To market, to market to buy a fat pig. Yesterday was crazy busy, but do remember that this is a shortened week for equity markets. Thanksgiving in the US is celebrated on Thursday and then Friday is a half day. I read an absolutely crazy book last week about a hedge fund trader that fell off the rails so badly that he basically lost everything that he had worked for, absolutely nuts and sort of recommended: The Buy Side: A Wall Street Trader's Tale of Spectacular Excess. Now that fellow who wrote the book (Turney Duff) was told to always work on Thanksgiving Friday, it made you look good. He obviously ignored all the other advice, because he ended up on the mat.
The Iranian map to a nuclear deal (non-enrichment) was a catalyst of sorts yesterday, the nerds of NASDAQ topped 4000 points briefly for the first time in 13 odd years, that was pretty amazing I guess. Except this time in the earnings multiple, or in the PE ratio, there really is a E in that PE. No E = infinite multiple. I was reading the story about Masayoshi Son, the Japanese businessman who supposedly in the dot com era was the hardest hit, at a personal level. He reportedly lost (on paper) 70 billion Dollars. You would have thought that would have floored someone for good, enough to send them to live in a wooden hut in the woods. But Son is back, wheeling and dealing, worth over 8 billion Dollars again and is the second richest man in Japan. You might be forgiven for thinking that Son does not sound Japanese, and you would be right, he is of Korean descent. And that would have been extremely tough for him, growing up in a society where 19 out of 20 people are of an ethnic background that is not yours. I do not want to make too much of it, but it is certainly far easier to grow up in that world today than it was 60 years ago.
Softbank (not a bank, but rather a telecommunication and internet services business went from 4600 Yen in May 1999 to 60666 Yen in February of 2000, before the dot-com implosion. So that is how on paper, Son was so incredibly rich, but by January of 2001 that price was back to 1056 Yen. What the hell? There was no time to even let the dust settle for Son to perhaps calculate that he has "lost". If he took it back to the beginning and then fast forward to today, I am pretty sure that he would have taken it with both hands. Call it a blip. Call it irrational exuberance on the part of (you can't even call them investors) speculators who chased the price to the moon.
Stocks in New York sank from their record levels intraday, ending marginally up or down, the Dow and NASDAQ marginally higher whilst the broader market S&P 500 sank a touch, only healthcare was the sector that managed to end in the green. Locally the industrials trumped the resource stocks, lifting the overall market around one quarter of a percent. MTN was a standout performer, obviously the closer a resolution with Iran and the rest (P5+1), the closer MTN are to being able to extract that money there. There is a Reuters story from October that suggests that there is as much as 450 million Dollars (what exchange rate, US to Iranian Reals is used I am not sure) in Iran. We discussed it in the office and suggested that if "things" were to improve a lot, those Reals would be worth a lot more in Dollars in time, but I am not too sure how MTN would see that. And as I suggested to Paul yesterday, an improvement in the currency and with inflation easing, that would mean that Average Revenue per User (ARPU’s) would start to improve in Iran. All around this is good news for MTN, not bad news.
Sasol released their biannual CFO letter update yesterday, the first by interim CFO Paul Victor, who is in the job temporarily after Christine Ramon quit in August, leaving after the full year numbers on the 9th of September this year. So I suspect that we should see the appointment of either Paul Victor as a permanent person, or perhaps someone high profile who has left the corporate world to take up the top job. Some of the more recent departures have been as a result of personal reasons, or simply retirements. I guess the most high profile retirement coming, in a South African context, must be Brian Joffe. He is 65 years old, and founded the empire in 1988, and I guess he cannot run the place forever.
Back to Sasol however. The big projects seem on track and that will require the level of gearing to rise sharply over the coming years, but not too much:
Our balance sheet still reflects an under-geared position. The low gearing is supported by continued healthy cash flow generation, particularly from our foundation businesses. This low level of gearing is expected to be maintained in the short term, but is likely to return to within our targeted gearing range of 20% to 40% in the medium term, taking into account our capital investment programme as well as our progressive dividend policy.
