Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. The volumes were thin around the world, with the post Olympics blues setting in. I remember the days just after the greatest show on earth left our shores, there was a feeling of success, we had done it, but also a sad feeling that it was over, and that we had to go back to the ordinary humdrum of everyday life. Markets were also lower yesterday, I suppose if you were looking for a reason you might well point it squarely at a Japanese GDP read earlier in the day that missed expectations. But as a Japanese commentator pointed out on the box, the first quarter was a big beat, the second quarter not so much. And if you add the two together she said..... but the TV anchor person wasn't buying it. After the dust had settled the Jozi all share index had sold off nearly half a percent to close near the lows of the day, down at 35417. It really was a mixed bag, some stocks took a blow to the kidneys, whilst others held up a little, at least relative to their peers. You know however when the gold stocks are "winning" that the rest of Mr. Market is going to struggle a little.
Ye olde worlde. Sadly there was another disastrous GDP read from the Greeks yesterday, their economy contracted over six percent in the second quarter and finds itself in a fifth successive year of recessionary conditions. According to the WSJ (subscription only, but you might get this for free for a while), in this article titled Pain Deepens for Greece's Economy, the obvious is happening of course. With cut backs in salaries and workers, government of course has less to spend. Businesses are fewer. Lower tax receipts means it looks worse for the government in the short term. We are not living but witnessing an almost classic rebalancing, but of course the pain is worse because the Greeks are still using the same currency. And it is serious. We are all used to high unemployment and human tragedy here, so perhaps we are a little desensitized to it all. Still, the stories about the suicides strike a dark chord. We will see the markets appetite for Greek short term debt, the treasury there plans to sell over three billion Euros worth of 13 week debt today.
On the other side of Europe, in another time zone, the French have reported that for the second quarter they have just skirted another recession in another strangely familiar resilient showing. Their second quarter GDP read showed no growth, but in a low expectations environment, that is a slight beat. German GDP released shortly thereafter showed that the German economy expanded (very modestly) by 0.3 percent when measured against the prior quarter. But, both these numbers are a beat. And neither of the major economies in Europe are contracting at the same pace as the poor Greeks. It is tough and hard out there, but clearly not as tough as we are led to believe. And oh, yes, Greece is still in the Euro-zone. This is of course a very simplistic view of what is happening in the region, but all I am trying to say is that with all the glum faces and headlines on the screen, you would swear that the reads would have been a whole lot worse this morning.
Byron's beats covers another one of our preferred stocks, an old South African favourite. And the biggest corporate tax payer in the country, both directly and indirectly through their product that they produce. You guessed right, Sasol.
- Still playing catch up from a disruptive public holiday week, today I'm going to cover the Sasol trading update which came in last week Wednesday. The release expects headline earnings per share to come in between 20%-30% higher than the prior financial year. This was a slight disappointment to the market following the nine month operational update released in June. The update indicated a 31% average rise in domestic fuel and an increase in production so the market had high expectations.
Where the disappointment arose, and I suppose it should not have come as a surprise following the Billiton impairments, was a write-down of the Canadian gas assets following the big fall in gas prices.
"These positive factors have been partially offset by an impairment of R964 million (CAD120 million) and depreciation of R1 324 million (CAD171 million) (at a rate of approximately 24% per annum) in respect of our Canadian shale gas assets, where we have been more conservative in the valuation and depreciation, ahead of our future gas-to-liquids ("GTL") investment decision."
Ironically cheap gas is good for the company as an input for the GTL process but they bought those assets at a certain price and the price has come down so an impairment is required. The timing of the purchase was not great, as with Billiton, but we are still confident in the long term demand for gas as an alternative energy source. So let's take a look at the numbers.
Headline earnings per share came in at R33.85 last year. If we take the middle of the range 25% we should be expecting around R42.31. The stock is trading at R342.50 and a very attractive valuation of 8. The dividend also looks to be handsome as they plan on growing their dividend payout. Last year the company paid out R13, a cover of 2.6. Let's say they increase this cover to 2.2 paying out around R19. That is a handsome yield of 5.6%.
We continue to like the company with its exciting technology in a world where we see energy demand increasing. The chemical business is struggling a bit due to European issues but the big profits still come from the synfuels business. The future in gas is also very exciting so we are not too deterred by the impairments. A definite buy at these levels.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. With very little on the economic read front, most of the days focus was spent asking questions about the GOP VP nomination, Paul Ryan. If ever you are going to be elevated into a position of potential extreme power, you have to deal with the voices of many. And of course the first negative turned up for Ryan, he was heckled by a few ladies at the front. Who were then removed by what looked like a very burly moustached police man. You can't do that ladies! Come on. Meanwhile the Washington Post had a less than glowing read on Paul Ryan: Paul Ryan, Republican vice presidential candidate, has a complicated record with little compromise.
Markets in New York ended the day lower, but launched an assault on the hill (kind of like myself and the dog this morning, we tried to crush a serious hill climb, but crested out of breathe) to squeak in with some green with tech stocks, but both the broader market and Dow Jones ended lower, despite the fight back. I came across an interesting article that quite rightfully pointed out the Dow Jones might not be as good a measure that most people might think. Because the argument put forward was that Google and Apple should be in place of both Alcoa and Travelers Companies Inc (or HP). But at 600 Dollars plus share prices, together the two stocks would account for 43 percent of the price action on the Dow Jones. In order to get into the Dow Jones Industrial Average, both Google and Apple would then in theory have to do a ten for one share split, which would still take their respective share prices higher than the Dow Jones price average.
Don't ask too many questions, it is just way too complicated. Notwithstanding all of that however, the Dow Jones Industrial Average has outperformed the S&P 500 over the last five years. We are fast approaching the five year anniversary of the all time highs for those respective indices. 14198 points on the Dow Jones, reached back in October of 2007. Even back then however, on an inflation adjusted basis, the index was below the early 2000 levels. The S&P 500 however clocked 1576 intraday on the 11th of October 2007. We are around 173 points away from registering a new high on the S&P. As for the nerds of NASDAQ, even if we doubled here, perhaps even on an inflation adjusted basis the index would still be "behind". Earnings are much better than they were 12 years ago. Even though the adjusted S&P 500 earnings are being projected lower than they were in March, we are looking at around 102-104 Dollar range for this year. Which means historically, the index is still cheap. At least that is what we think around here.
Currencies and commodities corner. Dr. Copper is last at 336 US cents per pound, marginally higher on the session, the gold price is last at 1612 Dollars per fine ounce. The platinum price is better at 1398 Dollars per fine ounce. The oil price is last at 93.17 Dollars per barrel. The Rand is slightly weaker, 8.13 to the US dollar, 12.76 to the Pound Sterling and lastly at 10.04 to the Euro. We are higher here to start with, thanks to better than anticipated GDP numbers from Europe and initially a late rally on Wall Street. Playing catch up!
Sasha Naryshkine and Byron Lotter
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