Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. It could have been a whole lot worse, but thanks to some economic data that was well received by Mr. Market, I suppose all was fine in the end, with the Jozi all share index finishing off the day less than one tenth of a percent from where we started. Byron made a good point about stocks in the news for the wrong reason, and their volatility. Phew. Stocks like Nokia, which has had the most amazing 30 days, up nearly 40 percent, but the most awful five years, down 90 percent. Did you see the little graphic doing the rounds? With the Samsung student cribbing the Apple students work and the Nokia student sitting way in the background. What made me chuckle was that the Research in Motion "student" was nowhere to be seen. Not even under the desks. I guess that is about right. And the fake story about Apple being paid nickels, in their Samsung settlement, someone worked out that it would take 2755 18 wheeler trucks to carry 1.05 billion Dollars in one cent coins. Let us just say that Tim Cook did not get a call and did not have to decide what to do with tens of billions of one cent coins. Nice story though.
Byron's beats again explores the unsecured lending space in South Africa, which has been under the spotlight for a while now.
- There is still a lot of concern about the unsecured lending environment in South Africa. On Tuesday afternoon Capitec came out with a trading update which looked good but the company fell over 3% yesterday (it's down 2.8% again today) and African Bank fell 2.5%. There was also a meeting on Monday between Finance Minister Pravin Gordhan and the country's big bank chiefs to discuss banking in South Africa as well as this specific matter. The meeting looked at these banks surge into the unsecured market due to higher regulations in the secured lending space which is decreasing those margins and making unsecured more attractive.
Let's look at what Capitec had to say and then discuss some important points from the meeting. Capitec announced that headline earnings look to grow between 25%-35% for the half year ending 31 August 2012. This is good though? But Capitec is priced for perfection and this is well below last year's growth of 53%. This has spurred speculation that impairments have increased considerably. I would agree with that. It is understandable that impairments will increase as loans increase. It all comes down to the company's ability to manage these risks. Unfortunately there was not anymore detail in the update but the market certainly did not like it.
Now let's get to the meeting. Here is the release from treasury, don't be scared, it's only 2 pages. Here is what it said about the unsecured lending space.
"The representatives of banks and the Minister noted the rapid increase in unsecured lending. The meeting agreed that the poorer households were at risk of getting caught in a debt spiral. Although some of this lending was by non-bank financial institutions, including retailers, banks could do more to ensure that they lend responsibly and do not contribute to household over-indebtedness.
While there are currently no systemic risks, the meeting noted and supported the close attention that unsecured lending is receiving from the SA Reserve Bank's Bank Supervision Department. There will be further engagement with financial and non-financial institutions on this issue so that South Africans are not over-indebted."
A few interesting points there. One is that the unsecured lending is not just from the banks. In JD Group's results we saw massive growth in their unsecured lending. This holds true for the likes of Truworths and Lewis. I think the other important thing to note is that everyone is well aware of the risks. This is not the same as the sub-prime mortgage crash which snuck up on the market unawares. Everyone learnt their lessons and our highly regarded banks actually walked away from the crisis with their reputations intact.
Regulation in this sector is good. It is more focused on transparency to make sure the banks do not take advantage of ignorant and uneducated people. We are still positive on this sector. We feel there is a lot of money to be made while banks have the ability and more importantly the willingness to manage this risk very carefully. As far as valuations are concerned most of the downside is already factored into Abil's share price which has come down heavily in the last month. We continue to add, taking advantage of this weakness.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. A flat finish overnight on Wall Street, it could have been better, it could have been worse. Before the session started there was a GDP read which matched expectations, but just as the session got going, around four pm here, a pending home sales number pushed us higher here. So of course the Fed are stuck with the same old obstacles, not so? The data is not bad enough, but equally it is not good either. I guess if you were comparing this to the old term "the Goldilocks economy" (not too hot and not too cold) then the current economy sits somewhere between the cold porridge and the baby bears porridge. As you know, the baby bears porridge is just right. Which would mean that the Fed would have to do very little one way or another, that is the whole idea of the Goldilocks economy. And adding to the market doubters of what Ben Bernanke can really say at Jackson Hole was the release of the Fed Beige Book.
