To market, to market to buy a fat pig. Wow, another record setting day on Wall Street. I also saw an FT article that pointed to 15 Greek companies that had raised nearly 4 billion Euros in the corporate debt market. Read that again. I also saw that Nouriel Roubini lost a bet (about a Greek exit from the Euro zone) with a less famous, but more accurate Swiss economist by the name of Beatrice Weder di Mauro. She is a UBS director and now the owner of a bottle of champagne from the broken clock that will get his day in the sun. I remember a journalist friend of mine returning from a lecture that he gave in 2010/2011 (somewhere there) saying that he was going to hide all of his money under his pillow now.
Of course that was exactly the wrong thing to have done, with the benefit of hindsight, because since the bottom in March 2009 (S&P 500 at 666 points intraday) we have seen a heroic rally. In April 2009 he said that the recent rally off the bottom was a mere bear market rally and there would be lower lows. Quite incorrect. It is a darn good thing that he does not manage money for people. Notwithstanding that, "the Nouriel" is apparently a very compelling and engaging speaker with his audience, but he attracts the morbid side in us, the one that always feels like the meteor strike that wiped out the dinosaurs is coming. No. It is not coming, and if it does, it really doesn't matter what equity/fixed income ratio you have.
Perhaps that is what has made us able, as a species, to continually overcome the seemingly unsurmountable odds. Notwithstanding all the natural disasters, as humans we have been the greatest risks to ourselves (through war) with the Second World War wiping up to 3.1 percent of the global population, World War One as much as 3.6 percent of the global population. But that pales into insignificance when measured against the Taiping Rebellion, which might have wiped out as much as 8 percent of the globes population. And yet we bounce back, more resilient and with better technologies all the time. The one that takes the cake of all cakes when it came to human destruction and sufferings is the Mongol conquests of the 150 year reign of terror of that empire, Genghis Khan being the most famous of course. It is estimated by historians that 17 percent of the worlds population was decimated during that time. One in six. Sounds like a meteor strike to me. Confidence in (fellow) humanity must have been at an all time low.
So we live in a world that is far more advanced than ever before, it certainly is not the dark ages. There are a few spots of extreme darkness, North Korea being one, where the people were forced to watch mass executions on video of ordinary folks that were watching South Koreans soapies. Wow. On that score I watched a time lapse YouTube piece on all of the nuclear bomb explosions from 1945 to 1998, 2053 of them in total, with the Russians and Americans being the vast majority of that. 2051 controlled ones and I guess the only two that have ever been used in warfare in 1945.
I guess we could argue that nuclear as an energy option as a result of the Fukushima Daiichi nuclear disaster has suffered a crippling blow. Notwithstanding that, the IAEA (the International Atomic Energy Agency) says that there are 439 Nuclear power stations in 31 countries around the world. Makes you think, did we need all those explosions, or was it part of the ideological muscle flexing going on back then? It could be fair to say that the communists lost that one and that free markets overtook all of that. How did we go from record markets to Nouriel Roubini to human disasters through to energy? Bizarre, time to get back to markets, the stuff we eat, breath and sleep around here.
The S&P 500 closed at a record high and is now within touching distance of 1800 points. The bullish Thomas Lee from JP Morgan raised his year end target on the S&P 500 from 1775 to 1825. Dont fight the tape Tommy, dont fight the tape. The actual quote in a note to clients (from this Bloomberg article -> U.S. Stocks Extend Records on Fed Bets Amid Factory Data) goes like this "The U.S. is in a secular bull market and remaining constructive on equities is warranted".
The Dow, driven by a rise in one of the big ticket stocks, namely Exxon Mobil (Warren Buffett/Berkshire announced they had bought a stake), was driven to all time highs too, closing within 38 points of 16 thousand. And the NASDAQ is closer to 4000 points for the first time since March 2000. Now that was a long time ago, when Cisco was going to be a 1 trillion Dollar corporation, because remember, if you had a cheap valuation (relative) then the market did not really take you seriously. It is easy to get caught up, I guess I get that Allan Gray advert (in black and white) where the folks are running away from distractions. I get that. If only their equity fund over the last ten years had crushed their benchmark, which is the ALSI without income, no dividends. That is an easy way of saying that the TER, the total expense ratio will gobble those up. Performance fees (benchmark and other) gobble up to three percent of assets under management. But that is a separate conversation for a separate day.
