Global
/ US past 40million initial claims and Q1 GDP updated to -5.0% from -4.8%
/ Personal saving rate 33% in April
/ Germany’s Business Climate Index rose to 79.5 in May as the country reopens
/ Reuters ~ China's May factory activity returns to growth but demand remains weak
/ China US tensions increasing
/ Bill Ackman's Pershing Square Capital Management announced it had sold off its entire stake in Berkshire Hathaway. BH has $133.3 billion hoards of cash vs S450 market cap (third of assets are lazy and not been deployed).
Local
/ PSG announced CPI unbundling details (14 CPI for every 100 PSG)
/ Woolies update, spending AU$100million on Australia
/ TigerBrands results as branded goods come under further pressure.
/ Famous Brands very pessimistic on casual dining recovery
/ Stats SA delayed April CPI by a month due to difficulty collecting data
/ PIC talking about converting Eskom debt to equity
TOPSBZ is a put warrant that trades on the #JSE and can be bought in any normal stock broker account .. @SBGTraderZA
clients buying in a warrant account pay flat R50 brokerage taxes etc. https://t.co/LX0mZmplYo— Simon Brown (@SimonPB) May 23, 2020
Warrants were the first derivative I traded, starting in October 1997 as they were launched in South Africa. SAWarrants was also my first successful website that launched me into the financial services industry. Recently I've been trading some warrants again as have a few traders I know and a tweetstorm I did over the weekend got a lot of question about trading warrants.
The short answer is don't.
They're derivatives and hence risky If you're an ETF buyer or even just a straight equity buy and holder, stay away. If you're successfully trading other derivatives then they're worth a look. Certainly, they have some benefits over traditional derivatives, but also lots of complexity.
A warrant is really an option that gives the holder the right to buy or sell an underlying asset.
The fact that it is a right, not an obligation, means your loss is capped at what you paid.
Warrants trade on the JSE just like any other share or ETF with six-letter codes. First 3 letters denote the underlying asset. 4th letter is the issuer, 5th letter the style (B for normal, I for instalment and K for knockout - be very careful of knockout warrants). The last letter is as above denoting call or put.
But a lot of greeks that can trip you up that are outputted by the Black-Scholes formula (this formula won the writers a Nobel prize).
One major benefit is that with warrants you can only lose hat you paid, unlike with CFDs or futures you can lose more than you deposited.
The warrant issuers will also ensure there is a market maker buying and selling at fair value at all times. They will use a pricing matrix that can be found online.
If you trade warrants within a Standard Online Share Trading warrant account you pay flat brokerage of R50 +taxes.
And Standard Bank have a good website at warrants.co.za
And I will end where I started. Be very careful and do not jump into warrants unless you're a successful trader already, otherwise, the greeks will get you. The big challenge is that you may get the direction of the trade right (call or put) but pick the wrong warrant and lose money.
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JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.
Offshore
/ Hertz bankruptcy
/ US initial jobless claims now over 38million (160m labour force), UK ver 10million (35million labour force)
/ This on the back of German Q1 GDP released this morning coming in at -2.2%
/ Moderna vaccine excitement, and then they raise capital on share price spike
/ Commodities having another good week.
/ Apple mobility data shows Europeana and US economy opening.
Local
/ 0.5% rate cut
/ Stor-age raises R250m in bookbuild.
/ Grand Parade Burger King sale being repriced?
/ Liberty 2 Degrees update, nice insights.
/ Nedbank update also offering solid insights.
/ Richemont raises Euro2billion debt as they strengthen their balance sheet
/ Online sales surging
Day 56 of lockdown
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JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.
**Global**
/ UK two-year government bonds traded negative last week as UK GDP -2% for Q1, -5.8% for March & retail sales fall 19% year on year. Biggest in 25 years
/ Tencent’s Q1:20 results showed a +19% jump in gaming subscriptions, overall Group revenue grew +26% and, on almost all metrics, the Group beat analyst estimates.
