Banks Stank

“And she may give some insight as to the path of their trajectory based on the data that they see. I was reading a Bloomberg article that suggested that the rate hike probability in March has gone from 50 percent at the beginning of the year (that is 40 days ago) to around 2 percent now.”


To market to market to buy a fat pig. Another stinker of a session I am afraid, stocks slid across the seas and far away on the concerns around global growth and rising rates in the US. Again. And whilst the real groundhog day was actually last week (love that movie), this was another look at the same thing. Heavy volume and heavy selling through the session, until the last hour and a half of trade. Michael said to me this morning, this is the lowest the Dow Jones has been in 22 months, I swear that I had to look at a graph to believe him. Whilst the indices during the washout last year were lower on the day, stocks have not closed at these levels for that long.

April 2014 is the last time we were at these levels, happy year of the monkey everybody. Year to date the blue chip index is down over 8 percent. Tech stocks have been dished a beating, down nearly 14 and a half percent year to date and now trading at levels last seen in May 2014. The broader market S&P 500 was last at these levels at about the same time, the lowest close since 2014, of course there have been 52 week lows that have been worse. Year to date the S&P 500 is down around nine and one-third of a percent year to date.

Adding fuel to the fire is the fact that European banks (starting with Credit Suisse last week) are under pressure, stories that Deutsche Bank is facing, ummmmm …. problems, manifested over the weekend. If you read through this BusinessInsider article titled Deutsche Bank is at a record low and investors are once again scared of European banks. It seems like the Deutsche Bank ADR has been available for investors to buy since October 2001.

Since then, Deutsche stock is down 72.65 percent, the stock has lost nearly three quarters of their value, closing at 15.57 Dollars last night. At the height of the market in 2007 when financials were being fuelled by the subprime market (and the Dollar was in the toilet relative to the Euro), the stock traded at nearly 160 Dollars, 10 times higher than it is now. Lest you forget, when we were talking about Bulge Bracket Banks a while back, Deutsche is the only German bank of that category.

Two Swiss banks, the aforementioned Credit Suisse and UBS make up the European contribution, one London bank in the form of Barclays completes that side of the Atlantic, New York based banks, Bank of America Merrill Lynch, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley finish the grouping off. And such, the liquidity of Deutsche Bank is of paramount importance to the global economy, I am pretty sure that central banks and all these banks have been talking. Information being articulated timeously and “hey” we are in charge is needed at a time like this.

Federal Reserve chair Janet Yellen delivers testimony to the lawmakers of the US in Washington DC this week, starting tomorrow. And she may give some insight as to the path of their trajectory based on the data that they see. I was reading a Bloomberg article that suggested that the rate hike probability in March has gone from 50 percent at the beginning of the year (that is 40 days ago) to around 2 percent now. Jeepers, “things” change quickly in interest rate markets. For this year, the only meeting that is likely to yield a better than even chance of rates going up (according to the same market) is the December meeting. Chances of a rate hike according to the market are lower than 50 percent for June and September, as well as being barely non-existent in March now. Wow.

So I guess for settling the jitters, this testimony is important, even as I often hold the view that it is a waste of her important time. I suspect that Janet Yellen will highlight the obvious worries that monetary policy makers have to deal with currently, European banks no doubt will be there for the first time, I am pretty sure that Mario Draghi and the European Central Bank are about to unleash some program. They cannot and will not be idle whilst there is a whiff of uncertainty in the banking sector. Not this time. I for one am expecting something pretty soon, most especially if anxiety through the likes of the less transparent end of the market are showing stresses, as the BusinessInsider article points out, the Credit Default Swaps (cost of insuring against Deutsche debt) has spiked, their own collateral (that of Deutsche) being called into question. Stand by, it is going to be a “process”.

Locally, unless you were in gold or platinum stocks, it was not exactly plain sailing. Gold prices have been going nuts this year, the stocks locally which are geared to slight moves have been going bonkers. Harmony Gold is up a whopping 155 percent year to date. You could be forgiven for thinking that you read that wrong, it is however right. Over five years however, the stock is down 50 percent, certainly lately the company has been (as per their release last year) “proving their critics wrong”.

