Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. First quarter of 2012 is over folks, cricket season is finished and we are already deep into the Champions League and the Super 15. So how did the overall markets do in the first quarter? The winners were (drum roll) the construction stocks, up 19.79 percent, wow, and the banks, which were up just over 13 percent for the first three months of the year. Retailers added nearly twelve percent, financials around 11 and one quarter, and industrials just shy of nine and a half percent. The overall market however added just 4.9 percent, mostly as a result of the resource stocks having shown a negative 4.44 percent for the first three months of the year.
The poor gold stocks got whacked, down 15.78 percent for the quarter, not good. I suspect that in light of an improving outlook for the global economy (not everyone convinced I can assure you) that the allure of gold as a hedge against inflation/disaster is starting to wane a little. Also, in light of less full blown Fed intervention, the short termists are starting to lose their short term love with the yellow metal. Or so that was what I thought, but it turns out that the yellow metal gained 6.6 percent on the quarter. Higher margin rates are seeing open interest levels fall to multi year lows, who knows what the fundamentals are for gold, with any great deal of conviction. I don't, at Vestact we cannot find any clear answer and as such avoid the companies which have very variable and patchy earnings records. Platinum stocks, with their well documented problems printed a 4.91 percent loss for the quarter. They have had a tough time, in particular Impala Platinum.
On Friday the Jozi all share index managed to register a 71 point or 0.21 percent gain to end the session at 33554. Around 1000 points or three percent off the best level of the quarter. Banks on Friday lost around one fifth of a percent, but MTN still was the most highlighted stock moving one way or another, down 1.73 percent on the day. At one point it was a whole lot worse than that, the stock was at 13156, but closed at 13502, close enough to the days high of 13650. The stock traded a whopping 1.375 billion Rand on the day, enough to tell you it was crazy busy, strangely (or perhaps not that strange) the last trade of the day accounted for around one quarter of all the deals done on the day. Dare I say it, window dressing? But all for the sake of 52 cents, it hardly seems worth it, not so?
Oh wonderful, wonderful, Copenhagen, you know the Danny Kaye son? Well, either your parents listened to it, or your grandparents. Danny Kaye was a musician and actor, who's great works were just after world war two, so that tells you how old the music is. The salty old girl of the sea, he called Copenhagen in that song. Not so salty on Friday, perhaps crusty, as the fellows involved saw the bailout system, or the size of the central fund as I like to see it increased by 500 billion Euros.
The new 500 billion Euro fund is in addition to the 200 billion Euros that has been set aside for Greece, Ireland and Portugal, at least that is what I am reading in the FT this weekend. Interesting that those are separate. Because I for one do not believe that the Europeans want anyone to exit the region, but separating the entities from the weak (Greece, Portugal and Ireland) to the others, potentially Spain and Italy apart. Bigger economies, perhaps the too big to fail versus the worst case scenario, exiting the zone. That is my reading of it right now anyhow.
South Africa recently saw a ratings outlook downgrade (no change in the actual rating, just the outlook) from Standard & Poor's. Everyone seems to take these things so badly and personally. I remember chatting to a market anchor, one of South Africa's finest and he said that he had read that including government debt issuances and parastatal debt, the number was much higher than we were lead to believe. In fact I caught reference to a very short piece that mentioned what he was referring to, by a fellow by the name of Rob Wilkie, who said in this piece: Rob Wilkie's Food for Thought 4, written back on the leap day this year:
- "Do we really know the extent of government debt? South Africa’s debt to GDP ratio as listed by Eurostat is 34%. However if you include parastatal debt (the likes of Escom, Transnet, Denel etc) it is said to be more like 70%. Above 60% requires real caution so as not to fall into a debt trap. We are still in great shape when you consider Greece whose most recent round of debt restructuring was to bring its debt to GDP ratio down to 120%."
He means Eskom of course. Not Escom. Which immediately leaves me sceptical about his thoughts. Why I was interested in this is because I saw a SENS announcement on Friday that suggested that Eskom had been placed on negative watch too by Standard & Poor's. I am urging everyone out there to try and find the debt numbers of the parastatals, I shall try and get a list myself, so that we could get a bigger picture view.
Telkom. Always trying to touch tomorrow. Pity, they should worry more about the issues that are happening right now. Both Paul and I are trying to get line installations. I succeeded quicker than Paul, he is still waiting after a number of weeks. Your customer always knows best ultimately. And on the customer services stakes Telkom treat the customer worst than most. But any business who treats their clients better than their peers makes sure that the clients are around for longer. Telkom have amongst the worst client service levels, even if they are getting better. But lets face it, why stand in a six person queue to get a line installed at your house, when you can go to .... err .... you could use .... ummmmm, well that is the real problem. The last mile is still owned by Telkom and nobody else. So even if I am going to use uncapped ADSL from Mweb, I still need a simple line from Telkom. That is the huge challenge that South Africa lives with, awful service from the only real supplier. De-regulate the last bit, that would benefit the consumer.
