To market, to market to buy a fat pig. Wow, I was surprised that the JSE had such a rollicking day, but it was in large part due to having to catch up some of the positive sentiment that we missed out on. And a weakening currency through the day that buoyed the usual heavyweights. And all of that pushed us to a new record, the Jozi all share index closed up shop at a few minutes after five pm at 44 453.88 points. That is around 150 points higher than the previous closing high. Wall Street had a choppy session last evening, the looming debt ceiling debate (sigh) around the corner.
US Treasury Secretary Jack Lew suggested that US Treasury would be out of cash by the end of October. Of course all that is required is that the folks on Capitol Hill get together and raise the debt ceiling through a vote, easy enough? Sigh, if only so. The affordable healthcare act, not exactly a sideshow, saw a 21 hour speech from Texas junior Senator Ted Cruz, who even read out green eggs and ham, the Dr. Seuss classic. Cruz's parents, in particular his father had a tough life, so 21 hours speaking in a suit in an air-conditioned room is a piece of cake. If you are confused as to what I am talking about, check this out -> The Double Absurdity of Ted Cruz's 'Filibuster'. The only point I am trying to make is that the Republicans are up for a fight on the 16.7 trillion Dollar debt ceiling being raised (again).
The debt ceiling itself has been around since 1917, as part of US law. According to Wiki, the only other country in the world with such a law in place in Denmark. But, why have such a law in place, when according to this Wiki piece: History of United States debt-ceiling increases, the ceiling has been raised 14 times this century and 90 times the last century. 104 times in total. Huh? So why have a limit at all? An estate agent (if this were a house) would be describing this as the Alcazar of Seville or the DC metro station in Washington. I have not had the pleasure of seeing either. Cullen Roche however has an interesting take: Markets Aren't as Stupid as Politicians. We will see what transpires over the coming weeks, perhaps the market will get REALLY anxious and sell off thinking that this time it is actually different, or we will drift sideways until politicians say, no really, next time.
Why this obsession with US debt, yes I am sure that 16.7 trillion Dollars is an enormous amount of money, but then again so is 74.8 trillion Dollars. Before you jump down my throat, yes I do think it is a problem, but I suspect that you have top look at US net assets too. This is a Bill McBride article: Fed's Q2 Flow of Funds: Household Mortgage Debt down $1.3 Trillion from Peak, Record Household Net Worth.
There are some very important parts in there, first:
- Household net worth was at $74.8 trillion in Q2 2013 (up $19.2 trillion from the trough in Q1 2009).
And then:
- The Fed estimated that the value of household real estate increased to $18.6 trillion in Q2 2013. The value of household real estate is still $4.0 trillion below the peak in early 2006.
But this part you might find interesting:
- Mortgage debt declined by $41.8 billion in Q2. Mortgage debt has now declined by $1.32 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).
Huh? Americans are actually servicing debt post the financial crisis. Is that a major thing? I guess it is.
But for me the graph that shows that total household net worth as a percentage of GDP is 450 percent is pretty telling. 450 percent? Wow. So whilst there is still this obsession that the US has this creaking debt burden (and it does), the net worth of Americans has increased by 19.2 trillion in four years, around 2.7 trillion Dollars (Or roughly the entire GDP of France last year). So what can we draw from these two things, the debt that the US continues to crank up and the wealth effect? When tax receipts improve (of course they will) and the economy improves the net wealth will continue to outpace the debt. It should. We will try and do a little more on this weighty issue over the coming days as people continue to obsess over the one issue and ignore the other, again that is human nature.
Michael's musings! How much does rotating stocks cost you?
Let us assume that as an investor you started with R100 000 in a stock and then after 4 years your holding is worth R200 000 and you think that the share is overbought and that the share price will drop. In this scenario you have 3 options.
Option 1 is you sell your shares, take the after cost cash and go on holiday. (Not really relevant to this discussion).
Option 2 is to sell the shares and then invest the cash in a more fairly valued share. In this option you will pay about R1500 in brokerage costs, then R15 000 in capital gains tax and then a further R1500 in brokerage to get into the other share. The cost to rotate the portfolio has cost roughly 9%.
Option 3 is to hold your position, enjoy the current share price, and not worry about a possible pull back in the share price because the investment timeframe is a couple of years.
Comparing option two with option three; the new share purchased needs to grow by 10% until it is on par with the value of the original share. Rotating between shares on a regular basis (more closely trading as opposed to investing), only makes sense if some form of leverage is used. AS Buffett says, "If you're smart, you don't need leverage. If you're dumb, you have no business using it.". I think that not using leverage is a bit extreme because I think if used correctly leverage can be very useful, but leverage can be just as destructive if it is not used correctly.
The reasons for selling a stock should only be if the company's future prospects are no longer positive or if planning to use the cash to go on holiday.
Home again, home again, jiggety-jog. European markets are all called lower at the start, there is both a US and UK GDP read today. For the US it is the final read of the second quarter, the advance estimate is scheduled to be released at the end of October. Important for Mr. Market too is the weekly jobless claims, they are expected to rise to 325 thousand a month. South African PPI is also set for release this morning. But I am guessing that JP Morgan and their massive 11billion Dollar settlement talks will dominate talk today.
Sasha Naryshkine and Michael Treherne
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