Dividend bonanza
"Dividends are a portion of earnings that the company pays out it to its investors. The company makes the decision after all other cash needs both now and in the future. Obviously there are other factors to consider but that is the simplified version. So this means that companies are making more money and can afford to pay it out to investors. It is a good indicator of the financial health of a business."
To market, to market to buy a fat pig. A much better day for the local bourse, in fact globally a much better day. It was Canada Day, and equally the first non British citizen to head the Bank of England is a Canadian fellow, Mark Carney. The poms do get ahead of themselves, Jimmy Anderson is not the best bowler in the world. Surely the rankings are there for all to see. I do not envy Mark Carney, he has a tough job ahead of him. In the age old tradition of English tabloids, Carney was reported to have taken the tube to work yesterday. Carney is the 120th governor of the bank of England. The first fellow, according to Wikipedia was a chap by the name of Sir John Houblon. I wonder if there was any operation twist and I wonder what the information stream was like to the market back then.
Non-existent I guess, perhaps he reported directly to parliament and the Queen at the time, Mary the second. And then there was William the third. Confused about royalty all the time around here, I can't figure out the fuss about being born into a family where your ancestors invaded a place and set themselves up as the leaders! William III of Orange is a perfect example, sending the future family of James II into obscurity. I suspect that there is no better time to be born a royal than today. Nobody is going to storm the castle and depose the incumbent and place themselves as the rightful heir.
Away from that pomp and ceremony and back to the nitty gritty of equity markets. Retail stocks enjoyed a cracking day yesterday, adding over three percent, resource stocks and in particular gold stocks comfortably outperformed the broader markets. The Jozi all share index started the second half of the year with a 0.9 percent gain to settle just below 40 thousand points. Overall the market is around 5 percent off their year highs. Over on Wall Street, in New York, New York, stocks closed comfortably off their highs for the day.
Initially stocks were buoyed by the June 2013 Manufacturing ISM Report On Business PMI, a good report that beat expectations. And that is how humans are conditioned in markets, a beat of expectations. Earlier in the session the European PMI numbers were all largely better than anticipated. Hey, on that score I remember back in the first quarter when everyone was anxious about the outlook for the manufacturing numbers because of the automatic cuts in spending from government. Now, because market participants have the short term memory of a goldfish, that doesn't seem to matter anymore.
There was also a positive May 2013 construction number that increased by 2.1 percent when measured against the prior May. What the Americans often neglect, and this is because they are used to the sheer eye popping size of the numbers, is that a seasonally adjusted annual rate of 874.9 billion Dollars might not be that impressive to them, but it is absolutely huge to almost everyone else. Relative to their economy of 14.99 trillion Dollars that is 5.8 percent of their overall economy, but bigger than the annual GDP of Argentina or Poland. And if we added another fifty percent annual economic output, that would equal US construction spending for a year. That feeds *nicely* into the next piece.
There is a certain anxiety about slowing Chinese growth. Sometimes however a bit of perspective is needed. Once you have built a base, and you have done it quickly, expectations rise quickly. Let us put this into numbers. According to the Google database of these numbers, in 1993, twenty years ago, the Chinese GDP clocked 440.5 billion Dollars. Ten years later the number had increased a little less than fourfold to 1.641 trillion Dollars. Fast forward to the expectations for this year. Nominal GDP is expected to grow to 8.8 trillion Dollars, if the Chinese economy can grow by seven percent this year.
In recent days, various investment houses have even suggested a three percent growth rate in China inside of the next three years. What would that equate to? Well, presuming that this year we have seven and next year we have five and then four after that, and then to three percent growth in 2017, what would that number be? Well, I can tell you, that it would be roughly 70 percent of their entire economic output from 1993. Sounds just fine to me.
The Chinese economy cannot grow at 10, let alone 7 percent forever. A slowdown to more consumer led growth is inevitable. Is there a housing bubble? Probably. Chinese company debt issuances are growing at a rapid rate, as the underlying businesses look to expand. A recent Forbes article suggested that Chinese non financial businesses could look to issue between 16 to 18 trillion Dollars of debt. What matters not is the quantum, but rather the ability to be able to repay the debt timeously.
Should you worry about Chinese interbank liquidity? I guess it is important. Do you think that the Chinese authorities are on it? Yes is the short answer. The future is cloudy as ever. We have no way of knowing whether the Chinese economic miracle of our time has the legs to continue the momentum. My sense is that the Chinese consumer is ripe to become a bigger portion of consumer spend globally. The Chinese are only around 5.3 percent of global consumer spend, but on the list, Household final consumption expenditure percentage, they keep company with Libya, Kuwait, Saudi Arabia and Chad.
