Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. When you take a public holiday your equity markets are not going to trade in the same fashion as global markets. Resources took another pasting here yesterday, the Chinese infrastructural plan and the Fed open ended Mortgage backed securities buying programs gave a temporary boost to the sector, but there has been pain since then. Collectively the sector was down nearly two percent. The pain continues for the local miners, Coal of Africa mine workers went on a protected strike, sending the share price down nearly 15 percent.
It was not only the strikes, South African coal prices fell to a two year low according to a Reuters article that I read. AND, there were no bids in sight, on Monday that was, I guess no real surprises there. I could not find a longer dated graph, but saw that Australian thermal coal prices were down over 26 percent over the last year. But still, the price of thermal coal is up 25 percent over five years, not bad considering that we had the deepest global recession of our time. But as per Bryon's beats yesterday, the debate exists over commodity prices and the Chinese demand picture going forward.
I hate saying that, going forward..... Super cycle sustainability, that is the debate that is doing the rounds, I suspect that 300 odd million Chinese that need urbanising over the next 15 years are definitely going to require places to live and related infrastructure. Perhaps those apartments do not need to be built, and have been built already. I remember reading that there were around 60 million empty apartments. I must have been reading some Hugh Hendry or Jim Chanos propaganda pieces. Although as someone pointed out, 300 million new folks to the cities means 100 million new jobs, more or less. Forget the apartments, think about the jobs. Manufacturing jobs? Manufacturing what and for whom? All the new consumers in the world I guess.
At the beginning of next week we will be more than 75 percent of the way through the year. Only 25 percent left to go. Our market is up 12 percent year to date. Stinking up the joint are the platinum stocks, down 21 percent year to date (following a 28 percent drop in 2011), worse than the gold stocks which are down 17 percent year to date. The sectors to have been in have been property, retail, industrials and financials, in that order. Resources and construction have been the sectors to avoid. Some, like Bill Miller, might argue that you ignore the cyclicality of those sectors, your returns will almost always beat the market. It worked for him and his Legg Mason Capital Management Value Trust, which he managed. Although Miller suggested that being measured on a year to year basis gave him some lucky breaks now and again. Such is life. The right place at the right time.
I think that the strikes issue deserves more than our full attention. It deserves the attention. David McKay has written a really good piece this morning in MiningMx, titled Strike contagion shuts down 40% of SA gold. 40 percent? Wow, that is almost tragic. And as the quoted source suggests, this is going to be an opportune time for the South African miners to reflect on their growth plans. If any. Time to rethink those, time to reflect on costs and dare I say it, this no doubt will lead to job losses.
Tiger Brands, that purchase announcement from yesterday, the purchase consideration is even higher than I initially thought. The total purchase consideration by Tiger of Dangote Flour Mills shall not exceed 4.1 billion Rands. That is the maximum that they are going to pay. The initial 1.5 billion Rands stands, and THEN on top of that, Tiger are going to pay 14 times the current years adjusted profits after tax (according to a pre determined formula) for the current financial year for DFM which ends on the last day of the year. Their share at least, 63.35 percent.
All you need to understand is that they will not pay more than 4.1 billion Rands, which in itself is a hefty amount, whichever way that you look at it. But it turns out that the chances of them paying that much are remote, in order for Tiger to start paying Dangote Industries more money (than the 1.5 billion Rands), Dangote Flour Mills would have to increase their "audited profits after tax" by more than 73 percent. And in order to get to the 4.1 billion Rand mark, on the same measurement, profits after tax would have to increase by 374 percent on last year, 2011. Seems funny, but I guess all parties have had a chance to check this out and would be comfortable with this agreed formula.
Digest these links.
I have heard this idea a lot, the Germans, you know, need to exit the Euro zone. What? Really? Whatever for? Now these are articles written by really smart people. Martin Wolf from the FT (subscription only) has written Why exit is an option for Germany. Paul reckons that the fellow is overrated by the community. He writes well. But I agree, what kind of an idea is that? Especially when I read in the WSJ (also subscription only sadly), in this article, State of Europe's Banks: Safe and Stressed that German lenders have nearly 140 billion Dollars worth of exposure to Spain, I can see the need for closer ties. Not further away. So whilst we continue to muddle through the European sovereign debt issues, we will continue to see stories about what is best for Europe. Written by Americans and English people.
Meanwhile, IMF Managing Director Christine Lagarde Calls for Action Now to Secure Global Recovery. All this against the backdrop of anti-austerity protests in Madrid last evening, or perhaps these are just people demanding that their beloved football team should be doing better. But just this morning the boxes in front of me suggested that Spain may ask for 60 billion Euros. And now Catalonia is apparently seeking independence from Spain. Wow. All 7.565 million of them want to be somewhere else, having their own football team, seeing as the Spanish national team never gets to show their skills in Barcelona. The Basque region also wants autonomy and they have a superior economy at least. Sigh.
