Family Office Bulletin – Investing – Earnings Estimates, COVID-19 & V-Shaped Recovery

12 minute introduction to understanding consensus earnings estimates. Their use in valuation models. How they represent a generalisation of the underlying economy. Why the stockmarket may not represent the consensus earnings view. Effect of COVID-19 (coronavirus) on earnings expectations. How they can provide a guide for managing operating business’.

Kings Portfolio Newsletter Q1 2020 – Now That’s What I Call A Quarter

Economy & Capital Markets
The S&P500 fell 35% and the U.S. Federal Reserve Bank cut effected funds rate from 1.59% to 0.25% in 24 trading days. This followed a reversal of Western Governments response to airborne COVID-19 (first globally reported on new years eve), initially failing to impose “cheap” measures pre-boarder, then enforcing delayed internal draconian ones. Government treasuries price rose then moderated, as the size of fiscal expansion further elevated borrowing levels on a diminishing or slowing income tax base. Although an opportunity to move to fiscal surplus and improve savings rates were missed during the previous decade, we maintain a lack of inflation accommodates both monetary and fiscal easing to combat the immediate slowdown in economic growth.

Multiple companies have identified potential vaccines for COVID-19 expected by year end and doctors are already sharing best “non-approved” remedies. Evidence from Japan and Korea support (as the secondary strategy) local authority social distancing orders to protect and bolster health service facilities and internally develop supply for testing, remedial and protective equipment. After which the spreadability can be embraced so non-vulnerable and non-infected citizens are released from quarantine back to normal activities. From mid-April individual economies can stagger start to accelerate through the end of the year. It is likely there will be no significant (5%) variance in 2020 from the death rate in 2019 (2.8m Americans in 2018).

Remodelling supply lines, to reduce exposure to China in favour of its low cost neighbours and home production, is anticipated to accelerate. International travel is expect to have health prescreening enforced similar to terrorism after 9/11, adding to cost and duration. Communication and broadcasting providers are likely beneficiaries. A large number of previously loss making business are not expected to reopen.

In the quarter OPEC and Russia could not agree production limits while Brent crude oil prices fell sixty percent.

As we expressed during the 2008 recession (, economic disruption takes the form of an absence of liquidity and moral hazard brought about by the inability of commercial financial institutions to distribute funds made available to them by central banks. If central banks are unable to LEND directly to the general economy, governments should provide generous loan facilities underwritten by central banks and administered by the commercial banks, based on tax registration of LOW INCOME individuals and previously PROFITABLE business taxed entities. The moral hazard of bail-out and need for massive fiscal stimulus could then also be avoided. Once the liquidity crisis is over commercial banks should then be forced to adopt these loans.

Over the last 12 months our net exposure to equities fluctuated around the zero mark due to excessive valuations. As an investing portfolio the minimum holding period for any position is three months, therefore when western governments preparations for the epidemic proved to be “the Emperors New Clothes” we were unable to react, in response we have accelerated development of AI market sentiment tools. During the quarter we had overexposure to the transport sectors and underexposure to energy sectors that balanced out, with a marginal exposure to equities. The net performance of the strategy over the last three months was -3.5% providing a 39 month performance of +32% with 0.8 sharp ratio, compared to the S&P500 performance of -20%, +15% and 0.3 respectively.

Year 2019 in review

• Successes.
– Developed and implemented first deep-learning applications providing a massive improvement in analytical power by leveraging previous years hardware purchases
– Acceleration in pipeline of third party cutting edge quantitative research to implement
– Impressive performance from improved security selection criteria
– Further improved the fundamental and technical criteria for security selection
– Corrected and refined machine learning methods in asset allocation
– Further improved econometric criteria in asset allocation
– Developed new software to access better data sources
– Now accepting client defined portfolio universes (asset allocation, ESG, religious etc.)
– First venture capital investment
• Fails.
– Single digit net return for year (annualised double digit return over three years)
– Poor asset allocation due to not applying correct procedures for machine learning
– Natural language processing sentiment analysis not developed further

A.I. Stock-Picking October Gross Realised Results: 0.83%

Jan17- Oct19 net cumulative return 39% & sharp ratio 1.03 against it’s ACWI universe 35% & 0.81.

Trade, FX, Ticker, Holding Period, Position Return, Portfolio Contribution

Short, CAD, CPG, 16Jul-10Oct, -18.20%, -0.20%

Short, GBP, DRX, 16Jul-10Oct, 4.40%, 0.04%

Short, GBP, INTU, 16Jul-10Oct, 52.40%, 0.53%

Short, GBP, TED, 16Jul-10Oct, 41.75%, 0.46%

Immediate transparency, 3 day full liquidity, 3rd party custodian.

The A.I. assesses Econometric, Fundamental, Qualitative, Quantitative, Technical and Traditional data and, sentiment from documentation and news flow.

Our A.I.’s Stock-Picking September Realised Results

Trade, FX, Ticker, Dates, P&L, Contribution

Short, EUR, APAM, Jun27-Sep24, 6.29%, 0.21%

Short, EUR, VAS, Jun27-Sep24, 17.89, 0.46%

Long, HKD, 3968, Jun27-Sep24, -9.16%, -0.07%

Long, HKD, 688, Jun27-Sep24, -13.32%, -0.24%

Long, USD, EBR, Jun27-Sep24, 11.21%, 0.09%

Long, USD, LKOD, Mar22-Sep24, -6.32%, -0.04%

Gross Month Realised Return: 0.41%

Net cumulative return 36% (Jan17-Sep19) and Sharp Ratio 0.98 against it’s ACWI universe 31% and 0.74.

Immediate transparency, 3 day full liquidity, 3rd party custodian.

The A.I. assesses Econometric, Fundamental, Qualitative, Quantitative, Technical and Traditional data and, sentiment from documentation and news flow.


Between Wednesday 28th August and Wednesday 11th September (the last 10 bars in the charts below) the S&P 500 Index had a mild recovery to near record highs on light volume.

However over the same period the DJ US Thematic Market Neutral Momentum index fell steeply, in it’s most violent move ever.

Whilst the DJ US Thematic Market Neutral Value index recovered strongly.

Further during the period we incurred several security specific news items that were detrimental to our positions.

Securities in our AI selected global equity strategy have a minimum holding period of three months and profitable positions suffered from this rapid reversal. The AI does however assesses both momentum and value and will adapt (over time) to changes in thematic rotation whilst not suffering behavioural issues of short term misfortunes.

Broker statements are always available for inspection.

Our A.I.’s Stock-Picking August Realised Results

The A.I. assesses Econometric, Fundamental, Qualitative, Quantitative, Technical and Traditional data and, sentiment from documentation and news flow.

Trade, FX, Ticker, Dates, P&L, Contribution

Long, USD, AMZN, May28-Aug9, -1.18%, -0.03%

Long, USD, ESNT, May28-Aug9, -2.1%, -0.02%

Long, USD, LRCX, May28-Aug9, 8.73%, 0.09%

Short, USD, MAC, May28-Aug9, 23.57% 0.69%

Total Month Realised Return: 0.73%

Net cumulative return 39% (Jan17-Aug19) and Sharp Ratio 1.1, MSCI ACWI universe 29% and 0.69.

Immediate transparency, 3 day full liquidity, 3rd party custodian.