Money with a dash of Funny

Tuesday, 10 July 2012

We need more jobs. Seriously.

"All in all it makes for pretty ugly reading. In fact for a much smaller sized population and economy relative to the US, the job losses of 82,520 folks over two months locally is a pretty poor showing. The only good thing I guess, is that the informal sector continues to grow employment numbers, but not enough to pick up the slack."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Well, let us just say that the Europeans were not all to blame for this sell off, it was also the Americans with another poor show on the jobs front. Jobs are just not being added fast enough, perhaps the only beneficiaries are the Republicans currently, although Mitt Romney's fund raiser over the weekend attracted some choice comments that were more than just eyebrow raisers, they were just plain rude. Check it out, it is in some parts quite funny: Mega-Rich Donors Live Up To Stereotypes At Romney Fundraisers In The Hamptons.

That juicy quote from a clearly very wealthy person, tees up the headline perfectly: "But my college kid, the baby sitters, the nails ladies - everybody who's got the right to vote - they don't understand what's going on. I just think if you're lower income - one, you're not as educated, two, they don't understand how it works, they don't understand how the systems work, they don't understand the impact." Ouch. And of course the mainstream is using that quote to their advantage, come on lady, poor dumb people just not getting it? Seems like those Botox "treatments" might have actually gone through your skull. And into your grey matter that seemingly "gets it". Election time, you have to love all the ugly tricks and antics. Having said that though, I saw a post yesterday that suggested that the top 400 American tax payers pay more tax than the bottom half of the other 138 million registered federal tax payers in America. Don't believe me? Check it out: Top 400 Taxpayers Paid Almost As Much in Federal Income Taxes in 2009 as the Entire Bottom 50%.

OK, back to the local market, where we saw the Jozi all share index sink 296 points, or 0.87 percent to 33930 points when all was said and done, dragged lower by resources, which closed nearly a percent and a half lower. Banks caught a bid, and added nearly 0.4 percent, the problems in both the US and the UK have been fairly well documented. The Rand weakened as the concerns about Europe were highlighted with the Spanish bond yields rising above 7 percent. Again. {Sigh}

I suppose of it is any consolation, at least there is an immense attraction for the local bonds, for our government bonds which continue to sail into unchartered territory as far as the yields are concerned. During the month of June, according to this piece (S.Africa bond ylds hit new lows but political risk looms) from the folks over at Reuters, we saw inflows to our bond market to the tune of 20 billion Rand. And the yields of the shorter term debt (2015) have dipped below 6 percent. South African government debt maturing in 2021 however has a yield just above 7 percent. So, in essence this is comparable to Spain. So, whilst Spain might not be Uganda, or such other country, South African yields are comparable to Spanish yields.

Political risk my friends, whether you believe it to be true or not. We also share another dubious statistic with Spain, a very high unemployment rate and a much higher than the average rate youth employment problem. It is not a "challenge". It is a problem. And just this morning the labour picture in South Africa looks a little poorer, as per the Adcorp Employment Index, June 2012. Most of the job losses have been (if you scroll down and have a look at the tables) in the mining sector (a whopping 8.05 percent fall), Manufacturing (a depressing 4.46 percent fall) and construction (down 4.66 percent) as well as a broad category "Transport, storage and communication" (which fell 8.56 percent).

All in all it makes for pretty ugly reading. In fact for a much smaller sized population and economy relative to the US, the job losses of 82,520 folks over two months locally is a pretty poor showing. The only good thing I guess, is that the informal sector continues to grow employment numbers, but not enough to pick up the slack. If I had to put that number into and American context, that loss of 82 thousand jobs of two months, the non-farm payrolls number would have clocked around 300 thousand lost jobs, if I just compare the sizes of the labour force (7.5 times the size of ours). There would be no way in hell that Barrack Obama would be re-elected with labour numbers like that. These calculations of mine are on the fly, and would require some looking at carefully. See if I am right, I am taking this Adcorp data and taking the "employment situation" as per the Department of Labor in the US website, and coming to pretty "fast" conclusions. Either way, we are losing jobs whilst the US are gaining jobs, albeit at a slower pace. Neither makes me feel particularly good.

Byron's beats takes a look at some local company news, and an Indian acquisition.

here is the release

At the end of October 2008 both shares traded at R30 a share. Both were doing well all the way up until Jan 2010 when they started to diverge. Adcock now trades at R60 while Aspen sits at all time highs just below R130. But where did these guys differ?

In May 2010 Aspen announced the acquisition of Sigma, an Australian drug company for a whopping R10bn. It was criticized by many as it was during a time where the likes of Pick n Pay were trying to exit Australia because it was so hard to do well there.

When Aspen released results in March this year it was very clear that the Sigma deal had saved them. The South African division had completely under preformed due to increased competition and less ARV's required by the government due to donations. In 2010 South Africa was responsible for 62% of EBITA while Asia Pacific contributed 8%. In 2011 SA dropped to 39% while Asia Pacific contributed 34% to EBITA. Profits were up 28% that period all thanks to the Sigma acquisition.

Had this deal not been executed Aspen could very well be trading at R60 today. The share looked expensive and investors had high expectations for growth. But not many knew how tough it was operating in SA that year. What is my point here? There are 2, the benefit of diversification and the value of a good management team.

Here, diversifying geographically was the key. They saw an opportunity in Sigma who were struggling but had access to the lucrative Asian market. Adcock who do operate throughout Africa are still very reliant on SA. I saw an interview with Aspen CEO Steven Saad fairly recently and he explained how difficult the Sigma deal was to execute. Sleepless nights spent negotiating in boardrooms often goes unnoticed. And this is why management is so key. Yes, they have the incentives to do well and are big shareholders themselves but when you watch that Aspen share price go up and up you must realise that things could have been very different and a lot of hard work is being done. Hence why we are happy to stick with Aspen for the long term even if at times the share looks expensive.

As for Adcock, this move seems good in principle and rather late than never. Whether the acquisition will be successful or not depends on management's ability to buy the right assets. We can only wait and see.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. The real wait was for afterhours and the start of earnings season, but the normal trading session saw trading action swing in both directions, but end in the red after all was said and done. Again, the last hour of trade saw Wall Street end comfortably off the lows, the late buying bias. Equally the opposite often happens, perhaps this is Joe Public getting back into the market slowly after a period of withdrawals, I will check that out shortly.

The kick off of earnings season started with not necessarily two businesses that would make for investment grade, but nevertheless decent enough indicators of the US economy. Alcoa, which of course is the aluminium (or as they say in America Aloo-min-him) producer, is an indicator of the economy. I guess that is so, because Alcoa sells aluminium products to the aerospace, automotive, heavy truck & trailer, beverage can packaging, construction and gas turbine industry. Many of those industries themselves are indicators of where the local market is going. Trucks, planes and automobiles. Without spending too much time on the Alcoa numbers themselves, let us have a look at what is normally the most important slide (for me) in the Alcoa presentation, is the following 2012 Market Conditions slide:

Look at the global picture, all looking just fine to me, considering the issues that everyone has to contend with. About the only number that stands out for me is the massive beverage can packaging growth in China. Amazing, expectations are for nearly 20 percent growth. Europe is the clear laggard. I am going to pay attention to this slide over and again, to get a sense whether or not the European region is improving. Pre market the stock is flat, and over a year however the price is down 40 odd percent.

Currencies and commodities corner. Dr. Copper is last at 343 US cents per pound, the gold price is higher at 1593 Dollars per fine ounce, whilst the platinum price is slightly higher at 1441 Dollars per fine ounce. The oil price is lower at 85.51 Dollars per barrel. The Rand is firmer, last at 8.17 to the US Dollar, 12.70 to the Pound Sterling and the Euro at 10.11. We are seeing improving markets as the day goes on, the poor (rich) chairman of Barclays is taking a pasting from politicians on our screens as we speak. Pfff.... but as Paul pointed out, from what he read on Twitter (via Sarah Butcher): "At the moment Barclays is paying 3 times more in bonuses to top executives than it pays in dividends to shareholders." That is an issue for shareholders, who should be more vocal with this.

