Schlagwort: Incrementum

Dear Ladies and Gentlemen

I received a fair amount of feedback to my last weeklies. Many thanks especially to Robert and Patrick, who are always very challenging readers and ask questions that make me think further (…and usually lead to some more work on my side), Alain, an old friend who shares my passion for travelling to the Far East and studying in the U.K. and Giorgio, a recent acquaintance, very profound fund selector with a vast industry knowhow. Thank you very much indeed!

Now, most of the feedback I received to the question of my last weekly was showing some optimism for the Swiss Equity Markets (and equities in general) for the months to come. That’s just fine with me!

But today, Ladies and Gentlemen, I would like to look at current low interest rates and ask all of you, if from the bottom of your hearts you think they have become a nightmare or maybe not, as there is most probably more than one perspective.

You know, I have a little black book for notes. In this book there is a dedicated page called “low interest rates pros” and a dedicated page “low interest rates cons”. Whenever I come across an idea or a statement pro or con low interest rates, I try to remember it when I’m in front of my little black book and write it down. I don’t need to like the idea and therefore am writing down just about everything on the topic, a bit like in a brain storming exercise. The advantage of this is to avoid as much as possible any sort of “confirmation bias”.

Anyway, I am mostly a critic of ultra-low interest rates but even I must admit that it is nice to see the value of my house going up, while groceries prices are stable, and TVs, cars, laptops and travel arrangements get cheaper and I also must admit that I rather pay mortgage rates of 2% than of 5%. I also can imagine that for any potential seller it must feel much better to sell a lithography of Jean-Michel Basquiat at USD 10’000.00 rather than at USD 500.00. I would call this effect „selective asset price inflation“. There are some goods that become very expensive while for most of us, in our daily life no inflation or very low inflation can be felt.

However, there is also the other side and by far the biggest risk I currently detect in this respect is not the risk of hyper-inflation, (I regard the risk of hyper-inflation as very low at least for the next decade or two) but the risk of not achieving enough investment return on our retirement money. Ultra-low interest rates lead to very low investment returns for pension funds and my fear is that we will be stuck with ultra-low interest rates for a very long time and that this will have a negative influence for pension fund policy holders and even lead (and has lead) to some strange investment behaviour, potentially creating even more risk. Let me elaborate on this.

There are pension funds of mid-size companies in Switzerland that have invested their employees‘ pension money to a large extent into residential real estate close to the companies’ production sites and offices as to offer fairly priced living space to some of their employees. Basically, a great idea. Over the last decades however, some of those companies have moved offices and production sites to low cost countries and at the same time find themselves in a position of an over-ageing workforce in Switzerland. What happens in some of the bad cases now is that such residential real estate held by some of those pension funds become difficult to rent out, while the overaged pension fund at the same time suffers from a negative cashflow profile or in other words sees more outflow than inflow, leading to a liquidity drain. Such pension fund portfolios in addition suffer from a serios lump risk, as the real estate portion of it takes up too much of total assets in %. The real estate can not be sold at the prices needed to match its book value in the portfolio, the pension fund does not want to take a loss and admit under coverage and thus sells in a first attempt all liquid assets to cover the pension fund’s outflows. The longer this situation lasts the more inert the pension fund becomes as its room for manoeuvre diminishes month by month. This maybe looks like an extreme example, but it is also a real example happening today in Switzerland.

Therefore, Ladies and Gentlemen, to me low investment returns due to low interest rates on our pension scheme money is far bigger a risk than inflation over the decade to come and still and to sum it up, low interest rates can represent someone’s loss and someone else’s gain. No?
Now, let me know, do you think low interest rates are a nightmare, yes or no?

Please share your thoughts and ideas with me. Please feel encouraged to do so and please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

Stefan M. Kremeth

Dear Ladies and Gentlemen

I am looking at the markets and I am surprised. There are so many reasonably intelligent and well-informed people out there with a negative view on markets looking for a crash to happen.

Usually an equity markets crash does not happen when the markets have come down roughly 10% over the last six months already. Usually an equity market crash does not occur when the media and most analysts, brokers, bankers and asset managers are negative. Usually an equities market crash does not occur when interest rates are close to zero or even below.

…and still the Swiss Market Index is down almost 10% this year. What we have experienced so far in 2018 I usually would call a crash in instalments.

With very large companies like Roche, Novartis, Nestle and some insurance companies paying regular dividends of 4% and above, the SMI seems rather defensive but investors don’t seem to care and shun away from it.

I spoke to a friend of mine who manages an investment fund to get his view. He is always very happy to see prices go down because this gives him the opportunity to increase positions in stocks helping him to generate the cashflows needed to invest in even more equities or other assets, which over time helps him to reach his long-term performance targets.

