Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. Another day for the equities market here in Joburg and almost another all time closing high, we ended 11 points off the closing best level reached on Friday. We did however reach an intraday high during the course of trade, it is becoming tough to keep up changing the scoreboard. All I know is that KP is not around, but that is another sad story of egos and talent. And perhaps winning too. Banks were winners yesterday, adding over a percent, the resource giants ended the session ever so marginally in the red. Perhaps this was as a direct result of a combination of currency strength AND Chinese authorities reluctance to do anything with the triple R, the reserve ratio requirements for banks, as there is an inflationary monkey lurking around. In the form of higher food prices, that is going to be coming through soon for all of us, the US droughts of 2012 have been well documented, and will have an impact on all of the staples that we love so much. Eating. An essential part of life. Byron and I are having another competition as to who is going to lose the most by the beginning of October. I have to keep hitting the streets and ignoring the pantry.
Just this morning we have some news on one of our preferred stocks, which Byron's beats will cover. It is about Aspen Pharma, where the share price has been falling in recent days. But this is good news.
- This morning we had an interesting announcement from our recommended healthcare stock Aspen. The company has reached another agreement with GlaxoSmithKline to acquire 25 established pharma products which are distributed throughout Australia. It is a fairly big acquisition by South African standards, GBP 172 million or R2.2bn which will be raised through new offshore debt facilities. According to the latest financial statements the company is sitting on about R 3bn in cash with borrowings of about R6bn. Remember the Sigma acquisition was worth R5.8bn.
This looks very similar to the GSK agreement they have here in South Africa. Except that was done when Aspen were smaller and had to swap equity for the products. Now they can raise capital at much better rates and without diluting shareholders. It is a good relationship, GSK are looking to become more focused and Aspen can ride on their already established brands. It has worked very well here so you would expect, with Aspens experience, that they should be able to roll it out successfully in Australia. Here is the rationale from the announcement.
"The Products acquired through the Transaction represent an excellent fit with Aspen's existing portfolio and the added revenue will strengthen Aspen's position as one of the leading pharma companies in Australia. Whilst the Products received little promotional focus from GSK, Aspen is confident that it will be able to leverage its proven ability to reinvigorate older brands and the products' considerable brand equity in order to enhance the value of the portfolio."
You see, these brands which includes analgesic, antibiotics and anti-virals seem somewhat neglected by GSK and Aspen plan to reinvigorate the portfolio. It also enhances Aspens global reach which has been its strength over the last year following a weak South African market. We expect the SA sector to improve along with another strong performance from the international businesses in the next reporting season. This should result in a strong growth in earnings yet again. We are not the only ones, the share price is up 40% this year. We continue to add to the stock especially on the back of this announcement as the company seeks further growth off of our shores.
I do not know what to make of this news, but I am guessing that it is not the best news for tobacco manufacturers. The Australian High Court ruled today that British American Tobacco (BATS) and others do not have a case to make against the plain packaging act of 2011. Check out the short and sharp release from the court: JT INTERNATIONAL SA v COMMONWEALTH OF AUSTRALIA; BRITISH AMERICAN TOBACCO AUSTRALASIA LIMITED & ORS v COMMONWEALTH OF AUSTRALIA. Short and sharp folks. BATS has replied to the judgement and are clearly unhappy: Response to decision of the Australian High Court in plain packaging case.
I hear BATS, but you are dealing with one of the most emotive issues of them all, healthcare. Do not mess with folks health or their kids. They will vote against you. Call Aussie what you like, nanny state or some such other name, the ruling is being watched really closely by the rest of the world. The FT reports this morning (and has been watching the story for a while now) that the UK and others have been watching this more closely for a number of reasons. Firstly, if the Aussie high courts can shove this through, then the same might apply across the globe in other countries. BATS in their release talk about unintended consequences. I presume they mean a) lost revenue for government as a result of lower sales and b) the rise of the illicit tobacco trade.
The release says as much: "In fact, plain packaging would only exacerbate an already significant illicit tobacco trafficking problem, and would have other significant adverse unintended consequences including driving down prices which would lead to increased smoking while reducing government tax revenue."
BATS think that the issues of plain packaging is worth taking to a higher court, the international court of arbitration. BATS grounds are that the Aussie government are infringing on their right to prominently display their product in the proper packaging. And replacing it with this, from the Bloomberg piece this morning: Australia Wins Court Approval for World-First Plain-Pack Law. But check out this video piece, BATS are on their way to fight the Aussie government in a trickier environment: High Court clears way for plain packaged cigarettes to be sold in Australia.
At the heart of this issue is public healthcare. Australia pay nearly ten percent of GDP to their national healthcare program. They have some of the best healthcare systems anywhere in the world. According to Wiki in the segment titled Health care in Australia: "Cigarette smoking is the largest preventable cause of death and disease in Australia." In a country where the state pays for all your healthcare, they then should be able to tell you what to consume. I am presuming that soon there will be a "fat-tax" implemented, Australia has a high obesity rate and a growing diabetes problem, associated with bad individual habits. So whether the brown and unappealing packaging starts in December or not (it seems so), and consequences it has for the company operating in other geographies, this is not a victory for the industry. Government entitlement programs should mean that they have more flexibility to intervene, either by continuing to tax the product at a higher and higher rate, or look to find a way of seeing that consumers use less, like this. We continue to think that all companies operating in this space do not have long enduring investment properties.