Parting shot. Yesterday I messed up, I can't believe it. Sometimes one says things without thinking them through properly, I knew what I wanted to say, but it came out wrong. I was on Power Lunch on CNBC and at the end of the interview I meant to say "Good headlines and cheap stock prices don't normally go together" but rather what came out was "Bad headlines and cheap stocks don't come along together". Dumb. What an idiot. And it took me until I got back to the office to recognise that I had actually said the wrong thing. But that holds true, bad headlines DO go alongside cheap stocks, and whilst we continue to see the prices subdued because of the European flipping and flopping, that will have proved to have been an opportunity over the medium term. And if you were wondering what medium term means around here, it means 3-5 years and much more for long term. Long term is 7-10 years, don't let anyone else tell you otherwise. But like we often say, borrowing a line from many others in our industry, my favourite holding period is forever.

Sasha Naryshkine and Byron Lotter

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Monday, 9 July 2012

My favourite season is earnings season

"In the last earnings quarter nearly 80% of companies beat earnings expectations and out of the ones I looked at, most of the beats came from developing nation growth. This is why I am slightly worried about the numbers coming through this quarter. As ever, it will be really interesting to see what companies say about the conditions that they are currently operating under."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. After starting better here, and enjoying a decent day, the rally was scuppered by the release of the non-farm payroll numbers, which were lighter than anticipated. And worse than the market expected means that the selling starts, the Jozi all share index closed down 51 points, or 0.15 percent to end at 34170. I guess you could say that this is not very good news, US unemployment data in the last three months has been weak, but so then has the economic news, European austerity and uncertainty has weighed heavily globally on markets, I suspect that the Greek elections and the Greek momentum had a lot to do with confidence (lack thereof) during the first part of the quarter just past. And by no means is the European crisis finished, it is ongoing all the time as governments try and balance growth and austerity

A trading update from Kumba Iron Ore on Friday looked weak, but once again this is as a result of the same factors that we were referring to above, a slowing European economy which is resulting in a global slowdown. As Byron often says, if someone does not need a new washing machine in Spain or Italy, and the goods are manufactured in China, well, that means less business for the Chinese. And that means less demand for the raw products too. ALTHOUGH, the internal consumption story in China is one that still continues to impress the pundits, or so I am led to believe. China still has a relatively unbalanced economy. But back to this main story, Kumba Iron Ore expect earnings for the first six months of the year to clock 7.1 to 7.5 billion Rands, which on a per share basis is between 22.10 ZAR to 23.40 ZAR. Which on balance sounds good, and the share price is acceptable at 559 ZAR a share, bearing in mind that the distributions have been amazing. The payout ratio in recent years has been around 80 percent of earnings.

The first six months of last years' earnings clocked 28.20 ZAR per share, so we are going to see a comfortably lower set of earnings relative to that period. The full year number last year was 53.13 ZAR a share (24.93 for the second half), with 44.2 ZAR paid out to shareholders by way of dividends, including Anglo American who are a nearly two thirds shareholder. The reason for the lower earnings are explained in a simple one liner and are "largely attributable to a decrease in export iron ore prices in the period". I have been watching the monthly change at the SA ports, and the key one (as far as Kumba Iron Ore is concerned) to watch here is Saldhana Bay, where the volumes have been growing. Indicating that the volumes should be slightly higher, remember that in the second half of the year last year, production fell. What is different this year is that the newly "opened" Kolomela mine, which should produce between 4-5 million tons per annum this year and 9 million tons per annum from next year, 2013. Total sales last year were 43.5 tons, it will possibly be the number to watch.

But I thought, let us check out a five year iron ore pricing graph to see what Kumba Iron Ore are talking about, which I sourced from here: Iron Ore Monthly Price - US Dollars per Metric Ton. Here is the graph, which just shows the highs and lows and recent price.

These prices are average monthly prices and are perhaps a blended price of the spot market and the contract prices. You can see at the bottom left, the prices were set annually by the majors in a negotiated settlement with the steel companies. And then everyone kind of set that as the benchmark. I was trying to do a simple back of the matchbox type iron price, with the first six months of last year seeing an average price of 177 odd Dollars per ton. For the six months just past the price is roughly 20 percent lower at 141 Dollars per ton, that was the simplest calculation that I could do. Helping Kumba out would be the weakening Rand to the US Dollar. The results are expected to be released around the 20th of July.

Beware the one commodity stock is the message I guess, this no doubt is weighing on Exxaro too, which is lower on this news, and another piece of news that was pointed out to me this morning. Iluka Resources, which mines zircon missed earnings expectations by a country mile. It is an Australian mineral sands mining company, and from what I have read have blamed almost all the worlds markets for having missed almost every metric that analysts find important. Zircon is used in the making of ceramics, fancy plates and tea cups and so on, think your grandmothers finest tea cups when you were a kid! It is also used in construction, another sign that the Chinese economy is slowing. We do not have to wait too long to find out, the Chinese release their second quarter GDP number on Friday (expected 7.6 percent), as well as retail sales (expectations are for a 13.5 percent jump) and industrial production (9.8 percent growth expected). This without a doubt is the single biggest release of the week and no doubt will have everyone focused.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Non-farm (as opposed to NO farm payrolls, that would have been worse) payrolls clocked 80 thousand new jobs for the month of June, and the quarter clocked the worst seen since 2010. Well, I guess the optimistic types would be tempted to say that at least jobs are being added here. And you remember that piece that we posted on Friday, which suggested that the unemployment number would have been a whole percentage point lower if the government had kept all their jobs. But the unemployment rate remained the same, at 8.2 percent and government changes in jobs were not that bad for the month of June, recording a loss of 4000 only, state and local government jobs lost are 586 thousand since December 2008. Wow. So, on balance you could argue that the system itself is working, getting rid of unnecessary government jobs when the tax receipts fall, and now might be seeing a stabilization of that trend. Session end all the indices closed higher, off their worst point, reversing that trend in the last hour or so. Losses for Blue chips and the broader market were lower by one percent or so, whilst the nerds of NASDAQ sold off by 1.3 percent.

Byron's beats looks into the most favourite of seasons over here at Vestact, earnings season. There is earnings seasons from quarter one through to four, so that is like football, cricket, rugby and athletics seasons, but these are the same teams participating. And we get roughly a month and a half from each season, around half the year is spent with proper markets direction from companies.

In the US they report quarterly so this happens 4 times a year. So far the economic data for this quarter has been negative and I have a feeling we will see this showing up in the earnings numbers. I say this because we already saw numbers from Nike (whose economic calendar differs from the rest) which showed weaker demand from China. If that is a theme we see throughout these companies we could be in for a wild ride.

In the last earnings quarter nearly 80% of companies beat earnings expectations and out of the ones I looked at, most of the beats came from developing nation growth. This is why I am slightly worried about the numbers coming through this quarter. As ever, it will be really interesting to see what companies say about the conditions that they are currently operating under. Forward looking statements will also be very interesting and can move share prices extensively depending on the sentiment of the statement.

I've always said it is a lot more constructive to listen to what a company like Caterpillar have to say about demand in China than a 70 year old professor who spends the majority of his time in an office. Of course you have to try and filter through bias issues.

If we do get a bunch of misses there could be some good buying opportunities presenting themselves. We know how reactive the US market is to misses or beats. I would also assume expectations to be lower and most of the negativities to already be factored into the market. As ever we will follow and cover these releases extensively and will relay them onto you guys as they come in. Be prepared!

