"Whilst this is wonderful for global consumers everywhere, this is not so good for the businesses of Sasol or BHP Billiton. What is likely to happen, if the Goldman U shaped recovery happens is that prices are likely to find a level and then stay sideways for a while. That will make it tough to hold these companies, patience is however required. The quality of these companies relative to their peer grouping is undisputed, they are the better companies."
To market, to market to buy a fat pig. Commodity crunch time, oil, copper selling off "like nobody's business" yesterday, gold enjoying another spectacular day. In fact the gap between platinum, the price thereof and the gold price has narrowed nearly to parity again, indicating to me at least that industrial demand is lower and "investor" confidence has been sapped a little, in the short term folks turn to what they know, gold and US treasuries. Goldman Sachs had stuck out a report earlier in the day talking about lower energy prices and the implications for all and sundry in the industry, Michael told me from across the desk (via the BusinessInsider) that oil capex is less than one percent of GDP. It is still sizeable and has been growing, consumers account for 70 percent of the US economy, this "tax saving" is far more important for consumers.
That does not however tract from the obvious for shareholders of Sasol and BHP Billiton, we have seen those company share prices slide heavily with the resource prices that have fallen. The resource 20, as a collective, were down 17.8 percent last year and 5.4 percent this year. That is against the backdrop of an overall market that was up 7.6 percent and is so far (only a handful of trading days thus far this year) down 2.6 percent. In South Africa where a lot of the history is associated with commodity companies, there is a fixation with the sector. For historical reasons many people still want to know what the Anglo share price is, Anglo American at the heights of their power were synonymous with South African business.
I am looking for a decent book to read on the history of the company, any ideas? There is a book that I found on Amazon titled Ernest Oppenheimer And The Economic Development Of Southern Africa. The author, Theodore Emanuel Gugenheim Gregory, was a British economist, born in 1890 in London, the company Anglo American will be 100 years old in two years time, according to the Anglo website. The founder of the company, Ernest Oppenheimer, raised 1 million pounds, or using this inflation calculator -> Historic inflation calculator, 75 million pounds in 2014 money. Not a lot to start a business today, 1.31 billion Rand is hardly chump change!
Over the last five years, Anglo American is down nearly 42 percent in Rand terms, BHP Billiton is down 6 percent and Sasol is up 24 percent, this is all on relative basis, measured in Rand. The last six months however is a different story altogether, Sasol is down 38 percent, Anglo is down 27 percent and BHP Billiton is down 35 percent. This is all in six months. I think that the important thing, first and foremost is that you have to ask yourself right now as a shareholder whether or not BHP or Sasol will cut their dividend, in other words, what do these businesses yield at the current levels. Let us deal with Sasol first. Their dividend cover is a pretty consistent 2.2 to 2.3 times, meaning that their payout ratio (invert it and you get 43-45 percent of earnings paid out) is high, the company has no gearing.
Their ability to meet their obligations are just fine, including those to their shareholders in the form of dividends. You can imagine that project finance for the new ethane cracker in Louisiana is a tougher ask right now, they will have to pay up, that will impact your returns. It will be a balancing act however. The problem that many folks who have held a company for either a short or long time is that they suddenly get confirmation bias, which turns to something that resembles "I must act now". The truth is that nobody saw this decline a-coming, we all knew there was softer demand with a marginally slowing Chinese economy and a European economy struggling to get out of Park, let alone the parking lot (I drove an automatic rental, using that analogy), we did not expect energy prices to plunge like this. Oil prices are for another day down, falling to levels last seen in April 2009.
Whilst this is wonderful for global consumers everywhere, this is not so good for the businesses of Sasol or BHP Billiton. What is likely to happen, if the Goldman U shaped recovery happens is that prices are likely to find a level and then stay sideways for a while. That will make it tough to hold these companies, patience is however required. The quality of these companies relative to their peer grouping is undisputed, they are the better companies. The problem is that these businesses do not have any say over the price of their products, whilst demand may pick up, it might well be a bumpy road ahead for longer than anticipated. The question which always remains unanswered (hindsight like mathematics is a near perfect science) is "can I do better", which I always think is deal with on a client by client basis. For us, our clients are individuals, real people with real relationships. Warren Buffett always said that if you cannot watch a stock go down 50 percent, then perhaps you do not have the stomach for the equities markets and specific investments. The flip side of this is that this is excellent for your consumer stocks, and almost everything else that you own, cheaper costs for almost all other businesses.
Company corner snippets
Do you remember from the mid nineties (that is now twenty years ago) the Deep Blue Something song, And I said, What about breakfast at Tiffany's? I actually went to the Tiffany's HQ, quite impressive really, the best part is that this shop is close to the NikeTown store, which is more awesome for me. However, back to Tiffany's, the "soft luxury" category took a hit yesterday after the company that sells jewellery and packages them in beautiful little iconic blue boxes guided forecasts lower for the full year. Holiday weakness, sales around 1 percent lower across the board for the last two months of last year, when compared to the comparable period in 2013. Sigh, the WSJ cites lower banker bonuses and says that the flagship Manhattan store on several levels accounts for 8 percent of global sales. That is around 320 million Dollars from that one store, quite astonishing really, less than a million bucks a day sounds less impressive. The upshot of it all for us here was a declining sector globally, Richemont after being up for the day went lower, it did end higher in Switzerland. Their (Richemont) sales update is the 15th of January, they themselves have had a lot to contend with, including a weaker Euro and the Hong Kong protests!
Things we are reading, we think that you should read them too
3D printing is starting to make ripples in society - Local Motors just 3D-printed a car live at an auto show. As the technology becomes cheaper through innovation more of us will own 3D printers and then just download designs off the internet for basic things that we need around the house.
Low oil prices have net benefits for the global economy - Low Oil Prices Are Great, But They Really Bum Out The Pessimists. Then These Industries Benefit Most From Falling Energy Costs
Rent v Buy is a debate that never has a fixed answer - We Did The Math: Should You Buy Or Rent In These Major Cities?. I did an experiment last year about which was better and the conclusion was that if you are disciplined enough to invest the money that you save each month from renting, renting over a 10 year period works out better.
Investors can be their own worst enemies - Should Fund Managers Care About the Behavior Gap?. Here is an extreme example, "Over the decade, the fund had gained 18.2 percent annually, beating its closest rival by 3.4 percent per year, which is exceptional. The typical investor in Heebner's fund, however, lost 11 percent annually.". I think that at Vestact we do a good job at communicating and educating our clients, so that everyone does well at the end of the day.
Home again, home again, jiggety-jog. The plunging oil price continues to fixate all of us, after all it is one of the commodities that we use the most. We also use a lot of coffee, that price was up around 50 percent last year, did you notice that your cup of Joe was a whole lot more than before? Have you noticed plunging ticket prices for your flights yet? Possibly not, you would think that airlines would have hedged a little way out. The power is out here. Load shedding is terrible, it does however drive human innovation, as people need to think differently now.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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