"It is possibly the better for society to have people set the rates for us, even if it feels condescending. Not everyone has self control. If they did, then there are many businesses that would not exist at all. I for one am thrilled that we all have many choices and by function investment opportunities. To presume that someone like Janet Yellen does not know what they are doing, you would probably find those same folks tend to agree that the moon landings were done in NASA studios somewhere else too."
To market, to market to buy a fat pig. Not just sayin' but yellin'! The FOMC statement from last evening, about half way through the trading session and just after the Aussies had provided a scare to the Dutch and just before the old champions went crashing out of the world cup, courtesy of Chile. So my group, the one that I drew in the office draw has the Netherlands and outsiders Chile as the only contenders. I suppose that the Spain and Australia match will not quite be one that folks expected.
Football aside, the FOMC, Janet Yellen and her team have been hard at work themselves in the science of economics. This is not chemistry or math, where the outcome is binary (I think in almost all cases), this is economics. Where, to use that overused idiom, the goalposts are always moving. You can have a look see at the release and see what all the talking points are in the media currently.
So what are these talking points? What is everyone focusing on? First things first. Tapering continues, down another 10 billion Dollars a month. Treasury purchases down to 20 billion Dollars a month and mortgage-backed securities now down to 15 billion Dollars a month. As with the stadiums having been completed on time and the fans enjoying themselves, the taper event has not caused the equities market to fall in a heap. If your whole strategy was to wait for the Fed to do this or that or thought that was more important than companies doing X or Y, then I am afraid that you are doing it wrong.
And then perhaps the last paragraph that sent everyone running around trying to figure out what this means: "When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
It basically means that rates may stay lower for longer as the Fed expect inflation to stay lower for longer, even after the one objective of the long term mandate had been met. Maximum employment is one of the parts of the dual mandate along with stronger economic growth, the other being price stability. So if one part of your mandate is met, but the economic growth part is not met yet, nor you expect it to reach the required levels any time soon, then it is appropriate to keep rates lower for longer. And of course that means people with cash on deposit are forced out of that investment and should explore something riskier.
Not always a good thing, people taking on more risk, because the Fed's job of course is to yank the punchbowl when the loud music starts to get louder. William McChesney Martin, Jr., have you heard of him? Well, he was actually the fellow who coined that phrase about the punchbowl, he was the 9th Chairman of the Board of Governors of the Federal Reserve. And in fact, he led the Fed for longer than Alan Greenspan. True story. The so called punch bowl speech took place in 1955, it went like this:
"The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up."
So it turns out, that even something written nearly 60 years ago is as apt as it is now, if you would like a permanent copy, you can actually download it in the archive from the St Louis Fed. Broader society and business as a collective needs oversight to prevent them from doing harm to themselves, rather than the purists who would rather have a boom and bust type cycle, to clear the greed and the air and allow the risk takers at the bottom of the cycle to benefit in the next cycle.
It is possibly the better for society to have people set the rates for us, even if it feels condescending. Not everyone has self control. If they did, then there are many businesses that would not exist at all. I for one am thrilled that we all have many choices and by function investment opportunities. To presume that someone like Janet Yellen does not know what they are doing, you would probably find those same folks tend to agree that the moon landings were done in NASA studios somewhere else too.
Anyhow, I am sure that the only thing that we should care about is whether or not the Fed, or any other central bank for that matter, read the cycle better than anyone else. And the answer to that is no, they sure as hell try hard and make predictions, but almost always, like anyone else making predictions, you are prone to big changes in conditions. All I know is that they are probably the best people for the job in almost every instance. So. Keep calm, carry on, stay invested and as Cullen Roche put it a couple of days ago, this remains the most disliked recovery for many. His words are of course stronger than mine: The Most Hated Economic Recovery Ever. It is almost always better to be in the market than out the market, aim squarely for quality.
The upshot of the Fed being more accommodative for longer, that is the interpretation, and as such the S&P 500 reached all time highs. The Dow Jones was close, but heck, you know that the NASDAQ all time high was reached on the 10th of March 2000, at 5048 points. Last evening the tech heavy index closed at 4362 points. Another 700 points or so from the highs. That is 5215 days ago. Which is a LONG, LONG time ago. If that feels like a long time, then you need to use the Japanese example. The S&P took 25 years to recover from the great depression drawdown, the Nikkei 225 (which is also calculated by using a News publication) is not even half of what it was back at the end of 1989. 38957.44 is the 29 December 1989 high. As of close of trade today? 15361.16 points. It is best not to complain.
