"K, the only reason I could find as to why the market sold off heavily in the US session was the news that the Fed could change their language. True story. And just a specific phrase. Yes. There are obviously many market participants who place a great deal of emphasis on trying to decipher Fedspeak. Fedspeak is not like doublethink or doublespeak, that is the language of communists, this Fedspeak is the language of highly skilled and great scholars of economics. The Federal Reserve has some of the soundest and finest economists on the planet, although if you read Twitter you would question that. There is a chance that the Fed could change their "considerable length of time" of keeping rates lower for longer to just "for some time", suggesting that rates will rise around the third quarter next year. Rates, should that change the way you invest, whether they go up or down? No, not here, we would want to own quality businesses long through the cycles. It should not matter at all what rates do whilst you are in the process of owning quality assets."
To market, to market to buy a fat pig. The oil price continues to fall, the local currency fell to the US Dollar, in part due to the stronger Dollar, that was cemented by another cracking employment number on Friday. Weaker Chinese numbers at face value looked to pull back the broader commodities complex, I have a "soft" subscription to a steel publication, Kallanish Steel (headlines only) which said that China was on track to export more steel this year than ever before after a record November. Yes, you read that right, China exported more steel products in November this year (9.72 million tons) than any other month. Ever. Should the country export 6.39 million tons in December, they will cross 90 million tons of steel exported for the first time.
Don't freak out, ok, the Rand is seemingly in free fall, it is not just the Rand to the US Dollar. This was a tweet from a FT chap that I follow, Robin Wigglesworth.
EM currencies slide to lowest since at least 2000 http://t.co/KAD4YCsbS9 pic.twitter.com/032qnOUw3Y
— Robin Wigglesworth (@RobinWigg) December 8, 2014
Here is the associated graph:
Since 2000, you heard right, an FT article, subscription only (there is a free subscription to view a couple articles a month), sorry -> Oil and dollar hammer emerging markets. I said to a new client yesterday after she had met Paul that this feels a little like the end of 2001, or the end of 2007, she affirmed that it had the same mood, perhaps different reasons. The currency is vulnerable, our debt levels are higher, the electricity situation is at best dodgy. Currently. Memo from Eskom, all go on holiday, sit on the beach and use less electricity please, ok? One thing I am starting to see more of is how government employees of various parastatal companies are paid X or Y, the outrage of it all.
So what do you do about all of this? Lower oil prices are great for the general consumer across the globe, the Chinese market is up around 30 percent from early October, the oil price is down around 40 percent over the last 12 months. That must be good for everyone? South Africa imports a large portion of their energy needs, luckily we have some here too, so that we do not have to import everything. That is the good news. Cheaper fuel translates to more money for consumers, the weakening currency that you need to pay for that oil is not altogether a positive. Yowsers. Lower oil prices however are bad news for the oil producers. Sasol and BHP Billiton included. Sasol are down more than a percent a day over the last two weeks and the pain is set to continue today. Do you sell on the basis that no person is ever going to use another drop of oil, ever again? No, Sasol are committed to maintaining their dividend, so you should get before tax next year, 2150 cents. There are concerns of course that the lower oil price has issues with Sasol to raise the money necessary for their next big project. We will see.
OK, the only reason I could find as to why the market sold off heavily in the US session was the news that the Fed could change their language. True story. And just a specific phrase. Yes. There are obviously many market participants who place a great deal of emphasis on trying to decipher Fedspeak. Fedspeak is not like doublethink or doublespeak, that is the language of communists, this Fedspeak is the language of highly skilled and great scholars of economics. The Federal Reserve has some of the soundest and finest economists on the planet, although if you read Twitter you would question that. There is a chance that the Fed could change their "considerable length of time" of keeping rates lower for longer to just "for some time", suggesting that rates will rise around the third quarter next year. Rates, should that change the way you invest, whether they go up or down? No, not here, we would want to own quality businesses long through the cycles. It should not matter at all what rates do whilst you are in the process of owning quality assets.
Company corner snippets
Another note on that Famous Brands acquisition that was announced yesterday. I was asked a bunch of questions by a delightful journalist from Moneyweb, Sungula Nkabinde. It became clear to him that this business was all about logistics. Group revenue was 2.83 billion Rand. The supply chain segment accounts for 2.15 billion Rand. The rest of the business, the parts that you know better has the front end store presence, the royalties earned from the franchise owners sales. If they, being Famous Brands, can squeeze more out of the production and storage process, that has a huge impact on margins. The money is made in making the products that are then sold onwards to the franchise owners, making it clear that quality will be controlled. No matter where you eat that meat product, you can taste the "sameness" each and every time. That is what people want, the same taste across the country and in this case, across the world.