Currencies and commodities corner. Dr. Copper is last at 341 US cents per pound a little higher on the session. The gold price is slightly lower at 1580 Dollars per fine ounce, the platinum price is also lower, last at 1435 Dollars per fine ounce. The oil price has ticked up a little, remember the Norwegian lockout takes effect today, 84.63 Dollars per barrel for NYMEX WTI. Brent is last at 98.41 Dollars per barrel. As the risk off returns somewhat to the market, the Rand of course will sell off. 8.29 to the US Dollar, 12.84 to the Pound Sterling and 10.22 to the Euro is where it was quoted last. We are around two thirds of a percent worse by mid morning here in Jozi. ECB president Mario Draghi will deliver a testimony to the European parliament today, I guess that does hold some interest for many, we shall keep an eye on that. After the bell, as Byron said is the real meaty part of the markets for us.

Sasha Naryshkine and Byron Lotter

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Friday, 6 July 2012

The Fed not blinking

"The upwards moves in interest rates by Jean-Claude Trichet in hindsight seems to have been the wrong ones, but that could have happened to anyone. The interest rates on deposit facilities was cut to zero percent from 0.25 percent, this would encourage banks to lend. But will they? Who knows?"

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Yesterday was that one day before the market junkies get their single biggest number for the month, the non-farm payrolls data. Normally it is a little quieter than it was, from a data flow point of view, but there was no shortage of action yesterday, it came flying in all directions after midday. Some we were sort of expecting, the ECB (European Central Bank) cut rates to an all time low, whilst others we did not expect, the PBOC (People's Bank of China) lowered the deposit rates across the board, and also lowered lending rates at the same time. I wouldn't say obviously. The Chinese news was a positive surprise (I think), but there was no change to the reserve ratio requirements rate. And whilst the Chinese release was not expected, a Bank of England announcement that they would continue their asset purchase program, adding another 50 billion Pounds to it, was expected. Quantitative easing or QE is what this is chaps.

Session end the Jozi all share index managed to hang on to good gains, 182 points up on the day to close at 34223, 0.54 percent better on the day. Banks added almost exactly that percentage gain, Telkom slid by about the same amount. I promise that we will talk about that ADSL pricing sometime soon, or perhaps I should just point you in this direction, Techcentral deputy editor Criag Wilson wrote this piece: Rock. Telkom. Hard place. Resource stocks added a less exciting quarter of a percent, general retailers were on a tear, up 1.81 percent, MTN had a cracking day, up the same amount as general retailers. And in fact MTN is within touching distance of their 52 week high, which is possibly a "normalised" high, if I could put it that way. I guess the overhang of the Turkcell allegations are closer to going away, if I could put it that way.

Ye Olde Worlde. Listened carefully to the ECB press conference afterwards, we all admired the way that ECB chief Mario Draghi conducts himself. He comes with such an impressive resume and track record. Perhaps the only disappoint was that there was less clarity with regards to the bond purchasing program that would have helped the bond yields of both Spain and Italy to get lower. But rates were cut to an all time Euro low, to 0.75 percent. The upwards moves in interest rates by Jean-Claude Trichet in hindsight seems to have been the wrong ones, but that could have happened to anyone. The interest rates on deposit facilities was cut to zero percent from 0.25 percent, this would encourage banks to lend. But will they? Who knows? Have a read through the Introductory statement to the press conference. I guess the biggest disappointment was the bond purchases, that would have helped Spain and Italy. And that is why I think that the market received this news negatively, the Spanish equities market was crushed nearly three percent, the Italian stock market was down two percent. Not good.

Byron's beats converges on Beijing central. 39^o 54' 50" N, 116^o 23' 30" E for a look at the rates decision from yesterday:

This is the second time rates have been cut in a month as the authorities take advantage of less than expected inflation numbers. The market didn't like it however. China has been known to implement stimulus just before a slew of negative economic data. Market participants expect that the authorities have had a glimpse at the June figures and have made this cut as an urgent reaction. Maybe they saw less than expected inflation numbers as well. It is funny how markets work, bad news seen as good news seen as bad news.

I'd have to say that net net this is good news. We know China is hitting a speed bump. We also know there is a lot of room for easing. We also know that this economy is still growing very fast and when it is stimulated the reactions will be more extreme. For example when the deposit rate decreases in a nation which has a saving culture, millions of people will be incentivised to spend instead of save. There are also growth opportunities which need investments. So when interest rates decrease, better places to put money do exist. This, as opposed to Europe, where money is cheap but the alternatives are fewer.

But most importantly these rate cuts further liberalise the Chinese consumer who are supposed to be the next big growth theme, not just for China but for the whole globe. Consumer based growth is sustainable and even more powerful than an industrial growth spurt. As more and more Chinese people experience the joys of consumption it will spread like wild fire. It's addictive, contagious and often customers are the best advertisements. I've already convinced three of my friends to buy iPads. Fashions, fads, must haves and must do's will be embraced into their everyday lives.

Of course this is just my opinion and admittedly I have never been to China. But I know human nature and I know that, judged by the numbers we have seen, this is already take effect. The base is still low and there is tons of potential.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. There was a whole slew of US data, the ADP employment number beat expectations, the weekly jobless claims were lower than anticipated and although the ISM services index missed expectations, it is clear that the US economy is in far better shape than the folks across the Atlantic. The Dow managed to do a there and back again, after a poor start, but still closed in the red, down 47 points to 12896 on the day. The broader market S&P 500 lost nearly half a percent, whilst the nerds of NASDAQ ended about flat, just marginally better.

Let us check out those ADP numbers. Who are ADP? And why are these numbers even considered important? Well, as per their website: "It is a measure of employment derived from an anonymous subset of roughly 500,000 U.S. business clients. During 2011, this subset averaged about 344,000 U.S. business clients and represented over 21 million U.S. employees working in all private industrial sectors." So, this is an estimate then of the whole workforce, through the ADP numbers of their payroll systems! A guesstimate really, but a very good one.

Here is the release from their website: June 2012 ADP National Employment Report. However remember that last month there was a much better read on ADP than there was on the Labor department's non-farm payrolls number. I will tell you something interesting that I came across, the perception is that government is too big in America. BUT, the WSJ has a piece that suggests that if the government had not been firing people left right and centre, the unemployment rate would be closer to 7.1 percent. Wow. That is pretty amazing really. But still, the same article (admittedly old, from May) titled Unemployment Rate Without Government Cuts: 7.1%. That part is most interesting, because this is directly in contrast to what the Republican types are saying, "big government" is getting smaller. But by smaller, there are still too many government employees, 20.3 million folks!

So, this tees us up for the actual number, non-farm payrolls. The expectations that I can see are for an improvement of 100 thousand jobs, versus a 69 thousand gain last month. I get the sense that NOBODY pays as much attention to the revisions as they should. Hopefully the manufacturing trend will change, the last three months have seen losses for that industry. But May and April have both been pretty awful employment months, the Greek issue was pretty big too. Weekly hours worked has been unchanged over a year, to 33.7 hours. Average hourly earnings was lower in May than in April! And then there is of course the unemployment rate, which is a household survey, so that could be interesting from a mainstream point of view. For those interested, 8.2 percent is the current rate, 12.7 million Americans are currently unemployed. That is more than the whole population of Greece (10.8 million) and just less than Zambia (13 million people). That puts the sheer size and scale of the American economy into context.

Currencies and commodities corner. Who are Statoil? Well, they are a Norwegian company that is the world's 13 largest oil and gas company by revenue, listed in both Oslo and New York. The business is relatively young as far as energy majors go, founded in 1972 only, and recently merged with the oil and gas part of Norsk Hydro (made sense from that name). As far as I can tell, the Norwegian government has a 64 percent stake in the business. This is a global business, which operates in 36 countries around the world, closest to us here is Mozambique and Angola, no guesses as to why. So where is this all going? Well, as per the release from the Statoil website: Statoil preparing to halt production after notice of lockout. Yech. "For Statoil, the shortfall in production will be around 1.2 million barrels of oil equivalent per day." Not good for global consumers I am afraid, unions are demanding higher wage increases and earlier retirement. I am not too sure if union members all want a paid for holiday to Corsica. Pfff... really Sasha.

