Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. What a difference a week can make. At the beginning of last week we were talking about 4 year highs for the Dow Jones and all time highs for the Jozi all share index. But then disappointing jobs numbers and uneasy feeling markets about the political outcome in European elections over the weekend came along and did almost everything to trash the rally that has been largely earnings led. Also, the markets have been improving against the backdrop of largely improving economic data for most of this year, although that same data has been looking a touch weaker over the last five weeks or so. We have had two US employment numbers that have pointed stronger, but it was a case of only the first Oliver Twist bowl of porridge, we were left asking for more please sir.
So the open debate of the Greek elections has captured every watcher and participant this week, the Greek stock market has plunged to the worst levels in 20 odd years, probably a whole lot worse on an inflation adjusted basis. Perhaps my review of the situation was a little alarmist yesterday, but there are many that share my view, being a member of the Euro club is far better than being out, check out this Economist piece: The euro crisis - No way out. You see that analysis, the second paragraph? Yip, whilst being out might be a good idea at the time, being in is better.
Spain was also feeling a whole lot of heat yesterday, the equities market was off heavily, around three and a half percent, the bond yields had spiked through six percent and there were serious worries about the new plan to inject liquidity into Spanish banks. Excuse me for thinking this is a slow motion repeat of the part nationalisation of the American banks European style. They are a bit slower and a whole lot more bureaucratic, but eventually the job gets done. Spain is in the process of organising a program to inject new capital into their banks. Last evening basically the state through a fund named Frob (what kind of a name is that) took a 45 percent stake in the nations third largest bank, Bankia. By basically converted state funding to equity, this is not the first (the 8th as far as I understand it), but the biggest, ten percent of bank deposits in Spain. The Spanish stock market is at its worst level since the end of 2003. Sigh. At the same time German bund yields dropped to their lowest level ever, signalling that Europeans trust the Germans, and nobody else. No wonder the Germans continue to drive this line, but I am sure that they will start to share the view of the new French president, austerity is not everything.
As a result on this side of the world (Paul told us the other day that only ten percent of the global population live in the Southern Hemisphere, I feel lonely) we saw equity markets sell off, we had started well enough, but quickly slid. The Jozi all share index closed at 33434, down 113 points or 0.34 percent on the day. Banks sank three quarters of a percent, industrials lost around the same amount, resources, perhaps thanks to a weakening Rand added just over half a percent. Gold miners added a whopping two and a half percent.
Staying with gold miners, Harmony Gold released numbers yesterday morning. These are third quarter numbers, the company is a June year end. Production for Q3 was 18 percent lower than Q2 and cash costs were up by as much, an 18 percent hike sports lovers. On a nine month basis however production is only down 2 percent, cash costs are also up 21 percent. But I am not going to go into the reasons I would not want to own it, you know what those are already. I do not want to own gold as a physical asset, and therefore do not want to own a company that mines gold. David McKay had a great story yesterday, which basically explains that Harmony have decided which asset is the future of this company, and it is not a South African mine. Briggs nails colours to "this animal Wafi-Golpu".
Interesting, not chasing production at all costs, but rather focusing on being a more profitable company. Sadly for shareholders the stock has done very, very little for a very, very long time. There are periods of weakness and periods where the stock sank sharply. Over five years, the stock is down 34 percent. Amplats are down 60 percent over the last five years. Yech, so, in short the Harmony shareholders have beaten the Amplats shareholders over that time frame, and by quite some margin. Both stocks are closing at 52 week lows.
Remember we were talking about Swedish finance minister and his amazing handling of their economy through the crisis. A staunch free market type that I follow gave the thumbs up to a Mark J Perry post (that must have been where I read it) about Sweden's amazing supply-side, tax-cut experiment. Read it. Because for a socialist country to promote what are seen as a pro business policies, that would be considered a huge turning moment for James Pethokoukis. Because he does not like the Democrats and their policies, that is Pethokoukis, so obviously this would be exciting for him.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Phew. Markets again fell hard at the beginning but managed to recoup half of those losses again, the same old issues impacting us here weighed on markets there. The nerds of NASDAQ again, after having been down over a percent and a half, managing by the time markets closed to end less than four tenths of a percent lower. The Dow Jones industrial average lost nearly 100 points, down nearly three and one third of a percent over the last week.
