Slasher's coffee beans

I could almost hear that Billy Joel tune ringing out in the background, we didn’t start the fire. I remember that there was a specific year, where at the end I tried to put the events of the year into the tune. I tried the year after, I think it might have been 2007. Although I have an archive, not all of it is online. I should from time to time stick up the old articles, how it was going on that day. The reason why I mention that song, we didn’t start the fire, is because yesterday the cats were plentiful and the pigeons were the bulls, scattering. The reasons were a few, that HSBC flash PMI number certainly spooked the commodity bulls. That had an impact on our market. The other big event was a “failed” German bond auction, we will have a look at that.

There was a slew of US economic data, some alright, some better than anticipated, some slightly worse. Meanwhile, in Latvia, an aptly named Krajbanka (sounds like crash bank) was seeing long queues reminiscent of those of Northern Rock, from earlier in the week -> Scores of Latvians pulling money out of the bank Krajbanka. See the article titled Latvia Concern on Krajbanka Won’t Spread, Lender Group Says.

Bank stress tests looming in the US, some people are getting anxious by the worst case scenario that the Fed have put forward. I can’t remember anyone having shown the Fed’s best case scenario. We will have a short look at this. Next on the radar screen were the results from Eskom. For their first half. And what might actually happen in the future from a reporting point of view. On the corporate front there was a whiff that the Vodacom sale of their DRC asset might be sooner than you think. Locally, there was a Consumer Price Index – October 2011 which suggests that any slim chance of a rate cut is possibly shelved for the time being. Darn weak Rand. Yip, darn weak Rand.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Local not so lekker yesterday, as we said commodity stocks sank nearly two percent, there was a slight Rand cushion, but that was not enough. The lower house in Australia have now passed the Aussie Senate the baton to decide whether or not to proceed with the mining tax -> Australia’s mining tax passes biggest political hurdle. Does the Australian government somehow think that they created the new client in the form of the massive Chinese demand over the last decade? And therefore the companies that were chugging along in the past, somehow they must pay a mining tax that will cover what? The planting of trees? The building of dams? And what about all the jobs created by the mining houses that are tax paying jobs? Yes/No? Am I being unreasonable?

The overall market slipped another 413 points to close the day at 30956, down 1.32 percent. Sasol was a notable outperformer, up just over four fifths of a percent. In case you missed it yesterday -> Sasol trading update. SABMiller (+0.45%) was the other major stock that stood out, ahead of the rest of the market with their defensive attributes, you know, people will always drink beer.

Byron’s beats speaks about the listed entity that owns some really well known South African media brands. But is not doing that well as a business.

Media conglomerate Avusa came out with results for the 6 months ended 30 September 2011. Lots of activity here so it is quite a complicated set of results to evaluate. Let’s just refresh our memories and see what this company, who owns brands such as The Sunday Times, Businessday, The Sowetan, NuMetro and Exclusive Books are up to. For their full list of businesses check out their website here.

Firstly these results include the recently acquired Retail Solutions business which resulted in a 23% growth in revenues. But remember they raised cash for this acquisition by issuing shares which will affect earnings negatively. Then they had an expression of interest to acquire the whole company from a consortium called Capitau. This however fell through with costs. They also had big management reshuffles with former CEO Prakash Desai parting ways along with a nice separation agreement. The board was also reshuffled.

A combination of these factors resulted in the company moving from an interest earning to an interest paying position. Combined this with poor performances from the books and entertainment divisions and we get earnings per share of 25c, down 60% from 61c last year. It gets even uglier, this includes a once off payment they received for the sale of some commercial properties owned by the book division. This means that headline earnings actually came in at 6c, down 90% from last year. Ouch.

Let’s look at the divisions to get a better understanding of the company as well as which economic trends are taking place. We already know that Books and entertainment took a hit. They blame tough trading conditions for this but according to the other retailers, people are spending. Unfortunately it’s pretty obvious who is stealing their lunch. iPads, Kindles, notebooks, home theatre systems, DSTV’s box office, movie streaming, I could carry on for ages and these technological innovations are only going to get better. For the consumer that is, not for Avusa. They are increasing their exposure in digital publications but I fear they may be a little late. Maybe textbooks have some potential in this space.

