To market, to market to buy a fat pig. It is hard to get a "sense" of it all, one week the collective is distraught at the ending of the Fed action, the next week the interpretation of the same said Fed seems to point to easier monetary policy for longer. The only "thing" that irritates me a little is that good news might well be interpreted as bad news, because that would mean that the Fed will wind down their bond purchasing program.
I always fall back to this Cullen Roche piece -> Stop With the "Money Printing" Madness. I think the points are well made, the Fed has the ability to extend the banks the necessary liquidity to extend the loans, but if the banks fail to make the loans then there is no "money created", right? See that first point: "Banks create most of the money in our system. Loans create deposits and deposits are, by far, the most dominant form of money in the economy. So, if you want to say someone "prints money" you would be most accurate saying that banks print money." And because banks, at best, have been a whole lot more conservative than in the lead up to the financial crisis of 2008, businesses (small and medium) mostly have struggled to secure credit lines.
Credit for individuals has been much harder, even here in South Africa, contrary to popular opinion. I was going through the Capitec results not so long ago (about two weeks ago) and the number of people turned down for unsecured loans in South Africa far outnumber the loans granted. And whilst the non-performing loans ratio might be too high for many to stomach, the banks on balance in South Africa have been very good, relative to their developed world peers in the last two decades. There was actually a web reference to a thesis done by Sipho Makhubela (a quick Google search suggests that he is just down the road here) for his MBA at the University of KZN, Westville campus on Causes of bank failure in the post democratic South Africa. It is pretty old, but relevant, have a skim read!
All I was looking for was the list of the banks that had fallen over, and a short bunch of reasons, I got more than I bargained for. I did not read the whole lot either, that I promise, time is precious. The list includes (since 1994) Prima Bank, Sechold Bank, African Bank (not related to the one that you know, only by name), Community Bank, Islamic Bank, FBC Fidelity Bank, New Republic Bank, Regal Treasury, Saambou and BoE. A pretty short list, but because the South African banking arena is NOT fragmented, they are usually upsetting and irregular.
As each banking crisis passes you would expect each and every regulatory environment to continually update their reality (the rules are almost always behind the curve) so as to make sure that they exclude the past loopholes and limit risk taking. But I am always mindful that the next financial crisis globally is being brewed right now, and being hatched somewhere else. As Jamie Dimon (CEO of JP Morgan Chase) answered when his daughter asked "what is a financial crisis", he simply replied something along the lines, "oh, it is something that happens every seven odd years".
Let us quickly recap Mr. Market on Friday, locally the Jozi all share index closed nearly half a percent better on the day. The rally was largely driven by financials and banks, who had endured a horrid session the day before. Resource stocks sank, Sasol was amongst the best of the majors, being driven higher by elevated oil prices and a Rand that has been weaker for longer. Results however are not for a long time, expectations are for early in Spring, around the 9th of September, according to the Sasol investor relations section of their website. Last year we had a trading update on the 8th of August, so I am pretty sure that in the next three weeks we should have a fair idea of earnings for the full year.
Over the ocean and two thirds of a days flight away, the markets on Wall Street managed to register modest gains, nearly one third better for the overall market, another closing high! Blue chips (the Dow) were dragged lower by the Boeing Company, which was down 4.69 percent on the session. Why? A fire broke out on an Ethiopian Airlines 787 on the runway at Heathrow on Friday. Even though as far as I understand it, the plane was parked and not going to fly, but was scheduled to fly soon. The Queen of Sheba was the name of the plane. I remember when I was young, that question was always asked, "who do you think you are, the Queen of Sheba?" I suspect that meant royalty. In other words, get the milk and biscuits yourself!
Helping themselves to milk and biscuits whilst we stay on the banking theme, Wells Fargo reported record quarterly net income on Friday. This was for the second quarter of the year. Size and scale, the mind absolutely boggles when you read through the numbers. Deposits at quarter end of 941.2 billion Dollars, roughly 9.4 trillion Rand. Non-interest income for the quarter (which was lower than the prior quarter) was 10.6 billion Dollars. If you annualise that, you get to 42.4 billion Dollars, around 420 billion Rand, which is not much less than the entire market capitalisation of Standard Bank, FirstRand and Nedbank combined (437 billion ZAR). Size and scale folks!! Massive.