So now you see where that was all going, just as the Iranians are having to store oil in ships going around in circles looking for someone to buy, the Norwegian bosses are adamant that the warmer weather is a good time to negotiate and implement a lockout. An industrial lockout is different from a strike, because the company closes operations and workers lose pay. This type of action is only instituted on workers if management feel they have to muscle terms of wage negotiations. Not something that you would see here.

All this though has resulted in a shortage of supply, Iran oil is a no go for everyone, and now Norwegian oil production is about to grind to a halt. And that is why oil prices have gone higher in recent days, with NYMEX last at 86.50 Dollars per barrel, and 99.49 Dollars per barrel for North sea Brent, that is why you see the price between the two having moved further apart, the lockout. At one stage yesterday Brent had topped 101 Dollars a barrel. Since the lows of 20 June (Brent was under 90 Dollars a barrel), the oil price has moved steadily North.

The gold price last traded at 1604 Dollars per fine ounce, the platinum price is lower at 1468 Dollars per fine ounce. Dr. Copper is slightly lower from yesterday, the price last at 347 US cents per pound. The Rand is last at 8.16 to the US Dollar, 12.66 to the Pound Sterling and 10.10 to the Euro. We have started slightly better here, heading back towards all time highs.

Sasha Naryshkine and Byron Lotter

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Thursday, 5 July 2012

Super Mario looking at Koopa Troopa, Goomba and a rate cut

"Total group sales for the period reached a record 61.2 billion Rand, showing an increase on last year of 15.5 percent. In terms of who is the most important division across the group, the Masscash division represents the most important part of the business currently, taking these increases into account, that division should roughly be 37.4 percent of overall group sales."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. It was slow going here in the city founded on a "whole bunch of gold", as we were stuck in the liquidity doldrums, the Americans were on holiday celebrating their independence from the British. The only excitement across the screens was the build up to the Bob Diamond hearings in London in front of ~~narcissistic types~~ the Treasury select committee. It made for interesting viewing, because there is always the sense that the politicians are mostly there for political point scoring and the bank chiefs are mostly trying to deflect attention, say sorry and get out of there as soon as possible. A waste of time, because surely questions can be submitted in an orderly fashion and answered in good time too. Or is the purpose supposed to be a televised headmaster/pupil type session? Whatever the case, it made for good TV. Self important politicians, aren't they all like that? Don't get me started.

The Jozi all share index rose marginally, adding just 34 points, or 0.1 percent on the day to close at 34020 points. Banks continued to sink post the ABSA trading announcement shocker last week, down nearly one percent. I did see that the SARB annual report was released yesterday and subsequent interviews where officials from the central bank stressed that in light of this Libor scandal, that they were happy with the way that the interbank rates are/were set here. We have often said that our banking system is a very well structured, perhaps largely due to the restrictions placed in terms of exchange control, but that is not fair, that sweeping statement.

Massmart released a 52 week sales update yesterday, and I guess Mr. Market was marginally pleased with it. It looked better than I had anticipated, that is an upside surprise! Firstly the 52 week cycle that retailers have do not coincide with normal year ends (for other companies), because a month does not end on a Sunday all the time, the end of a retailers trading week. This particular 52 week sales period is to 24 June 2012. Really Sunday the 1st of July, that is so inconsiderate of you. But in a way this is a good thing, because that means that next year could possibly have a week longer and that is good for sales.

There are four divisions over at Massmart, Massdiscounters, which includes DionWired and Game stores, Makro (Masswarehouse), which is self explanatory, Massbuild, which consists of the "Builder's" brands, the Warehouse, Express and Depot, all of which I am sure that you know well. The ones that perhaps you do not know as well, is the last division, Masscash which consists of CBW, Jumbo Cash & Carry and Shield. And more recently the addition and roll out of Cambridge Foods, Byron visited one of these on a Massmart site tour not so long ago. The major difference between say for instance Game Foodco (the new retail offering) and Cambridge Foods is offering to different LSM groups, with Cambridge servicing 2-6 whilst Game Foodco's will service 5-10. For a simple explanation, I found one on the web, here goes, The 4 Lifestyle Levels. Which one are you?

Into the sales numbers, which are broken down by each division, straight from the release:

* Massdiscounters increased by 11.0% (4.4% comparable) with deflation of 3.3%;
* Makro increased by 20.1% (11.6%) with inflation of 1.9%;
* Massbuild increased by 13.0% (9.3%) with inflation of 1.4%; and
* Masscash increased by 16.5% (11.6%) with inflation of 6.1%. Total sales growth has been boosted by the inclusion of Rhino from 1 March 2012.

Total group sales for the period reached a record 61.2 billion Rand, showing an increase on last year of 15.5 percent. In terms of who is the most important division across the group, the Masscash division represents the most important part of the business currently, taking these increases into account, that division should roughly be 37.4 percent of overall group sales. Makro makes up roughly 25 percent of the group sales, whilst Massdiscounters represents around 24.2 percent of total sales. Whilst Massbuild sales are the smallest division (13.4 percent), they still manage to clock nearly 8.25 billion Rands worth of sales. That Builders Warehouse, you can never walk out with just one thing! Results are expected on the 22nd of August, we will as always be watching.

Vodacom have announced this morning that there is going to be a change in directorship at the very top, Pieter Uys is stepping down after having been at the company for two decades, and the Group CEO position will be assumed by Shameel Joosub, who rejoins Vodacom. Joosub of course, if you had been following has been working for parent group Vodafone in Spain. Nice, must have been fun there. Joosub knows the Vodacom business well, he has extensive experience and has lived through the business roll outs. I suspect that this news is about neutral, the appointment would have been by Vodafone with consultation with some of their other big shareholders, including Government and the PIC, the "other" shareholders of size and scale. The free float realistically of Vodacom is much smaller than you think, with around 84 percent in "safe" hands. The price at the get go is unchanged.

Tiger Brands have reached an agreement in principle, after much talk, to buy a 63.4 percent stake in Dangote Flour Mills from parent company Dangote Industries. Aliko Dangote, who is the richest fellow in Africa, is obviously getting the parent company to cash in here. Dangote is still the chairman of the Flour Mills business that has his name, but perhaps for not too much longer. As far as I understand it, Dangote Industrials will continue to hold a 10 percent stake in the business, should the deal be concluded. Now, as far as I can understand from the Bloomberg information on Dangote Flour Mills: Dangote Flour Mills PLC (DANGFLOU), the market cap is 29750 million Naira. Or 29.750 billion Naira.

Currency conversion time, officially one US Dollar is 162.8763 Naira, so this means that the whole business is worth 182.65 million Dollars. Which is roughly 1.48 billion Rands. And at the ruling price for Dangote Flour Mills, Tiger Brands would be paying 0.938 billion Rands, or 938 million Rands. Tiger Brands entire market cap is nearly 49 billion Rands, so this deal is worth roughly 2 percent of the market cap of Tiger. From their last set of numbers, West African sales were 336 million Rand, with EBIT of only 18 million Rands. This purchase (if closed) will raise West African sales significantly, in the 2011 financial year Dangote Flour reported sales of 66.281 billion Naira, or 3.3 billion Rands. So roughly 2.1 billion Rands, this is a significant jump in their presence in the region. The business that Tiger are buying into seems to have a creaking debt load, I am trying to find out more about that from a Nigerian source directly.

Byron's beats takes a look at possibly one of the many market moving events of the day, the ECB rates decision. There are many tools that they can still use, including sovereign bond buying, that could help ease the yields, just this morning we have a sovereign bond auction in France. And Ireland are close to coming back to the market, for 500 million Euros, welcome back. Spain had an auction this morning, which sadly meant higher borrowing costs, 6.43 percent for their ten years'.

"The six members of the European Central Bank (ECB) Executive Board and the 16 governors of the euro area central banks vote on where to set the rate. Traders watch interest rate changes closely as short term interest rates are the primary factor in currency valuation. A higher than expected rate is positive/bullish for the EUR, while a lower than expected rate is negative/bearish for the EUR." Interesting.

