Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. Yesterday was D Day, well the 68th anniversary of the Normandy beach landing, which I guess was the turning point in the Second World War, but instead of red on the beaches, we had green across the market maps. Whilst Europe has sovereign debt issues to contend with, I promise you that the problems that they had back then were MUCH worse. The ECB did not use up any of their bullets yesterday, saying that they would watch it. I suspect that the talking heads are right, the ECB will wait until after the Greek elections which are in just over a weeks time, next Sunday, and then decide on whether to act. The great Greek tragedy stills weighs on everyones minds, the Spanish "situation" is far greater and heavier, in fact Spain is set to sell 2 billion Euros worth of debt today, the yields undoubtedly will be much higher than last time around. Both short and medium term debt, Bloomberg TV tells me 2,4 and 10 year. But, if you could think of a day to be doing it, much better than the end of last week. Because the headlines read across the major publications that policy makers are preparing to do more, and equity markets were favourably disposed to news of this sort. Bloomberg TV is calling it "Stimulus Speculation". I guess that is exactly what it is.
We were in lift off mode in the late afternoon after having enjoyed a good time earlier in the session, the Jozi all share added a whopping 1.47 percent to end at 33603, up 485 points on the day. The main stars were the resource stocks, which have been in the dog box as of late, collectively the mining houses added just shy of three percent. The action for the bulls however was everywhere, banks up 0.85 percent on the session, remember the news from yesterday was that ABSA would be buying Edcon's book. That left us puzzled here and thinking that perhaps Bain's timing had been poor on the way in and that they were creaking for half a decade. Or perhaps Mitt Romney needed more funding as his campaign entered the critical stage of the US presidential race. Make the connection? I hardly think that it is that, like Paul said when Edcon discuss their results and present to their mostly bondholders as interested parties, the bottom line is hardly ever discussed. The stand out performers yesterday were the platinum stocks, they collectively went nuts, up five and a quarter percent, but they still trial the broader market, and are in fact year to date (YTD) the worst performing index, down nearly 12 and a half percent.
Byron's beats looks at the global motor vehicle industry, platinum and oil price correlations. Fascinating stuff.
- There is one sector which is doing very well both locally and internationally and that is vehicle sales. Last month automakers around the world reported 25.7% stronger retail sales in May. This equated to an annual rate of 13.8 million vehicles compared to 11.7 million for the comparable year. That is a big increase especially when you consider that the base was considerably increased by the Cash for Clunkers campaign in the US a couple of years ago.
Locally sales have also been flying. Sales increased by 20.7% year on year in May to 50228 units. Consequently Imperial who sells vehicles is replacing Lonmin who mine the material that goes into vehicles, on the JSE top 40. The Imperial share price is up 37.5% so far this year while Lonmin is down over 20%. So I guess it is better to sell cars than it is to produce catalytic converters. In Imperial's latest results, vehicle sales grew by 14% which was on top of a 49% increase in the comparable period a year before.
This makes me wonder about two issues. Firstly, why are so many cars being sold? And secondly, why is the platinum price so low? Let's deal with the first issue, car sales. I think you know what I am going to say here, Aspirational Consumerism. One of the first purchases you aspire to when you get your first job is a vehicle. Especially in South Africa and other developing markets where public transport is lacking. It really is life changing and often a symbol of success.
So why is the platinum price so low? Or is it low? The benchmark is usually gold but that metal price is driven by very different factors. In fact over the last 5 years the platinum price is 86% correlated to the oil price. That is a much better indicator than gold. So maybe it is not so 'cheap'.
Regardless of that I posed the question to the other guys in the office and we agreed on a few things. Technology has improved so that the amount of platinum per catalytic converter has decreased. Small diesel vehicles have also increased in sales which require less platinum. Recycling has also become more prominent.
That was off the top of our heads, here is what Johnson Matthey had to say, we were not far off. "The platinum market swung into an oversupply of 430,000 oz last year. Supplies of platinum rose by 7% to 6.48 million ounces due to inventory releases from South Africa as well as higher output in North America and Zimbabwe. Recycling increased by 12% to 2.05 million ounces. Gross demand for platinum rose by 2% to 8.1 million ounces largely as a result of heavy purchasing by the glass and petrochemical industries. Demand for platinum for use in heavy duty diesel autocatalysts was strong but this was partly offset by lower use in light duty diesel emissions control and reduced buying by Japanese auto manufacturers. Autocatalyst demand grew by 1% to 3.11 million ounces. Purchasing last year by jewellery manufacturers was 2% higher than in 2010 at 2.48 million ounces. Investment demand declined by 30% year-on-year but remained positive at 460,000 oz."