What is most interesting is that in the last washout there were big time losers and those that handled themselves better. Remember that not everyone wanted the TARP money, but some took it. Wells Fargo stock is trading near their all time highs. Citi, over the last ten years is down nearly 89 percent, you have effectively been wiped out. What are the chances of the stock being a ten bagger over the next decade? Virtually nil at that size and scale I am guessing. Often when investing in a banking institution, you might be puzzled why it is important to align yourself with big shareholders.
And in this case it might well be, what is good enough for Warren Buffett's Berkshire Hathaway, is good enough for me. Berkshire owns 8.66 percent of Wells Fargo. And they are the biggest shareholder by quite some margin, double the second biggest, which is Vanguard. No doubt through ETF holdings. The stock has had an amazing year to date, but has actually underperformed both JP Morgan and Citi, not by much. We might well be in a wait and see stage for financials. Still, the stock trades at less than a 12 multiple, with a yield of 2.8 percent. Seems like good value to me.
Byron beats the streets
Over the weekend we saw Chinese GDP figures which, throughout the years have become more and more significant as the economy has grown. Compound growth is an amazing thing. The number came in at 7.5% growth for the second quarter which was in line with expectations and in line with government's goal of 7.5% for the whole year.
This WSJ article titled China Slump Ripples Globally has a look at the numbers and also interviews a few businesses who have been affected by the slow down. As you can see the trend is obvious, China is turning into a consumer based economy while the infrastructure boom is definitely slowing. Here are the numbers from the article looking at growth in the different divisions.
"China also said Monday that industrial output rose 8.9% in June from a year earlier, compared to a forecast of 9.1% and lower than May's 9.2% growth. Fixed-asset investment also disappointed slightly, with 20.1% growth in the first half compared to a forecast of 20.2%. Consumer spending was a bright spot, as retail sales accelerated to 13.3% in June, compared with 12.9% growth in May. But disposable income growth for urban households slowed, to 6.5% year-on-year in the first half, down from 9.7% growth in the first half of 2012."
I think this is a good trend for everyone. Consumption growth is more sustainable and the Chinese government know this. They are even implementing policies to encourage it. Increasing minimum wages, lowering interest rates and altering taxes to support consumption, to name just a few. This has two long term implications which immediately spring to mind. Firstly this is the Chinese government's way of preventing a massive bubble burst. They are helping the economy evolve while trying to avoid human natures greedy habit of over exploiting anything that is good until it collapses. A strong Chinese consumer will then benefit everyone who supplies them with goods. We have seen this with the US economy and the knock on effects have been beneficial for the whole globe.
The second thing that comes to mind is commodities. Why are we so heavily invested in BHP Billiton if we believe the infrastructure boom is slowing down? Because Billiton have the diversity to benefit from the shift. As economies evolve they consume more energy and food. BHP Billiton have huge projects on the go in gas and potash. This company has picked up on the Chinese trends long ago and have geared themselves for the change.
There is another huge benefit here that not money people mention. Because Chinese demand for commodities has slowed, everything has become cheaper and inflation has been non-existent in most developing countries. That has allowed the US and Europe and to keep interest rates low in order to boost their own economies. If inflation had reared its ugly head the US economy would not be in the great position they currently find themselves.
Home again, home again, jiggety-jog. The Rand has caught a bid. It must be because we have five year olds from East London that are champion chess competitors. Chess is not a sport is it? Wiki reckons that one {can't say the word, use "session" instead"} lasts between 10 to 60 minutes. Phew. I must be either useless or can't think ahead too much, my problem is almost each and every time I partake, I take too long! Markets are modestly ahead in another big week for US earnings. Ours starts next week. Real market "stuff"!
Sasha Naryshkine and Byron Lotter
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