Mixed messages scream at Yellen and co.

“As such, this is a case of Mr. Market taking the view that the Fed is going to raise rates sooner, rather than later. This spooked equity markets, sell first and ask questions later and rush to the safe haven of bonds. The broader market S&P 500 sold off heavily, down 1.5 percent (and a little more). The nerds of NASDAQ closed down just over a percent. Remember that this sell off was also in advance of Labor Day weekend in the US, today is a Federal holiday. I wonder then why schools started last week in the US? Delay it by a week and close a week later maybe? Come back the day after Labor Day? Not for me to choose.”


To market to market to buy a fat pig. So much for Spring, the weather over the weekend in Jozi, Jozi resembled that of something we would expect of you guys down in the Cape. Having lived for a decade in the Eastern Cape (school and varsity, not technically living there) I remember the sideways rain and the incoming dark clouds, accompanied by wind. At least there was no wind here in the city founded on gold, it was very welcome rain, soon our gardens will all start looking great again. What long only equity investors are hoping for, their gardens to start looking green again. After a period of uninterrupted gains across the board and stable markets for the most part of the year, stock markets have been seriously rattled by a combination of factors.

Forget the Greek “crisis”, that flavour has been cleansed off our collective palates with much less desirable tastes. The insipid taste of slowing Chinese growth with recent manufacturing data suggesting contraction. The weakening of the Chinese currency, the Yuan has also led people to believe that these measures are to shore up export revenues, although truth be told, exporting deflation and making goods cheaper for the rest of the world hardly seems like a bad problem for everybody else, right? That seems really good for the largest consumer base in the world, the Americans. The other really unfavourable taste for equity market participants is the inability to see past a pending rate hike in the US. I saw the old Fed Chair Alan Greenspan suggesting that he is baffled by recent market action in anticipation of a 25 basis point rate hike. He was on the box, talking about it all.

The second longest serving Fed chair (pipped by William McChesney Martin, the chap who coined the term “remove the punch bowl”) turns 90 next year, he has his own consulting company. If he casts his mind back to his childhood, I am pretty sure that he remembers the Great Depression in parts, his father was a stockbroker in New York. Greenspan worked on Wall Street, he also worked as an economic advisor, he is familiar with policy and policy studies. His first love was the trumpet however, he failed in his attempt to become a successful band member. In his mind the rate hikes were not the problem, the longer term problem (and he has experience for days, or bucketloads of experience if you prefer) was entitlements. Those were the problem. In the 1960’s he said that entitlements were 5 percent of GDP, they were now 15 percent, unsustainable in the long run.

As Paul said, whilst we were watching the interview, it was a view that we had not thought about for a while, this was a hot topic 3 odd years ago. It was not something that every hot blooded Republican spoke about. As tax receipts rose in a recovering economy, the size of the US government was cut, deficits narrowed and it was business as usual. Sound of mind and body entering his 10th decade next year March, superb!

Anyhow, the hottest Wall Street data point was Friday, a lighter than anticipated “jobs number” that sent global markets lower. The Employment Situation as it is known officially, the rest of us call it the jobs number. Anyone in capital markets globally knows it as the focal point of the month, the healthier the US jobs number is, the better the shape of the largest consumer base in the world, as a collective. Not that the number was bad, manufacturing and mining lost jobs, unemployment slowed to 5.1 percent (we wish), wages increased, those are both good things.

As such, this is a case of Mr. Market taking the view that the Fed is going to raise rates sooner, rather than later. As soon as a week and a half, the middle of September. This spooked equity markets, sell first and ask questions later and rush to the safe haven of bonds. The broader market S&P 500 sold off heavily, down 1.5 percent (and a little more). The nerds of NASDAQ closed down just over a percent. Remember that this sell off was also in advance of Labor Day weekend in the US, today is a Federal holiday. I wonder then why schools started last week in the US? Delay it by a week and close a week later maybe? Come back the day after Labor Day? Not for me to choose.

Locally stocks were again pulverised. Down over two and a half percent on the local front, giving up most of the gains from the middle of the week. We really have seen days of major ups and downs, a loss of 1300 points plus on the local front certainly unsettles even the best of us, right? I think that in times like this you have to accept that this is the way that equity markets roll. If you “own the good stuff”, all the boats sink when the tide goes out, know that your vessel is watertight. Or know that your swimming trunks and bikini are tightly secure, you are not swimming in the nick, to borrow a phrase from Warren Buffett. They (your cossie) are/is not going to come off when the tide goes out, no ways.