/ US, jobless claims came out as another nasty number today, now totally around 36m (the worst number since the Great Depression) while April retail sales collapsed -16.4% m/m.
**Local**
/ Barloworld is attempting to back out of its deal to buy Tongaat Hulett’s Starch business due to COVID-19 likely negatively impacting the business’s EBITDA and triggering a “Material Adverse Clause”.
/ Dis-Chem announced the acquisition of 100% of Baby City
/ Richemont released FY 20 results showing revenue flat but profits collapsing by two-thirds. and are proposing a possible warrant instead of a dividend
/ Strong Aspen update while Life healthcare says EPS for full year likely 20% lower after mid year was +12%.
/ Knockout Sibanye Stillwater results that saw debt down 40%.
/ Impala Platinum Mine has temporarily suspended operations at its Marula Platinum mine in Limpopo. This follows the detection of six more COVID-19 cases among workers at the plant.
=====
Day 49 of lockdown
ffff
It's very early days but an announcement from Twitter shows how things may look as the company says it will "allow its employees to work from home forever".
Hello new world.
This is surely going to be a large part of our post COVID-19 reality and has serious implications across many sectors. A recent IBM survey during April of 25,000 US adults found;
Commercial property in this example will simple need less office space. This will hit not just office rentals, but for example also car an Uber usage as we travel less to work reducing fuel and car needs hurting the respective industries. Then of course lower insurance rates as less driving means less risk, and so the all rolls.
The flip side of course is that less travel time means more money and free time for an individual and how will we spend that? Reading? Eating out? Family?
Taking the Twitter example a step further, working from home means more virtual meetings (such as Zoom) and then it is a small step to less corporate travel as meetings or events that may required travel are now done virtually.
It'll be a long time before we get to the new post COVID-19 reality, but it's not going to be a new normal, it'l be way more. A new reality and importantly we get to define what this new reality will look like.
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Global
/ Worst US unemployment since the depression, but lagging indicator. Likely 25% by end May
/ Last weeks PMI, local and global mostly setting records for worst ever
/ Nasdaq is up year-to-date
/ IMF warning that their 2020 GDP forecasts may be too low?
Local
/ Comair business rescue
/ Phumelela Gaming business rescue
/ Our bonds are strong, 10 year at 9.3%, shorter dated below 8%
/ Anheuser-Busch InBev QoQ volumes down 9.3%
/ Property stocks and risk of losing REIT status
This week’s episode of JSE Direct is courtesy of OUTvest, our preferred supplier in retirement products.
A REIT ~ Real Estate Investment Trust is essentially a special purpose vehicle for listed property stocks. In South Africa the most notable requirement is that 75% of 'distributable income' is paid to shareholders as a taxable dividend. This absolves the REIT of tax liability but that dividend received by shareholders is taxed as income, not the 20% dividend withholding tax (DWT). So depending on your marginal tax rate, it cold be higher or lower than DWT.
With this in mind I asked Redefine CEO Andrew Konig about this on my show on Tuesday. The company had some 33c per unit of distributable income due to investors but did not declare it rather saying they'd decide at yearend in August 2020. This is perfectly legal as this was an interim distribution and they only need to be paid annually.
Now that 75% rule is a SARS issue as it regards taxation, it is not a IFRS concept and as such it is a murky issue. So the REIT industry is engaging SARS in case some REITs can't pay the distribution. There could be lots of options such as delaying the payment and maybe spreading it our over a number of years. But if they lose REIT status frankly the property companies would unravel as the tax advantage from that status is huge and how they operate. As such I expect industry and SARS to come to some sort of agreement.
But what Andrew Konig said was that liquidity issues were of more a concern for REITs. Frankly their ability to actually pay anything and liquidity is a part of the companies act so is more immovable than the SARS REIT definition and allowances. This is the bind property stocks find themselves in. Debt that needs to be paid, income (rentals under pressure) and legal requirements to pay distributable income. There is going to have to be lots of clever thinking to get through this crisis.
