Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. Whoa! Watch out everybody. We did not actually feel much of the pain that was unfolding around the world, for one reason or another, banks added comfortably over another percent. At the other end of the spectrum were the resource companies as a whole, the sector down nearly one and a half percent, with the gold miners down over two percent. It was mixed, an even smattering of green and red, the Jozi all share index closed down just over one third of a percent to close at 33617 points, that is a loss of 114 points. What did protect us to an extent yesterday was a weakening currency, in the whole risk off trade the Rand took a bit of a beating, but that saved us from the worst of the selling taking place in Europe.
Listen in a little closer, because the main anxieties of the day were the Spanish and Italian bond yields that spiked, raising concerns once again about the debt levels and lack of growth inside of those sovereigns specifically. The Spanish government said, nope, we don't need a bailout. The central authorities in Europe continue to say, over and over, Spain must do more to reign in their government spend. In other words more austerity. And in the face of lower growth rates, in fact contracting economic activity, the debt to GDP ratio rises even more. Which in turn makes your debt less attractive to others, so rising Spanish and Italian bond yields I guess are here to stay. And having to pay higher interest on new issuances, that throws cold water on the other spending cuts that are wildly unpopular on the home front. Ironically, in other parts of the Euro zone the yields are falling, and the spreads between Spanish and German bonds are widening again. Ditto for Italy.
So what happened when everyone got completely anxious about the rising yields in Spain and Italy? We start, for one, hearing the rhyming about Spain and pain. That was a given. But equity markets and in particular banking stocks sold off, London's FTSE closed down two and a quarter of a percent, the Dax in Frankfurt sank two and a half percent and the Cac40 in Paris was over three percent lower on the day. Yech. Whoa. And don't forget there are French elections soon. Very soon, it is coming in a number of days, 11 to be exact. There is in fact a political party called the New Anti-Capitalist Party with a candidate, or as I like to call it, friends of North Korea. Methinks the incumbent will squeak through, even though the French threw the monarchy out over 200 years ago, change is not altogether something fun to live with. The other reason of course why Mr. Market sold off, were the missed expectations of the jobs number Friday. That was of course hanging in the background like a bad smell. Clear it out the fridge!
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Another case of the global jitters and the worse than anticipated jobs number hangover pre-Easter saw the sellers step in and the buyers run for cover. The old saying, shoot first and then ask questions later. We have now had five successive sessions of selling on Wall Street, the futures today do suggest a reprieve, but the sellers were most aggressive last evening. Perhaps they were the most tense after a few days of selling and then just could not take it anymore. The markets sold off aggressively, the Dow was down one and two thirds of a percent, the nerds of NASDAQ down below 3000 points, 1.83 percent lower after all was said and done, whilst the broader market S&P 500 sold off to the tune of 1.17 percent.
There was a bit of excitement at the opening bell when the Apple share price traded up to 644 Dollars exactly, which meant that the market cap of Apple had passed through the 600 billion Dollar mark. It has been pointed out several times that Microsoft was of course a 619 billion Dollar market cap back on December 30 in 1999. General Electric got close to 600 billion Dollars in the summer (northern hemisphere) of 2000, but did not quite crack that mark. If you needed reminding, Microsoft market cap last evening was 255 billion Dollars, GE was last at 198 billion Dollars.
Something that is exciting for the watchers, Apple is up an astonishing 60 odd percent this year, I think that the idea that the stock was way too cheap and now needs to be re-rated to levels relative to their peers. Price to earnings expansion or PE expansion as they call it. GE trades on 15 times earnings, Microsoft on 11 times earnings and Apple inc. on just less than 18 times earnings. HP has experienced the opposite, PE contraction. PE deflation. The stock trades on 8 and a bit times earnings, just a little less than Dell. Ah well, Apple might still have some way to go, there was a brokerage house who just recently stuck a 1000 Dollar share price target on the stock. Piper Jaffray's Gene Munster said so, and Gene has clout. But then Apple would have to be making at least 40 Dollars a share and growing by 20 to 30 percent per annum. Apple iPhone 5 and the TV pending, who knows.
Earnings season kicked off after the bell last evening, this was both good news because it was a beat, Alcoa made a "surprise" profit when analysts had pencilled in a loss. Well, I guess estimates are meant to be beaten, but I thought that it was by just a penny, not by a country mile in this case. Alcoa reported earnings of nine cents for the last quarter, versus Mr. Market expecting somewhere in the region of a four cent loss, that was consensus. So what was the big miss on the analysts part? Well, one part, there was a cost cutting exercise on their part, closing high cost smelting operations but more importantly (for me anyhow) was rising orders. Check it out: Alcoa Earnings Rebound Over Prior Quarter on Higher Productivity, Improved Market Conditions.
That point that I have been making, about how companies used the tough times to make sure that they were leaner and meaner, Alcoa are exactly that. But they still trade at one quarter of the price from back then in the go-go days of 2008. I am not so much interested in the company from an investment point of view, their earnings are too cyclical to warrant anything remotely close to investment grade. But I am more interested in how they see the world. Why? Because they sell to people who make all the useful indicators about growth, they should be a proxy for the economy, but have too many pressures. Check this out:
"Alcoa is raising its 2012 global growth forecast for the aerospace market 3 percentage points (13-14 percent), and expects global growth in the automotive (3-7 percent), commercial transportation (1-5 percent), packaging (2-3 percent), building and construction (2.5 - 3.5 percent), and industrial gas turbine (1-2 percent) markets."
Errr, soft landing, hard landing this or that, these are the people that see demand from their real customers. People who make aeroplanes and motor vehicles. People who sell products packaged in tin cans, beverages and food. Products used in building and construction. This is not huge demand that they see, but this is good enough for me where the mood has kind of soured in the last two weeks. For the record Alcoa has ramped up 6 percent to 9.9 Dollars pre market. 47 Dollars plus in July of 2007. Just above 5 Dollars in the lows of March 2009. Too cyclical but one of my favourite indicators.
Currencies and commodities corner. Dr. Copper is lower at 368 US cents per pound, the gold price is flat at 1660 Dollars per fine ounce. The platinum price is lower at 1593 Dollars per fine ounce. The oil price is last at 101.59 Dollars per barrel. The Rand weaker this morning. Last at 8.01 to the US Dollar, 12.75 to the Pound Sterling and 10.52 to the Euro. We are actually better, after having started worse. Good thing, a bounce.
Sasha Naryshkine and Byron Lotter
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