It is really hard, I know as I have seen this many times that private investors get spooked and throw in the towel at the first sign of weakness. The headlines tell you the worst is coming. Even the best of the best, as we pointed out last week get trounced in times of market volatility. Which lends this FT article (subscription only, sorry) credence: Hedge funds deserve a place on the shelf of perfect misnomers. The article points to Paulson’s fund, it gained 20 percent last year and lost over 7 percent last month, that hardly sounds boring and unhedged now, does it? I suspect that people who give their money to Paulson et al do so for the longer dated market outperformance, looking past the 2 and 20 fee structure. The upside should always be your in my opinion, I am yet to see any money manager who sticks money in when stocks go down. Know anyone like that? Perhaps drop the word hedge and just call it dynamic fund. Stay calm, check back again in six months.

Lastly, read the piece from Jeff Miller, about weighing the week ahead in the good and the bad section. Titled Weighing the Week Ahead: Time to Revise Year-End Market Estimates? and around one quarter of the way down he points to all the good data recently, auto sales being the best in ten years, amongst other broader economic measures, the only bad read has been a miss in employment by 50 thousand (47 thousand to be exact) from the estimates. I suppose, and scroll down the bottom of the report (from above), the Employment Situation Summary, upward revisions for the two months prior were a collective 44 thousand. And hey presto, your report is neutral, a statistical decimal point way down in a massive workforce of 156.4 million. All I can say is that the short term in nature people, who are only headline readers, impact on volatility. That friends, is a huge opportunity for all of us.


Company corner

Sasol have released results this morning at face value look OK, the dividend was cut in response to lower energy prices, that is understandable. They do however say that they expect oil prices to remain lower for longer, echoing what we heard from Impala Platinum last week, we are in an environment of lower prices for longer, when it comes to commodity prices. Without sticking their necks out too far, the expectations are for oil prices to remain low until the end of the 2017 calendar year. The truth is that nobody really knows, a major supply disruption or suddenly heightened conflict in an oil rich region may send the prices higher. US shale producers have been racking up a lot of debt, there is no doubt a lot of consolidation that will take place in the oil and gas sector across the smaller independent companies in North America in an attempt to “stay alive”, I mean that in a business sense.

Sasol aim to continue to cut costs, their headcount has reduced significantly over the last year, the company is responding to the lower prices as a matter of urgency. They have secured funding for 80 percent of the massive company changing Lake Charles project, this needs to be watched like a hawk until completion. I hope that the cost of funding does not rise significantly in this low oil and weak Rand environment, most specifically in Rand terms. I guess it has already, it must have. And lest we forget that rates are going to rise over the course of the project, albeit slowly. Our clients know our view on this company, we will continue to monitor it.


Linkfest, lap it up

This is another sign that globally there is a move to mechanisation of tasks everywhere. It makes sense that berries are picked by machines and not people. It frees up time to “think better” and perform other more important tasks for humanity. I think it is a mature sign of advances in society. Others may disagree. Machines take place of migrants as berry harvest booms.

This is a link to a story about the potential for Apple TV. What I find most amazing is that all the Apple TVs ever sold outpace that of all the Sony PlayStation 4s ever sold. Yes, more people have bought the Apple product than have bought the best selling console of all time. Apple and the TV Market.

The story comes via the Times of India: Naspers eyes laundry app MyWash. MyWash is on the brink of the biggest ever round of funding raised by an Indian startup, 17 million US Dollars is not chump change. This is a sign of maturity of the Indian economy, outsourcing domestic tasks in urban areas, and using technology to do it. Naspers and MyWash did not respond.

I have read many articles recently (and before the market hiccup of the last month) that people have got used to the market mostly going up. The result is a false sense of security and then increased risk taking, which is a great way to sow the seeds of your distraction – Hurricane Amnesia.

The realm where humans rule and computers have no place is in creativity. Researchers based in Germany are trying to change that – Computers can now paint like Van Gogh and Picasso. Will computers ever be considered creative though?

This article highlights the power of the internet, the power to connect people and share idea! – Man Asks Kickstarter for $20,000, Gets Over $9 Million

As we are in Spring and moving towards SummerScientists say they’ve found a way to slow ice cream’s melting


Home again, home again, jiggety-jog. The US market is closed today, it is traditionally the mark to both return to work and the end of the their Northern Hemisphere summer. Indeed the planting in my garden has been pretty aggressive lately, mostly herbs and vegetables, I am working hard to try and get that mix right. Another small scale project!

The Chinese (more important matters) cut their 2014 growth from 7.4 percent to 7.3 percent. In September 2015? Yes, true story. The Shanghai market after being closed for two days is lower after having been higher, the less immature markets across Asia are flat to modestly lower. I suspect that we should see the same here, the much weaker Rand to the US Dollar (it was at 13.87 a while back) is bringing back inflationary fears, notwithstanding low demand and low US Dollar energy prices. A little respite for consumers in the form of lower petrol prices at least.


Sent to you by Sasha and Michael on behalf of team Vestact.

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