To market, to market to buy a fat pig. Mario Draghi dovish guidance was enough for markets across the globe to feel positive again. And the ECB and Bank of England agreed to provide the market with more information. Because somehow that will make everything better and time to feel ok about the future. No, wait, just remind me, the Fed suggested that the bond purchasing program was going to end, and they signalled that. When they said that, let us just say, it wasn't better. So whether central banks supply longer dated guidance will smooth people towards making less hysterical decisions, that remains to be seen.
The release is available there for all to read, it makes for fun interpretation: Mario Draghi, Frankfurt, 4 July 2013. The key line that got everyone excited was: "The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time." Extended period of time? I guess that means different things for different people. He was asked the question and replied with his extreme coolness: "It says an 'extended period of time'." So he said that, and he means that. Economics, not an exact science. And of course economics is always answered, on the one hand this and on the other hand that. Always hedging your bets there!! But having indicated this, it means that the sunlight is a way away.
Markets globally, even without the Americans, celebrated a solid day of gains, we were not excluded from that rally. Today the European gains are muted ahead of the next big event. The Japanese market surged another two percent, I wonder if it is even worth watching that volatile market! You are only likely to reach for the tums.
Well, it's jobs day.... again...and that must mean we're glued to our screens waiting for the forecast from the Labor department in DC, to tell us if the "jobs situation" continues to improve. I reengineered that line from Phil Connors out of one of my favourite movies, Groundhog Day.
The jobs data, or as the Labor department in Washington DC refers to the report as the "jobs situation", is unfortunately sandwiched in-between the July 4th Independence Day holiday and a Friday. So there are plenty of people who have taken the day off today. I am very sure that they will be watching from a distance however, even if that distance is the Hamptons. It must be one of the most well known places to have a population (permanent) of around ten thousand folks or so. Tell that to the folks of Xiamen, a Chinese city with a population of 3.7 million!
Expectations, what are they today? 165 thousand new jobs created for the month of June and an unemployment rate of 7.5 percent, unchanged that one from the month prior. People are expecting the workforce to expand again after having contracted for an absolute age. Hours worked and pay, watch out for those too, and of course the revisions.
Now listen in a little, because this is the part that is harder to understand than normal. If the data is good, and is better than anticipated, then how will the collective react? And if it is much worse, then bad news is bad news, right? Well, the gold bugs might not view it that way and the hyperactive gallery might be happy with a miss either one way or another. A meet at every level could be the worst outcome for the networks. What then with the octoboxes and shouting like mad guests? What then? Boring makes for bad viewing. But a terrible report might lead the short termers to believe that the Fed are going nowhere for now, and that is good if you like the so called liquidity fix! A very good report might have the opposite impact, and the Fed taper angst might return in a flash. For us around here, good news is good news. Bad news is bad news. Interpret what the Fed or anyone else is going to do from there at your own peril I think.
Byron beats the streets
Yesterday we received a SENS announcement from African Bank with the details of a recent Moody's assessment. Although deposit ratings were unchanged the outlook was changed from stable to negative. Fair enough, following the recent write-down the business made a lot less money than was expected in this last half. Ratings agencies have to look at the businesses ability to pay back loans and if the business is less profitable then the risk increases. Here is what Moody's had to say:
"Moody's said that African Bank originated credit has remained within their expectation and was not the driver for this change in outlook. The Agency however indicated a concern that, based on ABIL's interim results released in May 2013, asset quality on furniture-related credit may deteriorate more than they had initially anticipated. This, together with potentially weakening profitability on the back of lower yields and increasing provisioning requirements precipitated a downgrade in their outlook for African Bank. The Bank's high capital levels continued to support the current ratings."
There are 2 things to look at here. Firstly, it is the furniture business (Ellerines) that is being singled out as a problem area. I have touched on this before when comparing Ellerines to Lewis. It is quite clear that although the furniture industry is tough at the moment, Ellerines are losing market share and need to up their game. Maybe they have put too much focus on using the stores as kiosks rather than on what is important, selling furniture. That is an internal issue however that needs to be fixed.
The second point to note is the potential weakening profitability from lower yields and increasing provisional requirements. I have also touched on this before, the interest rate environment is cyclical and it is something this business will always have to deal with. The market knows this and it is factored into the price. An increase in regulation is also to be expected as the industry has been in the lime light for a while now about a potential bubble.
I have often stated my opinion about ratings agencies. I feel they are way too reactionary and although they play a role in how to judge a potential investment, I feel that role has diminished somewhat after the financial crisis of 2008. African Bank was up 2.2% yesterday and we still feel it is extremely undervalued at current levels.
Home again, home again, jiggety-jog. Can you believe that Alcoa have results on Monday evening after the market closes. You know what that means, earnings season for the second quarter of 2013. My favourite four seasons, first quarter, second quarter, third quarter and fourth quarter earnings. You could argue that even that is overkill and bombarding the market with information and guidance all the time seems like a little too much for me. But, it has been engineered that way and much like the monthly non-farm payrolls number, there is always a great deal of energy and excitement. For us here these numbers are more important than worrying who is or isn't the finance minister of Portugal.
Sasha Naryshkine and Byron Lotter
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