Slasher's coffee beans

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. It was always going to be tough to hang in there, just to hold onto the gains of the prior day. We almost did, by the close, the Jozi all share index had shed 63 points to 32748, that is a percentage loss of 0.19 percent for the day. Basic materials, the resources 10, those collectively added one quarter of a percent whilst the banks gave up one quarter of a percent. Gold miners were the real winners (on the day), having added 1.38 percent from where we started. I am going to keep on saying it, over a longer dated period gold miners have not been a good investment, the Rand gold price, a Kruger Rand for instance or even better, the GLD ticker, now that has seen some amazing gains.

Over five years exactly, 1 December 2006 to closing price last evening, the gold index is up 5.6 percent. Whilst the Rand gold price is up 197 percent! Whoa!!! I explored a little further, there are 334 companies listed in the Basic Materials index in the US, 71 of those are in the sub category Silver & Gold. That index is up 32.67 percent over five years. The Gold ETF, ticker GLD in New York is up 164.57 percent over five years. The precious metal miners around the world have solidly underperformed the bullion price. It would have been better to have just held the physical. Next question however, what to do from here. Personally and at a company level, like I (and we) have said many times, I do not understand the fundamentals of holding something (paying associated costs) for something that does not pay any dividend. I am prepared to lose out on the price because I do not understand the hype and historical significance of holding physical metals.

I will side with Warren Buffett on this one who famously said (I am sure I have told you this 100 times): “Gold really doesn’t have utility, I’d bet on a good producing business to outperform something that doesn’t do anything.” Or my other favourite one: “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Phew, enough playing with fire today, I will step aside and excuse myself from the gold bulls who are seething now. Bye!

I was starting to worry that there was not too much corporate news going on, it was all being dominated by news flow from Europe specifically, when SABMiller confirmed that they had got all the necessary approval to buy Foster’s. Good for them. As hard as I try I just cannot see Australia as an emerging market, but that is perhaps the point, diversifying away from the fast growing Latin America region. Here is the simple announcement:

“SABMiller plc (“SABMiller”) is pleased to announce that, following the approval by Foster’s Group Limited (“Foster’s”) shareholders yesterday, the Supreme Court of Victoria has today approved the Scheme of Arrangement pursuant to which SABMiller will acquire all of the shares in Foster’s. The Scheme will be implemented on 16 December 2011.”

Dr. Foster’s is done and dusted. What next? Business as usual, but perhaps this does signal something subtle, a) no deal is too big and b) that SABMiller are looking outside of developing markets. Perhaps because most of the heavy lifting around half a decade back has been done! Meaning, all the acquisitions in emerging markets were done, almost like most of the big mobile deals in Africa were done too!

Another day, some more Brussels. I swear to you, this “European debt resolution process” has almost been as unappetising as actually eating a bowl of Brussels Sprouts for breakfast, lunch and supper for the last six months. The Netherlands, the UK and Germany produce a whole lot of them. The only reason anyone outside of Europe eats them is because they must have colonialist tendencies. The word delicious and Brussels Sprouts do not belong in the same sentence. But this is not a culinary piece, but rather trying to understand what the Europeans are up to, how they are closing in on a deal of sorts. I was pretty amused with this piece: Europe’s Race to the Bottom: How Austerity is Killing the Euro. Phew.

But I agree, and the opposite of austerity is stimulus, which you pay for later, whilst austerity means that you take the pain right now. Now I do not care which school of economics you belong to (the only school where you don’t have professors or sit with fellow students), ultimately the growth path is more important than what to do in a crisis! Yes, because only then will revenue collections improve and only then will countries be able to record budget surpluses. Or you hope. I was completely astonished and had not heard or read this before, but France last recorded a budget surplus in 1974. Yes. Since then their debt to GDP has risen from 22 percent to 82 percent last year. France however itself has been a huge benefactor of the appreciating Euro to the US Dollar, as have most of the economies of the region. I can see why ordinary citizens have felt the benefits.

But when I hear the French President say something along the line that if there was not fiscal integration then the Euro area would explode. Yes, he said explode. Why use words like that? But he also went on to say that they needed more discipline in Europe, and that they need to reshape Europe. Not physically of course, the Polish would have a heart attack. I remember my history teacher telling me something along the lines that the Polish borders had shifted more often than any other country in the region, so much so, that their most east Western border and most west Eastern border had intersected. Something like that. OK, but in the speech, Nicolas Sarkozy basically said that France and Germany had not come this far to lose the battle of the single currency, they had and have had that history in the past. I get it, no more battles on the battlefield. But my question is, even Italy has run a primary surplus, France has not recorded a surplus since 1974. What is the anxiety of the triple A rating then? Is it just me that thinks it is absurd that you can’t expect the top notch credit rating if you can’t come close to recording a surplus? And over 35 percent of the workforce works for the government. Eish, not fixable immediately.

