Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. Whilst some of our finest athletes were setting records in the pool, Mr. Market and the participants set another record last evening with the Jozi all share closing at an all time high. 35071 points to be exact, a massive rally during the day, which saw us 1.37 percent better. Thanks mostly to industrial stocks, which surged over two percent and platinum stocks which managed to add nearly two and a half percent. There was something very strange that happened yesterday. When we saw what was very good ADP numbers, the monthly private payroll numbers, suddenly the gold price sold off aggressively (as did the platinum and to a lesser extent the copper price) because the thinking was now that the Fed are likely to do less, not more. Remember that for a couple of days now, Mr. Market has been waiting for the FOMC announcement, which we will deal with later.
This is complicated at first glance, like most things in life. The thinking I guess was as follows. If the Fed, like the rest of us, sees improving economic data in the form of the employment number, then there is less chance that they will act. If the Fed is perceived to be "watching", if only to act if necessary, but seeing the data improve, then that is good for the Dollar, but not good for commodity prices, in particular not good for the gold price. Immediately after the positive employment data, the gold price dropped, check this Gold In US Dollar per ounce - (GOLD) graph from Kitco. That drop off saw the gold stocks here in Joburg get mashed. A mere hour or so later as quickly as it happened to the downside, gold stocks started to ratchet higher on poor ISM manufacturing data. Because now the Fed, you know, were going to do something. Hyperactivity. Trading. Second guessing monetary policy and response from the Fed and ECB. By trading gold and gold stocks. Holy smokes, no wonder the old phrase, once mentioned to me by a seasoned stock jockey (not nice, he was a trader) holds true: "trading gold makes you old".
Liberty holdings have released results this morning, for the six months to end June 2012. You can download the Interim Results for the six months ended 30 June Presentation by following that link. First things first, this is a famous business by South African standards, it has been around in one form or another since 1957. Donald Gordon founded this business. Standard Bank however are the nearly 54 percent shareholder, and beneath the surface there was never a good relationship between the two, Gordon and Standard Bank.
What do you get however when you buy this business? There are three segments, South African long-term insurance which consists of the largest sub segment, Retail South Africa (Liberty Life insurance). Their Asset management segment of their business (STANLIB which is just around the corner is the biggest contributor) is the most visible to our industry anyhow, and then lastly a business segment that they term Growth initiatives, which consists of newer businesses, naturally, including their African business, Liberty Africa. Which is the only little business that makes money. The other two, Liberty Health loses money, as does Direct Financial Services (those new adverts with the Mafia guy for Frank.net is that new business), which has incurred start up costs.
Are there any of the above businesses that you would want to own individually? Perhaps one could be of the opinion that you want to be owning a life insurance company in a developing market, where people are going to get richer and as such more important things such as life insurance enter the mix. But this will take time. So I think that business will be just fine. The other important contributor will be their asset management business, which has not exactly covered themselves in glory. There has been some bad timing with the hedging of their market exposure at the bottom of the market in 2009, that was a little embarrassing, plus also some of the Stanlib funds underperformed the markets in the last downturn. There was also a long broom brought out at that stage. But if you check the analysis of how they have done in the medium term, both the STANLIB Balanced Fund and the STANLIB Equity Fund have underperformed their respective benchmarks. The STANLIB Value Fund, and aggressive fund has also underperformed the index. The STANLIB Bond Fund has slightly outperformed their benchmark.
That is another argument altogether, the high costs for the investor in South Africa. I often think that the average retail investor, who is doing this on a monthly basis and saving for their retirement, they should go for the lowest cost option. Satrix products (which still attract a sizeable admin fee, BUT much less than these fees) and government savings bonds, in the right percentages (and a cash portion) should hold private individuals in good stead. Go the direct equities route, and pay attention, but that is our model. So naturally you can appreciate that we do not like the heavy fee model, we think that savers will wise up in time. High fees equal low returns over time. The business is sound, but it is not for us.
Byron's beats has a look at the only real hotel group left in South Africa. The reason I say that is that micro cap the Don group are winding up, whilst the others, Sun and Tsogo don't make most of their money from hotels. I suppose that is not too fair to IFA and Wilderness, but those are smaller.