Media also struggled as advertising slowed due to the economic slowdown. Newspapers and magazines will also face the same competition from new technologies. I haven’t bought a newspaper in years, I consume all my information online on my notebook or through my phone. Twitter has become my own customised newspaper. This trend will continue, it’s just so much easier and mostly free. They do have some online initiatives which I enjoy and use but unfortunately these are small parts of the bigger picture. Retail Solutions actually did quite well and was responsible for most of their profits after picking up some good printing contracts. Again, shifts in the way we consume will put pressure on print.

I think by now you know that I am not very optimistic about this company. Naspers went the online way, they didn’t. Naspers is worth R144bn, Avusa is worth R2.4bn. Maybe they can get their online businesses going but I fear it is too little too late.

Oh, and back to regulation, I do not really like the sound of this: ANC Targeting Export Taxes, Pension Funds in South Africa’s Economic Plan. Sounds like suggesting forced funding to me, not like it has never happened before, someone pointed out to me. Again, if you are exporting something, it means that there is a demand for that product. You didn’t make or create the demand out of thin air, it exists because somebody needs your resources. And the explosion and need for resources was as a result of someone else’s economic expansion policies, not something that you had a hand in. Not good.

And we were talking about unintended consequences yesterday, if you remember I wrote this back in September of 2009 in a note titled -> Labour day yay: “Just this morning I see that Freddie Flintoff is heading to setup shop in Dubai. He wants to become the worlds best exponent of the shortest form of cricket, the one that Ricky Ponting just gave up at international level.

Reasons for living in Dubai for Freddie include huge tax breaks. What, and you don’t want to live back home for the pies Freddie and pay the bigger taxes there? When you can live a foreign life, plus you get more sun for you and your family. And India is closer. Plus England aint that far either. Got that Gordon?”

Gordon (Brown) of course at the time was prime minister of England. We know how that ended. I was interested to come across a piece that Jim Pethokoukis tweeted yesterday titled Why the 50p tax makes “no economic sense whatsoever”. What a surprise, so you mean higher taxes chase investors away? Why didn’t anyone think of that at the time? {Sarcastic} Oh yes, there were elections looming and rich people needed to be taxed out of sight, ah yes, I remember now.

On the opposite end of the spectrum and falling into the yes, this is good column was the news yesterday that the Vodacom Congo sale may be permitted to go through. I was chatting to one of my favourite journalists two days ago and I said to him, I kid you not, if someone wanted to buy the whole asset, then I guess that the minority shareholders that have given Vodacom a headache, well, they might be on board. As the saying goes, everything is for sale, it is just about the price. Who is the buyer? Well, MTN’s name has been bandied around. I suggested to my journalist friend that even the name of Safaricom be thrown into the hat, why not? I suspect that the sale announcement will be relatively soon.

All these worries about the failed German auction yesterday, are they founded, or not? Well, I guess so when you read these headlines: “Disastrous” bond sale shakes confidence in Germany. Notwithstanding all of that, this is the lowest ever yield recorded in a German auction. Below the two percent issue rate. I think that was the point that I was trying to get across here in the office yesterday. The German Treasury might not have been able to get the full issuance away, BUT this is the cheapest debt that they have ever issued in the Euro era. So perhaps bond investors thought, hang on a little, I can get a new French issuance for over three and a half percent. Courtesy Bloomberg, via this link -> German Government Bonds 10 Yr, here is a German Ten year bund yield over the last five years

Or, you can buy the French ten year bond (should they be issuing new bonds) which yields around 3.65 percent. Do you expect the French to default? Or even the Germans? It could happen, it has happened in the past, but that was as a result of wars fought and costly expenses with limited economic progress. Call me crazy, but perhaps this flight to safety just saw the German yields as just not good enough. See back in the middle of 2007, the yield was 4.7 percent. We did not say that it was way too expensive for Germany back then, did we? Anyhow, that is just my take others are viewing it as a complete failure and blame the rest of Europe’s woes, perhaps, here is the WSJ -> German Bond Sale Spurs Worries.

