Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. The wait was on all day. For the announcement that would be the next big thing since, well, the last big thing. Markets are seemingly event driven, looking for the next big thing. This week it has been two events, the German constitutional court ruling on the countries participation in the European Stability Mechanism and then perhaps bigger, the FOMC announcement from yesterday. Which we will deal with in detail later. Stocks in Jozi edged higher the whole day long from a weaker start, retailers bounced hard whilst the banks were sold down heavily, resources contributed a little to a rally that saw the Jozi all share index end just a little over four tenths of a percent better. Expect the all share index to crash through the 36 thousand point market at the start of trade.
I thought that this was quite an admission from Gold Fields. Although Byron said to me, come on, we are all on the same side here, whether it is gold or platinum, we need our companies to do well and we want the underlying metal prices to go up, to support the companies. But when I saw this article from MiningMX titled Holland: 'We're not making that much money', I thought, but we knew that already. The key parts from that piece is as follows: "Holland said part of the problem was that despite the industry’s intentions to grow, production among the world's top eight producers has declined by 2% per year over the last six years, while operating costs have increased by 12% per annum on average. At the same time, grade has declined by around 5% over the same period." At the same time, the ADR price (New York price) of Gold Fields is up a mere 3.78 percent since the beginning of 2005. Gold stocks have been a wretched investment, at least the ones we follow locally. And still, people continue to think that they make investment grade. No. No thanks.
There was a strange comment from Mike Schussler on the telly the other day, I don't remember the exact quote, but it had to do with pay demands of the platinum sector workers. What Mike said was basically that should the mining companies in South Africa become a whole lot less profitable that would mean that they would pay less taxes. Less profitable because their cost base of course was rising as a result of increased labour costs. Mike said that would put money in the hands of the workers and less money in the hands of government. Mike's contention was that it was going to be spent better by the individuals rather than wasted by the government. That is how he put it. BUT, and this is where it is a compelling argument for some, money in the hands of individuals would be more likely to grow jobs in the segment of our economy that has been growing, retail and finance jobs. The only place that this of course would backfire would be that shareholders would be less likely to allocate new resources to these business to grow. And lower growth rates means that eventually the cost base needs to be reduced. As ever, the balance is the trickiest part of the lot.
Meanwhile, and we are jumping around here, but the Gold Fields story ties up nicely with the fact that Lonmin have made an offer to all their workers. The company have offered the striking miners an increase of 1000 Rands a month, which translates to 121 US Dollars more, 75 Pound Sterling more or 93.5 Euros more per month. Roughly 1461 Dollars per annum more. Which, as per this Wikipedia table, titled List of minimum wages by country, is roughly the total annual minimum wage in Kazakhstan. The increase that Lonmin have tabled is the total minimum wage in Kazakhstan. The country forever tainted by one movie, at least in the mind of the man in the lift. I mean on the street. And at the risk of being chacharag (I am sure that is not how it is spelt), Kazakhstan has an adult literacy rate of 99.5 percent. And they are a huge mining destination too. Just saying.
I agree however that the living conditions have to change. The responsibility of building housing, should that not be both a government and mines project, bearing in mind that much of the migrant labour does not call the areas where they work home? Read this transcript from the Moneyweb show last night -> Business news headlines, the interaction between David and Alec. We actually watched the president yesterday take questions in parliament. Read the BusinessDay piece for more: Zuma vows crackdown on platinum 'instigators'. This is going to be a long and tough road, and as Nick Holland will attest to, it is hard to be profitable. Which makes the businesses less attractive to investors for a longer time.
Bart Simpson's shorts, digest this.
There are always people who are not convinced. And it is true, just like I have an opinion, they are like posteriors. Everyone has one. But there are the Euro sceptics and then I get the sense that there are those that are miffed that their base case of an exiting of the Euro zone by some of the members has not taken place. So excuse me for being a little cynical when reading this: Has 'Super Mario' really saved the euro? Well written, well thought out, great conclusions, don't get me wrong. But when you read all the articles in the archive of the author, Marshall Auerback, you see the same bearish headlines: The euro zone can still blow up even after unlimited purchases and The eurozone's architects have created a doomsday machine and a gift for speculative capital. Same bearish, well written stuff. Meh.
I was trumpeting the fact that the TARP had worked, because the government had been there as a backstop at the time. This was needed at the time of course, because without government there would have been an ugly and deeper hole to climb out of. But these two guys suggest that the liberal view is completely wrong: The Bailout: By The Actual Numbers. And then a more eye popping number: Financial Crisis Cost U.S. $12.8 Trillion Or More: Study. Not great. Hey, make up your own mind, I often say that the chances are nobody ever thinks, "what would have happened if the government did nothing?"
I was fascinated by the graph that Scotty Barber tweeted: Italian equity price and earnings. Check it out, forward earnings multiple of 8.5 times. Surely by historic standards that is way cheap? 16 times was too much in 2003. Surely then, if you have five to ten years time frame the equities trade in Europe could be an opportunity of a generation. No? Yes?
