To market, to market to buy a fat pig. Markets globally continued the run upwards, a PE expansion story if you will. Not PE as in the place they call the friendly/windy city, but rather a price to earnings multiple. With confidence returning globally, and even individuals are getting involved now, companies have without doing too much just managed to get re-rated by the broad investment community. For very long everyone has been chasing yield in a time of uncertainty. Certainty equalled something that you could trust, and if that meant sovereign bonds there were very, very few countries that you could trust, Germany and the United States, along with Japan were the few places that folks were happy enough to just park money.
There is a ticker on CNBC, during Fast Money that shows that we are now only a percent and a half away from the highs on the Dow Jones Industrial Average, three and two thirds of a percent away from the all time high on the broader market S&P 500 and of course I would not expect the NASDAQ to show up there. The NASDAQ closed at 3153.66 last evening. January 29 2013. The all time closing high is 5048.62. So, that is only 1894.96 points to go, or roughly another 60 percent gain for the tech heavy index. That might take another ten years, but who knows, tech stocks were valued to infinity back then, they look cheap to me. Amazon.com released results after the market, we will have a look at those tomorrow, too much to cover today. We can have a look at the Caterpillar results from two sessions back.
On the local front we referred to the Minas Rio write down yesterday, we will expand on that front today and then just this morning there was a first quarter trading update from African Bank, of course we will have a look at that too. To the north of our continent Egypt is on the brink once again. Yes, it certainly seems like their peak was millennia ago. And this is the same place where I saw their finance minister on the box, just last week suggesting that Egypt was a great place to do business. Sigh. He must be pulling his hair out.
Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E Stocks eked out a marginal gain, led mostly by the resource stocks. Although it did depend where you looked, the gold stocks sank over half a percent, mostly led by a drop in GoldFields shares, down one and a half percent and Harmony, which was down 1.8 percent. This is the lowest levels (share price) for Harmony Gold since September of 2008, which was at the point that we were right at the beginning of the {expletive} storm. The Rand is weak, but the gold price, after a 12 year run is seemingly going sideways for a while. The bulls are still there and suggesting 2000 Dollars per fine ounce, personally I have very little understanding of the inner workings of the gold price fundamentals.
Is it Indian households, central banks or just good old fashioned speculators? Combination of all of the above, a store of wealth as a result of human behaviour historically (108 billion folks said to have walked this planet) and more recently the only "fiat money" as a result of the excesses of central banks and governments. The idea that humans cannot create value and that printing out of thin air is possibly the most disgusting thing you can do, there is something there that does not stack up for me. You can build a house and sell it for something to a buyer. Have you created value out of thin air? More difficult to explain would be a service based industry that would be worth something to many people. Stay out of the conversation, there are too many crazy people with long hair telling us about the end of the world and how their gold will be sought after. You had then better get a deep bunker and a whole lot of shotgun shells to protect that bunker from zombies. As they say in the classics, if you don't understand something, steer clear.
- Byron beats the streets. This morning we received a very informative trading update from African Bank for the first quarter of their fiscal year ending 31 December 2012. As expected trading conditions in the furniture industry and unsecured lending market remained challenging. Credit disbursements were flat for the quarter due to risk reduction measures. Leon Kirkinis has been very vocal about pulling back on loans to avoid a bubble. They did this by reducing both the average size and duration of the loan.
But still their overall book grew by 8% to R57.3 billion as loans with longer durations still sit on their books. This also includes growth from their credit card facility (R509 million). They indicate that competitor growth has also slowed down significantly. They still expect total advances to grow 23% for the full year.
Importantly for investors, Non-performing loans as a percentage of advances improved marginally. Then they clarify the impact of the strikes which as an investor is very interesting.
"The fallout from labour unrest increased the bad debt charge slightly. ABIL's exposure to sectors that are currently experiencing labour volatility is limited, with its exposure to platinum and agriculture less than 3% and 1% of advances, respectively. NPL coverage on both of these books is prudent based on the expected performance, and is substantially higher than on the overall portfolio. The industrial action, while disruptive to the economy, has also resulted in substantial wage increases in those sectors of the economy. The overall impact of the labour unrest and potential retrenchments will become clearer over the next few months. The group has intensified its focus on collections in the wake of the current trends in the market."
So there it is. The exposure is small and although they are feeling the effect, don't forget that strikes more often than not result in higher wages which of course benefits ABL.
Retail on the other hand looked very slow. Ellerines is definitely losing market share in a difficult furniture market. Merchandise sales decreased by 8%. I have said this before,the main benefit of the retail segment is the access to credit seeking clients through the kiosks they have built in the stores.
To conclude we are still happy to be buyers of the stock, the price fundamentals are still very attractive, even at these slower growth rates. We have been right about earnings growth for this company, unfortunately the share price hasn't followed suit. We remain patient.
