Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. Yesterday was mostly about one man and monetary policy, and the direction of the European Union in the short run. Remember six weeks ago Mario Draghi, the ECB president said that he would do everything in his power to "save the Euro". I still don't know what that means, saving the Euro. Saving from what? The bond vigilantes? From a break up? The last poll that I saw suggested that the Greeks wanted to stay inside of the Euro zone, but the Germans did not want them there. And equally, the Greeks did not want too much austerity. Exactly. We all want more, but you have to work for it.
We will talk about what it is that the ECB will do later, the reaction from markets was huge. Enormous. Resources absolutely rocked, up nearly three and a quarter of a percent, sending the all share index up 1.8 percent. Phew. It has been a tough 10 days for the bulls after the incredible run since the lows in late May, but there was some respite yesterday. Another one percent move forward from here would be enough to take us close to the all time highs. Stocks surged globally, the Stoxx Euro 600 added 2.3 percent. Those are the top 600 European stocks. Big place you see! Did you see that article that suggested that the Australia financial systems market capitalisation is bigger than that of the whole of Europe? Check out this WSJ blog: Australian Banks Are Larger Than Euro-Zone Banks: BofA. I still can't get my head around that.
Ye olde worlde. Mario Draghi saved the day. This was something a whole lot more concrete than the promises that he would save the Euro. And do everything in his power. This new program, called the "outright monetary transaction" or OMT, will buy bonds with maturities of between only 1 to 3 years left. But more importantly, with the words unlimited in front of it. So, they (the ECB) could buy a ten year Spain issuance with three years maturity left in the secondary market, as well as a short term Italian debt issuance, 2 years or so. What Mario Draghi said was that they would effectively remove "tail risk in the Euro zone". Phew. Now to understand tail risk, see this simple (????) definition from Investopedia, Definition of 'Tail Risk': "A form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution."
So, if you remove the risks, you are more likely to get the middle road outcome, lowering rates in the peripherals and naturally rates would rise in the core, Germany and France. I can understand how this is not great for Germany, and I can see why they were dissenting. Because as someone said about the acronym, OMT, it translates to "on my tab". I could try and do my best to describe the nitty-gritty, but there is still a lack of what the conditions are, for the countries to participate in the OMT. As someone else said, smells like a bailout in a different form, because it involves money and conditions.
The confidence that this is returning to the markets, in fact ever since the actual announcement around six weeks ago, is visible this morning. Spanish ten year yields this morning are comfortably below 6 percent. Italian yields are about to print something with a four in front of it, currently 5.11 percent. This is the idea you see. To lower the costs to those two giants, Spain and Italy, so the pressure valve is relieved somewhat, and any of the new issuances will be welcomed by investors at the lower yields. For me the participation is important, but more important is the return of confidence. Back when people were loose and fast with capital markets, and in particular fixed income, the spreads between the core and the periphery was next to nothing. But this graph from Scotty Barber is key for me: Euro Zone GDP since 2007. Germany are fine. Everyone else is not.
Lastly, if you feel you need more details, I liked this Counterparties analysis by Ben Walsh, Felix Salmon's co writer: Counterparties: Draghi makes his move. Nice. It would be astonishing if the mere presence of the European Central Bank ready to act would be able to chase the yields down to a more "acceptable" level for Spain and Italy, without actually ever implementing the program. But that would be a Utopian view, I suspect that the debt market knows the problems in Spain and Italy are great. And the conditional line that comes with the program might even mean labour reforms, social benefits might be eroded, and that is a pretty poor showing for any politician concerned.
After this press conference, later in the day, Mario Draghi travelled from Frankfurt to Potsdam (both in Germany) where he was accepting a prize. Yes, a prize. Via the M100 website: "The M100 Advisory Board is awarding Draghi in recognition of his commitment to stabilize the Euro and stabilize the European house by all means." Germans giving Draghi the thumbs up! Surprised? Not me. The speech that Mario Draghi then delivered was published on the ECB's website, and it was most useful: For a European Public Space. There are some choice words in there for the Euro detractors:
- "The global crisis has revealed the vulnerabilities in this arrangement. Loose coordination of policies neither ensures stability nor does it facilitate effective crisis management. The institutional design of the euro area therefore has to be reviewed to put our economic and monetary union (EMU) on a more secure footing. But how should this be done? There are two possible paths. The first is to go "back to the past", to make the original design work better. The second is to develop a new architecture that properly reflects lessons of the crisis. In my view, the first path is not viable. We have seen that the euro area is too interconnected for economic and financial policies to be a purely national responsibility."
In other words, we are not going to turn around. Turning back is not going to happen. For the Euro detractors I suspect that this is as important to read than for anyone else. He then continues and reminds us of what we already know, how important the common currency is:
- "The euro is the world's second most important currency. It makes up 25% of the world's foreign exchange reserves. 1.5 trillion euros are traded daily on the world's foreign exchange markets. And it is used daily by the 330 million citizens of the euro area. A currency that plays a central role in the lives of so many people has to be managed with effective decision-making."
Perhaps that part is more important. Don't come here with your break up this or the other. More citizens use Euros than Dollars. Of course Dollars are interchangeable almost anywhere in the world. The Euro could see their day in the sun at some stage. Again I salute the ECB. They will continue to thumb their noses at the naysayers. And get the job done. The stakes are just too high.
Bart's shorts.
Ha-ha. I confused someone with Bart's shorts, that was not the intention. Bart is for Bart Simpson, and his shorts are for his eating exclusively. So we are digesting short pieces of information here in Bart's shorts. Got it? Good, first things first:
Maybe it is just me who thinks the South African governments line that the events at Marikana are not deterring investors is somewhat clouded in politics speak. Err... perhaps Minister Rob Davies does not read the same things that I do, even in the local press. The Economist has a circulation of 1.5 million. And the magazine, as per the Wiki entry "targets highly educated readers and claims an audience containing many influential executives and policy-makers." I see, so people reading this very exclusive magazine are both policy-makers and execs who make business decisions for their shareholders. That is a fair assumption, not so?