Whilst we are talking about convenience dining, I saw my first Domino's Pizza this weekend, it was going up and looks about ready for opening during the quiet season here, gearing up for the year. There are 382 Debonairs Pizza stores in South Africa, as of last February. The holding company for the Domino's franchise licence in South Africa is Taste Holdings, in their last annual report (also to February 2014) there were 120 Scooters Pizza stores and 25 St. Elmo's. 145 in total. If I add Famous Brands and Taste's pizza stores together, that equals 527 stores, as at February this year. There are lots of restaurants who sell Pizza, including Primi, around 30 stores here in South Africa, that is sit down and not convenience dining, in other words, take out. 13 Andiccio stores. 30 Mimmos. 28 Col'Cacchio stores, all as per their websites. I counted (at high speed) around 99 Pizza Perfect stores. 6 Pizza huts. You get the picture, whilst there are seemingly a lot of Pizza stores around, I am of the opinion that there is huge room for expansion here in South Africa. Kevin Hedderwick always said they did not need chicken, as Famous Brands sells lots of chicken on their pizza. My only point is that there are 52 million South Africans and less than 750 (my best guess) formal pizza stores (possibly many more than formal) translates to 1 store per 35 thousand people in South Africa.
My word it is tough out there. Impala Platinum share price is plumbing new lows, well, multiyear lows at least, this year marks the fourth consecutive year of losses for the overall platinum index. Impala was last at this share price in the middle of 2005. Holy smokes. Back then, things were easier. Or so it seemed. The company released a trading update this morning, suggesting that earnings were (wait for it): expected to be more than 20% lower than the comparable figures of 142 and 145 cents per share respectively for the half year ended 31 December 2013. The best that they can do for the half is 110 to 115 cents worth of earnings per share. Whilst the perception may be that these companies "make billions" amongst the working classes in South Africa, that amount (for the first half) suggests that headline earnings in aggregate (with 632 million shares in issue) will be millions, not billions. Results at EOY 2005, platinum mined 1.848 million ounces, price achieved 840 Dollars per fine ounce, cost per platinum ounce refined 735 Dollars, 26.9 thousand people employed. Same metrics at the end of June 2014 - 1.178 million platinum ounces mined, price achieved 1487 Dollars per fine ounce, group unit cost per platinum ounce 1874 Dollars, employees including contractors - 55 thousand. Wow. Employing many more people, costs are higher and production is lower. Avoid.
Things we are reading, we think that you should read them too
Our favourite online retailer is trying something new - Amazon to use bike messengers for one-hour delivery in New York City-WSJ. If they can get this right they will put some distance between them and their rivals and eat more into the brick and mortar sales.
Given the very strong jobs data over the last few months the "when will the FED raise rates" question has been coming up more frequently - What Happens to Stocks and Bonds When the Fed Raises Rates?. "But so many investors are absolutely certain stocks and bonds are both going to get killed once the Fed finally does decide to raise rates. The historical record doesn't clearly back up that argument."
The wonders of modern medicine - Drugs can repair spinal cord injuries, study shows.
Following on from yesterdays graph of mobile phone usage - CHART OF THE DAY: YouTube's Revenue Is Catching Up With TV Networks. Remember when Google bought them in 2006 for $1.6 billion and not many people could understand why?
More on the media front - Ofcom outlines challenges for UK's communications networks. The two figures that stood out to me were: "The use of 'voice over IP' services, such as Skype or Apple Facetime, has risen from 22% of adults in 2012 to 35% this year."; which is a bit of a concern for the likes of MTN but then they say this "The average mobile owner's data usage has increased by 55% since last year, to around 1.5 GB per month.. It is forecast to increase four-fold between 2013 and 2018, driven by consumers using devices such as tablets, e-readers and mobile phones on developing 4G networks.".
Home again, home again, jiggety-jog. Phew. It has been a really tough year for local equity markets, resources down around 18 and quarter percent year to date, following two years of flat, that has been harder. Construction shares too have lost more than one fifth. Platinum down one third year to date. No seat, the market is up, as a result of retail stocks, financials, banks and industrials. That would have been a better place to have been invested this year, after a really tough four years for resource stocks.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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