As we have said a few times however, when the initial announcement this time last year came of the US strategic investment, the piece went as follows Sasol. This changes everything. The way we saw it then, and now: Why does this change everything in our opinion? Because if you do not have a serious presence in the US, even though you posses world class technology at that sort of scale, then prepare for a lower valuation. I guess that is the sad way of looking at it. But it may be sad to think that you have a lower valuation here, in fact many of the oil majors all trade on very low valuations. And Sasol will have to change their profile away from integrated oil and gas company to a technology company, in that space. That is a challenge in itself.
Michael's musings. Taper buzzing and then ... nothing
The word Taper has been the 'buzz' word in the markets recently. What does it actually mean, and does it impact on the way you should be investing? As you will know the US fed is busy with a bond buying program, which is intended to add stability to the economy. The name given to the bond buying program is Quantitative Easing (QE), which is where they are buying $45 Billion a month of long dated US treasuries and then $40 Billion a month of Mortgaged Backed Securities (MBS). Tapering is where the Fed are going to decrease the amount of securities that they will buy on a monthly basis.
Why has the Fed chosen this route to of trying to stimulate the economy? The traditional way of stimulating the economy has been lowering short term interest rates, but going into the financial crisis, interest rates where already low, so they couldn't lower them by much. The solution was to buy long term bonds, which lowers the long term interest rate (the rate used when considering big capital expenditure). The most important thing that the Fed has done has been with their words and the confidence that they instilled in the markets, following on from the famous Mario Draghi words where he said on behalf of the ECB: "We will do what it takes".
By saying that, the Fed has given the market confidence in the future, and when people are confident about the future they increase spending and more importantly they invest in new projects. At this point I would like to insert a line from Sasha's piece a few days ago, "Daily traded volume (on the bond market) of 492 billion Dollars. If the Fed are buying 45 billion a month, that is around 2 billion a day. Excuse for using this analogy, but isn't that like farting against thunder? Less than half a percent of the daily activity" A large part of that 492 billion is probably a result of traders buying and selling and not buying and holding like the Fed, but the small bit that the Feb buy is enough to give the market confidence needed. The Fed announcing that they are going to do what it takes and by stating their objectives, has become a self-fulfilling prophecy, because as a trader/investor do you want to try fight the Fed or go with them? Traders and Investors will be going with the Fed, so the Fed doesn't have to buy much and the traders/investors will do the rest of the buying for them.
The only reason that the Fed will taper is when they think that the economy doesn't need their stimulus. As we have seen their stimulus is a small part of the pie, so when they taper markets might drop, but then markets will realise that Fed gap isn't very big to fill and that the underlying economy is still strong. The thing to remember is that the Fed won't taper until they feel that the economy no longer needs their support, so the taper in the long run should be a non-event.
What if the Fed taper is really bad for markets and their economy? The world economy is not solely the US economy, and the lack of $85 billion a month in a global context isn't very much. The Fed taper should be at a pace where the economy can fill the 'gap' left by less bond buying and if there is a big sell off when tapering is confirmed then use it as a buying opportunity. So keep calm and keep investing.
Home again, home again, jiggety-jog. Stocks are lower. I do not know, take your pick, Fed taper, Greece falling out of the Euro zone, Spain and Italian bond yields higher, oh no wait, those are not concerns anymore. There are moves afoot in the US to impose further sanctions on the Iranians, the timing might not be good here at all. The biggest news of the week must be that the first Diplodocus skeleton might fetch 500 thousand Pounds at an auction on Thursday. Yes. Really. The nickname of one of only seven in the world, semi intact that is. For the rest of the auctioned items, titled Evolution, follow the link. A gigantic lobster for 400 to 600 pounds, stuffed snowy owls for between 1800 to 2500 Pounds, an elephant bird egg for 3000-5000 Pounds, a 10 thousand year old walrus skull for 15 to 20 thousand Pounds and the list goes on. You know what. Let us stick to owning businesses which have a quoted price.
Sasha Naryshkine and Michael Treherne
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