Remember last month when we discussed why they didn't cut rates earlier? They were using the cut as a potential silver bullet in case the Greece election ended for the worse and a possible exit from the Euro. That of course has not happened but, the region can do with as much stimulation as possible. Rates are currently at 1% and are expected to be cut to 0.75%.

Following the rate cut decision we have the ECB press conference. Again Forexpro has a good description. "The European Central Bank (ECB) press conference is held monthly, about 45 minutes after the Minimum Bid Rate is announced. The conference is approximately an hour long and has two parts. Firstly, a prepared statement is read, then the conference is open to press questions. The press conference examines the factors which affected the ECB's interest rate decision and deals with the overall economic outlook and inflation. Most importantly, it provides clues regarding future monetary policy. High levels of volatility can frequently be observed during the press conference as press questions lead to unscripted answers."

So basically we are getting the ECB's views of the region and what they expect going forward. Expect lots of central bank lingo which often needs Google translate to decipher. We watch these things when they happen but you normally have to siphon through the important information. Like the rest we expect and hope for a rate cut. If you have room to cut then why not? Following the recent PMI data coming from Europe, a weaker Euro plus cheaper borrowing rates will help. Every bit counts.

Currencies and commodities corner. Dr. Copper is steady, last at 350 US cents per pound, the gold price is flat at 1617 Dollars per fine ounce. The platinum price is last at 1480 Dollars per fine ounce, slightly lower on the day. The oil price is higher, it has shot up, there are various bits of news and clarity regarding the Norwegian oil workers strike AND what the extent is of Iranian crude tankers circling not far from home. I read this morning that tankers are being repainted, or simply idling whilst waiting for orders. Kenya cancelled an order because of pressure from the English authorities. A small one, but pressure is being placed, and perhaps this will lead to something concrete from the Iranians with regards to being more open about their nuclear ambitions. The oil price is last at 88.21 Dollars per barrel for NYMEX WTI. The Rand is steady-ish, 8.16 to the US dollar, 12.70 to the Pound Sterling, 10.24 to the Euro. We are higher to start with here. LOADS happening today, ADP, weekly jobless claims, services ISM all happening in the US.

Sasha Naryshkine and Byron Lotter

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Wednesday, 4 July 2012

Happy 236th birthday US of A

" So, the sense from the mainstream is that bankers are evil, money grabbing, greedy individuals who mostly do "things" at the expense of their clients and the broader public. But this note suggests that pressure from the regulators was placed on a major global bank to somehow influence their submission. Everyone of course was chatting back then, and the regulators were very close to the institutions trying to maintain some form of stability."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Well, well, we took off in the second half of the afternoon, risk on came back in what is a festive week in the USA. The sense globally, at least that I get is that there is going to be another round of coordinated policy response, the Chinese inflation worry is dissipating, the Europeans have kind of steered away from hard and fast austerity thanks to the people having spoken, and the US economic growth although better than Europe, still looks anaemic in dare I say it, an election year. We saw the commodities complex benefit yesterday, in particular the oil price and the copper price surged during the day. The oil price also got a lift as the Iranians of course are no longer able to export oil as freely, potentially removing as much as one million barrels of supply a day. Exacerbating the supply side is that Norwegian workers in the oil industry are striking currently. So, now you know why the oil price took off yesterday.

The Jozi all share index closed up shop at 33986, up 333 points, or .99 percent. All sectors measured decent enough gains, financials, resources, industrials all participating in the European afterglow rally from last Friday. And we are steadily heading back to the highs, so clearly the balance of the market believes that the worst might be behind us. But, that is the optimist in me, many others would call themselves realists when in reality they are pessimists. Mark Mobius is right, you have to be an optimist to be a long term investor, you have to have conviction around your investment thesis. I suspect that the local and global vehicle sales numbers we saw yesterday were upside surprises, the recent PMI numbers that we see have a lot to do with the European dithering and hence delaying of spend or paralysis of decision making of sorts.

MTN yesterday decided to unleash a release which calls for the immediate dismissal of the Turkcell US claims, check out the official release: MTN dismisses Turkcell US claim. They use some pretty strong and colourful language, well I thought so anyhow, the first part and last part I think is most important. Here is a copy/paste. "... the US court does not have jurisdiction over the subject matter of Turkcell's claim, because Turkcell has not alleged a violation of the law of nations as required under US law for the sort of claim Turkcell is seeking to bring... " AND " ... the US court lacks personal jurisdiction over MTN and its subsidiary, MTN International..., which is also named in the US action. MTN and MTN International both lack sufficient contact with the United States to be subject to the jurisdiction of the US court." MTN are suggesting the US courts dismiss the case, Turkcell will respond to this motion by mid August. I hope that I have used the correct legal terminology.

Second, as MTN point out, Turkcell have already been sent packing in Paris (that is France guys) in front of a arbitration tribunal, in which their former Iranian JV partner was involved. MTN reckons that the case will be thrown out by the end of the year, but I then wonder what Turkcell would do next, because clearly they are not letting this just lie down or go away. The MTN share price in recent days has awoken from their seemingly long slumber, and are pretty close to their 52 week high. In contrast, poor Telkom traded at a 52 week (and all time low in their current format) low yesterday. That of course is another story, for another day. In a way, Telkom are admitting defeat through their increasing of their ADSL offering.

Another sad story is the operational update from the fellows over at Aquarius Platinum, who this morning have released a Operational Update. I guess the only positive thing that you could say about them relative to the rest of the sector is that they are taking a proactive view when compared to their industry peers. And I guess although ugly for their shareholders in recent weeks and months, Aquarius you could argue have done the right thing. In fact Aquarius say as much, with Stuart Murray saying the following: "I would hope that the other industry players follow suit and cut the unneeded production that is depressing the industry." Interesting, not so?

As you can see from the release, Aquarius have terminated their mining contract with Murray and Roberts Cementation, and Aquarius will assume the owner operator role. As they point out, this is part of the cost saving initiative. Poor Murray's, both the construction company and Stuart the CEO of Aquarius, I feel bad for both them, circumstance I guess. The other good news is that 75 percent of the workers at Marikana have been placed in "other organisations" as the news release puts it. Everest is on care and maintenance, as you well know.

The overall impact is heavy, from a production point of view, the company has produced 412,594 4E oz so far to the end of the financial year, with the next financial year (the one we have just started) expected to yield around 327,500 4E oz. So roughly 85 thousand fewer ounces this year, not a train smash, but certainly much lower than the group production in 2008 which topped 500 thousand ounces and was even better back in 2007, with 530 thousand ounces produced. Going backwards is not what shareholders want to be reminded of, that is for sure. A sad state of affairs, but as Stuart Murray points out: "The Board and management of Aquarius are acutely aware of the difficulties facing the industry at present, and are monitoring the business and financial health of the Company as closely as we have always done. We believe that the measures we have outlined today and over the past few weeks once again demonstrate our commitment to controlling our own destiny while carefully husbanding our assets on behalf of shareholders and thereby ensuring the survival of the Company in these extremely difficult times." Survival mode at the moment, hanging in there. All I can say is that emissions controls don't look like they are going out of favour anytime soon.

Byron's beats looks at an issue that is probably the most close to my heart, other than family, and that is education.

It is a joint venture between Curro and the OMIGSA schools fund. This fund is backed by the PIC and Old Mutual and has financing of up to R397.1 million. Curro will add a further R42.9 million bringing the fund to R440 million. The purpose of the fund is "to play a supportive role to Government in addressing the educational needs of South Africa in the lower income market and to put in motion the objectives set out in Curros pre-listing statement."

This is how the fund will work according to the announcement. "The joint venture includes the incorporation of an operating company that will operate schools, to be known as the Meridian Independent Schools, and a property owning company, held 65% by Curro and 35% by the OMIGSA Schools Fund, that will provide the school facilities and premises for the schools, with Curro being appointed as the manager of the schools. The Meridian Independent Schools will focus on providing private schooling to students where the majority of parents earn less than a defined threshhold, currently R200 000 (two hundred thousand Rand) per annum."