Just this morning we have the German Chancellor delivering a declaration on suggestions for an EU Treaty, that I am sure will face much scrutiny. In fact she is speaking as I am writing this. I do not speak German and I have not seen any document as of yet sadly. But the wires are telling me that she is saying that “they” need to strengthen the EU economic union and this will be the central theme at the next meeting, 9 December. And more importantly, she said that they cannot solve this overnight. Really? And she says that this current crisis will take years to resolve. Yip, I have always been saying that, expect this to unwind over half a decade or so. This is the worst crisis since the inception of the Euro. Of course, nothing new there either. So, as we said yesterday, lots of muddling towards fiscal integration. And no, Europe or the Euro is not finished, I said that part. AND, she has said that Economic and Fiscal integration is on the agenda. And that the ECB is not the same as the Fed or the Bank of England. True!!

And in closing Merkel has said that Euro Bonds are unthinkable without Fiscal Union. My favourite “boytjie” this morning, David Bloom a South African that is at the top of his “stuff” in London, he is a currency expert for HSBC. He said this, the ECB do not want to “print” because they want governments to start running a surplus. But they eventually will “print money” because they will have to. In between now and then, we are set for tricky times. Credit Suisse have come out this morning suggesting that Euro GDP will contract by half a percent, but the US should skirt through a recession. All I can say is that the Europeans leaders are on it! And you should not get too anxious about the zone failing. Like I often say, there are more

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Initially the weekly jobless claims disappointed, albeit by not that much, but the excitement about jobs was all Friday, what is the number going to be? Tech stocks did better than the rest of the market, some heavyweights moved north quite decisively, there was also a Zynga IPO range was between 8.50 to 10 Dollars a share and that they were looking to raise 1 billion Dollars. Now if you do not know who Zynga is, go and stand in the corner for a while and then come back and check out their website. Mail.ru owns a modest stake in Zynga. And Naspers owns around 30 percent of Mail.ru. Can you see now why the Zynga IPO is of a little more interest to us than most.

According to this old piece that I found -> Mail.ru IPO to Give Mortals a Stake in Facebook, Zynga, this part is quite interesting: “The company is clearly a Russian powerhouse, but the holdings that matter most to Western investors are its stake in Facebook (2.38 percent), Zynga (1.47 percent) and Groupon (5.13 percent).”

Obviously the Groupon stake has been diluted, but the Facebook stake is interesting, and Zynga is too here, because it is relevant!! Right now of course. So when trying to get to your Naspers NAV, you could measure what your indirect stake is in these businesses. Take the Naspers Mail.ru stake and multiply it by the percentage amounts that they (Mail.ru) own. Fun.

This “jobs number predictions” is like hide and go seek in the dark without any reference point, or knowing where the walls/tables/rugs are. I am sure that it is a very serious business predicting the number of jobs added in the US, the predictor bots have come back with 125 thousand new jobs. But that labour market is crazy, people carry cardboard boxes and nobody whispers under their breath, just say better luck next time buddy! All I can say is that this number is too unpredictable to chat about with any real authority. But like the rest of the world, we watch this number with the same interest.

Commodities and currencies corner. Dr. Copper is much higher at 360 US cents per pound, the gold price is also better at 1749 Dollars per fine ounce, the platinum price is “flat” at 1561 Dollars per fine ounce. The oil price is last at 100.71 Dollars per barrel. The Rand is last at 12.62 to the Pound Sterling, 8.05 to the US Dollar and 10.85 to that “finished currency” the Euro. Finished is sarcastic from my side of course. We have started lower and higher here, oscillating ahead of the big number.