The media but also many investment professionals almost seem to long for an end of days scenarion in markets. This, Ladies and Gentlemen, is very strange because there will be misery and not many winners will come out of it.

I am rather trying to see what’s next. How can we outperform in rough times? This is a very difficult one as precious metals, commodities and hedge funds have seen a rather uninspiring first half of 2018.

What do you think will outperform in the second half of 2018? Will the defensive Swiss Market Index be able to come back and cross out its H1 losses?

Please share your thoughts and ideas with me. Please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now Ladies and Gentlemen I wish you a great Friday and weekend!

Yours truly,

Dear Ladies and Gentlemen

I was asked if I was willing to give a short interview for the upcoming issue of the “Finance Monthly” magazine. I was and today I am happy to share the questions as well as my answers with you.

1) What inspired you to found Incrementum?

The inspiration of founding Incrementum AG was to offer first class services to private clients and investment fund investors at fully transparent and competitive prices and to work with an inspiring team, in a fun environment.

2) What would you say are the key issues that you assist clients with regarding asset management?

Our investment team is very interested in and has a profound understanding of monetary history, combined with out-of-the-box reasoning and prudent, fundamental financial research, purposely avoiding daily chatter and noise. This offers a distinct skillset that has proven to be utterly valuable for our private clients and investment fund investors alike.

3) What strategies do you implement to ensure that your clients’ goals and objectives are achieved?

We only offer cashflow generation and capital preservation strategies. Participations in listed companies are very tangible to us and equities therefore belong to our core investments. We are building truly customized client portfolios according to our clients’ requirements, needs and willingness to accept risk. We are long-term investors and we invest solely in equities of listed companies with a proven track record of producing net free cashflows over years, happy to share those cashflows at least partially with investors in the form of dividends and/or capital reductions. On the other hand, and after many years of extraordinary money supply and ultra-low interest rates, we do not invest in government bonds as we do not feel comfortable with the current risk reward profile offered by those. Large scale monetary policies are difficult to judge and while we are not entirely certain that the increase in global debt will be sustainable, we are humble enough to recognize that so far, the leading central banks seem to have mastered the 2007/2008 financial crisis rather well. Either way at Incrementum we see money only as means for facilitating global trade, consumption, maybe storing value very short term – thus as a lubricant for the global economy.

4) How important is a maintenance strategy for optimising asset value?

At Incrementum we very much believe in an active portfolio management approach. We cut back positions that have reached our price targets and we love to buy into companies that have sound underlying business models but maybe missed their targets for a quarter or two. We are very patient investors.

5) What are your hopes for the future of Incrementum moving forward?

We are happy with what we have achieved so far but are constantly striving for innovative growth. Last year, we entered a new business field by setting up our Crypto Research report, which swiftly became the most read research report in the crypto currency field. (https://cryptoresearch.report/)

I hope you like it, Ladies and Gentlemen and wish you a great day and weekend!

Yours truly,
Stefan M. Kremeth

Dear Ladies and Gentlemen

Most Central Banks’ goal is price stability, which basically means they want to keep inflation under control. There may be other goals as well, like for example the U.S. Federal Reserve System also and explicitly takes unemployment into the equation.

Ever since the financial crisis ten years ago, Central Banks are seriously coordinating their actions. This was already the case before WW2 and ever since but never as rigid as in the past 10 years. That is probably why we have not seen the huge swings in exchange rates between the major global currencies versus the US Dollar in the last years, which seem to have been more frequent prior to the financial crisis.

Looking at long term interest rates and long-term exchange rates, Japan, is somewhat ahead of the curve in comparison to other members of the G 20. Japan is on ultra-low interest rates for a few decades already, is deeply indebted and yet, price stability is granted, and the YEN’s exchange rates versus other major currencies is reasonably stable. Of course, debt still increases, and Japan’s government debt levels have grown to above 250% of GDP, which certainly is a massive!

However, the Bank of Japan currently owns roughly 50% of Japan’s government debt. In 2011 this number stood at 9% and still we cannot detect any sign of inflation. If the Bank of Japan owns 50% of Japanese government bonds and is willing to buy up everything the market is not absorbing, they are heavily interfering and, I think one could call it like that,” manipulating” government bond’s interest rates. On the other hand, I am asking myself what would happen if tomorrow the Bank of Japan decided to decrease their bloated balance sheet and just cancel all Japanese Government bonds on it. In such a scenario Japan’s debt levels would decrease immediately at the same time, I am asking myself, would investors and the Japanese people still show trust in the Japanese currency? Would maybe trust in it even increase or would it decrease to an extent to cause high inflation or even hyperinflation?

After all, Ladies and Gentlemen, as long as people believe in the relatively stable long term purchasing power of a currency, hyperinflation will not occur.