So basically they are putting in 10% of the capital but owning 65% of the fund. Sounds too good to be true not so? This Moneyweb interview with CEO Chris van der Merwe explains it very well. You see what he says right at the end there. Curro have specialised expertise to manage the schools and that is where their bargaining power comes in. Old Mutual and the PIC get good PR for investing in a project which will benefit our nation. In fact many say education is the core solution to most of our problems. I agree.

It is also important to note that through this fund Curro are targeting the lower to middle income bracket. This is where the gap seems to be in the market and where we see future growth in this sector. Like I mentioned earlier, this is also a good example of why we like to invest in positive themes that are seen favourably by government and the public. I can't see this kind of a deal being struck with a Tobacco company. All in all this is a fantastic deal for Curro and a great deal for the nation and the 100 000 children who stand to benefit.

Do you remember that instant messaging software called ICQ? When you got a message from someone it popped up and said uh-oh in a very high pitched voice. Remember? Well, I heard that voice again as the Barclays Libor scandal escalates, the chairman Marcus Agius (the only true defender of London/Rome) resigned first, then Bob Diamond the CEO yesterday morning, and then if that was not enough, the COO Jerry del Missier announced his resignation. My twitter feed lit up, even one that made me laugh from the fake Christine Lagarde account: "*BARCLAYS CLEANING LADY RESIGNS WITH IMMEDIATE EFFECT"

But this is not a laughing matter. Bank of England deputy governor Paul Tucker is under the spotlight, because the sense is that the Bank of England is involved. How? Well, Tucker queried with Diamond via a telephone call late October 2008 (at the height of the non trust of banks of one another) how Barclays could submit such a high borrowing rate at the time. If you recall from that time Libor spreads blew out. Still confused about Libor is used for? Don't worry, here is "simple" explanation of how banks get to the published rate: The Basics of BBALibor. Now as I can tell from my reading, the actual process is not THAT old, it has been around since 1985 and accepted as the standard.

So, why would Tucker be at fault here? And how is this all going to come out in the wash? Well, we do not have to wait long at all, because as luck would have it the Treasury select committee will grill Bob Diamond today. The seemingly unapologetic Bob Diamond, but I am pretty sure that he does have certain regrets, if not apologies for the broader public. Remember that Barclays did not seek assistance of any sort during the depths of despair, the same time as "that" phone call. Barclays have submitted documents ahead of the hearings, INCLUDING that call and the note that RED (Robert Edward "Bob" Diamond) made on the day. The full submission including all the Libor rates submitted are included in this document, Supplementary information regarding Barclays settlement with the Authorities, but I have cut the note made on the day. Excuse the fuzziness, but that is how it appeared in the submission:

So, the sense from the mainstream is that bankers are evil, money grabbing, greedy individuals who mostly do "things" at the expense of their clients and the broader public. But this note suggests that pressure from the regulators was placed on a major global bank to somehow influence their submission. Everyone of course was chatting back then, and the regulators were very close to the institutions trying to maintain some form of stability. But the last question worth asking, where were the law makers and regulators when we always need them? Mostly asleep at the wheel, if you read ~~Too big to read~~ "Too big to fail" you will get the sense that SEC Chairman Christopher Cox was not exactly up for the job. Well, he was criticised by all and sundry openly as being more than asleep at the wheel, nowhere to be found. So whilst the popular line might be to point fingers at everyone here. And Joe Public might feel let down. The ONLY folks in the pound (no pun intended) seat here could be Osborne/Cameron and they could use this to score cheap political points over Darling/Brown. And I have no doubt that they will do this, kick them while they are down you know.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. It was a shortened session on Wall Street, with trade only up to 1pm, allowing people more than enough time to get to their respective fireworks displays (not yet, that is reserved for day) or hot dog eating contests. Picnic type foods is what I am led to believe, to watch the various displays and patriotic marches, music and attractions. In terms of economic data points before all these festivities there were the auto sales, which looked like a comfortable beat to me. Session end all the indices closed higher. The nerds of NASDAQ tacked on 24 points to close at 2976 points, the broader market S&P 500 added eight and a half points to 1374, whilst blue chips, the Dow Jones Industrial Average added 72 points by the end of the session to 12943. All the majors near some pretty important milestones, 3000 on the NASDAQ and 13000 on the Dow. And I guess 1400 on the S&P, although that is further away I am thinking.

Currencies and commodities corner. Dr. Copper is last 352 US cents, the gold price is lower at 1615 Dollars per fine ounce, the platinum price is off a touch at 1476 Dollars per fine ounce. The oil price is lower at 86.94 Dollars per barrel for WTI as per the NYMEX quote. The Rand is slightly weaker, at 8.12 to the US Dollar, 12.72 to the Pound Sterling and 10.21 to the Euro. The market is marginally higher on a VERY slow trading day.

Parting shot. Happy birthday the United States of America, which turns 236 years old today. Well, in the form that we are used to anyhow, this is obviously a holiday that Americans hold near and dear to their hearts, they are a patriotic bunch, you can't fault them for that. The WSJ has a great article on what the USA looked like back then in 1776, check it out: Fleming: What Life Was Like in 1776.

Sasha Naryshkine and Byron Lotter

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Tuesday, 3 July 2012

Goodbye Big Boy Bollinger bottle Barclays Bob

"Banking again is falling into that domain where the public are outraged, and Barclays employees monkeying with Libor is just another example of what lies in those murky and muddy waters when investing in these entities. I am sure that most bankers, like lawyers and doctors hold their industry in high esteem and it is a small part that causes such scandals, when uncovered. But, for us, for these very reasons, these companies do not make compelling and enduring investments."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. There was something very different yesterday, the JSE started disseminating information locally with the matching having moved from London to a home grown system. The idea was that speeds would have improved dramatically, but this is clearly not the landscape that we roam, the eat-what-you-kill space, but rather we are at the other end of the spectrum. So whilst we noted that the JSE and the broader participants were struggling it was by all accounts a success at the end of the session I would argue. Now there was something also different about yesterday, the 2nd of July according to Wikipedia is exactly the midpoint in the year, and we ticked over to the 2nd part of the year after midday. Now you might have thought that this would have happened a day earlier, but count your knuckles and you will see that both July and August have 31 days, and of course you know that February has fewer days in the year, even though this year was a leap year. Which begs the question, are we halfway, or not? Well, perhaps this Tumblr picture can help you, we are NOT there yet. Check out: number of days in each month

Yesterday we kind of went nowhere, the Jozl all share index closed down at 33683, a loss of just 25 points on the day, or less than one tenth of a percent. Resource stocks were the biggest losers on the day, down two thirds of a percent, PMI data across the globe helped nobody, falling mostly bar for a few surprises here and there. My simple theory is that PMI's will improve in the coming months as confidence returns, the Europeans are at least on track looking for some sort of integration processes as far as their banking institutions go. I take this as a move in the right direction.

Goodbye Big Boy! We could learn a thing or two from this. This morning the news comes that Bob Diamond is a goner, he has resigned from Barclays. Remember that the Chairman is staying until his replacement is found. That is yesterdays news, he is now staying until a CEO replacement is found too. A rudderless ship? Well, it seems that we might have been led to believe that the deckhands were acting like ragamuffins below deck whilst the bloated management, the XO and CO were not quite asleep at the wheel, but dozing. When I say that we could learn a thing or two, all I am saying is that accountability is key for any business, organisation or country, when someone is caught out. And in this case Bob Diamond has also fallen on his sword.

