To market, to market to buy a fat pig. We all need more jobs! Interestingly we are starting to live through the age of the machines, in which companies respond to higher wage demands by mechanizing in order to maximise profits. For their shareholders, which are of course humans and not machines. Not so long ago, in 2008, some of the big bulk commodity miners pushed the heavy duty machinery equipment maker for autonomous trucks. That is recently a reality, driverless trucks don't get tired, don't have to stop when nature calls, make fewer mistakes, but ultimately are cheaper in the long run. Rio Tinto, and it is early stages, are already running 10 driverless trucks as of May 2012. I suspect that there might be more, in fact in what I have read up on the matter, 40 trucks of this nature by the end of 2014 in the Pilbara. A truck costs a bomb, a human, what do they cost?
Well, Rio Tinto suggest that they are going to "start" 16 percent fewer people. In other words their annual intake is going to be less. They are "mining for the future", which is code for fewer jobs for skilled workers, let alone for semi to unskilled workers. At the end of the day, companies have to adjust for the future, and saving money in order to see the business make money for their shareholders. Nobody is going to invest money in a business that does not make them money, for the risks that are taken on. Business is not charity, and charity ironically needs business to be successful in order for philanthropy to be a reality. The word philanthropic translates effectively to love of humanity. On the Wiki entry for philanthropic donations, of the top 15, 14 are Americans. Makes you wonder, right? In order for donations to be of a certain size and scale, you need to encourage people to be rich!
And talking of America, and where the above is all going, the US non-farm payrolls were released on Friday mid afternoon local time. An hour before the US markets opened. The number was somewhere between little baby bear's porridge and mommy bear's porridge. Not quite the goldilocks number that everyone was looking for, a number that was actually a little disappointing, 162 thousand jobs created for the month on July. And there were also some downward revisions for the months prior to that, so all in all not the best outcome. Because of course a poor number is a poor number. The unemployment rate fell, some of that was largely to do with labour participation rates falling. A little. Here is the monthly release, you can even bookmark this: Employment Situation Summary.
So what happened to Mr. Market? How did the collective approach this piece of news, because the unemployment rate is ticking down, that is not good news, right? Of course it is, you would say. But for the short termers, the folks are/were really, really worried about when the Fed is going to end their bond buying program. Because the unemployment rate is getting to a point when tapering will start to happen soon. And as such, some might have interpreted this number (weaker employment relative to the last 12 month average) and a lower unemployment rate as a bad outcome. Equally both weekly hours worked and pay shrank, as a direct result of the sequester, that is starting to take its toll somewhat.
But equally as folks are anxious NOW, about the employment situation, the sequester impact was supposed to be much worse than it has turned out. So far. All in all neutral I guess, the equity markets ended the day at the best point, the S&P 500 and the Dow Jones closing at all time highs. Oh well, so much for anxiety. Most of the anxiety was in the bond markets, with the ten year yielding 2.74 percent at one point, the highest levels in 2 years. Yip, that 6.5 percent unemployment rate will mean that rates will rise. Perhaps the bond market is getting ahead of itself. Not all positive for the Dollar, hence that is why we are seeing the Rand at better levels this morning.
ABIL is out with a trading update this morning. But that will not be front and centre of shareholders minds. At the same time, the company has announced that they are raising up to 4 billion Rands by way of a rights issue at as of yet an undetermined price. And that is possibly the key to explaining the massive wild swings of the share price this morning. It has been down 10 percent, and it has been up 7 percent. The stock is currently trading a little higher now from the close Friday, up around three and a half percent. The volumes are enormous. Three times higher than the normal volume, which itself has been elevated significantly.
First, let us look at the business itself, before we get to any assumptions around the capital raising. I am presuming that a lot of care was put into communicating these third quarter results, more than usual because of the heightened interest in the company and the sector. And because the company let us know that they were paying more attention to communicating with the market, and in particular their shareholders.
Total advances over the comparable period grew 19 percent to 60.3 billion Rand, but credit disbursements over the last three quarters is ten percent lower, year on year at 17.7 billion Rand. That means that whilst the overall book has grown, more recently the business written has been a whole lot more constrained. As a result of a more cautious approach by management, having recognized nearly a year ago that there were early signs of stress. And also as a result of lower application and higher rejections, not exactly what you want to see. Non-performing loans as a percentage of total advances ticked up 100 basis points from 29.3 percent to 30.2 percent, reflective of a more stressful environment. And prudence, or perhaps both.