This leads me to my next piece. I can’t bear it anymore! I am talking about the headlines that I read. Close to the cliff. Peering over the edge. Save the Euro! That last one is my favourite. Save the Euro from who? Investors are spooked, ordinary citizens are even more spooked by the headlines that we read. Question, if you are so close to the edge and a strong wind blows if you fall off the edge, you should fall into the sea below. Right? So all these analogies imply that things are completely awful in Europe. We have seen the recent data suggest as much, the third quarter GDP numbers suggested that growth was pretty sluggish. There was a stage yesterday where Paul said that the headlines suggest that Mercedes Benz employees in Stuttgart were laying down tools to walk into the snow because nobody was ever going to buy another motor vehicle ever again. Never. Actually that is not happening, but you would swear that it was.

Just this morning we see German growth numbers. Yes, their economy grew in the third quarter. By half a percent, but that was anticipated actually. Yes, it is a train wreck. No wait, it is not, here is the official English release -> Gross domestic product in 3rd quarter of 2011: upswing continues and I was quite smug about this part: “In a year-on-year comparison, too, the GDP grew strongly, although not as strongly as in the first half of the year: In the third quarter of 2011, the price-adjusted GDP was up 2.5% on a year earlier (calendar-adjusted: +2.6%).”

Yes, things are so bad. Let me get this right, exports clocked an increase of 7.9 percent for the third quarter to 326 billion Euros. The best quarter I can see in the last seven. Perhaps the current quarter is going to be a whole lot worse, most of the indicators are suggesting as much. I really have not got my knickers in a knot, a weakening Euro is good for German exports. Provided the demand side looks OK, right? Again some survey data from the IFO institute this morning has beaten expectations, giving everyone a bit of a lift. And would you believe that Italian business confidence has improved too. What? Have all these people not been reading the same news as me??

Notwithstanding all of that OK, the problems that Europe have are structural. And that Jim (James) Pethokoukis pops up again (I do read his stuff) with the root of the problem: How did Europe get in so much debt trouble? This chart says it all. Quite. But the second part of the problem is solved when GDP growth returns and it will. Rich people in Europe are not about to go back to cave living. It is a bit unfair of Jim to use the 2009 GDP, perhaps a figure from 2013 would give a better figure, but you get the point, right? Too many entitlements as a percentage of GDP. Time to get working again, the past was too cushy. But here goes, in case you did not get a chance (or ignored the link, I do not mind), here is the rather telling picture:

Phew. Thanks for the rather ugly visuals, I would want to revisit this in 3 years time (2014) which would be five years from the initial snapshot in 2009. All the austerity measures taken and all the pro growth (not seen yet) measures that will be implemented by then. That should change things up a little.

Commodities and currencies corner. Dr. Copper is last at 330 US cents per pound. The gold price is higher, last at 1698 Dollars per fine ounce. The platinum price is also better at 1551 Dollars per fine ounce. The oil price is better at 96.79 Dollars per barrel. The Rand is weaker at 13.24 to the Pound Sterling, 8.51 to the US Dollar and 11.40 to the Euro. Which I thought was finished. Today we have started better. Pity that the participation rate will be quite low, the Americans all eat turkey and pumpkin pie. According to Wiki (which I made a donation to this morning): “The feast consisted of fish (cod, eels, and bass) and shellfish (clams, lobster, and mussels), wild fowl (ducks, geese, swans, and turkey), venison, berries and fruit, vegetables (peas, pumpkin, beetroot and possibly, wild or cultivated onion), harvest grains (barley and wheat), and the Three Sisters: beans, dried Indian maize or corn, and squash.”

Why do we not emphasis the fish element more? Because turkey is possibly tastier and easier to get than an eel. Clams and mussels? All this association with turkey and pumpkin, time for more fruit and berries guys.

Sasha Naryshkine and Byron Lotter
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