There is always someone making money! In fact, on the list of stocks making 52 week highs appeared none other than AngloGold Ashanti, Harmony, Sibanye, GoldFields, as well as some odd ones too, Afrox was there. Headwinds continue to buffer emerging markets and by extension their listed entities, we are mere pawns in the global investing Chess. Not to mean that we can’t be masters of our destiny, there is plenty to like in the South African investment space. Just seemingly not now, stocks are soft, at the end of the session, the All Share had lost around two-thirds of a percent. Keep calm and carry on, judging from where futures are pointing and stocks over in Asia (Japanese stocks are down over five and a half percent right now), we are in for a sharply lower opening.


Company corner

Bidvest announced that they were going to spin off and separately list their Food Services business on the JSE. This of course is not completely new news, an announcement in October last year about a restructuring plan had been telegraphed to the market. No time frames are given, shareholders are made aware that various obstacles and hoops need to be cleared and jumped through (poor, apologies grammar police) in order for this to happen. When we wrote about this the first time last year, in a message titled: Bidvest restructure, we pointed out that the FoodService business was around 116 billion Rand of revenues and just short of 4 billion Rands worth of trading profits.

We approve and continue to hold the company on the basis that the sum of the parts is worth more than the whole business. We continue to hold the stock, the stock has been one of the few good performers so far this year (outside of the resources space), up just over 10.5 percent year to date. Most of the recent heavy lifting may well have been done, whilst at one stage the stock was trading at an all time high of nearly 380 Rand, it settled lower, only up 0,43 percent on the day after all was said and done. I suppose we wait for more clarity on the timing, as we said, hold the stock until we have further news.


What happened to Mediclinic yesterday? Effectively the old Mediclinic as you know it, the listed entity here, stopped trading. And as such, the code for Mediclinic, MDC, will return you currently a flat price at the close of trade Friday. What you end up with, as per our explanation from November titled Mediclinic, Al Noor update, is 0.625 shares in the new entity, currently called Al Noor. The share code tells you that the name change will take effect shortly, MEI is no doubt short for Mediclinic International. The share price here in Johannesburg will trade as a function now of the primary listing in London. Although as you know, most of the shares appear here on the share register, which is very different to say for instance, British American Tobacco or Glencore, those are different entities.

So don’t freak out when next you look back and see a couple of things. One, as you have been stopped out the base price (i.e. your purchase price) will be much higher than where you bought them, you have effectively injured a gain of a capital nature, the good news is that your base price is now higher. The next thing to look out for is that your share quantity has changed, the ratio of 0.625 per one has now been applied. Lastly, the share price is nowhere near 120 Rand, the Mediclinic International/Al Noor share price closed last evening at 196.60 Rand. Be on the lookout for the change!


Linkfest, lap it up

In investing, missing the land mines is almost more important than finding those stocks that shoot the lights out. That is where diversification comes in, it helps keep your regrets at a minimum and ensures if a “VW event” happens you still have enough dry powder to stay in the game – When Diversification Works

Google knows what we are thinking by looking at our search history – What the world googled during Beyonce’s Super Bowl performance. Another trend picked up was a 3800% spike in people searching for tickets of live events for Coldplay, showing that playing for free in front of 120 million viewers does have its perks.

Cullen Roche asks a good questionWhy Do Corporations Pay Dividends?. It is a good question to ask considering that the likes of Berkshire doesn’t pay one. I think at the end of the day, investors like the flexibility of having cash flow from the shares that they own.


Home again, home again, jiggety-jog. As we mentioned, Japanese stocks are getting smoked, US futures look ugly and all we have to look forward to today is a cricket match up the drag in Centurion. Although, on current form we may well have nothing to look forward to! And of course, for the Constitution watchers, today is a very important day in South African history, no doubt most of the week will be taken up by number 1 and the pressures on him, remembering that the State of the Nation is on Thursday.


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

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