Well I never. When I read this headline from a post Astrology guides some financial traders, you would excuse me for giggling out loud. No, you would excuse me from snorting my drink through my nose. Sis. If you read the post you see all the suckers out there looking in the wrong place for the edge. Financial astrologist? I think that I have read everything useless now.
You must have read about that crazy dance and YouTube sensation PSY who has that block buster video Gangnam Style. That video has actually been nominated by MTV Europe as one of five videos in the category music video of the year. The first K-pop to "make it" globally. There are in fact two financial elements here, first: 'Gangnam Style' Has Been Good News for Psy's Dad's Semiconductor Company. No really. And the stock is up another eight percent plus today, check it out: D.I Corp. PSY's dad looks like he has been at D.I. Corp for 22 years, according to the company's website. But has probably seen the best run ever in the stock in two months. The 2nd financial element is that the song is satirical in nature, read this piece: The Wholesome Hidden Message of 'Gangnam Style'. Korean credit card debt issues look more serious than the silly dance.
- Byron's beats
This morning we received a very detailed 6 month earnings report from Capitec which, as expected from the trading update, showed very good growth. After reading it and their explanations of the unsecured lending market I again feel reassured that the banks are paying a lot of attention to the potentials of a bubble.
"The continued growth in the unsecured lending market should be considered against the background of the restructuring of the market that occurred with the introduction of the National Credit Act (NCA) in 2007. The NCA restricts the interest rates and fees that may be charged on unsecured loans. The resulting reduction in the cost of credit makes unsecured credit available to a wider market. Higher income clients, with monthly income in excess of R15 000, have progressively accounted for an increased portion of unsecured credit granted. These clients carry a lower risk. Our analysis also indicates that increased affordability, together with growth in disposable income has meant that the growth in unsecured lending has not resulted in borrowers becoming over-indebted."
When you look at the numbers however you realise that the company is far from just an unsecured lender. Of their 4.2 million clients, 3.1 million use the retail bank, lending only clients equates to 1.1 million. They clearly saw a gap in the market for low cost retail banking and took it with both hands.
Headline earnings per share were up 35% to 702c, the interim dividend increased 35% to 169c while return on equity came in at 28%. The company is expected to make 1440c for the full year as we finally see the earnings grow into the share price. That is also because the share price, at R205, has not done anything for 6 months. Trading on a forward multiple of 14.2 this is the first time in a while Capitec has not looked ridiculously expensive, but why?
Interest income is still the biggest profit driver which means the company is very much exposed to the concerns of an unsecured credit bubble. Even though the companies seem to be in control, the market is still uncertain. African Bank is now trading well below 10 forward earnings after pulling back over 20% since April. They of course are all unsecured lending so you can see what kind of multiple would be given to that segment of Capitec's business.
I still feel confident that the unsecured lending growth we have witnessed has been sustainable and very much needed in a nation where credit was very hard to come by for the masses. We prefer African Bank in the sector and will continue to add especially at these low prices but Capitec also presents a good opportunity with a bit more diversification.
New York, New York. 40o 43' 0" N, 74o 0' 0" W All fall tumbling down. That is what my eldest daughter used to say when she was small. She is still small, but she is not that small anymore, grade 1 means she is growing up. Not growing up were the indices yesterday on Wall Street, all sliding into the close and ending the session at the lowest points. Still, stocks have had a great run over the last 90 days, the S&P is up nearly eight percent since the end of June.
I have become fascinated with the housing recovery in the US. As we know, a man (or womans) home is their castle, or so the old English saying goes. If the value of your house increases, then I guess you feel better about the future, I guess that is right. But when I read Housing Market Displays New Vigor as Prices Rise from the WSJ and this then I guess translates to Consumers Back to Feeling Flush, from the same publication the WSJ. One of my favourite bloggers, Prof Mark J Perry, who has moved publishing platforms has the following to say: 2012: The year of the housing recovery, updated.
The conclusion is telling: "The ongoing monthly and annual increases in the FHFA's House Price Index at a consistent pace over the last six months that hasn’t happened since 2006 for consecutive monthly increases and 2007 for consecutive annual increases provide more support to the growing consensus that 2012 will mark the year of the U.S. housing recovery." I guess today we get new home sales data, which will either disappoint or no doubt confirm that the US housing market is on the right track. I suspect that we might be in for another upside surprise, which will be good.
Currencies and commodities corner. Dr. Copper last traded a smidgen shy of 370 US cents per pound. The gold price remains at elevated levels, up at 1763 Dollars per fine ounce. The platinum price is also gaining some traction, slightly better on the session at 1627 Dollars per fine ounce. The oil price is lower at 90.55 Dollars per fine ounce. The Rand is surprisingly steady for all the noise around the mining sector. The Rand was last quoted at 8.22 to the US Dollar, 13.33 to the Pound Sterling and 10.58 to the Euro. We are starting off the day with a bloodied nose here. Stocks have sold off nearly a percent so far today. Spain and pain again. Yields on the 10yr above 6 percent. Not good.
Sasha Naryshkine and Byron Lotter
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