Ultimately someone needs to take responsibility, but it is a hard one, must the top man be accountable for 140 thousand odd employees across the 50 or so countries that the company operates in? I guess the short answer is yes. Banking again is falling into that domain where the public are outraged, and Barclays employees monkeying with Libor is just another example of what lies in those murky and muddy waters when investing in these entities. I am sure that most bankers, like lawyers and doctors hold their industry in high esteem and it is a small part that causes such scandals, when uncovered. But, for us, for these very reasons, these companies do not make compelling and enduring investments.

It is not something that we give enough airtime around here, Byron did briefly chat about PMI's yesterday, but perhaps because there is enough media coverage. The local Kagiso PMI monthly release as per the release is: "An economic activity index based on a survey conducted by the Bureau for Economic Research in conjunction with CIPS Southern Africa and sponsored by Kagiso Tiso Holdings" So, this is a survey and there are various questions asked to various managers about how they see manufacturing conditions. The segments include employment, business activity, prices, new sales orders, suppliers performance, backlog of sales orders, expected business conditions, inventories and purchasing commitments. I am not sure about you, but when I am busy and someone is looking to do a survey, I either say that I am sorry, or ask how quick it is, so that I can get it over with quickly. So, does it depend what time of the month the survey takes place, on a day of either good news, or bad news? It is a bit like price targets, yesterday I was asked for a price target on the ALSI 40 from here on out for the rest of the year. Their (Thomson Reuters) guess is as good as mine, anything can happen over the next 12 months.

But back to this PMI, because sentiment is key in decision making and normally people are a whole lot more bullish about the future when the present looks rosier than the previous months. As was pointed out to me once upon a time, good news headlines and cheap stock prices don't come along at the same time. When the news is bad, or not good, that is when you get cheaper stock prices historically. This is almost always true, the quality of the company matters more than the stock price in the short term. But the same company with a cheaper stock price, now that is something to get excited about. We digress, again, apologies, back to the local PMI number which fell into contracting territory for the month past, the official June 2012, from the release: Kagiso Purchasing Managers Index

"The seasonally adjusted Kagiso PMI ended the second quarter on a weak note as the index declined sharply to below the key 50 index point mark. At 48.2, the PMI lost 5.4 index points and is now at the lowest level since August 2011 with almost all of the key sub-indices posting sharp losses. Whereas the early stages of 2012 saw the domestic PMI registering significantly more positive results than was the case in our key export markets such as the EU and China, the latest figures are more in line with the weak numbers seen in these countries for some time already."

Here is the graphic from the release, which is far more telling than the explanation above.

So is this something that is happening locally? Not at all sports lovers, this is a worldwide phenomenon, check out this glorious chart courtesy of Scotty Barber, who you MUST follow on Twitter, the stuff that he produces is legendary! This is of the PIIGS (without the P) PMI compared to the stronger economies in Europe. The picture looks exactly the same.

BUT WAIT! There is more, I found a more global one, this time courtesy of Bloomberg, this is PMI's across the globe, which includes the Chinese:

So, that leads me to believe that we are all following each other here, worried about the same thing. Confidence in the business world will be largely determined by central bankers and politicians for the remainder of the year. Expect a better plan and timeframes from the Europeans, whilst the US has election campaigning. And the sense from market participants is that we should see policy response in light of the weakening numbers globally.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Byron will explain what happened with a specific release, but I guess the Friday hurrah could explain why the Dow ended essentially flat last evening on Wall Street, but there was a surge in the last hour again, the S&P 500 closed one quarter of a percent higher and the nerds of NASDAQ added more than half a percent. The thinking, and that was explained above was that policy response is imminent.

Byron's beats checks out the disappointing ISM number yesterday

Even the resilient US economy has been hit. I'm not surprised, Europe is their largest trading partner. According to the US Census Bureau last year the US exported $3.3 trillion worth of goods to Europe and imported $4.48 trillion from the region. Imagine how many ships that takes to transport those goods across the Atlantic. I did a quick Google search and couldn't find a number. If you have any info please send it through.

This has caused the US factory sector to shrink for the first time since July 2009. The reading came in at 49.7 compared to 53.5 last month. Remember that anything below 50 is a contraction. This will also hamper confidence as companies start holding back their expenditures in order to face the turmoil with strong balance sheets.

US companies also face another challenge in the form of currencies. The Euro is weakening against the dollar which makes US exporters less competitive. This is a short term issue because a weaker Euro will in turn benefit the European economies which indirectly picks up their demand for US goods.

On this news the DOW dropped 85 points but later in the day regained all of these losses. Why is the market so resilient to such negative news? Because most of the downside is already factored into share prices. This is not an unknown-unknown. If we have a major drop then we could see a huge sell off but everyone knows that a weak European economy will have a negative impact on everyone else. The fact of the matter is that companies are prepared. They have learnt their lessons from the past.

There are also solutions out there. State assets can be sold, labour laws can be loosened, banks can be allowed fail or be bailed out if need be, lending prices can be controlled. The collective debt to GDP in Europe is 80% which is more than manageable, as a collective. That is why the market is riding on what the policy makers are saying. We are still positive their decisions will be more positive than negative. Jim Cramer says that if it weren't for Europe the US economy would be steam rolling and markets around the world would be at all time highs. The future is always uncertain but stocks do look cheap.

I saw an interview on Bloomberg TV in which Mohamed El-Erian of PIMCO and "new normal" fame was chatting about the way that he and his firm see the short term. Now El-Erian is always concise, smart and works for the biggest bond firm in the world, so let us just say that he did not get there by luck. But PIMCO is always cautious, I guess it is in their nature as bond investors. You might have heard about the "fiscal cliff", well, El-Erian warns that the event might trigger a recession in the US next year, something that many believe will be the case. But signalled this far forward, surely lawmakers will do something about it? Remember the debt ceiling debate though, and how that worked out for us? How the politicians fumbled and milled around until the 11th hour. Well, these two events are related, because the fiscal cliff refers to the points next year when the automatic spending cuts start to happen. And the so called Bush tax cuts expire at the same time.

Moody's have run some of their models and the suggestion is that if the automatic spending cuts are to take place and the automatic return of the taxes, the impact could mean that the US economy could contract by as much as 3.6 percent, and that would almost inevitably lead to the US recession. So, what to do? Well, I think that the lawmakers are actually aware of the lack of their actions last time and as such will act quicker, expect something more concrete by October, that is my best guess.

Currencies and commodities corner. Dr. Copper is higher, last at 351 US cents per pound, the gold price is higher at 1608 Dollars per fine ounce. The platinum price is last at 1463 Dollars per fine ounce, while the oil price is much higher at 84.38 Dollars per barrel. The Rand is much firmer as risk on is back, perhaps the EU summit did more for sentiment than we know. Last quoted at 8.11 to the US dollar, 12.73 to the Pound Sterling and 10.21 to the Euro, all stronger against those major currencies. We have started a bit better here today, catching the late rally in the US, but remember folks, tomorrow is the fourth of July, which is the US Independence Day. The USA turns 236 tomorrow, well, at least in the form that we all know well.

Sasha Naryshkine and Byron Lotter

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Monday, 2 July 2012

Forget the yields, check the goals!

" Accountability is key for shareholders, lawmakers, employees and Joe public alike. So whilst I think that this is a step in the right direction, I am not too sure what it means about the culture of the bank itself and the perception by politicians at large."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. The stuff online, on twitter, on the box, that I saw on Friday, ranged from this is very good, "the Europeans had gone a long way to solving their integration issues", all the way through to the usual "this solves nothing". Question, is Greece still in the Euro zone? The answer is yes. The decision by the Europeans to not lend the money to Spain, but rather directly to Spanish banks sent the borrowing costs of Spain and Italy markedly lower on the day, but had the opposite effect for Germany, their borrowing costs climbed, but admittedly we are not really that far off record low levels for the German Bund. So, I am guessing that it is fair to say that bond investors in Europe were either scrambling to cover their tracks, or genuinely believe that the Europeans were closer to a banking union, which is the first full step towards fiscal integration. I think that it is important that the Europeans have a central banking authority. If not Euro Bonds immediately, because the statistics (and Angela Merkel's not in my lifetime comment) leads me to believe that we should see these late 2036. By which time most of us will have forgotten this crisis. But I am pretty sure that we might be able to recall the wonderful football of Euro 2012, poor Italy last evening, but Spain were just too majestic. Now time for the tour de France.