So what about the future for platinum. The miners are struggling therefore supply is slowing. We feel demand will remain strong as developing market consumers grow. However you know our thesis about investing in the miners at the moment, we don't. A platinum ETF would be the best exposure.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Wow. A large rally, I saw a couple of tweets that I quite liked and even emailed them to my colleagues. Email a tweet? What for? Well, they come and go tweets, and email gets archived. First, the one from about the only fellow that I would call a realist, neither a bear nor a raging bull, his name is Cullen Roche. His username is the on the twitter handle @PragCapitalist. It was a rather sarcastic tweet and went like this:
"Beginning of the face ripper???? #teamworldisendinglosesagain"
First things, a Face Ripper is a huge rally. Second, he is really sarcastic when he says team world-is-ending loses again. I guess that part often goes to the core of our argument here, the world doesn't end even though loads of people ALWAYS tell you that it is going to.
The next tweet that I sent was age restricted. The_Real_Fly is a terribly rude guy who you should not be introducing to young children, and is sort of known as a very crazy fellow. His tweet that I was interested was basically suggested that everyone had gone completely quiet about Credit Default Swaps and Bond quotes, because of course bonds were no longer the flavour. It was all about equities, which absolutely roared, stocks gained big time, the best day of the year, with all indices adding more than two and a quarter percent on the day. The S&P 500 tacked on 29 points to close at 1315 points, a gain of 2.3 percent. Quite, a real Face Ripper.
Not everything has had a face ripper. In fact some have had their headlights, fender, wing mirrors, mags and handles ripped off. A stock price which has had the most awful time in the last month and a half is Tempur-Pedic International. Some of you might well know the company as the seller of beds in the TEMPUR range. When I got married all of ten years ago, my wife and I decided that there were two things that we had to have. One was a king size extra length bed and the other was a dishwasher. We still have both and don't intend to get another one. But there was a craze in the US about memory mattresses, the ones that remember your shape for the night and you can sleep beautifully well. Question, you can never have enough apps for your cell phone, but how many new beds can you have? One, right? And how many plush pillows can you have? Well, I am guessing one. So, when people went crazy buying mattresses, you could have guessed that it would come to an end at some stage. And it has, Tempur-Pedic said last evening that they were losing out to their competitors as everyone continues to roll out memory mattresses, they operate in the niche space. And it is getting more crowded. So whilst revenues might be up 70 odd percent over the last two years, don't expect that to continue.
And boom, the share price fell nearly 50 percent. But that is not the worst of it, less than two months ago the stock was trading at 87 Dollars a share. Down 74 percent in just 8 weeks. The company expects to earn around 2.70 Dollars per share. But at 22.39 Dollars, is the stock now completely oversold? Or is the outlook so bad, that the heavy selling is over and buyers are scarce. Over ten years, the stock is up, but the last eight weeks has been horrid. The response from other manufacturers in the space, Select Comfort fell twenty and a half percent. Sealy (awesome share code, ZZ) fell over five percent. So what is the moral of the story? Pay attention? Well, some things humans change often, handsets are a good example, but some other things people keep for a long time. So when there is a fad, like cool mattresses, how many can you actually sell?
Currencies and commodities corner. Dr. Copper is last at 338 US cents per pound, the gold price is a little better on the session, last at 1622 Dollars per fine ounce. The platinum price is last at 1460 Dollars per fine ounce, part of the reason that the platinum stocks went nuts yesterday. The oil price is last at 85.4 Dollars per barrel. The Rand is firmer, naturally, up at 8.31 to the US Dollar, 12.85 to the Pound Sterling and 10.43 to the Euro.
Parting shot. Remember yesterday we were talking about falling off a cliff, the abyss, etc? How things in Europe appear to be bad, but not that bad as reported? We tend to do that here too as South Africans, using the word freezing too generally. Yesterday was not freezing. Freezing implies that the air temperature drops below zero. In other words, minus. In the same way when central bankers talk, "Fedspeak" confuses almost everyone. Because there is a lot said, without saying anything in particular.
This was driving Josh Brown crazy last evening. Perhaps he had a beer or two, but in response to Janet Yellen's speech last evening, titled Perspectives on Monetary Policy he said the following: Talking for the sake of talking, half of them want to tighten and half want to cut. None of these speeches are giving anyone any "clarity". And then he (Josh Brown) got really mad, and said Janet Yellen: "Headwinds persist." Wow, how should we make the check out, Janet, that was amazing Where's the afterparty? Dripping with sarcasm of course. What am I trying to say, connecting misuse of the word freezing with Fedspeak? Well, it is all about interpretation in Economics, and forecasting is a very difficult job. But, I can tell you that according to the Accuweather application on my phone, Jozi is going to experience very cold conditions this weekend, and yes, here it is apt to use the word freezing. A maximum of 11 degrees celcius. That is cold, but not freezing. A bit like economic conditions, cold, but not freezing.
Sasha Naryshkine and Byron Lotter
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