Byron's beats looks at Cisco's results from last evening, which were released after the market.
- It's amazing to see how investors interpret results releases. Especially when it comes to management commentary. You get the feeling that the traders sus out the general consensus as quick as possible and then everyone follows like sheep, trying to eke out those tiny basis point gains. Seeing that more than 50% of the US market is traded by machines, once the traders push a stock down the momentum gathers and the stock stands no chance. This can happen both ways, pushing the stock up or crushing it. Unfortunately Cisco has experienced the latter after they released quarterly results which actually looked pretty good. The stock is down 8.8% post the market.
It wasn't the numbers that disappointed but the forward looking commentary. This is not the first time management have been cautious and the stock has been hit. Sales and Earnings actually came in above consensus, sales of $11.59bn and earnings of 48c per share versus consensus of $11.57bn sales and 47c per share earnings. This is up 20% compared to this quarter last year. Analysts expect earnings this year to come in around $1.84 and $1.93 for 2013. The share trades at $17.15 (following yesterdays fall) putting them on a very attractive forward valuation of 8.9 for 2013 estimates.
So why the low rating? Let's look at the commentary and the fundamentals supporting this $100bn company. CEO John Chambers projected revenue growth of 5%-7% for the next quarter citing significant uncertainty in the global economy as a big risk. Europe and the US public sector has shown some demand weakness, as you would expect.
But the fundamentals are still there. More data is being consumed than ever before. The iPhone 4S consumes 3 times more data than the average smart phone thanks to Siri and its ability to use data so efficiently. Over 35 million of these were sold by Apple last quarter. AT&T and Verizon are spending millions to keep up with this demand. Then you have companies like Netflix which stream movies and the Xbox which allows gamers to play on the web, all of this requires Cisco's products. As technologies improve (the rolling out of 4G as an example) data consumption will only increase and Cisco should benefit.
There are some issues over management which pose a concern for us at Vestact. Last year Cisco scaled back on efforts to expand into more than 30 businesses, rather focusing on a few core businesses. The market liked this (as did we) and the stock started rerating. John Chambers has a controversial self invented management style based on 5 pillars to drive collaboration. The CEO who has been at the company since 1991 has done great things but we feel that maybe a change is needed. Valuations look attractive and the fundamentals look exciting. We remain buyers of this stock but we follow potential reshuffles closely.
Currencies and commodities corner. Dr. Copper is last at 370 US cents per pound, the gold price has recovered somewhat to 1591 Dollars per fine ounce, the platinum price better to 1497 Dollars per fine ounce. Quite a lot of talk about the platinum market recently. And not all good. The oil price, NYMEX WTI is trading at 96.41 Dollars per barrel, Brent crude oil is last at 112.42 Dollars per barrel. The Rand is firming a little, as risk on seems to be back, 8 exactly to the US Dollar, 12.90 to the Pound Sterling and 10.37 to the Euro. We have started better this morning, around two thirds to the good.
Parting shot. China has reported a larger than anticipated surplus, with both exports and imports increasing at a much slower pace than last year. All pointing of course to a slowing in the Chinese economy, because this means that less is being imported by their major trading partners. As the FT points out of course, this slowing in exports is being felt by both Taiwan and South Korea. Slowing investment in China and not quite the pickup in internal consumption that everyone is looking for might well get Beijing central to act faster than anyone else. And there are those that suggest that the Fed at their next meeting might well be more accommodative. I would not really welcome QE3, because I concur with the Fed, perhaps it is a case of waiting a little.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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