- On Tuesday afternoon we got a trading update from our preferred property/hotel company City Lodge. This update is for the year ended 30 June with the full results release expected in the middle of August.
The update states that if you include the once off BEE deal from last year, earnings are anticipated to be 36%-40% higher than the corresponding period. If you do not include the once off transaction normalised headline earnings per share are expected to be between 14% to 18% higher compared to the previous year. Let's take at look at last year's numbers so we know what to expect.
Last year normalised headline earnings per share came in at 379c per share. Let's go with the middle of the range 16% which will give us earnings of around 440c. The stock trades at R81 putting it on an earnings valuation of 18.4. But remember 2 things. One, this company is not only valued by earnings. It has a massive property underpin which management value at R3.6bn, a slight premium to the current market cap of R3.5bn. And two, the company recently added 1380 rooms to its profile with a current total of 6440 rooms. When occupancy rates do increase we expect to see big growth in earnings.
The dividend also needs to be considered. Historically they have paid around a 1.7 times cover so expect around 260c a share or a yield of 3.2%. That is a good yield for a company with lots of capital growth potential.
From these numbers we can see that things are turning and occupancies are starting to increase. This earnings growth will be on the back of higher electricity and municipality costs which means occupancy's may have grown more than you think. It is a good sign for City Lodge and a good sign for the industry as a whole. The industry has struggled since the massive ramp up during the 2010 World Cup. An oversupply coupled with a recession has caused the whole the industry to experience big occupancy falls.
We continue to like the company. The share price has had a bumpy ride reaching as high as R89 a few weeks ago to as low as R74 in June. We will use this recent pullback as an opportunity to get into the stock.
Brussels sprouting ideas 50o 51' 0" N, 4o 21' 0" E The ECB announces what they are, or are not going to be doing today. They can do several things, it is just whether or not there is political will to get the job done, that is the key question here. Whether or not the Germans (which you can compare to the Tea party types in terms of monetary policy) are going to concede to "money printing" in the most raw format, in order to purchase peripheral bonds issued by Spain and Italy, amongst others. Do the Germans want this? As we said yesterday, you can employ tactics that your captain (the Bundesbank) does not like, but how is that going to work properly in the medium term? Mind you, the owners of the team (Merkel and Hollande) think that this is a good idea, so the coach (Draghi) might have to override the Bundesbank. Complicated, like most relationships involving multiple parties with no clear ownership over one another. The thinking is that the ECB will put rates on hold.
The broader market is looking for something different from the ECB. And the credibility issue is more huge here than many people think, if you have said that you are going to do everything in your power to preserve the Euro in its current format. Somebody somewhere must be seen to doing something. As Paul said however, he believes that Draghi will do the right thing. Whatever that right thing is.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Everyone was waiting for the FOMC statement, which was I guess a little bit of a damp squib. It was almost like the Fed told everyone what they suspected anyhow, the economy had slowed in recent months and that if it deteriorated, then the Fed were ready to act. And act they will. Now there are those who are saying that the Jackson Hole annual retreat is more likely to be the point where the Fed chief indicates what they are doing next. Phew. I get the sense that there is way too much time devoted to what central banks are likely to do next in the cycle. Or the next meeting. Or what tools they have at their disposal. I am sorry, but if your whole investment or trading thesis is around second guessing the Fed, then perhaps you should change that approach. Stocks settled much lower after the Fed failed to live up to whatever it was the market was looking for.
Currencies and commodities corner. Dr. Copper is last at 336 US cents per pound, the gold price is last at 1604 Dollars per fine ounce. The platinum price is a tad higher at 1397 Dollars per fine ounce. The oil price is last at 89.18 Dollars per barrel. The Iranians are sucking wind, although a Bloomberg story tells me that India are planning to buy more oil from Iran, by insuring their (Indian) tankers with the state backed insurance. The Rand is weaker somewhat, 8.31 to the US Dollar and 12.93 to the Pound Sterling. We are lower here to start with, but have been higher than the all time highs already this morning. And now, the junkies get to wait for the ECB a little later.
Sasha Naryshkine and Byron Lotter
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