To market, to market to buy a fat pig. Slip sliding away is OK if you are in the mood for some mellow music and are dozy, but it is just not on for a day at the markets. Stocks slid yesterday in Jozi, resources however surged over two percent. Industrials felt the brunt of the sellers, the Rand continued to strengthen through the day, Dollar weakness again. Dollar weakness normally translates to commodity price strength, thanks, we will take it for the time being. Industrials led Mr. Market lower, BATS, SABMiller and Richemont all fell in response to an improving local currency, but some of it must have to do with the new strain of avian flu over the seas and far away. You know, less flying around and more staying at home, less spend right now on luxury items.
Or is that the case? Just yesterday there was a confirmed case of avian flu in a big bird, an ostrich, on a farm near Oudtshoorn, not quite the same strain as in China, but worrying enough. I wonder how Rainbow Chickens and Astral will react in the coming days? Stocks like Air China, listed in Hong Kong have had a crazy few days of trade, from 6.50 HK Dollars before the news broke of cases of new bird flu last Wednesday, to 5.90 on Friday, back to 6.70 on Tuesday morning. Wild.
Everyone takes bird flu seriously. Why? Because of the Spanish influenza, a pandemic that killed 3 to 5 percent of the globes population, in the years just after the deadliest conflict at the time, World War one. And where did it come from, the flu? Birds, passed to pigs, passed onto humans. Amazing. So these threats are taken very, very seriously. A line from Wikipedia suggests how bad it actually was back then: "this pandemic has been described as "the greatest medical holocaust in history" and may have killed more people than the Black Death. It is said that this flu killed more people in 24 weeks than AIDS has killed in 24 years, more in a year than the Black Death killed in a century." Best we contain these outbreaks then.
Across the ocean and far away, where our colleague and friend Paul is (that is right sports lovers, Paul is in New York, eat your heart out) markets rallied. The Dow Jones Industrial Average hit both an intraday high of above 14700 and settled back from that to a new closing high. The S&P 500 did not quite get to its record but closed just a few points shy. The one company that kicked off earnings season beat estimates, but Alcoa only managed to end the day flat after all was said and done. What sank like a stone was JC Penney. I really like Bill Ackman, the hedge fund rock star, who has a big position in JC Penney. Pershing Capital to be precise, has a position on behalf of their clients, has been a loser in this trade, but Ackman has been glowing of the turnaround. The problem is that Ron Johnson, the former Apple retail store king and now former JC Penney boss, was supposed to lead the turnaround. But of course Ron is no longer there. Turns out that maybe the products do really sell themselves.
Ackman I suppose would have felt comforted with the fact that Herbalife took a dive after their auditor resigned. Not because the business is a pyramid scheme, but rather because the lead partner on the Herbalife audit, a senior KPMG fellow by the name of Scott London was offering trading tips in the stock. C'mon Scott. Not only Herbalife, but also Skechers too, those guys who make the shoes that you either love or dislike, hate is such a strong word. It turns out that Scott had been doing this for a while.
Sadly for Scott it is probably all over. He has violated the very trust that his industry is supposed to portray. If you read this WSJ article: Trading Case Embroils KPMG, you will see that Mr. London did it for a discount on a watch, and a little cash, plus some dinners. The information was not apparently sensitive, but hey, it is the same, stealing an apple or stealing the crate of apples, it is still stealing. Another WSJ article suggests that it may have been a little more innocent: Golf Pal Chats Led to Probes. Perhaps auditors should take up triathlons, no time for idle talk there. Oh, and it turns out the guy acting on these tips did not really make any significant money.
So I am guessing that this is not the news Ackman was waiting for. The recent news is that George Soros is pulling serious money from the funds managed by Ackman at Pershing. Pfff.... An exciting side show with the loser bruised and battered, when we eventually learn who that is. The problem that Ackman has is that this doesn't seem to be a trade where he can separate the emotion anymore, Carl Icahn has been rubbed up the wrong way and dished some of that back to Bill Ackman. Ackman is short Herbalife, Icahn is long, but that could not be the case anymore, who knows?
Byron beats the streets. This morning we received a trading update from Mr Price which looked very good at the face.
"Basic earnings per share ("EPS") and headline earnings per share ("HEPS") of Mr Price for the 52 weeks ended 30 March 2013, the results of which are expected to be released on SENS before the end of May 2013, are likely to be higher than the previous corresponding period by more than 20%. A range cannot be accurately estimated at this stage and shareholders are advised that a further trading statement will be issued in due course to provide earnings forecast ranges for EPS and HEPS as required by the JSE Listings Requirements."
Great, but remember that slow sales update they released at the beginning of the year? It said that sales growth for the third quarter had only grown 10%, 4.4% on a same store basis. They did however mention that the fourth quarter was starting off a lot better and that gross profit margins had increased. But how have they managed such strong earnings growth if sales are slowing? Let's take a deeper look.
An important factor to consider is how well the first half of the year went for the company. Headline earnings per share for the first six months of the year were up 35%. This was achieved on the back of a 13.9% growth in sales. The difference between the two is because of better tax rates, increase in margin, the extra return of their cash reserves and interest earned from credit sales. The last factor is the most significant for Mr Price in my opinion. A company that does most of its sales through cash but is growing its credit book can grow earnings much faster than sales. It is a huge benefit for being a cash retailer opposed to the likes of Truworths who already have a massive book. Cashbuild also sit in this advantageous position.
Going back to the update, with 35% earnings growth in the first half, anything less than 20% for the full year would mean a shocking second half. I know this message is coming across slightly negative but I wouldn't look too much into this announcement until further details are released. At least it is open ended to the upside. What it has reminded me of however is the fact that cash retailers have a great fullback in the form of credit sales if the management feel the time is right. Coincidently Mr Price attributed their slow third quarter to the fact that they had purposefully slowed their credit sales. It sits in their hands
Earnings season has kicked off, Byron had a great introduction a couple of sessions back. With regularity over the coming days we are going to be bombarded with quarterly earnings from businesses from all different sectors. Today we have Bed, Bath and Beyond. And Family Dollar Stores. But don't ever forget what you are trying to achieve as an investor. Maximum returns in as short a time as possible, taking the lowest possible risks. That is why I really liked the reference that Barry Ritholtz gave to 50 Cognitive Distortions, a paper written by Alice Boyes. Point 23 is hilarious, The Halo effect, thinking (and she uses the example) that Ron Johnson was once at Apple retail, so therefore he is going to replicate that at JC Penney. Quite relevant. Those first two points of Alice's that Barry has highlighted are worth repeating:
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"3. Negative predictions: Overestimating the likelihood that a market or economic report will have a negative outcome.
7. Negatively biased recall: Remembering negatives while ignoring positives."
Too true. The opposite I guess is also true. But this is what makes a market and keeps prices in check one way or another, different views and interpreting the same data a completely different way.
Crow's nest. European markets are set to open better. We need to catch a bid here, stocks so far this year have looked less than exciting, some sectors much better than others.
Sasha Naryshkine and Byron Lotter
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