Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. We rushed through 34 thousand points on the Jozi all share index, for the first time in four weeks. We certainly have had a stunning two day rally on the speculation that policy makers will do whatever necessary if they need to. Well, the European Central Bank did not cut rates, the theory is that they are waiting post the Greek elections before they use their silver bullet. But, the Chinese cut rates for the first time since 2008, possibly in a sign that we are in a softer patch now in the second quarter than in the first quarter. In fact there is no doubt that is the case, the recent data from across the globe suggests as much. Byron covers that in detail, ahead of major data releases from the Chinese later tonight and in the wee hours of tomorrow and Sunday. Data on a weekend? Wiki suggests that economic activity, like in Jozi here, takes place every day of the week, so I guess data releases on a Saturday are just fine in a Chinese context.
The mood is about as glum as I have seen in a little while, business confidence locally is at a ten year low. In fact, this is the worst number since the South African Chamber of Commerce has been releasing these numbers. So, you might well be forgiven for thinking that it looks quite cloudy out there. This time reminds me a little of the beginning of 2009, where the solutions around the banks and their liquidity in America related to the subprime mortgage melt down were starting to become clearer. This is the same sort of issues, remodelled in a different way.
All major sectors gained yesterday, other than the gold miners who were carried out on a stretcher, down nearly five percent. What is that about? An old timer trader once said, trading gold makes you old. I suspect that Bernanke testimony and lack of clarity on extra stimulus saw the precious metals (and oil price) go a whole lot lower in a flash. Remember that the Aussies earlier in the week also cut rates. So, I am guessing that Asia is feeling the heat of the cold and stodgy looking Europe. For the record, my homemade pasta (I roll and cut myself) last evening was overcooked. Overcooked pasta is not great.
Perspective. Sometimes you need it badly. Paul sent me a chart last evening, the chart this courtesy of TradingEconomics.com. Check it out:
OK, so these are Spain's borrowing costs, the yield on the 10 year government bonds, the current "scary" six percent plus is nothing compared to the 12 percent rates that the country had to borrow money at, pre the Euro area. But of course this is much worse than the close to three percent back in 2006. So perhaps on a more normalised basis, if you draw a graph from the top left to where we are now, the graph looks good for Spain. The rates are not what they (the Spanish treasury) WANT it to be, but this is FAR BETTER than where it was.
So why do we bring this up? Well, Spanish banks are stuck with stinky looking mortgage books, problems with loans to property developers, a softer economy that was too geared to construction, high unemployment rates not dissimilar to what we have here. And just last evening the fellows over at Fitch decided to cut Spain's credit rating to BBB, down a whopping three notches in one go. The ratings agencies, grrrr.... my theory is that they (the ratings agencies) went from a time of not paying attention at all to perhaps being too aggressive, not wanting to get it wrong again. That is our general view here. There were some no you know what Sherlock observations from Fitch around the Spanish banking sector.
Just yesterday Spain managed to raise government debt at just over 6 percent for the 10 year debt, which of course is nearly 25 basis points more than 7 weeks ago. The Economist (yes, I read the electronic version) article titled Slouching towards a banking union, in which Credit Suisse reckon that Spanish Banks will still have to raise around 60 billion Euros, as they might still have to write down 150 billion Euros worth of debt associated with loans to property developers. Further down there is a link to a graph which suggests that Spanish banks may need close to 100 billion Euros, as a results of NPL's rising significantly in the coming quarters. Reuters is reporting this morning that Spain is expected to make an aid request for their BANKS and not the central treasury, which I guess is very different from the Greek situation.
Now there are three charts that you need to see. Also courtesy of TradingEconomics.com, who are absolutely fabulous for all info graphic that you are looking for with regards to economic activity. First thing, to illustrate how the construction boom sucked up a lot of unemployed folks, check this 15 year graph:
So, unemployment rates 15 years ago were also at these same levels, perhaps nothing too new. But away from what was the recent norm. We all suffer from recency bias. Next graph, Spain has a problem at government level, right, too much spending, the people of Spain get too many benefits, is that right? So Government spend as a percentage of GDP must be higher now than ever before? Well, no. Notwithstanding the fact that the Spanish GDP is lower now than a few years ago. Check this out, this is government budget as a percentage of GDP:
So, according to Fitch the far right of the graph is going to look worse and not head in the right direction. And to recap the banking sector, worst guess would be as much as 9 percent of GDP, that is Fitch's worst case scenario. Next graph, perhaps the most troublesome of all of them, because of the downturn on the right there, Spain's growth rate.
