Back to interest rates

“When will the FED raise rates? No one knows, not even the FED themselves. What we do know is that they will only raise rates when the economy is strong enough to handle an increase in interest rates. As we have said before, the rate will probably tick up very slowly and maybe in smaller increments than the traditional 25 and 50 basis points. “

To market to market to buy a fat pig. Yesterday we had non-farm payrolls which came out on a Thursday instead of the usual Friday. It’s a long weekend in the US, they are celebrating the 4th July. The numbers were a bit worse than expected resulting in the dollar weakening and the 10 year bond’s yield dropping, both indications from the market that a September rate hike might not be as likely as people have expected. The negatives from the numbers were that May and April both had revisions down of their figures, May was revised lower from 280 000 to 254 000 and April from 221 000 to 187 000. The 200 000 level is a psychological level, so April breaking below it sent a negative message.

A tricky number to read is the unemployment rate which fell from 5.5% to 5.2%, which is in a level that the FED considers to be a ‘full employment’ number. The tricky part comes in the fact that 432 000 people left the labour market, which simple maths will tell you, if there are 200 thousand more people employed but 400 000 less people in your total labour force, the unemployment number has to come down. Did the 432 000 people leave the job market because they were discouraged and had given up looking for a job? Or because they felt positive about their future and went back to do an MBA? We are also seeing a lot people from the baby boomer era retiring. The FED has to decide which reasons were the stronger driving force for those people leaving the labour market, it is probably more discouraged workers I’m afraid, which would mean the job market is not as strong as they would like it.

When will the FED raise rates? No one knows, not even the FED themselves. What we do know is that they will only raise rates when the economy is strong enough to handle an increase in interest rates. As we have said before, the rate will probably tick up very slowly and maybe in smaller increments than the traditional 25 and 50 basis points. What you will probably find is that going forward the stock market will continually trade at higher multiples than usual with lower average returns but the returns on cash will remain close to zero.

Did you see the moon last night? It was your “once in a blue moon” moment. There seems to be a couple definitions of a blue moon, including when the moon looks blue in colour. The reason for the Blue moon was because it was the third full moon of a rare 4 in a season. Here is some more information on the phenomena – When is the next Blue Moon?. I Googled it but couldn’t find if there were any abnormal market returns which coincided with a blue moon but what Google did find were trading strategies relating to moon cycles. I think trading strategies based on volumes and Standard Deviations are shaky at best but moon cycles takes it to a whole new level. If you are a trader, please let us know what your two year returns have been after costs and income taxes?

The Shanghai Composite index fell a further 5.77% today meaning the market is down 25% in the space of 3 weeks! Here is a look at what the index has done over the last 12months:

You can see how quickly the index has shot up driven by the man on the street looking for a home for their savings plus using margin (debt) to boost their bets on the market. I think Chinese officials will contain any fallout.

Here is a comparison between the Shanghai Composite Index and the Hang Seng based in Hong Kong dollars, it is clear that they are very different in nature.

Graphs from

Company Corner

Apple music went live on Wednesday and is making a stir in the music industry. The debate centres around the amount of money that artists get paid every time you listen to one of their songs on a streaming service. The biggest competitor in the online streaming arena is called Spotify, who use the business model of allowing you to listen to music for free in exchange for the odd advert here and there. Apple have gone another route were they will charge a small monthly cost for the service which will allows them to pay the artists a higher price per play – Thom Yorke hates Spotify but his albums are on Apple Music. The long run result may be that more artists allow Apple to stream their music but none of the other streaming services, which would no doubt be good for Apple and make people more likely to stay in the Apple ecosystem. I signed up on Wednesday and I think the service is great! The cost is R60 a month and it allows me to stream any song that I want or it allows me to stream playlists based on a certain criteria. My favourite at the moment is “Best Guitar Riffs”.

Linkfest, lap it up

Given that we are at the half way mark of the year here is a look at some of the best trades for the year – Here are Wall Street’s best trades from the first half of 2015. Over a 6 month period prices can be driven by emotion just as much as fundamentals which is clear from the first one on the list, Chinese stocks.

Needing to know why something happens can take our eye off the ball and can paralyse us when it comes time to pull the trigger of buying/ selling a stock – Letting Go of the Why

Fun FactRed white and brew: Americans will drink $1 billion in beer on July 4th weekend

Taking the initiative puts you on the front foot and means in general you should be better off – This mathematical principle reveals the best way to get anything you want in life

Home again, home again, jiggety-jog. Our market broke below the psychological 52 000 mark, lead by anything connected to Iron ore. Data showed that Port Hedland had record ore exports last month with a 14% increase over the same time last year, the result being that the Iron ore price continues to fall. Kumba is down a whopping 43% this year! The Rand is doing a bit better than yesterday thanks to the weaker than expected jobs number from the US. Weaker jobs equals less chance of rate increase equals longer time period before cash flows into the US, which means we will only pay R/$ 12.25 for a dollar today.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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