Sasha Naryshkine
Email us
Follow Sasha and Byron on Twitter
011 022 5440

All the action happened just after midday yesterday. And you know that they say that things come in threes? Well, these were three pieces of good news for the bulls that helped us and the rest of the world a whole lot higher. First there was news that The People’s Bank of China had lowered the triple R, or the reserve ratio requirement by 50 basis points in response to a slowing Chinese economy. Well, I say slowing, slowing to nine percent, I will take that each and every day of the week for the next twenty years. Or even one year. So that was the first event, the second was a coordinated response from the central banks of the world, effectively supplying cheaper dollars to financial institutions. And then the third event of the day was the private payrolls number, the ADP employment report which was much better than anticipated. It did not stop there, there were extra reads in the form of Chicago PMI, even much better housing data added to the cheer. All good data and the bears were drubbed as the bulls had an absolute field day.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We benefitted hugely as commodity prices rallied hard, but there was a slight brake put on as the Rand surged too. This was the Mr. Miyagi risk on in a big way. Daniel-san, Breathe in through nose, out the mouth! OK, I had to add that piece. It is not often that you get a 1000 point plus surge in the index, yesterday was such a day. The Jozi all share index closed at 32812, up a whole 1176 points and basically hauling us into positive territory for the year. That monster move was a gain of 3.72 percent on the day, when last did you see that? Not very often I tell you. Banks added 4.45 percent, resource stocks added 4.63 percent, someone must have underperformed. Ah yes, the general retailers only managed to add 2.38 percent, the food producers also underperformed the broader market, only gaining 1.79 percent. Boom. If you were short yesterday, you scrambled. If you were long, it was like eating zero calorie Ferrero Rocher chocolates (same taste) by the dozen. There is a good thought, if you are a chocolate freak!

OK, let us start with the central bank coordination first. The six central banks who decided to take this coordinated action were the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank. This is not the first time that these banks have acted in unison and it will not be the last time. The official Press Release is available from the Fed’s website. Quite simply, these six central banks are coordinating “actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.” Phew.

What the hell are swaps though? This is a very detailed, but not so complex explanation. By a pom of course: A Guide to Central Bank foreign exchange liquidity swaps. Really well done, a little old, but you needed some refreshers.

The Fed have their own version of Q&A on swaps that I found via the WSJ (actually via Counterparties, one of my favourite RSS feeds), here is the link: Frequently asked questions: U.S. Dollar and Foreign Currency Liquidity Swaps.

I thought that these were *nicely* set out, for all the armchair Federal Reserve folks. Like the first question: “What is the purpose of the foreign currency liquidity swap lines?” The answer could be, to restore confidence when everyone is scared. But instead the Fed’s answer is “The foreign currency liquidity swap lines are designed to provide the Federal Reserve with the capacity to offer liquidity in foreign currencies to U.S. financial institutions should the Federal Reserve judge that such actions are appropriate.”

In other words, when all the other central bank governors feel their danger meters start sounding too many clicks, like a Geiger counter, that is when the Fed (and the others) steps in. Now how does everyone know what the right time is, in particular the Fed? Easy. Here goes a link that will trigger some vague memory (it was ugly back then): 3 MO LIBOR – OIS SPREAD. HUH? What is that? Wiki explains the LIBOR-OIS spread. For the purposes of those of you that don’t want to visit the 3 MO LIBOR link, here is the visual from Bloomberg:

Normally in almost every circumstance other than a bond yield, that graph would look good, no? But you can see steadily that the interbank rate has been rising, meaning that the banks trust of each other is diminishing. Which sucks real bad, there is no other way of putting it. Historical levels are around 10 basis points. During the worst of 2007/2008 the spreads exploded over 350 basis points, disaster, sometime just after Lehman Brothers imploded. Fiddle with the link above on the interactive graph, get a five year time line, you will see what I am talking about. Nice. Early intervention is best to restore confidence, who said that the various central banks learnt nothing from last time? In fact the New York Fed have a FANTASTIC paper titled The Federal Reserve’s Foreign Exchange Swap Lines which explains how it actually worked last time. Lender of last resort with an ammunition depot bigger than anybody else. All this action starts on the fifth of December. That is Monday. For the time being the Libor spread has widened a little more to 0.47 basis points, watch this all of next week.

Beijing central. 39^o 54′ 50″ N, 116^o 23′ 30″ E The first thing that powered us ahead yesterday was the Chinese authorities deciding to cut the reserve ratio requirement of their banks in response to a slowing (all relative) economy. UBS estimates (via a Bloomberg article) that the central banks action immediately adds 55 billion Dollars worth of liquidity to the broader Chinese financial systems. I had to search far and wide for decent commentary on this story, you would believe me when I said that every major publication had oodles of info on the coordinated central bank action, but little on this. The WSJ was my saviour, with the China Real Time report segment with this article: Economists React: China Reserve Ratio Cut as Manufacturing Slows. Others suggest if you have access to the article that even more liquidity might be added through this move, as much as 63 billion Dollars.

