To market, to market to buy a fat pig. North Korea and South Korean heat and weaker than anticipated private employment data impacted markets globally yesterday. Cyprus is not completely off the screens as of yet, they have a new finance minister almost immediately, and he is, as per this WSJ article Promising New Measures to Secure Rescue. Raising taxes, raising the retirement age, slimming down benefits. Yech, sounds all too familiar. And talking about slimming down, the French football players are in for a rude awakening, the 75 percent tax rate is going to be applied on earners over 1 million Euros. Perhaps this is good news for the Barca fans, you have the home leg next week, Zlatan Ibrahimovic might feel deflated that he will have to give back 75 percent of his 14 odd million Euro salary to the French government. I guess Wayne Rooney might not be joining him any time soon at PSG.
Back to Jozi, stocks sank a whopping one and a half percent to comfortably below 40 thousand points. Resource stocks were caned, more on that later, Credit Suisse decided to take a view. Collectively the commodity producers were down 2.4 percent. Year to date it looks ugly for the gold stocks, down 23.4 percent year to date. The platinum stocks are off 16.9 percent, whilst the overall sector is off 9.7 percent. Sasol on the other hand is up over ten percent this year in Jozi, the ADR program has seen no movement at all. Ascribe that to the weaker Rand, the Dollar has strengthened 9 percent year to date. All that movement in the Rand has seen Sasol improve. I wonder though, the price is clearly set here. Sasol trades 190 odd thousand shares in their ADR program in New York, here locally the stock trades 1.7 million shares on average a day. So, around 11 percent of the volume here trades in the ADR program. That sounds decent enough I guess.
US markets were also caned, the energy, materials and financials were all sold off heavily, the same as here I guess. But, it was pretty much across the board selling, the S&P 500 sold off more than a percent, the NASDAQ by 1.1 percent whilst Industrial blue chips, the Dow Jones, was sold off by only three quarters of a percent. That ADP report was around 40 thousand shy of consensus, 158 thousand jobs created for the month of March. However, and I guess this is also part of the fixation on the employment numbers, not too much was made of the revisions upwards of the February number and neither for the revisions downwards of the January number, it was neutral. For the full report, download it from their website March ADP National Employment Report.
I suppose wading through the report there are some encouraging signs, first of all the small business sector, those businesses with less than 20 people have been the biggest hirers, more so than the really large businesses. But, America as it is has an enormous services sector, almost all the jobs created are there, and not goods producing jobs.
This is the weakest number since October last year, the impact of the sequester is not quite fully understood yet, the impact that will have. All I can say is that if you look at a graph of ten years plus, the impact that the last downturn had is so visible. We were consistently seeing the largest layoffs since world war two when millions were let go. To Friday we go now, the non-farm payrolls number rolls in, expectations are probably being lowered as you can imagine. It is too tough to forecast. Way too tough. So leave that to people who sit and crunch numbers with their spreadsheets. Expectations are currently around the 200 thousand mark, with everything else expected flat over the last month. Unemployment is expected to stay at 7.7 percent. If we get a meet it might well be well received by markets.
The tensions that the pie faced Michelin man continues to build in North Korea is so much that news networks in Asia have actually got a live feed of one of the few places where North meets South Korea. The place is Kaesong Industrial Region, near the city of Paju, South Korea. It is a joint industrial zone, where the North Koreans are refusing to let the Southern workers in. The problem is that Kaesong is in the North. It is far bigger than I thought. And all in the North. 10 km north of the DMZ. I am guessing from my limited reading of the Kaesong Industrial Region that this is probably more important for the North than for the South, this is an olive branch from the southern industrialized nation to the communist north. Of course the South Koreans benefit from cheap Korean labour in the North. The wage estimates as per the Wiki link to the page, above, suggest that the Northern labourer earns 20 percent of a Southerner and 25 percent of the Chinese wage, for the same work. Shut. Closed. The North says no way.
And in the mean time the US have sent missile warning systems to Guam, about the only place a well guided North Korean bomb could ever reach. The north have moved a bomb to the East coast. Perhaps their only one, who knows how seriously the threat must be taken? But I suspect that the response from the US is such that the threat is being taken very, very seriously. I would swap Cyprus for this any day of the week, that seems to have faded from the radar screens even though the money has not quite flowed yet. The WSJ has a nice article: A Rundown of the Kaesong Industrial Complex. The North earns 90 million Dollars a year from the project. The GDP of North Korea is roughly 40 billion Dollars. Roughly one quarter of a percent of GDP. As a percentage of their foreign exchange earnings I have absolutely no idea what this is. But one quarter of trade comes from the South. This could stop tomorrow if the Chinese wanted it to, almost all of their goods are bought by the Chinese. Nutty. Strange. Weird. Unfortunately a real threat.
