"Much of the oil producing world is in deep trouble and I believe that it might actually bring about regime changes for those that are completely dependent on oil exports for government revenues. It is probably not the best news for Venezuela, ironically from an oil point of view, it is negative for Brazil. Obviously it is much worse when you click on the metals tab, it is equally bad for us here in South Africa, the lower metal prices have hit exports badly, luckily that we have shifted to more of a consumer economy over the last decade and a half"
To market, to market to buy a fat pig. Six year lows for the oil price, this is NYMEX of course. A large gap has opened up between the price for NYMEX crude and the price for Brent Crude. Both are produced and consumed in different regions of the world, obviously the lower price in North America represents the difference between a market glut in the new shale supply, versus the inability to export like the rest of the world. It is a strange place that US producers find themselves in, not able to export and having to sell locally at lower prices. I also saw on the Twitter thingie how this is good for some companies around the world and how this is bad for some of the oil exporters, as a country this is very good news for us, South Africa that is. This graph via the Economist (which I saw on Twitter) is pretty self explanatory: A risky state, click on the oil tab.
Much of the oil producing world is in deep trouble and I believe that it might actually bring about regime changes for those that are completely dependent on oil exports for government revenues. It is probably not the best news for Venezuela, ironically from an oil point of view, it is negative for Brazil. Obviously it is much worse when you click on the metals tab, it is equally bad for us here in South Africa, the lower metal prices have hit exports badly, luckily that we have shifted to more of a consumer economy over the last decade and a half. We are not immune and stand out badly. Worst of all on the continent is the DRC, 25 percent plus of exports are metals, another 21 percent other commodities. It is going to be very tough for that country, as if it wasn't bad enough already. For Angola however, nearly 60 percent of all exports are oil. Nigeria is closer to one third of all exports.
This will have a dramatic impact on our trading partners here in Africa, overwhelmingly however we should see a stronger consumer across the globe benefit, it effectively is like having a tax break. A stronger consumer across the globe creates perhaps better jobs in cleaner industries, we all consume, we all desperately need energy however to power our homes (don't get us started) and we need to get to and from work. What it means for key areas of the globe and political instability in the wake of economic instability, I guess it is just the good old fashioned market telling us that we need to do a certain amount of rebalancing I guess! In the end the market does not lie, the price today, that is it.
Company corner snippets
There seems to be a little confusion about what a rights issue is, this is ordinary run of the mill "stuff" for us to deal with, we have also explained it a couple of times, let us revisit for a second or two. Firstly, why would a company embark on the exercise of raising money? Of course there are many different needs for capital for a business at any given time, in a time of deep stress, often the company will return to their (long suffering) shareholders and ask them for money. Often it is the only way of raising money. The company works out how much money they need to either pay down debt, or advance their business with a specific purchase (as is the case for Discovery), and then works out how many shares at a normally discounted price to the market, and hey presto.
The shareholders, all, big and small, are given the opportunity to follow their rights, normally there is an underwriter that will take on all of the excess shares in this case Rand Merchant Insurance Holdings Limited are the underwriters. What that means is that if there is any excess (people let the right to purchase more shares lapse, that is the default) then RMIH will mop up the balance. You would, as a minority, want to be in that boat. Ideally, all shareholders would follow their rights and then not dilute themselves of the future profitability share of the business, I think that is the most important reason to follow your rights.
A rights issue and dilution is not the very best way to raise money, you could argue that you must and need only the same number of shares to be in issue at all times, not too dissimilar to Berkshire. Their share price however, for a single share, trades over 200 thousand Dollars a share (219 thousand), over 2.5 million Rand a share. No dilution ever, and no dividend. That is another story entirely, for those folks that have owned the company over 50 years, no sweat really, if they need cash they have a huge capital gains income headache. The 25 year return for Berkshire is nearly 3000 percent. Nice problem to have however.
The other way that companies can raise cash is to go to the debt markets and issue debt securities, bonds, with has a fixed yield and a future date to return the funds to bondholders, who would collect the cash in-between. Obviously the company could also borrow money from the bank, in the case of a financial services business this might always be a good idea, from a liquidity point of view. Lastly, if a company is really distressed, they can sell off assets, cut costs aggressively in order to stay afloat. In this case, Discovery specifically, they are using a strong set of shareholders, one gorilla one specifically that will underwrite the rights issue and a good prevailing wind with momentum in their business, to raise money from their shareholders. Not everyones cup of tea, just one of the ways to go about it. Just to be clear, we continue to recommend that you should follow your rights.
We're reading this, you should too.
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Recessions and pull-backs are part of investing in equities - Stock Performance Before, During & After Recessions. An interesting finding from the numbers is, "what these numbers really tell us is that, in general, stocks tend to perform below average in the year leading up to and during a recession and perform above average in the 1, 3, and 5 years following the end of a recession"
Home again, home again, jiggety-jog. We had a solid day in the US yesterday thanks to a stabilizing dollar. Remember a strong Dollar is not good for global US companies who's earnings come from all over the globe. The market is still focusing on what the Fed will say about interest rates. We are up here today, following the lead from the US.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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