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JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.
JSE – The JSE is a registered trademark of the JSE Limited.
JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.
Day 28 of lockdown.
Overnight WTI Oil (West Texas Intermediate) traded at a negative $40. Yip -$40, traders were paying you to take their oil off their hands.
Totally wild and now everybody wants to be an oil trader.
But some caution before you jump in.
1/— Simon Brown (@SimonPB) April 21, 2020
R500billion announced by the president on Tuesday evening. We await details from the finance minister, but some highlights.
10% of GDP and some 25% of the February budget total spend.
But it not all real money, some of it is soft loans, others tax relief in delayed payments.
The biggie is the increase of social grants, child grants ultimately an extra R500 a month and all others +R250 while a new unemployed grant at R350. This is to run till end October, in theory - but we'll still be in the midst of a COVID-19 pandemic then, so it will have to be extended.
Basically we have implemented a basic income grant (BIG) and it will be impossible to take that away any time. How do you say to poor hungry people, no more? Even when the pandemic has passed? Simple you can't and you don't.
For those who think a BIG is communist or evil, go check the research. There is lots starting from the 1970s in the USA and Canada, they work and they are cost effective. How do you help a poor person? Give them money. How do you help a homeless person? Give them a home. Surely there is nothing anti-capitalist about caring about the deeply less fortunate and having a little less of our luxurious lifestyles to help them? And the concerns that they will 'waste or drink' the money is simple not true. Every research shows the incidence of waste is actually lower in groups receiving state aid. As for the theory that women get pregnant in order to receive the child grant, again research has disproved that every single time. There is zero evidence to support that theory.
Lastly on social grants, we have a world class system that is also one of the largest in the world and it works. Further theft is pretty much impossible as the recipient knows what they due and if it not there, hell to pay. Now sure as we saw with Cash Paymaster Services, charges and 'extras' can get messy. But not the actual hard process.
It won't be enough, we'll have to do many more. Likely this will take us into the third quarter at best (note the extra grants end in October and COVID-19 is expected to peak around September for South Africa). But eventually we'll need well in excess of R1trillion, I think maybe some R2trillion to take us into the end of 2021.
How do we pay for the R500billion? Well as per above, majority of this is not real money. But short answer is we borrow and print money, especially for the next rounds we'll have to do later in the year. US$4billion is available for South Africa from the IMF (via the rapid financing instrument, here are the T&Cs of those loans) with pretty much no strings attached, that's almost R100billion. Is that all a risk to the currency and inflation, indeed it is.
But firstly if all countries are doing the same, we're all in the same boat and it becomes moot?
Also understand inflation, it means every Rand a person has is worth a little less in terms of what it can buy. Now the rich have the most Rands so end up paying the most, and why not pay up a little to help save the country? Certainly I happy with that as one of the rich.
The president also promised 'structural reforms' and 'radical economic transformation' which is trying to work both sides of the fence. We'll see which side he really ends up on in the end, but don't forget Minister Mboweni, he not going quietly into any night. He did speak a bit on essentially a new way of doing things, on that he's right.
Post COVID-19 the world will be a different place and we as individuals need to give serious thought as to how we want this new world to look. Then we need to start making it happen otherwise before we know it, we'll all be back to the same old same old.
A concern is about the actual process and fears of looting of the monies. Not unfounded considering our recent past. But thoughts on this.
One questions is does this 10% of GDP offset the expected 10% or so drop in GDP? The answer is no, it means maybe we only drop by the expected 6%-10%, not more.
As a last aside, the president said that the 2% repo rate cut adds R80billion into the economy in lower debt repayments. This is massive and helps middle to upper LSMs with their prime linked debt. Unsecured debt of the lower LSMs is not linked to prime, rather it regulated by the usury act, but that's why the increased social grants.
