To market, to market to buy a fat pig. What a weekend! Rain, sunshine, luckily no snow! And of course, the best part was that we got our public holiday at the end of the week. I wish it worked like that all the time, either a Monday or a Friday, as to not disrupt the week of trade. I guess with our economy becoming more oriented towards retail over time, the public holiday could fall at almost any time really. I was at Sandton late on Friday and it was packed! People in their droves seemingly defying the "under pressure" tag. And then R Kelly arrived to eat at McDonald's (all the choices and he chose something familiar) and people ran to catch a glimpse. I thought someone had fallen off the escalators there was such a commotion. Throngs mobbed him up the escalators and he vanished into Queenspark. At least he could be alone with the "timeless elegance" amongst the blouses and trousers.
Thursday was a rather long time ago for some people who trade by the second and hour for a living, sometimes I think that there is a certain romance associated with trading, in the same way as I guess there is with being an airline pilot. It sounds romantic, but it seems to me at face value as being a very tough vocation. Maybe the uniform for one! Or when folks think of traders they see themselves on the floor of the NYSE, in one of those jackets and a fistful of papers, jostling for position at the trading posts. Those days are mostly gone, the bulk of trades take place electronically. There are still floor traders, but older folks.
It looks very quiet compared to what it once was, but make no mistake, the place still rocks! I found a lovely piece done last year in October titled: A Floor Broker Explains What They Actually Do All Day At The New York Stock Exchange. I like that answer about what it takes to be a floor trader: "We don't care what college you went to, but if you're good with numbers, will be on time and not cry when someone yells at you. Those are more important things than your GPA and college...." Ha-ha, I guess in the end it does boil down to your attitude, good or bad!
There are interim results from Royal Bafokeng Platinum this morning, this is for the six months to end June 2013. EPS clocked in the middle of the range indicated in the trading update on the 23rd of July, 87 cents a share. Maybe a disappointment by a cent or two, but in the middle of the range. Production improved to 130,278 ounces (yeah, exactly), whilst costs only ticked up marginally. Half of all costs are labour and contractors. That is about an industry norm nowadays I guess. So these results, as improved as they are, is this a compelling investment? I would like to think so, but in recent years we have tended to steer away from single commodity (platinum group I guess as a collective is a single commodity) and in particular single mine exposure.
Although well run, the company for the time being has the one mine, north and south shafts, and is set to try and double production over the next six to seven years, which would certainly elevate their status from middle to nearing to top five to six producers. Styldrift is a quality asset, at a shallow depth and therefore carries fewer risks than some of the other recent platinum mega projects. Which unfortunately has seen less investments over the last five odd years. Styldrift also plans to be less labour intensive, more mechanisation, which is good for shareholders, but not for labour. No dividend until Styldrift 1 is complete! And we are talking huge money here, there is big execution risk.
If you think Lake Charles is big for Sasol, this is roughly (on a relative to market capitalisation) around 50 percent bigger! The company has a market cap of 8.5 billion ZAR relative to a project that expected to cost 11.39 billion ZAR. But the project is now cheaper by around 400 million ZAR, but is expected to be 13 months longer. It is nearly one third complete, a long way to go! It seems compelling enough, but the platinum market (although much better) is still in a tough space. More recycling of auto catalytic convertors has perhaps led to a bigger supply than anticipated, but with capex reigned in over the last half a decade, the medium term guess is complicated. But if you were looking for an ungeared company, able to survive the tough times and build up for the future, this might be it. Risky though, single mine for the time being.
Byron beats the streets
We are now at the twilight of the US earnings season and it's been a good outcome. According to Eddy Elfenbein's weekly report, as of Friday we had 443 stocks who reported, 72% of those beat expectations and more importantly 55% beat sales expectations. Why is that so important? Because we knew companies were becoming slimmer and trimmer but that can only go on for so long. Sales need to start increasing for earnings growth to become sustainable. It is a good sign for the overall economy.
The market has also followed suit, especially with regards to its stability. Here is an interesting quote from the above mentioned piece.
"Tuesday was the S&P 500's worst day since June 24th, but the more arresting fact is that that terrible, awful plunge was a loss of a mere -0.57%. Yes, that was our worst loss in a span of 30 trading days! Sheesh, going by recent history, -0.57% doesn't even scratch the paint. In 2008, the S&P 500 lost more than -0.57% in a single day 38% of the time. How times have changed."
So things are looking good, the only real threat to the market at this stage is the potential tapering. That is probably why its rhetoric has such a large effect. It is the scapegoat at this stage but I am sure there is something around the corner that will rear its ugly head, there always is. My opinion is that tapering will have a bigger effect on the market than the economy. Because of this the market will stabilise and regroup back to rational levels ones the uneasiness dies away.
Talking about sustainable growth I came across this article from the WSJ titled Consumers Set to Reach for Their Wallets. It states that sluggish spending in the second quarter was due to tax increases. Once that is absorbed and the consumer is used to the new rates, spending will increase again. We have also finally seen a bit of lending from the banks which has increased money in the system. This will also help the consumer.
The US economy grew 1.7% in the second quarter of the year on the back of a 1.8% growth in consumer spending. As confidence increases and the wealth affect becomes more and more influential, I'd expect this to be a bigger contributor in the third quarter. It'll also be very interesting to see comparable sales numbers when the next results season comes along.
Home again, home again, jiggety-jog. Our markets have traded at highs, because the resources have ramped our markets to all time highs. Or close anyhow. We are there! The broader resource markets are as a collective still down over five percent year to date, so it has been a proper slog!
Thanks for the support! I met a subscriber to the newsletter over the weekend, he said he loved our newsletter. I told him that we write it for him, and to some extent that is true. The reason why we write is to research, have an opinion on something, and to inform our clients and potential clients. Part of the journey is to make sure that we all become better informed, we stay the course and try and sort noise from the important and meaty issues that change the course of companies. We invest in companies. Central banks and government impact rates and policy and by extension the broader economy, but despite all that, quality companies negotiate their way around the efforts of big government. Who of course they fund! Irony.
Sasha Naryshkine and Byron Lotter
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