Don't believe the wet rags!

What we have in the stock markets in New York and London at the moment is something called a “bear market”. In such markets you will find many pundits suggesting loudly that one stock or another will be worth a lot, lot less in a year’s time than it is worth at the time they write what they write. This is because these people would like to see the share go down in value as they are doing something that is known as “shorting it”. “Shorting” is selling a stock when you don’t own it and then buying the stock to hand it over to the buyer of the stock after a short period of time – hence the use of the word “short”. Of course, you MUST have the money to buy the stock in order to transfer the stock to the legal purchaser!
Many BG readers will correctly regard shorting as little more than gambling. That was certainly the view of Louis D’Ascoyne Mazzini in the 1949 movie, “Kind Hearts and Coronets” which starred Dennis Price as Louis D’Ascoyne Mazzini, later 10th Duke of Chalfont, John Penrose as Lionel Holland Esq. of Redbank & Holland and Joan Greenwood as Miss Sibella Hallward (later Mrs Holland).
Herewith the memorable script!
One of my first tasks as partner [in the D’Ascoyne private bank] was to interview Lionel [Mr Holland of Redbank & Holland], who came cap-or rather, silk hat in hand.
“To save time, I presume you have called to ask the renewal of your bill?”
“The fact is, old boy, we sold short and the market hasn’t dropped as we expected.”
“I feel entitled to point out that we here regard our function as the encouragement of constructive investment and not the financing of mere gambling transactions.”
“Ah”
It would have delighted me to refuse him. However, a bankrupt Lionel could hardly have continued to support Sibella in her extravagances and I had no wish to do so myself.
“Very well. We will renew at three and a half percent.”
There are of course other memorable gems such as:
Of Lionel Holland ~ “I must admit he exhibits the most extraordinary capacity for middle age that I’ve ever encountered in a young man of 24.”
And ~ “How did you enjoy your honeymoon?
“Not at all.”
“Not at all?”
“Not at all.”
“And how was Italy?”
“Oh, impossible!”
“Every time I wanted to go shopping, Lionel dragged me off to a church or picture gallery. Said he wanted to improve his mind.”
“He has room to do so.”
“I should reprove you for saying unkind things about him but I can’t. Louis, I think I’ve married the most boring man in London. In England.”
“In Europe!”
“Oh, the Italian men are so handsome but I could never get away from Lionel for a moment. But I was forgetting – you’re Italian.”
“Half.”
And a gem at the end which sum’s the character’s situation wonderfully:
“Oh. How does the song go? How happy could I be with either were tother dear charmer away.”
I’ve often wondered if the late Alun Gwynne Jones, was inspired by the movie to take the title “Chalfont” for his life peerage. Or maybe he had a connection with “The Chalfonts” in Buckinghamshire (Chalfont St Peter, Chalfont St Giles and Little Chalfont).
But back to the stock market of 2020!
Such pundits wanting the market to fall will be very keen to encourage owners of shares to sell. The instinctive attitude of many ordinary shareholders faced with a situation of their shares having fallen in value is to hold them in the hope that their value will rise again to the previous levels. They are most unwilling to sell at a greatly reduced price and turn what is a paper loss into an actual cash loss.
In an attempt to encourage such shareholders to sell such pundits will seek to suggest to these people that their shares will be worth a lot less in say 12 months time than they are today and therefore the shareholder should “cut their losses” and sell.
You see, these pundits are wanting as many shareholders to sell the shares they are short in as they want the price to fall and people selling the shares is the one way such shares will fall in value!
This is why it is said that the stock market is driven by two things: Greed (of the shorting pundit) and Fear (of the worried shareholder).
Of course, the company that is prominent in your Editor’s mind is Royal Dutch Shell!
Herewith an analysis penned by Mr Roland Head who writes for the Motley Fool:
Six short months ago, Royal Dutch Shell (LSE: RDSB) was the FTSE 100’s largest company. That place has now been taken by pharmaceutical group AstraZeneca, and the Shell share price is down by 40%.
Oil companies are out of fashion with investors. But although there are many arguments against these fossil fuel producers at the moment, I think it’s too soon to write them off. Here, I’ll explain why I see Shell as a contrarian buy and have topped up my holding since the market crash.
Shell faces a tough combination of short- and long-term problems at the moment. Right now, the company is battling with a slump in oil demand that’s been triggered by the coronavirus pandemic.
Looking further ahead, the oil industry is under increasing pressure to reduce its carbon footprint. Shell has made big promises to slash emissions and is aiming to become the world’s biggest electricity company by the 2030s. But the details of how this will be achieved are still very uncertain.
Even if Shell does succeed, we don’t yet know if the company will be able to maintain its current size and profitability in a greener world.
It’s a tough set of problems for CEO Ben van Beurden to solve. But he does have a few tricks up his sleeve which make me believe that Shell’s share price should rise again.
Don’t forget the big picture . I believe the world needs to address climate change urgently. But the reality is that billions of people all over the world still rely on fossil fuels for transportation, electricity, and the raw materials needed in manufacturing.
Despite this year’s oil price crash and demand slump, Shell is still expected to generate revenues of $236bn in 2020. The group’s profits are expected to drop to $3.3bn, but should recover to $9.5bn in 2021. That gives Shell shares a 2021 forecast price/earnings ratio of 12, which looks reasonable to me.
I’m pretty sure demand for oil and gas won’t disappear overnight. It’s also worth remembering Shell does a lot more than just pump oil and gas out of the ground.
The Anglo-Dutch group owns refineries, chemical plants, distribution networks and is a world-class energy trader. I believe many of these engineering and infrastructure assets will remain relevant in an electrified future, especially if LPG or hydrogen become more widely used as transport fuels.
The Dividend cut should could help Shell shares . Shell’s share price fell when the group cut its dividend by 65% in April. It was a shock — the first cut by the company since the Second World War. But I’m certain it was the right thing to do.
The group’s $14bn annual dividend had become a burden which limited its ability to change and evolve. This isn’t right. Dividends should be paid from spare cash, when a business is operating as well as possible.
This cut will hit shareholders’ income this year (including mine), but I think we’ll benefit over the longer term.
NB: Mr Head owns shares of Royal Dutch Shell.
British Gazette comment: We agree with Mr Head’s analysis.