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JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.
Lockdown day 25
22million unemployment claims in US in 4 weeks (entire 2008 saw only 8.8million) opening economy
China GDP fell by 6.8% YoY in Q1 (first fall since 1992)
Wall Street gained 15% in the past two weeks, its strongest fortnight in 80 years.
Oil price .. crude oil getting smashed as global storage fills up
Earnigs season kicks off in US this week, includes March so some sense of impact but not entirely
Goldman Sachs cuts Apple to sell & cut its price target to $233 from $250 as it sees revenue dropping a third
Amazon trading at all time highs
Big cabinet meeting today (Monday)
End of the road for SAA (US airlines getting $25bn, and that not enough)
Another 1% repo rate cut, but still SARB expects SA to contract by 6.1% this year
Treasury looking to borrow $60bn, potentially from IMF
Lockdowns being extend everywhere (Spain +15 days, Italy +2 weeks, US wait and see, but likely end April)
ZAR blowing out
US jobless claims 6.6m this week Unemployment at 4.4%, non-farm payroll down 701k jobs (first down in a decade), -100k expected Numbers don’t add up, latter is only to mid March
Lots of lagging data, two issues here, one is data coming out at record worst, and even just a 1 month delay makes data largely useless
Woolies update
Famous Brands bails on GBK
Spur suspends franchise fees amid Covid-19 closures
Nampak gets their R1.5billion for selling glass biz
Anchor reports record demand for fixed-income assets
British American Tobacco working on COVID-19 vaccine
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Lockdown, day six as I record (seven as you listen). COVID-19 numbers globally continue to rise, but I'm watching Italy. They're now at three weeks of lockdown and are seeing daily new cases decline, but still at 4,000 a day. I am also seeing reports that they'll extend lockdown to after
Easter, which is bad news for us. Our new cases are minimal, but still likely to spike higher and come the end of three weeks surely we'll be winning but not wanting to let the virus back in the front door, so lockdown extended? My thinking is extended to first weekend in May. It's after the two public holidays and means we'd have been in lockdown for 5 weeks.
Longer term we're waiting for a vaccine, and that's 2021 at best, so even if lockdown gets lifted, heavy restrictions will be the norm and new lockdown periods very likely if the virus starts to spread with speed. Remember all data is two weeks old due to a 14 day incubation period.
Overall I agree with our governments response and think the president and health minister are doing a great job under unimaginable conditions.
Hardest hit is without doubt small business. Closing for even just 21 days with zero revenue can kill a business, even a strong one.
We also have extreme inequality in South Africa that makes lockdown frankly just not impossible for most South Africans. It's easy in Bryanston, but impossible in Alex and add in poverty we have an entire extra layer of impossible.
Questions is if the worst is behind us and the honest answer is that nobody knows. We've seen a massive rally in the last ten days, but that is more about liquidity as governments (especially the US) pump cash into the system. Certainly rallies of around 15% in a bear market are totally normal, we saw about half a dozen during the 2008/9 crisis. I also don't think the market is going to be able to ignore the horror data that will be coming out over the next many months.
The other issue is that markets try and price in the future, but our forward view is limited to days, maybe weeks. Markets want to price in the next 12-18 months and we have zero visibility that far out. The data for the rest of 2020 will be bad, very bad. But we have no real idea or reference as to just how bad.
We're going to see a number of bankruptcies, large and small, local and global. Some are easy to spot; airlines, high debt companies, cruise companies. But a lot will surprise us.
I continue to only buy ETFs (ASHGEQ my preferred).
And now we're junk. Full junk status, or in the lingo ~ non investment grade.
The outlook was negative and this is significant, means we can go further into junk status at the next review in October. Ideally we don't want to slip too far down that status because it makes coming back that very much harder.
The immediate response was the local market green, Rand weaker at R17.95/USD and bonds about 1.5% higher yields.
