other professional, including a noticeable academic presence.

The site's posts are regularly picked up by the financial press (some clippings are below) although not always for its main style of article: this has been by far the most popular and viral post this year. It has been cited in the WSJ’s MarketBeat, the Financial Times, FT Alphaville, the Daily Telegraph Business Blog, the Guardian’s Market Forces Live blog and even the Sun (if borrowing the Fernandel photo and caption from here counts); and there has been liberal borrowing of the CC Société Générale management flowchart tool.

The Times went so far as to name Capital Chronicle one of the 50 Best Business Blogs which is kind but possibly more indicative of the tight deadlines Times journalists must suffer.

Some press mentions (NB: this list is not being updated after summer 2011):
WSJ Marketbeat:
13 March 2008

Telegraph Market Forces:
17 March 2008
30 January 2008
7 March 2007

FT Alphaville
14 July 2011: "Further reading: Monkeys with guns?"
16 December 2010: "Further reading: Here come the Sans-culottes"
20 January 2010: "Further reading: Mind the gap in inflation"
19 January 2010: "Further reading: Le bonus modéré: liberté, égalité, fraternité"
15 January 2010: "Counterfeit statistics"
20 October 2009: "Chasing (and losing) insiders"
20 October 2009: "Further reading: The Galleon prosecution is a leaf taken from the syllabus of the Genghis Khan School of Market Administration"
.30 September: "Further Reading: The BNP Paribas timeline"
10 July 2009: "Further Reading: the mystery of PIMCO and the PPIP
22 April 2009: "World's 50 'safest' banks"
9 April 2009: "Further reading: Credit crises of the Caribbean"
18 March '09:"Of rubies and RBS"
21 January '09: ''Further Reading: UK banking secotr: all civil servants soon''
31 October: "Further reading: Baltic Dry Index: and all the boards did shrink"
15 October: "Further reading: C'mon trade the noise"
2 October: "France, pourquoi la ruée?"
2 October: "Further reading: The Hanke Panke"
25 September: "Further reading: ...this is the harder stuff..."
4 July 2008: Code-name “Badger” - the B&B rescue effort
23 May 2008: "More on the Baltic Dry"
30 April 2008: "Further reading: Exhibit 1, Wheat volatility..."
18 April 2008: "Le subprime"
14 March 2008
6 December 2007
19 October 2007
18 July 2007

Guardian Market Forces live5 June 2008
11 March 2008

Fairplay Shipping News (Lloyds register)21 June 2007: Capesize market hogs the limelight

The Times

50 best business blogs (13 June 2007)

Rates (US dollar or equivalent):

Email for details.

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Investment Approach

Friday, July 30, 2004 | 0 comments »

(This does not attempt to cover portfolio management which is, in my view, more important than stock selection)

Involves four steps and is focused primarily on US and UK small caps:

1. Screen looking for firms

  • that persistently produce strong free operating cash flow
  • set to continue driving revenues
  • that are comfortable leveraged
  • that are not massively capex dependent
  • enjoy current ratios well over 1
  • that have positive eps YoY growth
  • that have a positive trend of accumulated retained earnings
  • that have low price-to-sales ratios
  • where key decision-makers holding meaningful amounts of equity
2. Historical ratio analyses to gauge management and financial strength as well as specific year over year trend analysis. These typically involve some use of the Altman Z and Piotroski Score formulas (or derived versions). Particular attention is paid to free operating cash flow yield, debt levels and earnings quality.

3. Outlook: how does a company’s next financial year look according to
(forecast eps growth% + dividend yield%)*100 / (p/e ratio less extraordinaries)
Results over 2 imply a buyer is getting twice what he pays. But that is only a signal and may say more about forecasting than it does about the company.

4. Context and soft issues - what are the dominant company specific and/or macro considerations? What are its relative (to, say, the Russell 2000) alpha and volatility (using standard deviation) performances?

Above all, flexibility is key. Hitting the mechanics of a screen or ratio is one thing; assessing prospects another. Ultimately, for the rational small cap investor, the question is whether the company is weaving a business story that its house broker can sell to institutional money.

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Research List

Friday, July 30, 2004

Regretfully, all small cap research on hold...

Small Cap Research Index:

Please refer to the 'Investment Approach' to see how a company qualifies to appear here. These are not recommendations for readers: but they are intended to be something better than the top level summaries frequently found in the media. By design it is a 'prospect & watch' list.

There are indications from some stock market message boards and forums that are directing readers here that quarterly updates to the US list would be welcomed. If you are such a reader please email and I'll start putting a mailing list together. With enough numbers it'll be feasible.

Otherwise the assumption is biannual revisits.