Friday we had stocks rocking, resource stocks benefited from a lift off in commodity prices, the copper price, the oil price, the precious metal prices all steamed ahead in a rally alongside the equity market, and alongside falling sovereign yields for the peripheral bonds. At the end of the session resource stocks had rallied a whopping 2.54 percent, it could have been more if it were not for a surge in the Rand to almost all the major currencies. It was a clear sign of risk back on again. The Jozi all share index closed at 33708, up 455 points on the day, or a gain of 1.37 percent. Gold stocks slipped, but that probably was the currency, the Rand which had been trading at 8.40 plus the US Dollar earlier in the week, traded at the best level in weeks, down to 8.19 to the US Dollar. Mr. Risk-on was shooing Mr. Risk-off away from Mr. Markets house. There were a couple of downgrades, from the day prior where ABSA and FirstRand were both given the 'unlike' button, with a ratings change from buy to hold. Not that I care too much about 12 month target prices and estimates, because our time frames are a lot longer than that, but they matter.

When a scandal rocks, you expect someone to take the fall, not so? Accountability is very important in the way the world works, saying sorry is a hard but necessary part of life. In South Africa I get the sense that we are not good at this. The story that I am referring to is the Barclays Chairman having resigned overnight. He said sorry. And then he went his own way. No wait! He is staying until the company finds a replacement.

Is it a good thing that Marcus Agius took the fall? I reckon yes. According to the Barclays CORPORATE GOVERNANCE document that I dredged up: "The Chairman's main responsibility is to lead and manage the work of the Board to ensure that it operates effectively and fully discharges its legal and regulatory responsibilities. The Chairman will lead the Board to ensure its effectiveness in all aspects of its role, including setting its agenda to ensure that adequate time is available for substantive discussion on strategy, performance and key value issues."

Accountability is key for shareholders, lawmakers, employees and Joe public alike. So whilst I think that this is a step in the right direction, I am not too sure what it means about the culture of the bank itself and the perception by politicians at large. Only bad things for the bank. In CEO Bob Diamond's letter to a Member of Parliament Andrew Tyrie (who is also the Chairman of the Treasury Select committee) he makes it clear that this sort of behaviour is out of line: "The first issue is that Barclays traders attempted to influence the bank's submissions in order to try to benefit their own desks' trading position. This is, of course, wholly inappropriate behaviour. Barclays submissions should reflect the cost of interbank borrowing rather than individual traders' positions."

And then Diamond says something even more interesting, that will leave you saying a multitude of things, these days expressed through short hand in text messages and social media: "It is also important to note that these traders had no way of knowing whether or not their actions would ultimately benefit or detriment Barclays overall. They were operating purely for their own benefit. This inappropriate conduct was limited to a small number of people relative to the size of Barclays trading operations, and the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders, at the time that they were made. Nonetheless, it is clear that the control systems in place at the time were not strong enough and should have been much better."

Undoubtedly the way that Libor functions now is kind of silly, as John Cleese in a Monty Python act might say. It is rather silly. How can the banks send their rates to Thomson Reuters, who then aggregate and slice and dice and then come to a number. Surely the process itself, of which hundreds of trillions of Dollars globally depend on a rate, should be refined. The WSJ (in an article titled Barclays's Agius Is Stepping Down) puts the silliness into perspective, or perhaps it is just me: "Libor - or the London interbank offered rate benchmark - is supposed to measure the interest rates at which banks borrow from each other. It is based on data reported daily by a 16-bank panel."

And then the reason why I think it is silly appears in the next part of the explanation of how Libor is set: "By 11:10 a.m. London time, the banks on the Libor panels submit to Thomson Reuters, as an agent for the British Bankers' Association, their estimated borrowing rates. Thomson Reuters discards the highest and lowest submissions. The remaining 50% of the submitted quotes are averaged to work out the Libor rate. By about 11:30 a.m. London time, Libor rates are published."

Discards the high and the low rate? And then averages? What is the point, if the importance is for tens of trillions in swaps, securities and loans depend on a few reported bank rates and then the aggregating by Thomson Reuters, is the only benchmark. That has to change. And no doubt will. Expect Bob Diamond to appear in front of the politicians.

Byron's beats covers a pretty poor trading update from Angloplats and shifting PMI.

"Anglo American Platinum's earnings for the period is expected to decrease by more than 20% from that reported in the six month period ended 30 June 2011. However, in view of volatility in exchange rates and metal prices, Anglo American Platinum cannot, with reasonable certainty, quantify the extent of the decrease in expected earnings other than that the decrease is expected to be more than 20%. The expected decrease in earnings is primarily as a result of lower sales volumes and lower metal prices achieved compared to the comparative period."

So not much info given but I can tell you now that reasons include lower production due to labour issues, increasing costs due to electricity tariff and wage increases. The Platinum price, as we spoke about a while ago is not actually that cheap when you compare it to oil. I wouldn't say that is an excuse for a 20% decrease in earnings. Last year the company made 1236c per share for the period. Assuming best case scenario, earnings are down only 20%, the company will make 988c. At R468 the company looks pricey for an industry that is struggling. I can't say in decline because I do feel the platinum price will pick up. We will await the full release on the 23 July for all the explanation.

In other news we had a whole lot of PMI numbers released today which paints an interesting picture. For the record PMI measures activity in the Manufacturing sector. Any number above 50 shows expansion. Any number below 50 shows a contraction. As expected the average for the Eurozone was not good, 45.1. But, there is light at the end of this tunnel. Ireland which was one of the first countries to be bailed out and have had a torrid time showed their best improvement in manufacturing for the last 12 months. The read came in at 53.1. The Irish are still being funded by bailout money but the yields on their bonds have decreased exceptionally. If they can do it, so can the rest.

Elsewhere India showed their best month on month increase since August 2011 with a healthy looking read of 55 while locally we had a negative read of 48.2. China also came in with a read of 48.2 as their economy shifts to one of higher wages and stronger consumers. I am not trying to sugar coat this read. It is not good that Chinese exports are decreasing. Lower demand from Europe is taking its toll on both our economy and the Chinese. No one said it would be easy.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Lift off. Stocks surged through the session, closing at the highs, with the nerds of NASDAQ rising a whole three percent on the optimism that the Europeans had finally done something concrete, or moved in the right direction. Forward is a good direction to move. The broader market S&P 500 added two and a half percent to 1362, whilst the Dow Jones added a more modest (relatively speaking) 277 points or 2.2 percent to close at 12880. This was the single biggest rally and day for markets since last October, so I guess it is worth a serious mention then.

The rally was pretty broad based and across all sectors, energy, materials conglomerates all clocking huge gains, only one stock went backwards in the Dow Jones Industrial Average (out of 30), and that was JP Morgan. The size and scale of their hedge gone bad is just being predicted at this point. The London Whale finds his position at a parish called Kemble, the source of the Thames River. I beg your pardon, the River Thames is the correct way to name the river. If you are interested the FT has a whole lot of articles on how and why the London Whale trades have not yet all been unwound, meaning what, I am not too sure. So, JP Morgan still have serious problems on their hands.

Currencies and commodities corner. Dr. Copper was last at 346 US cents per pound, the gold price is slightly lower at 1592 Dollars per fine ounce. The platinum price is also slightly lower at 1434 Dollars per fine ounce. The oil price is also lower at 83.66 Dollars per barrel, but had a huge rally late last week from prices that we have not seen for the last 18 months. The Rand is firmer at 8.17 to the US Dollar, 12.79 to the Pound Sterling and 10.37 to the Euro. We are firmer here today, just a little bit, after having been lower initially.

Sasha Naryshkine and Byron Lotter

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