Coincidentally and very much connected to what Abil had to say, Cashbuild also released an operational update for the second quarter of their fiscal year. It was disappointing and the market has been ruthless, the share has dropped 7% so far today and is down 18% from the highs in August last year of R167.80.
"Revenue for the company was up by 1% on the second quarter of the prior financial year. Stores opened since 1 July 2011 (new stores - 7 stores) contributed 2% of the increase, whilst existing stores (187 stores) decreased by 1%. This, together with the growth reported in quarter one, equates to an increase in revenue for the half year of 2%."
For a retailer this is disappointing. Not as disappointing as it would be for a Shoprite or a Mr Price who are priced at 18 times next year's earnings but still disappointing for a company trading on 14 times forward earnings.
But why the slow growth? The housing market is picking up and home improvement is one of the first things people spend on when they have extra disposable income. On top of that competitors like Massbuild showed 10% growth in this quarter and Spar's Build It reported 17% growth for the year last year (they haven't released an operational update for this quarter yet).
I do have a few insights into why. Firstly Cashbuild are more situated in the rural areas whereas the competition who are experiencing good growth are focused on affluent areas. The rural areas are the ones who got hit by the strikes. But more significantly, what we have just heard from Abil, unsecured lending has been pulled back. Cashbuild rely on cash sales. Clients will go to Abil, lend R10 000 and build a wall using Cashbuild goods.
I think it is a good thing that Cashbuild do not rely on credit for sales, they do not have that extra risk on their books. Plus Abil still stated that their book is poised to grow 23% this year. This quarter has been a hiccup thanks to sentiment due to the strikes. This is hopefully a once off. And again I will repeat what African Bank had to say. Strikes result in higher wages which means more spending at Cashbuild. For their size we still see Cashbuild as great takeover target for the likes of a Shoprite, Pick n Pay or even an African Bank. We will buy into this weakness.
I knew that the longer that I thought about it, the more that it would eventually come to me. This extreme angst over the Rand having traded independently from all other currencies and that it is all us. We are terrible, no good and the world is starting to shun our financial assets. You have heard of Poland. The country. Cold, potatoes, vodka, invaded many times because of where they sit geographically, that place you know. Well, since the country threw off the shackles of communism, not too long ago in fact, you would have expected them to have made many advances. Yes, read that clearly, since the shackles of communism have been thrown off, life has on balance been better. The country is close to becoming part of the European Union. GDP since communism ended is up 9 fold, over nearly 25 years. In fact a path not too dissimilar to ours, since apartheid ended and everyone (the majority) was included in the formal economy. Where am I going with this? Well, quite simply I plotted the Polish Zloty versus the Dollar, and then the Rand to the US Dollar and this is the graph that I get:
For the permanent link, follow this: US Dollar ($)/Polish Zloty (PLN) and US Dollar ($)/South African Rand (ZAR). My point is simple. Having seen that graph, over the last five years, is all our angst justified or is it just the case of exiting emerging markets that were high yielders and now steering more to what looks like beat up equities with better prospects. If you are going to spend your life trying to understand currency movements, you are going to lose hair, that has got gray already.
Anglo American was once the titan of the South African business landscape. As was Barloworld for that matter. Not that they are not now, but the simple truth is that they are no longer the giants that people remembered them for. Yesterday there was an announcement from Anglo American that most people expected: Anglo American confirms Minas-Rio capex and records $4 billion impairment. 4 billion Dollars after tax. Wow. We were expecting to see iron ore shipped in this half right now, that was supposed to be now. Soon. Those expectations have been dashed. Well, they were already, 13 November we already saw an update from the company, we wrote about it back then: Anglo American updates on their iron ore business.
I saw red when I read this quote from Cynthia Carroll: "We are clearly disappointed that the diversity of challenges that our Minas-Rio project has faced has contributed to a significant increase in capital expenditure, leading to the impairment we have recorded. Despite the difficulties, we continue to be confident of the medium and long term attractiveness and strategic positioning of Minas-Rio and we remain committed to the project."
I can imagine (and this sounds incredibly harsh) that there will be a Mr. T sucker fools celebration come 1 April at Anglo, as the very last month of Ms. Carroll's tenure at the helm comes to an end. A bad chapter in the Anglo American history. That said however, hindsight is a much better science than predicting. It really is. It would have been better to allocate those same resources to what is clearly a much better iron ore business here in South Africa. But the temptation and steer to diversify geographically was too much to ignore. The only person that benefitted (and big time) was Eike Fuhrken Batista. Sadly I read the first line there and I could not help but think that he, Batista was in the right place at the right time: "Eike Batista is one of seven children of businessman Eliezer Batista da Silva, who was Minister of Mines and Energy." Coincidence? Not on your nelly (Nellie?). But hey, most people who got rich quickly or even slowly knew someone or something. I say most.