Locally Mr. Market got back some of the recent losses, cresting 45 thousand points again. Resources driven mostly. This year really has been a year of many different markets within the broader market, with Industrials in large part being responsible for all the gains. The weakening Rand has lent a big hand in boosting those prices and industrials have to some extent replaced the diversified miners at the top of the list. In many ways South African GDP contributions by sector has changed over the last 20 years and as such the market might (and often does) reflect those changes.
In the US the top employers are WalMart, Yum! And McDonalds. IBM and UPS are in fourth and fifth place, perhaps IBM being the only company with a hugely skilled workforce in amongst all of that! But to think that cheap goods, cheap and fast food employ a lot of people, and then the parcel delivery service for your online shopping. The US economy in 1955 (according to a 24/7 Wall Street article that was featured in the Huffington Post) had companies like General Motors, US Steel, General Electric, Chrysler and the Standard Oil Of New Jersey (merged into Exxon Mobil) as the biggest employers. Only GE has more now then back then. But having industrialised fast the US employs different people in different roles.
Is that a bad thing that we have more retail jobs in South Africa than mining jobs? We are gaining clerical and sales/services related jobs, whilst shedding craft and machinery related jobs. Is that bad? Ideally everyone wants a comfortable working environment to suit your needs, and a sales job in an air-conditioned shop sounds like a more fun working environment than a very noisy manufacturing floor with more dangerous equipment, safety goggles and masks. I am not too sure at all.
But. I still did not answer the very question about markets being cheap or expensive, or in bubble territory, that is very new and is being thrown about. You are seeing headlines like this, from Barrons: Bubble Trouble? Maybe with some segments of the market, but that is how it always goes. But then I saw someone put together this piece: Is the S&P 500 overvalued? From Factset. It is possibly best to just quote the first paragraph:
(H)ow does this 15.0 P/E ratio compare to historical averages? Is the index now overvalued? On the one hand, the index is now trading above both the 5-year (13.0) and 10-year (14.0) average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.2), and is not close to the peak P/E ratio of 25 recorded in the late 1990s and early 2000s.
As you were. No bubble. No nothing. Just a big uptick from a time that everyone was fearful of everything to something that represents closer to normality. And if some market commentators are talking about a bubble when the market trades 15 times forward, then we should be so happy. When everyone sings off the same hymn sheet then that is a bit of a problem, in markets, not organisations. Stay invested, the company earnings will follow. And, what I keep saying is that companies have probably done more to optimise their business in this last 5 years than at any time in the last one quarter of a century. Let me know if you agree with that!
Michael's musings. The private sector cares.
Netcare resealed strong results this morning, with HEPS up 25.4% and the final dividend per share up 19.1%. The biggest news was the group restructuring, where they are deconsolidating their property business (owners of the hospitals) in the UK. The deconsolidation means that they no longer show the property companies assets and liabilities on their books, and only show the earnings/ losses attributed from the company.
Part of the earnings growth is from the weakening of the rand, the group say that the 6.0% of the 10.4% increase in revenue was from the change in the exchange rate.
The most interesting part about the statement was where they talk about their partnership with the Lesotho government. Details about how the partnership works is not given, but they do say it is a pioneering model for developing countries with a budget constrained government. The results of the project were documented by Boston University, where the compared the old public hospital to the new model. Here is an extract from the results, "including a 41% reduction in the death rate, a 10% reduction in maternal mortality and a 65% reduction in the paediatric pneumonia death rate. This was achieved despite the number of hospital admissions increasing by 51% and outpatient visits increasing by 126% due to the demand for services."
Those findings speak for themselves, and show why governments should stay out of the economy as much as possible. My personal opinion is that governments should only provide reliable infrastructure and protect property rights, just about everything else should be handled by the private sector. What does a government know about healthcare? If governments only do the bare minimum in the economy, then taxes will be lower and us as individuals will spend money on the areas of the economy that the money should be going to. Smaller governments, means a more efficient allocation of resources in an economy; resulting in better economic growth and better services (as seen in Lesotho).
Netcare is in a growing sector, as more people join the middle class locally and in the UK as their population pyramid moves towards having a larger older population. If you want to buy into the healthcare space, we prefer discovery.
Home again, home again, jiggety-jog. Markets here opened up, went lower, but are trending higher again. All good. Stock futures are trading higher now, marginally. The S&P 500 should crest 1800 and the Dow 16 thousand, the NASDAQ 4000. Has a nice ring to it.
Sasha Naryshkine and Michael Treherne
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