Please share your thoughts and ideas with me. Please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

Stefan M. Kremeth

Dear Ladies and Gentlemen

Looking at the consensus forecasts for crude oil, it seems most analysts see price levels of between USD 55 – USD 60 for the years to come. Three reasons seem to convince most analysts of expecting stable to slightly lower crude oil prices. Reason number one is an assumption of almost endless supply of shale rock oil in the U.S., reason number two seems to be the assumption that OPEC members will go back to competing for market share and start flooding markets with cheap oil and reason number three is taking the assumption that alternative energy sources will lead to a decrease in global crude oil demand.

Ladies and Gentlemen, to me all three assumptions are rather boring and known to just about everyone in the market these days and they are lacking any sort of new thinking.

Fact is the global economy is growing and we found one analyst who builds his case for “triple digit oil prices” on the scenario of macro-economic growth especially macro-economic growth of heavily populated aspiring economies. I am fond of his idea. Let me try to elaborate the “why” in a reasonably concise way.

We all know from our own experiences that the global crude oil market may be very volatile. However, the global crude oil market has one very distinct characteristic, demand is very sticky almost no matter of where the price stands. This means that even if prices half as seen two years ago, consumption doesn’t jump up. Same is true for increasing price levels, i.e. even if prices for crude oil double, consumption is not really decreasing. Let’s have a look at the demand distribution, maybe we can draw a first conclusion from there. 56% of global crude oil consumption can be attributed to transport (trucks count for 24%, cars for 20% and 12% for other means of transport like marine and aviation). On a global scale this is very inelastic and even if Tesla sells many cars these days, the impact of electric cars will only be seen in decades. Another 28% of global crude oil consumption can be attributed to industrial usage. Again, I think we can agree that, on a global scale industrial demand will be rather inelastic. The next 5% of global crude oil consumption can be attributed to electric power generation. Inelastic, maybe even increasing I would think. Leaves us with some 11% for various use, which may be somewhat more elastic but even if this part of the cake increases or decreases by 20% it will not have any major impact.

Now, interestingly the same is true for the supply side. Supply is relatively inelastic. Even if we take U.S. shale oil production and potential increases by OPEC member states into the equation, relative to global consumption, global crude oil supply is reasonably stable. It appears in 2017 demand exceeded supply by roughly 0.7 million barrels per day, leading to lower inventories. According to PIRA (energy markets database) a hefty inventory increase is wanted and can be expected in 2018 and the beginning of 2019. The supply side is expected to increase only slightly but not enough to cope with regular consumption and demand for higher inventory levels.

This, Ladies and Gentlemen, is of course a very simplified explanation and maybe even speculation but gives you a somewhat different perspective of what might happen to crude oil prices in 2018.

What is your take on this?

Please share your thoughts and ideas with me. Please feel encouraged to do so and please send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

Stefan M. Kremeth

Dear Ladies and Gentlemen

With all the ups and downs in the markets and all the political and economic uncertainties we are currently experiencing, I think it is fair to say that we are living in a much less investor friendly environment than 18 months ago. “Wait a minute” you may think, this is more or less the time of Mr. Trump’s presidency. Yes, it is, and I don’t want to judge Mr. Trump, take conclusions or even blame him, but fact is, the world as I see it has become somewhat increasingly restless, no matter why and without looking for any correlation. Such „restlessness“ as I want to call it, usually is not good for equity markets. Market participants, as you all know, don’t like uncertainties. I wrote about this many times.

You know, analysts and/or researchers but also the media tend to impose their own views and ideas (or the views and ideas they may sell best) on their audience. What does this mean, it means that what happens ever so often is that analysts and/or researchers or the media will go back to trick their audience with two very old and rather blunt possibilities of attacking our inner feelings, our sentiments by manipulating our senses of greed and fear,

Either they are trying to tell us how unbelievably fantastic an economic scenario, a product or an investment idea is to make us greedy and wanting to buy into their idea or they will tell us how bad the world has become and how much protection or insurance their economic concept or investment idea offers … again to make us want to buy their concept, product or investment idea.

Ladies and Gentlemen, I want to sharpen your senses.

When reading a text, when listening to the news, when talking to your investment advisor, banker, an analyst or a researcher, etc. rather than just accepting the views of the one talking to you (essentially about his/her realities), keep in mind that there is almost for every situation in life a possibility of negotiating your (very own) reality. Which means that you may have a view that is close or not so close to the view of the person trying to convince you. Realities may depend on many factors like education, socio-demographic or socio-economic backgrounds, religious beliefs, etc. They generally consist of impregnated factual claims trying to modulate our “consumer” behaviour. If you therefore take a somewhat agnostic stance to all of this talk it probably can not hurt.

Now, what does this have to do with investing in an unstable environmentyou may ask. Well, first of all I don’t know anyone who has a crystal ball and may foresee the future and second of all I am very careful when listening to people preaching the same mantras over and over again and I would strongly advise you to do the same and rather stick to an investment style that seem good for you, suits your purpose and matches your risk profile.