China households spend around 37 percent of their budgets on consumption, comfortably below India (57 percent), Russia (55 percent), Brazil (60 percent) and South Africa (61 percent). So think that if that number rose by 25 percent to roughly 50 percent how significant that would be for the consumer based businesses globally. Less house buying and crazy saving, more consumption based economy. That is the direction that the Chinese are trying to massage their citizens. It is not easy, but doable.
Byron beats the streets
We have just seen the end of the Q1 earnings season in the US. We often make a big thing of earnings season and rightfully so. It tells us what is actually happening on the ground and how companies are finding business conditions. It is far more important than economic data in my opinion, but of course is not the whole part of the puzzle, just a very important piece.
So what have we gathered from this latest earnings season as a collective? According to a Reuters report Q1 earnings grew 5.4% compared to the first quarter last year. 66% companies beat earnings expectations while 46% beat revenue estimates. The trend of cost cutting and the efficiency controls are still clear.
An article from stock picker and blogger Eddy Elfenbein titled S&P 500 Dividends Grew 15.49% in Q2 is an interesting precursor to what to expect from Q2. The title gives a lot away but there is more to it. As he mentions, this is the tenth straight quarter that dividends rose by more than 12%. He also points out that the dividends paid out from the S&P will be double what they paid ten years ago. This is after a couple of market hiccups on the way.
What does this tell us? Dividends are a portion of earnings that the company pays out it to its investors. The company makes the decision after all other cash needs both now and in the future. Obviously there are other factors to consider but that is the simplified version. So this means that companies are making more money and can afford to pay it out to investors. It is a good indicator of the financial health of a business.
A graph from his article which shows that dividends have comfortably overtaken the highs of 2008. This is another reason why markets in the US are justifiably at their current levels. Investors have been attracted to these stocks because as an asset class they offer some of the best yields in developed markets.
As one earnings quarter ends another begins. Alcoa release earnings on the 8th of July which will announce the start of a whole new stream of information from companies operating all over the world. As always we will process and cover the relevant companies as the news flows in.
Shorts. Eat these ones.
If I did not see this with my own eyes, I would have scarcely believed it. It takes some getting used to that the US is becoming the leading oil producer globally: No. 1 US produced more petroleum in March than: a) Saudi Arabia, and b) Europe, Central and South America combined. Resource abundance in the US, and all thanks to having embraced the shale oil and gas revolution. Now, about that fracking in the Karoo, let us talk about it for the next 10 years, OK. Oozing sarcasm in that last sentence, apologies.
Blackberry used to be the phone that everyone wanted, it could get your email anywhere and you could chat to your specific group. Now every single smartphone allows you to do all those things and much, much more! To illustrate how much market share Blackberry has lost, read this article: The Crucible of the Phone Market. The graphics are astonishing. "It becomes immediately evident that BlackBerry has lost a huge part of its user base to Android and iOS. In 2.5 years market share went from about 42% to 8%. In raw numbers that's 11 million users that switched to another smartphone." Wow, how the once mighty have been reduced to also rans.
Nobody knows what the future holds. But you get folks who try and predict what the future holds for mankind, and in particular innovation. This interesting graphic that I found tweeted via Aki Anastasiou (the traffic and technology fellow over at 702), titled Tomorrow's world: A guide to the next 150 years is fun, and interesting. These are folks betting, and being given odds, because as you know, the poms bet on everything! World government in place by 2030? Really? A 10 kilometre high building by 2050? Tax abolished in the US by 2100? Admittedly that is a long shot. According to Wikipedia: "In 1894, Democrats in Congress passed the Wilson-Gorman tariff, which imposed the first peacetime income tax. The rate was 2% on income over $4000, which meant fewer than 10% of households would pay any." Seems like governments need more nowadays, perhaps they need to get more efficient.
Home again, home again, jiggety-jog. European markets have all been teed up for a modest fall this morning, as a result of the US markets closing off their highs, having halved from their session highs. I suspect that we will follow suit here and open lower. Later this week there are of course US employment numbers in the form of the non-farm payrolls. We will get the ADP numbers tomorrow I think, that is the usual cycle. Of course the hyperactivity and the octo-boxes will fill our screens and we will be led to believe that this is the most important jobs number ever. Even though nobody remembers what it was six months ago.
Sasha Naryshkine and Byron Lotter
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