New York, New York. 40o 43' 0" N, 74o 0' 0" W Stocks again barrelled higher as a combination of less fear, more broader participation, an improving outlook as well as being supported by improved earnings starts to grip market participants. There were many things noteworthy, Facebook got crushed, after one of the most heroic comeback rallies in recent history. Depending on who you are, history for a day trader might be two hours ago, for a speculator that could be last week, but for an investor that might mean World War II. Facebook actually have results today. I can understand the anxiety. Over the three months the stock is up 40 percent. Over six months the stock is up 30 percent. Since listing however, less than 9 months ago, the stock is down nearly 19 percent. As ever, it depends where you draw your line in the sand.
It seems like an age ago, but it was only two days. Refer back to that point about history. Caterpillar reported results on Monday before the market opened. At face value, because one only sees the numbers flash up on the screens it seemed a miss. But as ever the detail is where you find it all. A pie tastes better than it looks. Imagine never having seen a pie before. A rectangular brown thing, how tasty could that be?
Pies and tastiness aside, this is the small matter of full year numbers. And fourth quarter. This was the best sales and profits numbers ever from Caterpillar. 8.47 Dollars a share worth of earnings, despite an 87 cents per share impairment related to their Siwei acquisition in June of 2012. Pronounced Sea Way judging from the media that I have watched. That amounts to 580 million Dollars. Of a business that they have just bought. WHAT? OK, first the company appeases investors by explaining that the business that they bought, Siwei is very important for their expansion plans in China, specifically in the coal markets. On the CAT website there is a short explanation, Siwei is "manufacturer of longwall roof supports" and most of the mining in coal in China takes place underground.
The folks who are happy to dish out stereotypical examples will have more cluster ammunition capabilities than the US airforce. The Siwei financials before the deal was done were changed and fiddled with in order to conclude the transaction favourably for the Chinese shareholders. WTF were the powers that be at Siwei thinking when they manipulated financial statements and presented false information? Did they honestly think that they would get away with it? Turns out that of course the execs did not/have not: Caterpillar fires Siwei senior execs for suspected fraud
OK, that nasty stinky sort of surprise aside, the results were good: Caterpillar Reports Record Sales and Revenues and Profit for 2012; Inventory Reduced $2 Billion in the Fourth Quarter. 2012 started well, but then faded, much like 2011 for the company. Slower demand in the second half led to a higher inventory, and so of course the company did what they do, and that is to react to the situation. Notwithstanding the slowdown, revenue still increased by 15 percent.
More importantly, the price reacted positively as a result of the outlook. Caterpillar have a fairly good idea based on their sales orders as to the state of construction and mining globally. But their range is so wide that they could actually drive a monster truck through guidance. 7 to 9 Dollars worth of earnings is being anticipated this year on a equally wide revenue range of 60 to 68 billion Dollars. At the bottom end of that range that would mean revenue would be ten percent less than last year. The reason that the company have done this is because the last two years have been choppy. Europe is still flat, whilst the outlook for both China and the US have improved. If the top end of the range is hit, then the company will register another record year. The stock is trading near highs last seen in May last year, the stock hardly looks expensive. We continue to accumulate the stock, the longer term urbanisation and continued resource intensity trends increasing remain intact.
Crow's nest. You might have remembered a couple of weeks ago, a TV interview in which AMCU's Joseph Mathunjwa suggested that South Africa should follow Zimbabwe's example and let the state take a 51 percent stake in mines in South Africa. A very poor online article, Zimbabwe based is all that I have found: Follow Mugabe and Indigenise Mines: Union. Don't get me wrong, I am not against empowerment, done the right way, getting the employees to participate, that is tops for me. The government of South Africa obviously realises that mining is a very tough business. Hard, very hard. Like many, he was of course reacting to the Amplats news with disgust. That is why when I stumbled across this article this morning: Zimbabwe Is Down to Its Last $217, I thought to myself, this is what happens when a government is militant towards the people that pay the bills, business of course. What? Zim have 217 Dollars left. And that is it. How they are going to pay everyone next month is a mystery to me. Unless the Chinese decide to tighten the noose of you owe us big time in the future, Zim are going to scramble. Never mind the fact that 100 million Dollars is needed for elections, as the article points out. 2013 seems to be tougher for our northern neighbours than many envisaged when they Dollarized their economy.
Our markets have opened up. Earnings season in full swing, there will be some attention turned to the simple economic news. ADP data a little later, this should be fun. Because it will of course give us useful insight into the biggest economic point of the month, non-farm payrolls on Friday.
Sasha Naryshkine and Byron Lotter
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