Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. We started in the green but quickly joined where the Asian markets had closed, and slid all day long to close near the lowest levels of the day. The Jozi all share index gave up 296 points, or 0.87 percent to close shop at 33821.98 points, the main losers (L above forehead) were the resource stocks, down one and a quarter percent, banks sank nearly one and a half percent. Retailers were at the other end, "winning" (in the words of that nutter Charlie Sheen) up nearly half a percent, but perhaps the biggest surprise was MTN that really caught a bid, up over two percent on the day, on more than double the usual trade, over one point one billion Rands worth of stock crossed 'hands' yesterday. Interesting. Syria remains a huge concern for MTN, but Iran is still more than a little worrisome, with these Turkcell allegations hanging around like an unblocked drain with no plunger in sight. Sis, sorry.
ABSA have released a voluntary trading statement for the half year to end June, even though we only have a few days left in this half year. And perhaps the numbers are going to be slightly worse than Mr. Market as a collective expected, because the company expects headline earnings to be between 0 to 10 percent lower than the corresponding period last year. Why? Well, let me do a copy paste from the release that you can read yourself: "Credit impairments have increased due to higher cover required on our mortgage legal book, as property prices and distressed customers remain under pressure. However, early arrears on most portfolios continue to improve. Absa Group's revenue growth was also subdued in the first five months. While our new lending volume is improving, this is only expected to become evident during the second half of 2012. In this environment, sustainable productivity improvements remain a priority and costs continued to be managed effectively."
Ahhh, what does that last line mean? Does that simply mean that there must be less golf days and meetings and more real working that must take place. Sis Sasha, don't be like that. But this is interesting, because whilst the South African Reserve Bank was and is a little worried about credit extension in the unsecured space, it seems that the core of ABSA's business is still struggling, but as they indicate, improving now and expected to get better in the second half. Costs, the fellows over at Barclays are looking to get their pound of flesh. Barclays has a market capitalisation of 23.67 billion Pounds, or 312 billion Rand, roughly. ABSA has a market cap of 110.7 billion Rand, of which Barclays own a 55.5 percent stake, or in Rands and cents, 61.44 billion Rand. At the current exchange rate of 13.2 Rands to the Pound, Barclays stake in ABSA is 19.66 percent of their overall business. Not small fry, that is for sure. And I can see why they are demanding more, because HQ has been sweating under increased regulation, increased political and public pressure on costs, so there is no doubt going to be a transfer of pressure locally.
There are 718,210,043 ABSA shares in issue (at last results), a 55.5 percent stake is 398,606,574 shares. Whoa, Barclays have owned ABSA shares for longer than I thought, the deal was struck back in May of 2005, or the announcement was made back then, rephrase that. 82.5 Rand a share was the price offered to ABSA shareholders, that also included a sweetener 2 Rand a share final dividend. But that is the most important part, because regardless of the capital gain that Barclays have made on their purchase of ABSA at those low prices, the dividend flow has been nothing short of magnificent.
Since late 2005, ABSA has paid out 35.07 Rands a share in dividends. And this is how you have benefitted as a shareholder alongside Barclays who want to suck everything out that they can. But it has not been all roses of course and it could have been a whole lot better, a huge oopsie globally in 2008 and 2009 and tightening regulations have perhaps squashed the most optimistic and even middle of the road type expectations. And that is why costs come into focus, sweat the assets a little harder, turn the screws a little tighter. At the get go here this morning ABSA is trading down over six percent. Mr. Market is clearly disappointed with this outcome, and the rest of the sector is trading down in sympathy with the weak trading statement.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Rising home sales (see this piece -> Some Positive Signs in Today's New Home Sales Report for a Significantly Improving Housing Market) were one bright spot in an otherwise rubbish market for the bulls, the broader market S&P 500 closed 1.6 percent lower to 1313 points. The Dow Jones Industrial lost 138 points to close at 12502, the nerds of NASDAQ lost nearly a whole two percent on the day to end at 2836 points, the first time that the index crossed that level was in October of 1999. Hmmmm..... that was a long time ago, I had just moved to Joburg then. The traffic was better back then too.
HOWEVER, the NASDAQ valuations are very different now to when they were back then. Some of the very big constituents now trade on very low double digit earnings multiples and some even on single digit multiples. The worlds biggest technology companies have turned from blue sky to utilities, and look very cheap. Obviously not all companies, the recently listed Facebook is trading on a very demanding multiple. But the maturity of the NASDAQ when compared to 13 years ago is easy to see, the tech companies are no longer those companies that are not understandable, but well held across all the investment managers and retail investor types. Oh, and in case you missed it, whilst we were talking about Facebook, the company's board became more diverse overnight as Sheryl Sandberg, the COO was added to the main board. Good for her, she seems like a good operator.
Byron's beats continues the index versus economy debate.
- The article titled Reminder: Stocks And The Economy Are Not The Same Thing from The Business Insider has sparked me to write my piece about a statistic that I bring up with clients time and time again.