OK, but personal gripes aside, even though I think that it is important ultimately, the consumer votes. The trading update on Friday looked ugly. I remember reading in the Benjamin Graham book that you should be careful of companies that have recurring once off events. Because then clearly they are not once off events, they are recurring and perhaps provide valuable insight into the company's management. Not good. "Headline earnings per share from continuing operations for the year ending 31 March 2012 are expected to be at least 25% lower than the prior year. The net loss on disposal of Multi-Links and iWayAfrica impairment do not impact headline earnings."
Yech. OK, but what do those Multi-Links and iWayAfrica not so once offs come to? For starters, "R950 million on the disposal of the Multi-Links foreign operation, mainly due to the cumulative amount of exchange differences previously recognised in equity, now recognised in profit and loss" Sis. And then "the impairment of iWayAfrica of approximately R550 million." Wow. Well sold Naspers, MWeb Africa was part of that, in April 2009 Telkom bought that for 624 million Rand. It must be going well {dripping sarcasm}. Ah man, we actually laughed, we shouldn't, because the South African government are 40 percent shareholders. So, that means they should be held accountable by their citizens.
And it does not end there sadly. 8ta -> "the EBITDA loss incurred by the mobile business of approximately R2.2 billion" Whoa! And then the network that makes business work -> "higher depreciation of approximately R670 million as a result of the review of the useful lives of existing network equipment as the Company invests to transform to a commercially led next generation network." OK, I won't hold my breath. All these factors will impact earnings by as much as 90 percent. So expect basic earnings to be 48 cents, whilst HEPS from continuing operations is expected to be around 363 cents per share. Either way, all these once offs are becoming far too frequent to even think that the investor community should do anything but discount the share price. Sis. We are not going to be buying any, in fact this is a giant avoid on our side.
Beijing central. 39o 54' 50" N, 116o 23' 30" E I thought as much, I said last week when everyone got worried about the HSBC flash PMI that before you jump to any conclusions, you should wait for the official release. Marketwatch says: China PMI data paint mixed manufacturing picture. Yes, but the data is also about the best that it has been in a year. I am going to continue to stick my neck out and say, right, we know that there has been a slowing in trade between Europe from China, but now that the Europeans have resolved their short term problems, trade should stabilize. Pleasing at one level, I have already seen the concerns at another.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Friday was the closing of the best quarter for stocks since 1998, the S&P 500 managed to gain 12 percent. Wow. Even more wow is that the S&P 500 is up 28 percent since the lows of October last year. And as Bloomberg points out, in this article -> U.S. Stocks Rise as S&P 500 Posts Best Start Since 1998, the S&P 500 valuation is around 14.6 times, still less than the average 16.4 times earnings. That measure of 16.4 times is all data since 1954. Nearly 50 years worth of data here, and the market still trades at around a 13 percent discount to the long term averages. Ah well, snore to that, some good times and some bad times since 1954.
Byron's beats looks at the recent Apple anxiety.
- On Friday the US market was on the up yet Apple fell 1.7%. Of late this is almost unheard of. Apple have been extremely resilient regardless of any economic data. Apple was down on company specific news this time as worker demands in China hit the spotlight. This is not a new phenomena, Apple have faced criticism about the condition of the workers who assemble their products for years.
This forced Apple to allow an outside audit of its Chinese factories which found a whole host of breaches. For the record the factories are not actually owned by Apple but outsourced to a company called Foxconn. When you are on top however everyone wants to bring you down and Apple are no exception.
Following the report certain recommendations were made to improve working conditions. This includes less working hours per week and increased compensation. Interestingly The FLA (Fair Labor Association) who are doing the audit are headed by a South African fellow with a long pony tail called Auret van Heerden.
I'm pretty sure by now that you know how I would feel about such an organisation. Getting involved in labour practices of countries around the world sounds very noble but in my opinion it does more harm than good. China is already starting to lose some of its competitiveness because of pressures on wage increases. Yes, people have rights and deserve to be happy but if Apple had not chosen China to manufacture their products, none of these people would have jobs. Taking a job is a choice. You sacrifice your time for the money you get. If, according to your own subjective choice, it is not worth it then you may quit.
I am well aware it is a very sensitive issue and situations may arise where large corporate companies may take advantage of the individual and regulation is required. But an NGO which is not even domiciled in China getting involved does not slide with me. Regardless, Apple have a very important reputation to uphold and are dealing with the audit very diplomatically.
As an investor I would not be too worried, rising costs is a challenge faced by everyone and Apple are no exception. They have the margins to absorbs this in the short term. I just hope they do not decide to cost cut and lay off thousands of workers. I doubt this because their demand is still so strong. However companies like HP, Dell and Nokia who may not be in such a strong position, also have production plants in China and are all expecting audits from the FLA.
Currencies and commodities corner. Dr. Copper last traded at 385 US cents per pound, the oil price was slightly lower at 102.97 Dollars per barrel. The gold price is trading lower at 1663 Dollars per fine ounce, the platinum price is also lower at 1635 Dollars per fine ounce. The Rand is firmer today, 7.63 to the US Dollar, 12.25 to the Pound Sterling and 10.19 to the Euro. Looking better at the get go here. OH, strange one here, nonfarm payrolls will be released on Friday, but most markets are closed for Easter. And those not observing Easter, will be closed for business. Amazing.
Sasha Naryshkine and Byron Lotter
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