Most economists surveyed here in this WSJ article seem to suggest three things, one the authorities are acting slightly sooner than anticipated and two, the PMI data this morning (at a 32 month low) suggests that they are just ahead of the curve. And on top of it. And third, inflation in China is seemingly under control and the authorities are quick to act. Did we doubt the Chinese authorities around here? No. They are stuck with a good problem. Imagine folks in Europe worried about a slowing economy with the last GDP read at 9 percent. Yeah, imagine that.

We did not get a chance yesterday to have a look at the South African release of Gross domestic product. “Real gross domestic product at market prices increased by 1,4 per cent quarter-on-quarter, seasonally adjusted and annualised” And then “the unadjusted real GDP at market prices increased by 3,1 per cent year-on-year”. Sound good or bad, or not really like too much unexpected? Out economy grew 3 percent over the last year, in a very tough year where Europe barely got out of their seats (from a growth point of view), that is not the worst outcome.

And if ever there was startling evidence of the mining sector doing very little by way of growth, then it hits you in the face in this report. Although it could just be a major seasonal “thing”, but the contraction in mining and quarrying is not encouraging. Truthfully, on a seasonally adjusted basis at constant 2005 prices, the last third quarter showing from mining and quarrying is the world Q3 since 2009. And if you wade through the tables all the way back to 2000, at no time was it worse for this industry. In a WSJ article titled South Africa GDP Disappoints, the link to Europe and manufacturing is pointed out. So there you go, retail services growing strongly, manufacturing, well there are many “challenges” there.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. The other big reason yesterday that markets rocked was the November 2011 ADP National Employment Report, which was comfortably above expectations. Perhaps the least noticed (because of all the other noise) employment report in an absolute age, what was also encouraging was that the prior month was revised upwards. Small businesses is where employment is growing strongly. So this perception that we get from the TV folks in New York that the democrats this and that, well, the ADP data kind of rubbishes that theory. Anyway, Joe Kernan, the outspoken anchor of the CNBC early morning show in New York, has never shopped online. Never. My already dim view of him dropped even further after hearing that. What a hoot. He is always seems to portray his political views as mainstream. Somehow, or at least that is the perception that I get!

What was also kind of interesting from the report was this single line: “Employment in the construction industry increased 16,000 this month, the most notable gain in employment in this sector since November 2006.” Wow. Amazing. Kind of related was the pending home sales, which month on month grew over ten percent. Expectations were for a marginal increase. And then the other data release that everybody loved was the Chicago Purchasing Managers’ Index (PMI) which managed to clock 62.6, the nest reading since May. I am starting to get the sense that we are slowly working our way from the worst. From a data flow point of view, again there is seemingly a disconnect between what is happening in Europe and the US. Friday will be the short term litmus test, nonfarm payrolls, the most eagerly awaited number of the month by all folks alike. Expect I am trying to ignore all this short term news, so much emphasis is placed on this short term data, which is then subsequently revised wildly around.

Let me explain. Everybody got their knickers in a knot about the first August was a big fat goose egg. Zero. That was the initial read. Remember? Markets did not take lightly to this news. The following months report saw that initial zero revised upwards to 57 thousand jobs added for the month of August. Awesome. Now wait for it, the month after that, the number then gets revised upwards to 104 thousand. And the original September read of 103 thousand was then upped to 158 thousand. Again. What a hoot!! How can at the end of October now be around 160 thousand extra jobs than originally thought. Do you see why to me this number means what it means, but don’t place your life savings (and then add some leverage) on what the Labour (Labor) Department says. Really! My two cents worth, everyone remembers the headline number, nobody even cares (or only a few people) about the revisions. And if the original August estimate, the two months prior were revised downwards by 58 thousand. So basically, at that time “things” seemed so awful. My advice is simple, the number has really big market moving capability, but yet is prone to wild revisions. So take the initial print, but do not get too excited. And for the record, the predictor bots say 120 thousand new additions.

Commodities and currencies corner. Dr. Copper is lower at 353 Dollars per pound, the gold price is on the up and up, last at 1752 Dollars per fine ounce. The platinum price is flat after a strong rally, the last quoted price is 1752 Dollars per fine ounce. The oil price is last at 100.77 Dollars per barrel. Comfortably above 100 bucks a barrel. The Rand is slightly weaker after a ripper yesterday, 12.78 to the Pound Sterling, 8.13 to the US Dollar and 10.97 to the Euro. We have started a little lower, comfortably off the worst point of the day, even if markets track sideways until nonfarm payrolls tomorrow, that would be a decent enough outcome for the bulls.

Sasha Naryshkine
Email us
Follow Sasha and Byron on Twitter
011 022 5440