"The big contributor here locally was the food division, sales up 14.1 percent and operating profits increasing by a whopping 24.3 percent. Wow. The supermarket strategy is working well, customers have been receptive to the new format. I must say that as a user, the supermarkets are certainly a cut above the rest of the competition, the prices are too! "
To market, to market to buy a fat pig. Double sigh. In fact, double thick Greek yogurt sigh. The Greeks and the rest of their European brothers are once again involved in a stand off around the loans that were extended to the country after they extended themselves too much. As we pointed out earlier in the week, the Greek government spent too much, collected too little by way of taxes and the economy did not grow fast enough through that period. Greek debt to GDP during the restructuring was reduced by 40 percentage points on a debt to GDP basis. If that sort of thing were to happen here in South Africa, our interest bill that we currently service would be nearly wiped out. Let us just say that this was very generous, at the time.
Still, the country has a heavy debt burden, having piled on over 200 billion Dollars in debt in 11 years from 1999 to 2010. This is relative to an economy that doubled in that same time. Nominal GDP was 45 billion Euros in 1990 (public debt was 31.2 billion Euros), fast forward to 2007, before the financial crisis and nominal GDP in Greece was 232.8 billion Euros, the debt pile had increased to 240 billion Euros. It was far easier and cheaper to access Euro debt than it was to issue debt in Drachmas, this led to the economy having grown like gangbusters. Shipping and tourism was particularly hard hit in the crisis, these are two major industries in Greece, that compounded the problem. The other northern Europeans, who regard themselves as harder working would point to too many benefits, too early a retirement age, too little work and productivity being too low. In other words, too much of the good life and not enough hard work.
How do you unwind all of this? Quickly? No. It is far easier to rack the debt up than it is to pay it off. Ask anyone who had to cut up a credit card, they will tell you it was fun spending the money and getting things, it was far less fun, painful in fact, having to pay the folks back (at a pretty high interest rate) that actually lent you the money. Under the current programs the large loan relative to GDP (110 billion Euros is to 207 billion Euro GDP) with maturities of more than 15 years and interest rates of 3,5 percent, that sounds really favourable. And lest we forget, over 100 billion Euro haircut was shunted through, the bond holders were spanked. Perhaps their belief that the ECB would always backstop this at the higher rates meant they "deserved" to take the haircut, if ever there was such a thing.
Each and every Greek citizen, around 10.816 million in total, was given a reprieve of 9245 Euros on their collective debts. So, forgive me for being a cynic of sorts, it seemed like Greece went from being a really poor country that benefitted hugely from being inside the Eurozone with low rates, more funders, fudged their numbers (so it is said) and generally skirted many of the rules. I cannot recall anyone suggesting that they were the benefactor of too many benefits. I get what Christine Lagarde said, when she suggested she had more sympathy for victims of poverty in sub Saharan Africa than Greeks hit by the economic crisis. GDP per capita in many places across the continent are less than 1000 Dollars per person, each Greek person was pardoned around 10-11 years worth of GDP contribution per capita per Kenyan person. You get what I am trying to say, there are rich people problems and poor people problems, it depends ultimately what your reference point is.
The new government in Greece failed to reach a solution with European finance ministers last evening, another summit is planned for Monday. Sigh. Another summit, more time. I think that there will be a solution, one that will not favour any side. Both sides will feel like they failed to meet their objectives. The new Greek government are refusing to sell 25 billion Euros of infrastructure calling it national capital. Perhaps it is time to use that capital. If the Greeks are too combative, the upshot will be no more lifeline, the reason why they think they have leverage is that more than 80 percent of external debt is owned externally. We have leverage. No funding however from the bailout program means no ability to meet your obligations. Anyhow, everyone will meet and reconvene on Monday. In the meantime Mr. and Mrs. (and Ms.) Market will continue to be anxious, you know, about contagion.
After all was said and done here locally, market had ended the session marginally down, after being marginally up for most of the day. We pretty much traded in a very narrow band around 100 points up or down, which is not much when you are at 52 thousand points. A much weaker currency, as a result of a stronger Dollar and weaker Euro translated through to all of us in the developing world having to deal with the flows.