The yields are what matters. We issue new bonds every week to cover costs, so far his weeks auction was over subscribed and that's what I expect. We're not actually at risk of default so the +11% yield is very attractive. Also with SARB buying in the secondary market we've got lots of liquidity.
But overall, it was pretty much priced in, now government needs to get us out.
Practically we're now also out of the Citi World Government Bond Index (WGBI) at the end of April. This will see selling in our bonds, also a lot of mandates don't allow junk bonds, so more selling. The flip side is a lot of mandates only want junk bonds (for yield albeit at higher risk). So in a way we've gone from a tiny fish in a giant pond to a large one in a large pond. Nice, but still not want any country wants.
We'll also see the local banks downgraded to junk, when the sovereign is junk so go the banks. But it will potentially increase their borrowing costs and that will be passed onto consumers.
Question from Njabulo Nsibande
What happens if all REITs or the top ten REITs (as they make up about 50% in the case of CoreShares income property fund) in an ETF all go bankrupt.
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Moodys junk (negative outlook)
SARB bond buying
Moboweni, world bank & IMF
Motsepe R1bn
US worst US jobless claims - EVER
US $2.2trillion bail out
Edcon CEO, they can’t pay suppliers
TFG wants delay on rent
Dividends being delayed
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Yes it absolutely will. Exactly how much we have no idea, but our economy is largely shutting down for three weeks (at a minimum). The impact too GDP, business (small and large but especially small) will be huge and right now is not quantifiable.
We print money and take on state debt. Is this bad? Sure, under normal conditions. This is not normal conditions. This is a global emergency and it requires drastic measure. The extra and more expensive debt and more cash printed is all bad, but right now saving people and the country and its people takes priority over the economy. I know a broken economy is going to hurt, but no country or no people would make an economy moot.
One point is that if we print money and run our debt higher, we're not doing it alone as a country, so the impact may be muted as all countries end up with way worse debt to GDP levels and weaker currencies making it all moot.
Probably, maybe? But at this point nobody cares. Really, nobody does. The entire global economy is at risk of junk status. Also the local market and government bonds are way worse off than what a downgrade would have caused.
Initially sure. But most health experts say that after the initial lockdown the economy opens again, the virus returns and we go into another lockdown and this process continues for months if not the rest of 2020.
Pretty much everybody. Especially those with debt and high fixed costs. Tourism and entertainment industries extra especially.
Winners?
No real winners but food retailers and to a degree food producers will remain operational but likely with higher costs from their implementing COVID-19 restrictions and protective measures. And we'll be shopping less and spending less.
Example; Shoprite to pay shop floor and distribution staff R102 million 'appreciation' bonus.
Commodity prices are flying as mines move onto care and maintenance. As such miners are also have a great few days. But if they don't get back to mining soon, they're only selling stock piles and that eventually runs out.
I do not think so. Price action is moderately suggesting we have. But I suspect the markets will get solidly spooked when we start seeing the economic data. We'll get data that will be the worst every recorded, it'll take a strong market to not freak about that. Further the market seems to be thinking COVID-19 will be over in the next month or so. I think COVID-19 will potentially remain a problem well into 2021, we'll just be better at managing it.
We've seen a number of companies delay their dividends by up to six months. They're protecting cash in very uncertain times. At this point it has only been delays in payment, but at some point we may start seeing already declared dividends being cancelled. I have no idea how that process works, I assume the board has the right to reverse a decision they took early about dividend payment? Further we're seeing results coming out and dividends being passed as boards protect their cash. I am happy with this, but I don't need the dividend income, many do.
ETFs, ASHGEQ. Sure lots is cheap, price wise. But is it offering value? We can not know as we simple do not know how this plays out. I have made two purchases so far in March, doubling my usual monthly spend (excluding tax-free). But I am not going in boots and all.