Staying with the Europeans, all the finance ministers of the zone meet in the lovely location of Cyprus, which has a bigger economy than Estonia, Iceland, Macedonia and Malta. But still, it is small, one tenth of the size of Portugal. From Reuters: Euro zone finance ministers meet in Cyprus. Do you think that they all speak English at these get togethers? Oh, and in perhaps the most exciting news of the day, the Italian borrowing costs have fallen again, the yield on the ten year has fallen below five percent. It has a four in front of it. That is the best news of the day, and there may be some back slapping going on in Cyprus. I am guessing that they are in Lefkosia. That is what the locals call Nicosia.
- Byron's beats adds something different here. It is about the iEconomy and the USA.
If you have been following the iPhone 5 news closely you will have seen talk about the success of the product being vital for the US economy. in fact J.P Morgan released the following research note which looked at the impact of iPhone sales on US GDP. Here are some extracts from the note.
"We believe the release of iPhone 5 could potentially add between 1/4 to 1/2%-point to fourth quarter annualized GDP growth. Our equity analysts believe around 8 million iPhone 5's will be sold in the US in Q4, even while sales of previous generation iPhones are maintained at a solid pace.
Though past iPhone releases don't bear a visible impact on the relevant CPI components. The third of a percentage point lift would limit the downside risk to our Q4 GDP growth projection, which remains 2.0%.
Over half of the 0.8% increase in core retail sales last October occurred in two categories: on-line sales and computer and software sales, which combined had their largest monthly increase on record. The incremental growth of Q4 sales at those stores over Q3, if due to the iPhone, would have added between 0.1% to 0.2%-point to Q4 growth, after subtracting the import drag."
Very interesting analysis, especially where retail growth is coming from. There has however been a lot of backlash from critics who make some valid points. Paul Krugman says that this analysis is wrong because it underestimates the second hand sales of iPhone 4's to fund the purchases of the new phones. He also says that because Apple hoard so much cash, once these sales are made, a big portion of this money will not be put back into the economy but rather sit in cash or US treasuries.
Personally I do not think that 1 company, even though it is the biggest in the world can have a significant influence on GDP. What I do believe however is that the productivity that the new iPhone, as well as any other smartphones who have to raise their game to compete, brings to it users. I as an avid iPhone fan and user I feel it is helped my productivity exceptionally. I use it all the time to access information regarding the markets. If I am travelling around i use the GPS to get me there quickly, without getting lost. Siri has improved, we don't experience it here in SA but people use it a lot more in the States. It makes us more efficient and productive. That effect is immeasurable but I reckon we all underestimate it.
Washington. DC. 38o 53' 42.4" N, 77o 02' 12.0" W, home of the Bernank. Or helicopter Ben. Whatever you like to call him. I even saw an animated .gif titled Photo of the Day: Ben Bernanke As a Child Preparing for His Future Role as Fed Chair. Of course that is not Ben Bernanke. The .gif suggests that Bernanke is just throwing money at the problem.
First, before we get onto why, what are the Fed doing? Like Byron and I laughed this morning, there are more than enough explanations as to what they are doing and what they are hoping to achieve. First, read the official release from their website, Press Release. The last paragraph is key there:
- "To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015."
There has been one subtle change, super low rates have been extended through to the middle of 2015, extended by six months. Or, from the original starting point by 18 months. Bob McTeer says Hello QE3. That basically tells you everything you need to know about what they intend doing now.
So then, why are the Federal Reserve then doing this new round of asset purchases? Well, I listened to the press conference with Ben Bernanke answering questions in the same patient way that parents answer their toddlers questions. Ben Bernanke said simply, if they were to lower rates and keep rates low and see asset prices then rise, both house prices and equity prices, then that would mean households would spend more. If households spent more, then businesses would hire more. That would help the economy twofold, both with new jobs and new demand. Which is weak.
Markets then rocked in New York, New York. 40o 43' 0" N, 74o 0' 0" W, touching levels not seen since December of 2007, which seems like a rather long time ago now. We are now around 100 points (and a bit) away from the all time highs of the S&P 500, which added a whopping 23 points to close at 1459.99. Basic materials were the real winners, clocking gains of nearly two and a half percent, energy stocks added two percent, even utilities ramped up 1.37 percent on the day. Broad based and across a wide spectrum of stocks.
Currencies and commodities corner. Dr. Copper is last at 380 US cents per pound. Much higher. The gold price is off the best levels, last at 1772 Dollars per fine ounce. The platinum price is much better at 1696 Dollars per fine ounce. The oil price is last at 99.89 Dollars per barrel. The Rand is strangely a little weaker as Mr. Risk on visits in a huge way here today. Last at 8.26 to the US Dollar, 13.38 to the Pound Sterling and 10.76 to the Euro. We are much higher, at record highs. Thanks Ben.
Sasha Naryshkine and Byron Lotter
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