Now the Beige Book is not a little book of secrets that have been added to down the years, with scribbling from William McChesney Martin and Alan Greenspan on the best diners in DC, and who not to trust in congress, but rather, as per the Fed website "Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources." And the release is 8 times a year, so roughly each and every 45 days. Which, of course, gives the Fed members from their districts, more than enough time to see gradual improvement or gradual weakening. There are two more left for this year, this is the recent release which you can find here: Current Economic Conditions. I guess the words "expand gradually" and "moderate growth" are to some extent just shy of Goldilocks. But then again "slowdown in the rate of growth" and "decline in the level of sales" hardly fills you with enormous confidence.
I did however have a chuckle when I read that there had been weaker demand for high-end jewellery in Kansas City. And another chuckle when I read that adult clothing was a good seller in Boston, Chicago and Dallas. Please don't get me started on Dallas. Crazy that a bad soapie has the legs to come back, but that must just be me, because everyone else disagrees with me. The employment part of the report is quite interesting, wages are remaining stagnant, whilst employment is basically flat. That hardly sounds encouraging. Do I really then care what Ben Bernanke is going to say at Jackson Hole tomorrow? I would be lying if I said no. But do I think that there are going to be long lasting consequences of the Fed action, one way or another? No. I suspect that the tolls at their disposal, and the cleverest economic minds are navigating our way through this poor patch.
And that also holds true for the folks across the Atlantic Ocean. Who are dealing with their problems so actively that ECB governor Mario Draghi has declined to attend the annual junket at Jackson Hole. I thought that this was great news. Because, as you can tell from this Bloomberg article, titled Draghi Takes On Bundesbank Orthodoxy in Crisis-Plan Plea, he is busy. Busy getting the job done. Which I guess is a more meaningful shift from a year ago, where seemingly the Europeans, be they law makers, leaders or central banks were stuck in the mud. I wonder how important a factor the French and Greek elections were in the slow motion part of the crisis. I still side with the Central Bankers, there is a reason that they got to that point, and there is a reason why the arm chair critics are exactly that, arm chair critics.
Meanwhile Angela Merkel is meeting Chinese premier Wen Jiabao in Beijing. As we speak. Err... write I mean. So the Germans, as the head of the Euro zone economies, are talking to the Chinese, the fellows who ironically have most of the gunpowder in a monetary sense, and in fact the Chinese have indicated that they will participate in European debt. Or, continue to invest in European debt. The Chinese did invent gunpowder, now they can use it. Sigh. Politicians talk, the job gets done in the back rooms, provided the folks involved are competent. And I believe they may well be very competent. Their lives (the Europeans involved) are complicated by not only multiple countries and languages, but also regional issues inside of countries. Think Spain. Oh, and Real Madrid FC and Barcelona FC goes to the core of that, if you think about it. But, for all its problems, the upside of a collective Europe is worth the fight and struggle that we see currently. Otherwise when the "crisis" started, they would have all thrown in the towel, not so?
Currencies and commodities corner. Dr. Copper has improved somewhat to 346 US cents per pound, the gold price is also up a touch to 1658 Dollars per fine ounce. Ditto the platinum price, which is better at 1526 Dollars per fine ounce. The oil price, although not really impacted by Hurricane Isaac, is slightly lower at 95.30 Dollars per barrel. That is for light sweet crude, as per the NYMEX quoted price. The Rand is slightly weaker at 8.43 to the US dollar. This is also where the markets have started, weaker on the day.
Parting shot. If you were thinking of going to Jackson Hole, you had better hurry up. Actually, unless you have access to a private plane in the next few hours, it is not going to happen. Would you believe that Jackson Hole, where hardly anyone lives has an airport that sees over ten flights in a day. Jackson has a mere ten thousand residents. The whole state of Wyoming has just over a third of the population of the whole of Manhattan. Wyoming is vast. And perhaps the setting is apt for the most anticipated speech of the week.
Sasha Naryshkine and Byron Lotter
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