To market, to market to buy a fat pig. Oh dear, it happened. The shutdown, meaning that the estimated cost to the US economy (and Bloomberg have done the math here) is around 300 million Dollars a day. US GDP in 2012 was (according to Google data supplied to them by the World Bank) was 15.68 trillion Dollars. Or 0.019 percent of the US 2012 economy a day. Or 1.095 trillion Dollars, if it went for a full year. But. The longest shutdown was actually the last one, where Bill Clinton went head to head against the Republicans back then in December 1995 and January 1996. I remember the sun coming up then, and it no doubt will rise today. 18 shutdowns since 1976, that is roughly one every two years. 3 in 1977. Phew, 28 days in total. No money to fund the day to day operations basically for the short term, which means that non essential government workers (I know what you are thinking, don't be like that!) stay at home, without pay. So you get to learn a new term, furloughed. Temporary unpaid leave, which sucks for the 700 thousand to 1 million people that it impacts on their daily lives. No, it stinks for them, because there is a large degree of uncertainty and of course we all still have bills to pay.
So some jobs are essential and some are not. The Labor Department and their statistics department is NOT essential and as such by the time that Friday afternoon rolls around, we wont get to see non farm payrolls. I can imagine that the only people that are thrilled with that are the people from ADP. Because remember that tomorrow, they will be putting out their monthly reports on private payrolls. No shut downs there. Imagine if the government were the shareholders of a business who did not agree on anything at the AGM, which obviously included the annual budget and as such all the employees of the business were told not to come to work, because the finance committee could not agree on something. They were puffing their chests out and disagreeing on specific policies, which included your medical aid. How would you feel? Angry? Not too sure, some folks on our screens have suggested that the Chinese are laughing at the US, I am not too sure how or why......
I suspect that this will only be a few more days, Paul suggested that the GOP could start to see some cracks and that would mean the end as we know it, for this impasse. I suspect that the republicans might have the debt ceiling debate front and centre, wanting to extract a little leverage out of their core support base for more fiscal discipline. But this is a little nuts if you think about it, you send people to do a job, and seemingly they are not. The fact that Republicans are stonewalling, well, I am not too sure that is going to count for them, come the next mid term elections, where 33 Senate seats, 36 governor seats and all 435 seats in the House will be up for grabs. Sadly for us, these elections will be in early November 2014, the 4th to be exact. The democrats need 17 seats to control the House, but the record for presidents in their second term (historically) is not good.
Why should we care about any of this really? Someone dredged up the statistics for the last two shutdowns and the market does not really budge. Or has not, during the two shutdowns in the Clinton era. So I guess it must be a case of biting off their own noses to spite those people who are less fortunate than themselves (the politicians wealth I am referring to here). The average wealth, as per this piece, Average Wealth of Members of Congress from the Center for Responsive Politics is 11 million Dollars for a senator and 7 million Dollars for a representative. I am pretty sure that is skewed, but the current salary for rank and file senators and representatives is 174 thousand Dollars a year. Perhaps DC is an expensive place. I suspect that Mr. Market's anxiety will be short lived with this, provided it does not go on for too long. Next stop, debt ceiling raising time!
I think that Reuters broke the story Friday, but there was a confirmation yesterday that Vodacom were looking to buy Neotel yesterday. Or let me rephrase that, they are looking to buy. Because there are some issues with regards to the competitions authorities and those would need to be addressed, but I can see how the Vodacom hook up with Neotel would work. According to this article in MyBroadband: Vodacom-Neotel deal discussions confirmed, 15 thousand km's of fibre optic network, more than half of that in the Jozi, Cape Town and Durban areas. This would not be anti competitive, but rather could be seen as a direct challenge towards the fellows over at Telkom. Who seemingly are steering the ship in the right direction for now.
590 million Dollars is what Reuters is suggesting the price tag (nearly 6 billion Rand), that is just a little over three percent of the current Vodacom market capitalization, so this is hardly a massive deal for THEM. Why would the Neotel shareholders sell, if according to this Reuters piece, South Africa's Vodacom looks to boost data with Neotel purchase, that Tata have been upping their stake AND they have invested a whopping 7 billion Rand locally in infrastructure. Why? Have they been unable to gain the traction that they desperately were looking for? It is not the worst service in the world, nor is it the best service in the world, Neotel that is. We have personal experience, with our fixed lines (Telkom for bandwidth) being wireless essentially. The signals are good enough, and the service works. Plus if there is a problem, you phone a responsive human on the other side.
But why would the shareholders, the main ones, Tata (67 percent and a bit) sell at this point? Does the parent company need the money? Maybe.
Who are their other shareholders? Neotel that is? CommuniTel (who has MKhonto We Sizwe Military Veterans Association as a shareholder, as well as Telecom Namibia, the national operator in Namibia) at 12.5 percent and the balance, a little over 20 percent is owned by Nexus, which represents a whole host of members. And if you read the Reuters article, you will see that MTN was chatting to Neotel, but those talks had broken down.
Neotel's quarterly revenues are 80.6 million Dollars, multiply that by 4 and you get around 320 million Dollars. So the price of roughly 1.85 times annual revenue, is that expensive, especially if you can see that the revenue growth has been high teens. America Movil has a market cap to annual sales of 0.83 times. And that last purchase by Tata (valuing the company at 590 million Dollars) does not include a premium. I think that it would be a great deal for Vodacom, even at a 20 to 25 percent premium to the price now. Competitions authorities and how quickly can they pump their clients full of data, they certainly have the networks and the customers.
Michael's musings! Running with the Bulls
Why be bullish on where equities are going? To answer that question, another question needs to be answered, "what causes equity prices to go up?". Equity prices go up due to growth in the world's economies that stems from technological improvements (part of the industrial revolution that I spoke about yesterday) and more people moving into the middle class.
The GDP per capita in China was $950 in 2000, that figure has grown to $6091 for the year of 2012 and is growing at a whopping 7.8%. What that means is that last year China's economy grew by the same as two 1982 inflation adjusted China's added together (mind blown). Have a look at this interactive graph courtesy of Google (china gdp), where you can see the impressive growth that China has sustained since the mid-sixties.
China is growing at a staggering rate, off a not so small base, meaning that even if China's growth does start to slow (as has been speculated) we are not too worried because if their growth rate had halved, they would still have grown by a 1982 China. The increase in wealth for the average person in China means that many new customers are "born" on a daily basis for Chinese companies, which translates into higher profits and share prices.
China plays a significant role in global growth as they consume large amounts of resources and produce high quantities at lower prices than many other people can. Lower prices mean that consumers then have more money to spend on other things (other companies' goods), meaning that the broader economy benefits.
At home our GDP per capita is higher than China's (was a surprise to me) at $7507, growing at pedestrian 2.8%. Even though our growth rate is dismal compared to China's, we are still growing with the potential to keep growing at this rate or hopefully faster for decades. Growth is good for companies and with the absolute number in the shifting demographics in South African middle classes for the first time, things are still looking good for our local companies.
We will be bullish on equities for as long as there is room for technological growth and room for more people in the middle class, which will be the case until we all turn into zombies due to a deadly virus.
Home again, home again, jiggety-jog. Markets are flat here after a poor showing on Wall Street overnight. But quite quickly the expectations are for the market participants to ignore. Which means that the #fail does or does not work? Gosh, I don't know.
Sasha Naryshkine and Michael Treherne
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