There will be lots of time for buying stocks. We won't wake up one morning and suddenly everything is back to pre-crash levels. It'll be slow and volatile with a recovery to the peaks maybe as long as 4 years, potentially as short as two. We've got lots of time to buy, don't panic buy.
Nope, US Federal national deb in 2019 was some US$22trillion. Staggering numbers, but the proposed US 'package', while large is not that seriously big in total terms.
Our government is doing this right. Not all countries are, some are doing a horror job. We're not.
Load shedding is gone for now. With the economy shut down demand for electricity has collapsed and as such Eskom can cope with the reduced demand.
Yes.
Further SARB has announced “As a further measure to add liquidity to the market, the SARB will commence a programme of purchasing government securities in the secondary market.”. The R186 is already 1.5% lower on this news. The SARB is essentially creating liquidity for those who want to exit their government bonds and receive the cash.
How do they pay for this? They print money, that weakens the ZAR, but everybody is printing so that moot. It may spike inflation, but ain't nobody shopping, so maybe that also moot. Perhaps the best time ever to print money?
A number of political leaders being exposed. But also in business. We essentially had eight days of warning about the lockdown, and anybody looking at what was happening in Italy, China and the like should have seen lockdown coming a mile off. But now leaders are stuck in the headlights, no plan, no idea, putting staff at risk.
No.
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COVID-19, my presentation of just two weeks ago warning on the virus and resulting market melt down, is already totally over taken by the reality on the ground. Read this take from the Imperial College COVID-19 Response Team. It has flaws, but also has golden nuggets. If we manage this crisis well I still think the worst will be behind us by Q1 2021. But the worst is going to be worse than I had thought, and if we do this well, well then it is a horror show of epic scale.
It has solidly landed in South Arica and while still early days the confirmed case numbers are growing at the expected 33%, every day. So far government is doing a decent job lead by the NICD, President Ramaphosa the cabinet and especially the health department. But what matters more than anything is to #flattenthecurve. No large events, social distancing, washing hands, working from home if possible and limiting trips outside.
All of this will eventually slow the growth, but we'll still end up with hundreds of thousands sick and many thousands dead ~ as a best case scenario. Yip it sounds wild, but that is the only way to slow the spread and stop it completely overwhelming our health services.
This of course means a massive hit to our economy and individual peoples financial well being, find our series on managing debt here. If you have debt and are worried about repaying, or if you're in default already - this is a must read.
Our market, and in fact all global markets, remain under severe pressure and extreme volatility not seen since 1929. I's not getting better any time soon. The global economy is grinding to a halt and there is no quick fix. Best estimates suggest twelve months of COBID-19 before as a planet we're truly on top of it. So Q1 2021, at best.
For investors, we continue to tread cautiously and I continue to buy my monthly ETF allocation and will double the monthly purchase amount. But I am not whole sale buying stocks, because cheaper is very likely.
Traders, as I have said before. Reduce position size, widen stops and be disciplined. And of course, obey your stops 100%.
From a personal perspective, start planing for the long haul, I don't expect this to all be resolved in a month when schools are due to go back. As example, I've downloaded online monopoly to play with my niece and nephew in Durban and have proposed every few days or so one of us will present (via zoom.us) on a topic that interests us. It's going to be a very long school break house bound.
Lastly, let me know if we can help. I have no idea what or how, not money or food or handshakes. But if you got ideas how Just One Lap or I can help you or the broader community, let me know. Maybe it just something as simple as helping to set up Zoom.us or a weekly bookclub session on Zoom. Send ideas.
And very lastly, stay safe. Social distance and wash your hands.
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The Sasol (JSE code: SOL) share price has collapsed this week for three key reasons.
All in this is a total mess and coupled with poor management the market is not happy. I fully expect Sasol to survive, but in what form or price have no idea and I would NOT be buying.