Credit Suisse decided that enough was enough, they were cutting their outlook for both iron ore and copper, as all the building over the last four years had brought us to a situation where they see Chinese iron ore demand slowing to just 4 percent next year, whilst production will increase by as much as 16 percent. Their price targets were cut for all the majors, from Rio to BHP to Anglo, which of the majors was behind the curve from a capex cost cutting point of view. As much as two years behind, and still traded at a substantial premium to their peers. The full FT story is here (subscription only, sorry): Metal glut fears dent miners as FTSE dips. From that story you can see that Credit Suisse now has their estimates at 30 percent below consensus. 30 percent? That is a lot. In our client portfolios there is mostly BHP Billiton and Sasol as the commodity stocks of choice.
But. But. Earlier in March there was an FT article that quotes a Grant Thornton survey that concluded around half of the mining companies around the world were facing a credit crunch. Many of which, mostly smaller miners without producing assets yet, will require funding in the coming months, and I suspect appetite from investors is waning against the backdrop of falling prices. So, the predicted surge in production might not come, but more importantly it might mean that the majors can pick up a whole lot of cheaper assets, as some companies might be forced sellers. We have seen this more than once I guess. This happens many times, the cycles are so tough to call, so as ever quality matters more than anything as an investor. Which is why we have steered clients towards the top of the pile.
Byron beats the streets. Things seem to be getting heated between Bidvest and the Adcock Ingram board. As I am sure you are aware, Bidvest made an offer on the 22nd of March to Purchase 60% of the shares in Issue, half for cash the other half for Bidvest shares. Adcock then fired back on Tuesday 2 April stating that the offer had no firm intention and that Bidvest had not engaged with the board before making the offer public which was the usual practice. This means basically that the board will not respond to the offer because certain legal requirements have not been met.
Dr Khotso Mokhele the chairman of the Adcock Board then released this statement via SENS which basically said that not enough detail was given in the Bidvest proposal. It is their way of rejecting a proposal they do not seem fit for both the board and shareholders. Fair enough, many questions remain unanswered such as Bidvest's strategy going forward with the company.
If shareholders best interests are to be considered this needs to be relayed as 50% of the payment will come with Bidvest shares. The board and the Adcock management would also like to know the details of their future and clearly feel slightly threatened. Again fair enough.
Bidvest however came back with a response yesterday stating that the Takeover Regulation Panel had a approved the firm intention letter prior to sending it and that the offer should be taken to shareholders.
"Bidvest still believes that Adcock shareholders be given the opportunity to vote on the offer contained in the Firm Intention Letter. Shareholders are advised that Bidvest is considering its position in relation to the issues raised and inaccuracies contained in the aforementioned response. A further announcement will be made by Bidvest in due course."
This is certainly not the last we will hear from this matter and negotiations will go to and fro. The media will cover it extensively because it is interesting to follow, market participants love big deals. As Bidvest shareholders our biggest concern lies with whether this is a good deal or not. We have already established that this would be a good addition to the Bidvest group and we fully entrust Brian Joffe to make the right decisions.
If the deal goes through then great, if the deal doesn't go through then things will just go back to normal. Hopefully the parties will not part ways because negotiations have gone sour. If that pans out shareholders of both groups will be the losers.
You might have seen a picture before of how processing power has improved in many ways, the size of the History of computer data storage, this blog details it quite nicely. See that spaceship shaped thing: "The first hard drive to have more than 1 GB in capacity was the IBM 3380 in 1980 (it could store 2.52 GB). It was the size of a refrigerator, weighed 550 pounds (250 kg), and the price when it was introduced ranged from $81,000 to $142,400." Wow. Two decades later the entry level hard drive in a desktop (remember kicking the side of that clunky thing) was around 3 Gigs. The floppy, the stiffy, the CD and now the cloud has seen the amount of storage space grow to almost infinite. This blog piece: A History of Storage Cost sees the cost per Gigabyte go from 700,000 Dollars for an Apple PC in 1981 to 7 US cents per Gigabyte for the 1 terabyte Hitachi hard drive released in 2009. I am sure that it is even cheaper today.
Where I wanted this piece to head to was to try and incorporate the great Bill Gross piece titled: A Man in the Mirror. That is coincidently my favourite Michael Jackson song too. My favourite Beatles song is Eleanor Rigby, the lonely lady that nobody ever found. Back to that Gross piece, which I urge you to read, he suggests that he has lived through a golden era and the past performance might be as good as it gets. Maybe. I suspect what he might have missed is that humans have advanced technologically at a much faster pace than at any other point in the past. So what will 2020 look like? Your guess is as good as mine. Perhaps no more checks, more electronic payments through your handset, who knows what that will look like. All devices will be fitted with a sim card perhaps, cars are being fitted for internet usage, as we speak. So it is critical to admit that the future might be infinitely better than the past. Conflicts and wars could derail global growth, but there are far fewer ongoing conflicts now than at any other time in the last century. Long may it last. Gross and co will no doubt be remembered in the same breath as Rockefeller, Carnegie, Mellon, Morgan and Gould, as champions of their time.
Crow's nest. Stocks are flat here mid morning. Industrials are lower, US futures are getting a lift with a better UK PMI read. Good for them. Don't tell anyone that local business confidence fell to a 13 year low. Sis. European stocks are all higher, our underperformance continues to show through, some stocks are starting to look a whole lot cheaper than before.
Sasha Naryshkine and Byron Lotter
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