US Physical Therapy, Inc (added 25 April, 2008)
Kendle International, Inc (added 17 April, 2008)
North American Galvanizing & Coatings, Inc (added 9 April, 2008)


Diploma plc (added 3 April, 2008)
Education Development International plc (added 27 March, 2008)
Ascribe plc (added 28 March, 2008)

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RJH writes...

There's a satisfaction about stock market bulls as they digest the latest US economic data. Real debt burdens down for both renters and homeowners over the last year (Federal Reserve data); definite job growth; and, unsurprisingly given the first two items, enormous consumer confidence numbers. Debt bubble? What debt bubble? The case for economic health is (again) fluently made by Wachovia Bank's Economics Group on the excellent foreign exchange site FXStreet.com.

Alan Greenspan, in danger of being labelled Economic Advisor to the Bush Re-election Team, further helped matters last week in his testimony on Capitol Hill - "the current account deficit is not a problem" and words to the effect that record housing stats were no cause for concern.

Doomsayers fears are clearly misplaced in light of these facts.

Imagine for a moment that you inhabit a place experiencing negative real interest rates. What do you do? It's a no-brainer. You go out to your friendly neighbourhood Wachovia-like bank, take on new debt, refinance old debt and spend the rest like it's going out of fashion. If inclined to worry about the nest egg you might even buy a few sexy dividend-yielding stocks. Why on earth would anyone sit on dull piss-for-interest cash in the bank? No - you party like it's 1999. Again.

Is any of that a problem?

If a banker is a chap who lends umbrellas when the sun is out and takes them away when the rain falls, then debt is indeed a fair weather friend. Yet rates have been so low for so long that many have forgotten the dangers of leverage, or rationalise them away on the basis that this time things are different. Nonetheless, the dangers are clear.

Higher interest rates in the US will erode American consumption; huge actual personal and national debt levels and their over-stimulation by easy Fed money and political calculation in the US will have to unwind; the impact of cooling Asian economies, especially China's, on both the US dollar and US consumers will not help; geopolitical risk in the shape of terrorism and local mid-east politics continues; and let's not forget the spring-cleaning effect in 2005 and 2006 of whichever US administration is elected (Jeremy Grantham of GMO investment management enlightens).

Alongside these questions, there is surely no argument that right now - in July 2004 - all asset classes in the UK and the US are historically expensive be they small or large capitalised shares, property or bonds. Commodities, too, are expensive which begs a further question - for how long will those companies that yet can continue to be able to pass along the increased cost of their inputs?

So, there are obstacles ahead, and there is not great margin for error. Will the market crash? Who knows, but equally who truly wants to bet this year on all pitfalls being avoided? There is too much risk for the potential returns. Boring, but safe, advice demands the preservation of investment cash until asset prices (as measured by value ratios) cheapen. It may take 18 to 24 months - bar some interim catastrophe - but it might then prove possible to make the most of a truly rare chance to buy spectacularly low.

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Shareholders of Marks & Spencer’s may be enthralled by the Rose versus Green prize-fight but should ask themselves if they are witnessing a macho personal contest or a sincere struggle to win the challenge of reviving a fading national icon. And does the result even matter?

The clothing retailing model that made the M&S name combined tight UK or EU sourced manufacturing control, just-in-time-sales delivery and rapid sales data feedback. These meant M&S could offer keen prices all the time, maintain inventory of in-demand items and be confident of satisfying customer taste. The M&S brand was a rare jewel - something the customer would cross the road for.

Is it still?

Five years ago, the model collapsed. UK and EU sourced clothing became uneconomic and M&S moved to source abroad. The just-in-time-system and sales feedback components stalled in the face of logistic knots and quality issues. The retail world also changed with designer brands becoming king. In short, M&S had to learn to compete with traditional clothing retailers without the protection of their own proprietary retailing model. That model, inextricably linked to sourcing from UK clothing manufacturers, died with the industry's inability to compete economically with international rivals.

And that is what the last five years have been about - adaptation to a changed environment, a task at which traditional M&S managers failed. Bringing in external candidates to head up the company or its key departments is a sure sign of catastrophic internal inability to cope and is in itself no guarantee of success. Staff morale swoons and the new management is effectively starting from scratch. Shareholders will have to tolerate a long period of consolidation (more than one in this case) and possibly more exasperatingly expensive payoffs - verging on larceny - to failed outside managers. And all before expecting any proof that The New M&S Model can compete.

Clothing is 50% of M&S sales. Food, suffering its own identity crisis and faced with rivals who are not standing still, is about 43%. Investors should ask themselves if they are willing to tie up their capital waiting for M&S to master the new realities under a Rose or a Green (in the unlikely event he stays public), or look for better returns elsewhere. Either way, the company is not the investment vehicle it was.

400 pence per share looks a good way out.

Postscript (15 July 2004): Green drops his bid no doubt to concentrate his fire on M&S from the retailing battlefield. Does he get another chance at his prey in the next 12 months?

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