Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. It was a holiday in the US yesterday, the Labor Day holiday with the traditional end to the summer season. I can feel summer is here, I am not too sure about the folks down in Cape Town, they seem to be cold and wet. It is beautiful down there, but without a doubt our weather is better. Much better. You have the natural beauty, we have the beautiful weather. Our weather is also predictable. OK, enough of that, there is always an element of unpredictability. I honestly don't buy the September is a good or bad month for stocks, because this is what the charts say. No thanks, if you are suggesting that the month of September will be bad for stocks because you looked at the stock almanac, then I think that you need to have your head read.
When the stock almanac comes back with September of 1931 being the very worst month for stocks ever in the US (the S&P was crushed 29.63 percent - September is a Bad Month For Stocks), I ask myself one question. How is 1931 the same as 2012? The Empire State Building was completed in that year, 1931. The city of Chicago ran out of money and did not pay their teachers for two whole months in 1931, there is news today that Chicago teachers are planning their first strike action in 25 years, pupils might return to classrooms sans teachers. The US population was nearly 200 million less in 1931. Great Britain abandoned the gold standard in 1931. 2500 banks fell over in the USA in 1931. Oh, and Australia gained independence from Great Britain in 1931. So how would that September or that year compare to this one? I am not sure, but if it is bad for stocks, then hey, it is bad for stocks. We had better take notice and use this as an opportunity.
There were a whole host of PMI releases across the globe yesterday. Most of them below par, the Chinese one had only the services sector standing out as a bright spot, the European ones were awful. Even Germany. Ours was above 50, which I guess is not so bad, but with the mining labour fiasco continuing and spreading, it is time for intervention at the very highest level. But my wish has come true. It has coincided with a normal cabinet lekgotla over the next three days, where the ongoing turbulence in the mining sector is set to top the agenda. Wiki suggests that lekgotla is a "loan" word from Sesotho meaning court. And not the formal court proceedings, but rather the word suggests a get together where consensus is reached. Correct me if I am wrong. There is nothing more important in the very short term than sorting out the current labour environment between the workers and the mining companies. Consensus is a must, otherwise I have absolutely no doubt that we will continue to be in a zone of extreme uncertainty. That is not good.
Byron's beats covers all of these PMI releases for all of us.
- Yesterday we saw PMI data for the month of August coming at us from all over the world and to be honest it did not paint a pretty picture. To get some clarity of what PMI actually is and what it indicates here is the definition from Wikipedia.
"The Purchasing Managers' Index (PMI) is an indicator produced by Markit Group and the Institute for Supply Management of financial activity reflecting purchasing managers' acquisition of goods and services.
Markit Group and the Institute for Supply Management compile The Purchasing Managers' Index (PMI) surveys on a monthly basis by polling businesses that represent the makeup of the respective sector. The surveys cover private sector companies, but not the public sector."
So basically it is a survey amongst private sector companies which determines their confidence in the near future. Anything above 50 shows an improvement and anything below 50 shows contraction.
As you can imagine Europe showed contractions in most of its regions as many of its businesses sit in defensive mode. Italy: 43.6, Spain: 44, France: 46 and Germany 44.7 all looked weak while China: 49.2, Japan: 47.7 and South Korea: 47.5 all showed contractions from Asia. India: 52.8, Russia: 51 and Turkey: 50 were some big nations with positive numbers. The average for Europe came in at 45.1 while the US number is coming out today. An expectation of 50.0 is what the screens are telling me.
So what does this tell us? Firstly you must realise that this is a survey based on people's opinions, not on hard facts. Clearly confidence is low at the moment. But that is to be expected, confidence has been up and down regularly since the financial crisis through to the sovereign debt issues in Europe. That is why markets barely reacted to the news yesterday. We already know that we have been in a confidence slump over the last few months. But what is going to bring us out of it before it spirals?
What is the fundamental driver behind all businesses? Demand. At the end of the day all manufacture is geared towards consumption. And this is what I believe will pull us out of this slump. Demand, especially from the developing world is going to be higher than expected. This will filter through to the manufacturers who will have to really step up a gear to match the increase. This will have a knock on effect from manufacturers who are directly linked to the consumer to manufactures who sell to those manufacturers. Once this starts to gain traction, confidence will pick up and investments will increase. I understand that is a very simple explanation but I do believe that this is just a speed bump and these confidence numbers will start picking up sooner than you think.
There have been a few trading updates this morning, the biggest one from a market capitalisation point of view is undoubtedly from FirstRand. This is for the full year to end June 2012, and the update needed to be good. The stock is up 37 percent over the last 12 months, the trading update needed to be the very best. The company suggests to their shareholders that "diluted normalised earnings per share from continuing operations" is the most accurate when representing "operational performance".
OK. For the year FirstRand expects this to increase by between 22 to 27 percent from the same measure of 179.4 cents last year. In the middle of that range expect 223.4 cents per share, which I guess is about just right for the stock which is trading at 28 ZAR a share. Up over two percent on the day, which indicates that the market is quite clearly pleased with this result. Banks as a whole have been on a tear this year, gaining over 20 percent as a collective, but these results have lived up to the markets expectations. The yield based on the expectations of just over two times dividend cover sees this investment around 3.75 percent. Not awesome, but comparable to the current cash rates available for cash deposits. I would like to see whether or not their innovative product offering has managed to capture more market share. The consensus is in the affirmative. Steve from {expletive} bank is seeing his job getting harder and harder. The results are expected next Tuesday, in what is a very busy week for results.
Another trading update that does not nearly look as good as that of FirstRand is an 11 month update from the Pioneer Food Group. The stock is down three and two thirds of a percent as the update does not make for good reading. Copy paste time: "Revenue for the eleven months increased by 10.5% to R16.7 billion with volumes contracting by between 2% and 4% on average in the Group's product basket as consumer spend remains constrained. Price inflation on the Group's basket of products is estimated at c.13.5% for the period under review."
Whoa! That does not look that great. They give a few reasons and they all seem, once you have read them, to be what you would have expected. Firstly there have been sharp increases in the maize prices, as a result of the droughts in the US. So that is associated with theweather and there is very little that you and I can do about that, weather patterns. Operating costs have also risen sharply, increased transportation costs as well as electricity costs have been weighing on the cost base. Also increasing has been the payroll expense, again, that is not something that is different from the rest of the industry. Expect your chickens to start costing you more!
Currencies and commodities corner. Dr. Copper is last at 348 US cents per pound, the gold price is off its best levels at 1691 Dollars per fine ounce. The platinum price is also off the best levels, but last at 1546 Dollars per fine ounce. The oil price is last at 97.07 Dollars per barrel. The Rand is slightly stronger, last at 8.37 to the US Dollar, 13.30 to the Pound Sterling and 10.55 to the Euro. We have started lower here today. Lots of "stuff" over the coming days, the ADP report tomorrow before non-farm payrolls on Friday. ISM manufacturing numbers from the US today are pretty important as to where we end up.
Sasha Naryshkine and Byron Lotter
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