So when I read South Africa - It's not just the mines - The rainbow nation and its ruling party are failing to live up to their ideals, from the print edition, how does this make me feel about my country? And more importantly, how do I feel about my country being displayed to the world like this. Don't patronise us politicians, no matter which way you look at this, it is negative. If Minister Rob Davies really wanted to sort this out, instead of rushing off to London, stay here. Assure business here. Because, if the conditions for business are great here, that will attract the flows from the outside and from local investors too. You know the old adage, build them the field and they will come. Please do not let this short piece detract from the social issues associated with the miners, their living conditions and the whole debate around what is a fair wage, but rather what investors think. That was the idea. And investors vote first and ask the questions much later. In the short term, as Benjamin Graham said, the market is a voting machine. In the long term, it is a weighing machine. You might get no votes if something thinks there is no substance. Just saying.
Staying on matters of shareholder issues, developing this morning is that the whole Glencore and Xstrata deal is going to happen. There has been some tough work going on in the back rooms. The ratio has increased in favour of the Xstrata shareholders, 3.05 Glencore shares per Xstrata shares is the new proposed offer, up from the 2.8 offered earlier. This is supposedly saved the day. The Qatar Holdings shareholder has been holding out for more, and have been very vocal about the deal. But it seems that they will be swayed here. And the new proposal suggests that Ivan Glasenberg and not Mick Davis will be the joint CEO. Ah well. The Xstrata board still have to approve this. The shareholders do too. But this looks promising for Glencore shareholders. And good news for M&A too.
- Byron's beats
Yesterday we had results from a company we all know very well. Spur reported some strong numbers again reiterating the strength of our growing consumer. Revenues increased by 24.8% to R503 million thanks to successful promotional strategies, card memberships, 12 new Spurs, 3 Panarotti's, 1 John Dory's and the inclusion of 74 DoRego's outlets which the company recently acquired.
Spur is still by far the biggest money spinner. In the South African division, of the R217 million in franchise revenue, Spur is responsible for R155 million of that. The other divisions include manufacturing and distribution which contributed R142 million and the international business which contributed R144 million. In terms of profits as you can imagine the franchise division has much higher margins than manufacture. Of the R175 million in profits Spur contributed R136 million, Panarotti's R7.8, John Dory's R5.8 million DoRego's 0.928 million (4 months), manufacture R55 mil and international R3.4 million. Wow international has been tough. The UK has not been a success but growth into Africa has potential. There was a R36 million loss related to certain legal issues and purchases which brings the overall profit number into balance.
Headline earnings per share came in at 128c which was up 31.3% from last year and a full year dividend of 47c was announced. At 1980 the stock trades on a dividend yield of 2% and a historic PE of 15.5. This compared to Famous Brands who trade on 25.9 last year's earnings looks cheap. Granted when FBR earnings come out next month this historic number will come down as earnings increase.
Arguments for Spur. I like the franchise business model especially in the fast food/restaurant sector. In South Africa we have a growing middle class and I think we underestimate how pleasant a small luxury like eating out can be for someone who is new to financial liberalisation. The Spur brand is great with good food at affordable prices and the company will certainly grow with this brand which can also be a success north of our borders. The company is certainly the cheapest entry into this market compared to Famous Brands and Taste. They are sitting on R90 million in cash which gives them potential for further acquisitions.
Arguments against Spur. The success of a company like this is very dependent on the brands themselves. I am still not sold on Spurs sub brands in what is an extremely competitive market. Not only do we have the local guys but we also have the big international players like McDonalds and Yum! Brands who are targeting Africa for future growth. Spur needs to grow their brand base which will be expensive because they will have to pay up for already established names. That is why we prefer Famous Brands. They have the buying power and the track record for picking the right names. It is also important to successfully manage the previous management which Spur have had issues with.
Conclusion. Good company, good sector, but better options available.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Whoa, stand back from the screens. We had a good chuckle in the office here when someone on the talking screens suggested that perhaps the bears were throwing in the towels. Surely that is not the case. Just like the bulls, a top for the bears is seen as the absolute worst it can get, not so? So the bears should in that case have more conviction than they would have had before. The nerds of NASDAQ was last at these levels a whole 12 years ago. Yes. The last time the NASDAQ was at this level George Bush was campaigning against Al Gore for the presidency of the United States of America. The end of that story was more than a very inconvenient truth for Al Gore. Well, at least Al Gore was deputy president for 8 years in the Clinton era!
The level was also the best level for the Dow Jones Industrials since December 2007. In part it was a much better read on the ADP data too, that clocked 201 thousand leading people to believe that the most important event of the day, non-farm payrolls would be better than anticipated. That is going to be the main event of the day. Forget the Draghi excitement, if this is huge, it will be another major market move higher.
Currencies and commodities corner. Dr. Copper is on a tear as the Chinese have announced early messages about some more infrastructural development. The WSJ, subscription only sorry, has this piece: China to Spend $156 Billion on Infrastructure Dr. Copper is last at 354 US cents per pound. The oil price is last at 95.76 Dollars per barrel. The gold price is slightly lower at 1694 Dollars per fine ounce, the platinum price is also a fraction lower at 1576 Dollars per fine ounce. The Rand is stronger, risk on in a big way. 8.21 to the US Dollar. In a way, this is dragging on the markets a little, the firmer currency. It is all about the non-farm payrolls number today. No doubt about that. Watch on your favourite business television station later, at two thirty pm. Nice.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
011 022 5440
No comments:
Post a Comment