Please think about it.

…and please don’t forget, if you want to share your thoughts and ideas with me. Please feel encouraged to do so and please send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

Stefan M. Kremeth

Dear Ladies and Gentlemen

At Incrementum AG we are meeting with people on a regular basis. Be it because we are speaking in front of an audience, be it because investors, friends and interested people are taking the opportunity to come and see us in our offices in Schaan, be it because we are invited to people’s homes. This is the most enjoyable part of our business – the personal contact with you!

I think it is time to thank you for your trust and confidence in our ability to act as a solution provider for you, as a trusted asset manager and sometimes even as a friend.

At Incrementum we truly value personal relationship and contact. With great interest are we looking at the development of robo-advice and internet banking and there is obviously demand for such services and still algorithms are not able to interpret emotions and emotions is what we are after.

We are always happy of taking the time to broaden our views and knowledge while discussing with you all sorts of topics over a cup of tea or a coffee. If you are close by, give us a shout, don’t hesitate to come and see us

…and please don’t forget, if you want to share your thoughts and ideas with me. Please feel encouraged to do so and please send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!
Kind regards

Yours truly,

Stefan M. Kremeth

Dear Ladies and Gentlemen

My friend and partner Dr. Christian Schärer was attending the Denver Gold Forum in Zürich and I had asked him to write a guest comment and share his impressions with us, this is what he wrote:

“Every year in April, numerous representatives from the mining industry meet with analysts and investors from all over Europe at the highly regarded conference. A good opportunity to learn more about the latest trends in the gold industry and to feel the mood among investors.

After visiting various company presentations in the plenum and numerous 1:1 with representatives of mining companies from our investment universe, we would like to summarize our impressions as follows:

The mood was basically constructive. However, there were fewer institutional investors than in other years. This was also confirmed by the representatives of the mining companies, which usually had to deal with a smaller number of 1:1. Nevertheless, discussions between investors and companies were conducted with a positive undertone. The consensus among participants sees a lower USD, rising inflation and a peak in gold production as catalysts for a positive gold price development…

However, we were less interested in argumentation at the macro level. As a stock picker, we wanted to verify two investment hypotheses. On the one hand, against the background of a historically high gold-silver ratio of 80:1, we were particularly interested in the shares of silver producers. On the other hand, we are driven by the question of whether the growing fee cash flows of well-managed mining companies in combination with the much-discussed „peak“ in gold mining could lead to a wave of M&A transactions in the coming quarters.  

Silver has regularly disappointed investors‘ performance expectations in the recent past. In our view, the long-term decline in industrial demand is the main reason for this frustrating development. The steadily decreasing industrial demand distinguishes silver from other industrial metals. One of the reasons for this negative trend was the marginalization of classical photography as a great demand for silver. Since the turn of the century, demand has fallen by around 180 million ounces annually. This corresponds to about 17% of the current market volume. 

Now, however, a silver lining seems to be emerging on the horizon. For the current year, the “Silver Institute” sees an increase in industrial demand for silver for the first time since 2013. The constantly growing demand from the field of photovoltaics can compensate for the losses in the field of traditional photography and leads to new dynamics. Despite improving industrial demand, global silver production continues to fall in the current year. It is likely to fall by around 10% compared with the record level achieved in 2015. Against this background, we would not be surprised if silver outperformed gold in the medium term, albeit from a historically low base. We are positioning ourselves accordingly in our commodity equity fund. True to our preference, we focus on companies with a solid balance sheet and an attractive free cash flow profile…

Few takeovers have recently confirmed our assessment that the prerequisites for a constructive M&A environment in the space of precious metal producers are certainly given. In recent years, the sector’s heavyweights have focused primarily on reducing their production costs and have been reluctant to invest in expanding their production capacities or to replace mined ounces. Accordingly, there is a need to catch up here. In addition, the stock performance of many exploration stocks and mine developers has been disappointing in recent quarters. This makes the relative valuation between potential buyers and possible takeover targets appear attractive. This is not a bad prerequisite for a new wave of consolidation in the precious metals sector. A big deal would be a possible catalyst for the start of such a movement. 

Finally, we would like to emphasize that the shares of well-managed mining companies also move in cycles. Gold and silver stocks are not „buy and hold“ investments. However, selected stocks are currently trading at quite attractive levels. Moreover, as these stocks correlate comparatively little with the overall market, they can certainly find a place in a clearly structured equity portfolio. At least they belong back on the watch list of an active investor.”

To me this looks a lot like looming opportunities. Let’s see…

Please share your thoughts and ideas with me. Please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!
Kind regards

Yours truly,

Stefan M. Kremeth