More than 50% of S&P 500 earnings comes from outside the US. So what does that mean? It means that companies are flexible and have the drive and the ability to manoeuvre around the globe seeking profits while you as a shareholder sit happily at home supplying your own competitive advantage in order to make a living. It also means that when you buy shares in companies like Richemont, BHP Billiton, Visa, McDonalds and Nike you are not relying fully on the growth of developed markets where all the troubles lie. These companies have strategically placed themselves in economies that are growing very fast. That is why we strategically place our money with such companies.
In the article there is a Deutsche Bank analyst quote which compares the US economy to the S&P. Here goes. Manufacturing dominates the S&P, but services dominate US GDP. "Services make up more than 80% of US private sector jobs and 60% of US GDP. The slow recovery in services has been the main reason behind lacklustre US GDP growth. But S&P 500 profits have rebounded quickly and strongly owing to their bigger exposure to commodities, capex and exports. Although not big enough to make for strong overall US GDP or employment by itself, we expect manufacturing to remain a bright spot within US GDP and should be of great benefit to non-financial S&P EPS."
Since the financial crisis hit, it has been a lot harder to make money for everyone. It has forced companies to cut jobs, manage costs and generally be more efficient. It has also forced companies to leave their comfort zones and seek profits in more risky territories. It is not as easy anymore. The same applies to investors. You have to be very selective in the stocks you buy. Look at examples like Nokia, European banks and what ABSA is doing today. You can get your fingers burnt.
But there are also some absolute gems out there with successful business models and fantastic management teams. Companies who have embraced the crisis as a challenge and come out better because of it. That is where we come in, ploughing the news every day, picking up trends and discussing these topics together intensely so as to find these stocks. You could probably say that because all that has happened, asset managers like ourselves have also become more efficient. In hindsight maybe the crisis was needed by all. I get the feeling that the current situation in Europe will be a huge wakeup call and that after the clean up the current nations under scrutiny will be a lot more efficient. In fact they have to be in order to survive.
To back my thesis take this into consideration. In 2009 Latvia, one of the first European nations to fall had its economy contract by 18% in 2009. They implemented policies which cut wages and increased productivity. The Latvian economy grew 5.5% in 2011 and 6.9% in the first quarter of this year. This is all amongst a Euro zone that is struggling. Don't underestimate human resilience.
This raised more than just a few eyebrows, Microsoft announced last evening that they would be acquiring Yammer for 1.2 billion Dollars. Yammer has nothing to do with Usain Bolt and his ability to smoke the opposition over 100 metres, but rather a plug in piece of software that was supposed to improve productivity. That probably really does that. What is Yammer? Well, we used it once here and then promptly uninstalled it, for the only reason that Yammer is actually for bigger organisations with multiple users. It is basically a closed network of users who can interact with each other on chat, replacing memos, but has file sharing abilities as well. So, if I remember right, the software runs on your desktop, and integrates your calendar, tasks and all those clever things that Microsoft has achieved in their software over the years. But, 1.2 billion Dollars? I worked it out, it is a mere 14 and a bit days of Microsoft's EBITDA. Two weeks. That is it. And, if you forgot, Microsoft has a war chest of around 60 billion Dollars, in the bigger picture this is not a giant leap. So, expect the next patch in your new Windows operating system soon.
Currencies and commodities corner. Dr. Copper is last at 333 US cents per pound, the gold price is better on the session, last at 1585 Dollars per fine ounce. The platinum price is flat, 1438 Dollars per fine ounce is where it was last quoted. The oil price, that was last at 79.53 Dollars per barrel. I made a mistake yesterday, it was pointed out to me by a commodities dealer, who said that I had the price completely wrong on Cocoa, it should have been 2102 Dollars per ton. Whoa, that sounds like a lot. The Rand is weaker, last at 8.45 to the US dollar, 13.20 to the Pound Sterling and 10.58 to the Euro. We are marginally better here today after that selling pressure yesterday.
Parting shot. Cyprus. I don't care that they have become the fifth country to ask the central authorities in Europe for money. In part because they do not fit into the PIIGS acronym, that is disappointing, but in reality Cyprus has an economy the size of Ivory Coast (with all respect to the turf of Didier Drogba, Byron's favourite footballer) and in the Euro Zone is the third smallest member in terms of economic prowess. And is only 0.2 percent of the overall Euro zone economy. So, Cyprus is just a little more than half a day of the overall Euro zone economy, if the EZ economy is represented by a whole calendar year. Small. Not so small today is the Spanish Treasury auction, all very short term debt auctioned. I think that even though it is a 3 billion Euro auction, it is important for the pending European meeting on Thursday in Brussels, to test the levels of demand. That is likely to be the biggest news of the day. Tomorrow I am definitely going to write about the ANC policy conference, the stuff about miners makes me mad. The only reason that miners have benefitted hugely from an uptick in profits is because Chinese raw materials consumption has run away to levels not anticipated.
Sasha Naryshkine and Byron Lotter
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