Even though the European GDP reads were a meet at some level, the angst about the peripheral versus the core started to dissipate and the faith is somewhat being restored. As you know, confidence is a strange old thing, once you have it, it is infectious. It breeds more confidence. And I am just guessing here, or making an observation based on what I have seen before, but we seemingly are starting to see market participants getting the faith. Because of course the unemployment numbers do not look as bad as they have been in the recent past. Put that down to either recency bias (see this NY Times piece: Tomorrow's Market Probably Won't Look Anything Like Today) or the actual global economy is not as bad as some folks might have initially thought. Don't get me wrong, earnings expectations have been ratcheted down over the last four to six months, but equally the rowdy gorilla (European Sovereign debt) in the room has been appeased.
There was a weird interview with Olli Rehn, who is the vice-president for the European Commission, on CNBC yesterday morning, US time. Strange not because of what he said, but perhaps because his English mannerisms might not make us completely comfortable. You can only see what I mean if you watch it: Olli Rehn: Building EU Monetary Union 2.0 See what I mean there?
But Olli Rehn told it like it is, forget his manner. The European monetary union plan 2.0 is what Ross-Sorkin called it, and is what the video is titled. Kernan and his tie, pfff.... that guy is a bit ignorant, I remember that he didn't even get within 300 million people of the overall Chinese population. His world and what he cares about ends close to his home. I do not blame him, America is a great place. Rehn is clear, the Greek people decide what they want, the folks inside of the zone get the fix that they need. If it is too hard for the Greeks, then basically they decide. Wilbur Ross, a guest on the show asked the question: "Why is it so essential to keep Greece in the monetary union?"
His answer was clear: "The Euro is irreversible and it is essential that we will maintain the unity of the Euro. Of course, it will depend on the Greek people and the Greek leaders now to meet the conditions and they have to start with further actions in line with the memorandum that has been agreed between Greece and the European union and the imf. sure, but with the economy there shrinking and 6.2% in the recent report and now being in their fifth year of recession, is it realistic that they can, in fact, reduce the primary deficit? Greece has already been able to take quite substantial action in fiscal policy and structural reforms, and for instance, both labor costs and inflation have come down recently, quite substantially, so the rebalancing is going on in Greece. I know it is very hard and often painful for Greek citizens, but it is a necessary rebalancing, as Greece want to stay in the Euro."
Europe is working hard. And will get the job done. And that realisation is starting to sink in. Conditions have to be met by member states, or they will not get shown the money. And for the Greek people, being out is worse than being in. Even though the being in is feeling very bad at the moment, and confidence is not actually quite there yet. The Greeks are seeking an extension for implementing their austerity measures, the FT reports: Greece seeks two-year austerity extension. And just yesterday the Greeks breached a very important milestone. The Greek treasury managed to get away a short term, 13 week, government debt yesterday. Most of it, I read, was lapped up by the Greek banks. Borrowing from one to pay to the other I guess, but it exists.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. It is not often that people look forward to the closing bell on the floor of the New York Stock Exchange, but the reason was simple. The so called Fab Five of the US ladies gymnastics team rang the closing bell. And they were greeted with camera flashes and much excitement. BUT, before the bell Robert Pattinson, of Twilight fame (and recently girlfriend-less, naughty her) had his chance to open trade, by pressing an electronic bell. From there to the end of trade for stocks however, it was disappointing if you were in the bulls camp. Consolidating gains I think is the term used when stocks go sideways after a recent rally. We had initially opened higher after some pleasing enough US retail sales. Home depot has some very pleasing numbers, that share price rocked, up over three and a half percent. There is of course a CPI number later today, that might give Mr. Market something to watch. The PPI number yesterday was slightly hotter than consensus.
Currencies and commodities corner. Dr. Copper is last at 334 US cents per pound, lower on the day. The platinum price is flat, last at 1393 Dollars per fine ounce, notwithstanding the national disaster that is the strike at Marikana. The police chief was there the other day, the mines minister is on her way there. There is more information on basically every business website out there, you should read as much as possible and make up your own mind. It is so complicated and there are too many angles. Try and think with each and every cap on, from all points of view. The gold price is last at 1595 Dollars per fine ounce. The oil price is last at 93.25 Dollars per barrel, for Nymex WTI. Paul was telling us yesterday that the word Brent in North Sea Brent Crude oil was because Shell gave their oil fields birds name. The flying creatures with hollow bones and feathers type. And Brent just happened to be a goose, the Brant or Brent Goose. The Rand is weaker, 8.19 to the US Dollar, 10.09 to the Euro and 12.86 to the Pound Sterling. The markets are weaker to start with.
Parting shot. Fracking. Close enough to a swear word for some. But wait, how many people actually understand the process? I would not be surprised if almost everyone has a vague idea, but not a clear one. This Marathon Oil YouTube clip makes it clear: the process of fracking, start to finish. Watch it and then make up your own mind. It seems that water and sand are 99.5 percent of what is pumped down there and it is below the drinking water source. But of course you need water. So how would it work in the Karoo? Would miles of pipelines have to pump water from the sea? Perhaps. But it might have to be desalinated first, you can't have steel pipes carrying corrosive materials, not so? Sasol have decided that the hot potato is not worth the mash. The people of the Karoo are happy for now, but wait until one has to pay 15 Rands a litre for gasoline. I have heard how ordinary folks react, the government should do something they say. Quite.
Sasha Naryshkine and Byron Lotter
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