In times of stress, the flows are back towards what people know (i.e. the Dollar) rather than developing or emerging market currencies. In some ways the currencies being weaker are a reflection of the fortunes (or lack thereof) of the domestic economies, the relative strength of the Indian Rupee relative to the Russian Rouble or Brazilian Real, or even the Rand. Of those four currencies, we are the second best, only India is better than us, the Brazilian Real and in particular the Russian Rouble have been absolutely smoked. Most of the divergence comes last year and begins as commodity prices weaken. Around the time oil prices and other commodities fell. Stronger Dollar = weaker commodities prices, for that four pairing it is best for India, second best for us, and worst for Russia. It should not be a coincidence.
Darn, one major mistake yesterday. Whilst I explained that Glencore was going to unbundle their Lonmin stake to their shareholders, I unwittingly said that they were selling it, which is wrong. We did some quick math and unfortunately what you are receiving from Glencore (if you are a shareholder) is next to nothing. Let me explain. 23.9 percent (is what Glencore own of Lonmin) of 17.1 billion Rand market cap is 4.08 billion Rand. Which is not chump change. However, Glencore has a market cap of 646 billion Rand. Their stake in Lonmin is 0.63 percent of the overall value. Meaning that for every 10 thousand Rand of value of Glencore that you have, you are likely to get around 63 Rand in value. For every 200 Glencore shares that you have, you are likely to get around 2 Lonmin shares. Phew, it is not exactly a kings ransom now, is it?
Woolworths have released their results for the first half this morning. This is the first half that includes David Jones from 1 August 2014, there are however no comparable figures. So we have to look at the group as a whole, which integrates David Jones, it does not have a comparable period however. This makes this period of adjustment hard for those who love comparisons and patterns to appear and then to measure that against your expectations. Here goes, for the 26 weeks to end December the 28th 2014. Revenue grew to 30.3 billion Rand (excluding David Jones, an increase of 12.5 percent), pre tax profits were 2.9 billion Rand. Clothing sales in South Africa grew 9.4 percent, add merchandise and that is lower at 8 percent with profits in this division growing only 2.7 percent. Children clothing, footwear and accessories having a rough time of it.
The big contributor here locally was the food division, sales up 14.1 percent and operating profits increasing by a whopping 24.3 percent. Wow. The supermarket strategy is working well, customers have been receptive to the new format. I must say that as a user, the supermarkets are certainly a cut above the rest of the competition, the prices are too! David Jones, which is again recent and is going to take a fair amount of time to "get right" recorded sales growth of 2 percent. Country Road delivered sparkling results, up 9.2 percent, a lot of that in Rand terms juiced up. Australian sales growth was better than here locally.
Diluted HEPS for the six months clocked 192.4 cents per share, the dividend (interim) declared was 96.5 cents. Remember that there are 928 million shares in issue, dividend cover at the half year stage is 1.9 times as it was last year. At the full year stage it was 1.4 times, remembering now however that there is a small matter of the debt outstanding, raised to pay for the David Jones transaction. The rights issue itself cost 399 million Rand, good work if you can get it, right?
It is not all roses and champagne, to use a valentines analogy, load shedding and the prospect of higher taxes is going to impact their core market no doubt. Woolies have suggested that they are trading comfortably ahead of the market and the first six weeks of the second half of the year has been positive. I am never quite sure what that means, better is always good. Down Under, ahead of the beginning of the World Cup, both their major businesses David Jones and Country Road continue to trade ahead of the rest of the market. Talking the market, the equities market is really pleased with this result, the share price is up around four percent mid morning here in Jozi. Good work, we continue to favour Woolies as the best entry into what is now Southern Hemisphere retail.
Things that we are reading, you should too
Moving away from winning and manufacturing has a big impact on labour dynamics - SA trade unions in dramatic 'decline' says new survey. One of the interesting points made in the article was that unions were struggling to attract younger members.
Wall street doesn't understand the "Law of large numbers" - Cook Doesn't Believe This Made-Up Math Law Will Limit Apple's Growth.
Some scary numbers from the worlds biggest economy - Here are the facts:. Having a strong and growing US is good for the rest of the world. The number that stood out to me is "US household net worth hit $81.5 trillion. This includes all stocks, bonds, properties and business values, minus any debts or liabilities. This is a new all-time record.". Not to shabby hey Nige!
Is it safe to say that we have put 2008 behind us? - The "Misery" Index Falls to an 8 Year Low
Home again, home again, jiggety-jog.The Rand was weaker (more strong dollar) but has changed direction during the course of the morning. It looks like Russia and Ukraine have reached some sort agreement and a cease fire. At last look, the Russian market was up over 6% on the news. Glad to see that things are moving forward, war never benefits anyone.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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