The trading environment explanation nails it: "The third quarter proved to be another challenging period with the trends of the first half of 2013 continuing through the quarter, albeit improving. Over the past 12 months the environment in which ABIL operates has changed considerably due to the rapid deterioration in the economy and the high levels of indebtedness amongst consumers, following a period of high growth in unsecured lending."
And then perhaps a smallish bombshell: "Review of EHL's strategic fit" Ellerines, a review of that business. And there is a little explanation further down, suggesting that the whole furniture retail business will be disposed of. I am guessing that the initial reaction will be that the management of ABIL made a mistake, when they acquired the business in the first place. Water under the bridge, in the same way that Sappi have to deal with mistakes made in the past, ABIL management have to deal with this now.
So as far as the business going forward, the cost of funding is still OK, that is in order to maintain extending credit, their core business. Interestingly, the cost of funding is expected to be lower than last year. That is probably one of the more critical things to look out for and possibly explains why the company has decided to embark on a capital raising, of as much as 4 billion Rand. Underwritten by Goldman Sachs, we have no way of knowing this, but I don't think that it will come cheap. But if you want cheap, I guess you go further down the feeding chain.
In order to raise money for capital adequacy requirements, ABIL have turned to their shareholders. The quantum is not clear, they say up to 4 billion Rands. And the price is not there. I guess the dilution impact remains to be seen, until we get more clarity. For the time being, we will continue to stay the course, as painful as it may be in the short term and we will continue to monitor the newsflow.
Interesting, I saw via my twitter stream that us folks over here at Vestact are too bullish. Now in a world of markets, there are people with different views on different equities all of the time. Otherwise they would all trade on a rubbish multiple with no new listings (and perhaps going private if the prices were too cheap) or they would be so expensive and the inevitable would transpire. That is what makes a market, different sides of the investment spectrum. We like businesses that operate in transformative industries, and not businesses that are in decline. I know that sounds easy enough, and it is, but too much focus is given to the present set of earnings, and not enough to the business itself.
There are many businesses and sectors that we do not like. Paper (not packaging), old media (newspapers circulations falling, fighting the internet), tobacco (too many regulations, volumes in decline), big banks (too much black box activity), construction, insurance (too cyclical, both of those) and perhaps the gold miners, at the fringes. I can assure you that we buy far fewer companies on behalf of our clients than some of the portfolios that we get in from the other brokerage houses when people transfer their accounts in. Promise.
Byron beats the streets
We received a series of PMI releases from around the world which have shown an obvious pattern. Developed markets are showing growth and signs of potential growth while emerging markets are decelerating. It is amazing how markets work. Just a few months ago the markets already smelt this shift and the flows started happening in a big way. Unfortunately for us, as a developing nation the rand and the local market took a hit.
But why is this happening and what are the implications? Markets work in cycles. I think a huge reason for this is human nature. People get overly excited when times are good and panic when times are bad. This means that growth will never be linear and we will get volatility. When the financial crisis happened China immediately came out with massive stimulus packages. They had the resources and acted fast. This created over capacity which is now being absorbed.
China is also experiencing a structural change whereby the consumer is becoming stronger. This is a good outcome but change can be sticky and certain policies need to be implemented. This can hamper short term growth and it definitely won't be as strong as the infrastructure boom we have just experienced. China is slowing and that has a direct impact on many other Asian countries as well as many developing countries around the world.
Europe. I think it is still too early to get excited about Europe although I do believe policy makers are going about things in the right way. They had to take a different route to the US because of The Zones complex structures. The strong set of PMI numbers we have just seen will do even more for confidence. Although just a start, if the numbers over the next few months show some progress we could be in for some growth next year. That would be great news for the global economy who have been expecting very little from Europe.
As for the US, well they are still trudging on with the slow recovery as we saw with the jobs number on Friday. I have absolutely nothing against a slow recovery. When you consider the damage after the sub-prime mortgage crisis, this seems like the most sustainable route. People need to calm down and be patient.
A better looking developed market is very good for the global economy because they control the majority of assets. This will in turn have a positive effect on developing markets which may be decelerating for the time being but certainly not for the long term. There are still hundreds of millions of people out there who need to be liberalised.
Home again, home again, jiggety-jog. Mr. Market is higher here. We are close to the all time highs, the Rand is catching a bid, the commodity prices on balance are trending higher on decent enough Chinese data. And as Byron said above, green shoots in Europe. My Celtis is full of green shoots! And we seem to have escaped the worst of winter here on the Highveld! Winning!!
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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