Woolworths have announced this morning that the David Jones board plan to give themselves and their shareholders a couple more weeks to decide, the meeting will now take place on the 14th of July. Why? Well, actually it is more about Australian regulators being sensible. "The Federal Court of Australia has granted this postponement to allow sufficient time for the David Jones Board to assess the implications of entities associated with Solomon Lew holding 9.89% of David Jones shares."
What I guess is important for you and I is that in the eyes of Woolworths, this does not change the fact that the David Jones Board are unanimously recommending the Woolworths bid to their shareholders. Because of course their is not a superior bid from any other party currently. So we might well see the same outcome, Michael did say that it gave Lew two more weeks to hoover up more David Jones shares, I agreed with that, but whether or not it makes sense for Lew, that is another story entirely.
Let us say that Woolworths walk away, David Jones would go back to 3.20 Aussie, a fall of 70 odd cents a share, and then Lew would be stuck with all those shares. Posturing with real money, egos and agendas, we just hope that Woolworths are sensible here, but I am pretty sure that they are. Wait and see, that is the best route, David Jones shareholders will vote accordingly.
Michael's musings: Amazons new handheld shopping device, that makes phone calls too.
Yesterday Amazon released another product to their offering, the Fire smartphone. In terms of looks, it is similar to an iPhone with a slightly larger screen.
Why the move into the very competitive smartphone industry? The reason is because people are increasing their mobile spend by billions each year. The Wall Street Journal says it well, " U.S. retail spending on mobile devices is expected to reach $57.8 billion in 2014, representing 19% of total e-commerce sales, according to eMarketer. That is more than double the dollar figure spent in 2012. By 2018, eMarketer sees mobile commerce rising to $132.7 billion or 27% of e-commerce sales."
The way that Amazon plans to get people onto their site and spending is through software called, Firefly. Firefly is some awesome looking software, using the phones camera and sensors the phone can recognise merchandise, music or television shows. Once the phone recognises the item you are then taken to the Amazon store where you have the option to purchase the item with a simple tap on your screen. The result will be that you can walk around a shopping mall, see an item, scan it and then see if it is cheaper to get it on Amazon. The odds are that Amazon will be cheaper than your brick and mortar store.
A further feature of Firefly is that the user can point the phone at a painting for example and get all the facts about the artist and painting.
This type of information at our figure tips is the future, not only for the retail sector. So from that point of view the phone is great.
My biggest problem with the phone is that Amazon do not have the best track record when it comes to hardware. Their standard Kindle is great, but their tablet less so. The bigger problem for me though is that the phone does not have access to a large app store. The Fire will be running a form of Google's Android, but you will not have access to the play store.
Apps (Google Maps, Facebook, Running Apps, Games) are the reason that you buy the phone that you do. The Amazon "ecosystem" is very small, so as an App developer you have very little incentive to create an Amazon app over and above the iOs and Android app already created.
Some cool features of the phone is that it comes with unlimited photo storage on the Amazon cloud servers, it has a 3D looking display and it is $100 cheaper than the iPhone on a comparable two year deal through AT&T.
The goal of the phone is to guide more people to the Amazon store which is where the money will be made. This means that not very many phones will have to be sold for smartphone addition to the family to be a success. Exactly how many phones need to be sold is not clear, Amazon are not very forth coming with numbers.
Going forward the Amazon ecosystem is going to be central to their plans to get people spending online. It still has a long way to go to get anywhere near the ecosystems built by Apple and Google, but they are heading in the right direction. Amazon is still a stock that I like and as people move to online retail, Amazon will continue to grow.
Home again, home again, jiggety-jog. Markets are racing away this morning, the Jozi all share has touched new highs. For those who sold in May and went away, good luck with coming up with a new rhyme for July. Time to buy, it is July. Pity that all the zigging and zagging and the angst about the highs left many feeling like that. I should not be so smug, there are always geo political hot spots that can cause anxiety. But for all of those, the enduring qualities of the businesses still remain and if anything get better as time goes on.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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