The only way to solve the budget deficit problem is to make sure that growth picks up and treasury collects more taxes. Well, growth is more important in the long run, you can put a cap on government spend right now and stimulate the private sector. But how? Spain has pretty restrictive labour laws, the worst of the lot in Europe. What is the incentive to get to Spain and start investing there? Well, the Invest in Spain website in this section, which I took a look at, Why Spain? tries to make a fist of it. I suspect that they will be OK. But it is time to act and stop thumb twiddling in the typical European bureaucratic way. I guess we do not have to wait that long.
Byron's beats is always upbeat about life, and takes a slightly different view to the one being offered out there about why the Chinese cut rates.
- We don't talk about China enough. Yes we refer to it all the time when talking about growth and where it's coming from but how much detail do analysts really cover? It is understandable. It's a foreign economy in a foreign language so it would be difficult to watch their news channels like we watch coverage of the US and Europe. Yesterday my screens were showing the Bank of England's decision to hold rates whilst China were also making some important monetary decisions at the same.
Yes the Chinese news was covered but not nearly to the extent of the UK decision. Yet the Chinese economy creates the equivalent of the UK economy every three years. This is where I think we are getting it wrong at the moment when it comes to sentiment about global growth. And it's not as if Europe is going to fall off the face of the earth. People forget how resilient we are. When times get tough the will to survive will bring out the extraordinary. Europe has proven they have the grit many times before throughout their history.
So what actually happened in China yesterday? Well rates were cut by 0.25 percent. This was unexpected and of course good news. This is part because of inflation reads coming in lower than expected. But there were some other policy changes announced. Banks are now allowed to offer a 10% premium to the benchmark deposit rate compared to 0% previously. This means that money deposited will actually earn more. Very good for a country with such a high savings rate. A higher yield will also take some pressure off the inflated property market.
On top of that banks are now allowed to offer a 20% lending discount to the benchmark compared to 10% previously. So this will make money even cheaper. At this stage none of the big 5 banks have offered anything less but if you did Economics 101 you will know that the prisoner's dilemma will force banks to cut at some stage in order to be competitive.
So you see, a deeper look shows that this was actually a rate cut on steroids. There have been calls for the liberalization of the Chinese banking system for ages now. This is a step in the right direction. It makes you realize that we are all on the same side here, pushing in the same direction for a better world and a bigger pie for all.
Telkom. Why do I even cover the company, is it a certain smugness about them having woefully underperformed their two market "peers"? We were told years ago that the yield on our preferred investment MTN was not up to scratch with regards to their dividend payments. Well, the shocker this morning is that Telkom has suspended their dividend payment. And at current trading levels, MTN has a historic dividend yield of 5.55 percent, Vodacom currently at 7.17 percent. Telkom have suspended paying dividends. Yes. So their historical yield, from the last full set of numbers is zero percent. {Sigh} With exceptional items becoming the norm rather than the exception, that exposes management weaknesses. At the results presentation this morning a customer was heckling the CEO. I have nothing else to say, I will absorb everything this morning. I did a piece which I will talk about next week. Government should just buy the rest of the business that they don't own already if it is of national importance. Really. The price is dirt cheap now.
Currencies and commodities corner. Dr. Copper is last at 3.30 Dollars per pound, the gold price is off the best levels at 1577 Dollars per fine ounce. The Platinum price is also lower at 1420 Dollars per fine ounce. The oil price is much lower, down at 82.31 Dollars per barrel. The Rand is weaker as Mr. Risk-Off tugs his Friday strings ahead of a very important weekend for Spain and China bulls. Currently the Rand is trading at 8.47 to the US Dollar, 13.08 to the Pound Sterling and 10.60 to the Euro. If only Spain had a better looking economy than their tennis stars and football team.
Sasha Naryshkine and Byron Lotter
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