COVID-19 continues to create havoc with Italy shutting down the entire country of 60million people as deaths exceed 600 and confirmed cases over 10k. But that still means some 20k cases they do not as yet know about. (Watch: COVID-9, markets in trouble)
Recession is fast becoming a certainty as regions (and entire countries) shut down, people stop going to work or out at all so no spending and no production. A huge concern is the USA who are not testing very well as South Korea did and may have tens of thousands of cases they don't know about.
South Africa has 13 confirmed cases and so far it is being handled very well. Identify the confirmed case and works backwards with who they contacted putting people into isolation. Testing is key as South Korea shows. But while we're very good at this sort of thing (remember listeriosis) it can very quickly overwhelm a struggling medical establishment. Global there are simple not enough ICU beds and we're likely far behind the global average.
Bottom line is that this is getting worse and will continue to do so for a while (no idea how long that while is). No surprise markets are panicking and extremely volatile and my view is they'll go still lower.
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"the risks to the U.S. outlook have changed materially" -- Powell
"The virus and measures taken to contain it will surely weigh on the economy ... for some time." -- Powell
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I chaired a panel discussion on the 2020 budget by Minister Mboweni and have included the audio from that panel.
The biggie, which is not mentioned is that the annual tax-free allocation has been increased to R36k a year effective 2 March 2020.
On the panel with me was;
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One of the issues surrounding the Coronavirus is lost revenue and hence lower profits. Apple is reporting supply constraints, Starbucks has closed the majority of their Chinese stores and so the list goes on.
But here's the question. Which purchases are simple deferred and which never happen?
Supposedly large ticket items such as an iPhone or white appliance will simple be bought later. So lost sales now come up later. But this is 100% true. Say your phone was lost. You need a new one now, not in a month so maybe instead of Apple you get a Samsung, or a cheaper Apple that is in stock.
With consumables the story is very different. If I don't have that coffee or lunch today, it doesn't get held over till tomorrow. That sale is lost. So Starbucks suffers more than Apple.
Another point is for example the Mobile World Conference in Barcelona has been cancelled and this is not deferred. The event supposedly brings in some Euro500million in spending over the three days. That money is gone, it'll be spent at home, so the city loses out.
But if you don't buy your consumable today and have left over lunch at home, where does the 'saved' money go? Do we still see a surge later, but maybe in big ticket items if we've saved enough from deferred lunch dates an coffees? Or does it get properly saved into a bank account?
What about hourly paid workers? No work = no pay. They will be hurt, albeit company will benefit as lower expenses while closed.
Point is, the money to be spent will surely be spent.
Maybe different timing and maybe different product or location. But that money doesn't disappear. So absent of the Coronavirus becoming a lot lot worse, any hit is merely short term and could be followed by an equally short burst of spending? Sure some spending will be lost, but not much?
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Gina Schoeman, South Africa economist for the Citibank Global Economics team.
I attended a S&P Dow Jones Global event on Tuesday where Gina delivered the keynote and here are my notes on what she said. Any errors are mine, not hers.
Gauteng is 35% of SA GDP.
Service delivery protests show strength of democracy.
People are leaving small towns due to lack of services and this erodes tax base, making service delivery even harder.
SONA watch list;
Watch the World Bank Ease of doing Business survey as good metric for Ramaphosa. We're 84th but where under 50 when Zuma took over.
SA union rate is 24% and dropping and will drop further.
Members are aging and youth are unemployed.
Household debt is 75%, down from 84% in 2010. But the nuance is in the data.
SA population growth is 1.5%. GDP growth has to exceed this for people to be getting richer.
Lack of rental inflation is a big driver of low inflation overall.
No VAT increase in the 2020 budget.
Moody downgrade is very likely, but don't worry about that. Worry about Fitch and Standard & Poor dropping us lower because it is now about the recovery.
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In a financial context, the law of large numbers indicates that a large entity which is growing rapidly cannot maintain that growth pace forever.
Simple that the bigger you get the harder it is to grow and ultimately the growth slows to modest inflation or GDP adjustments. We see many companies fearing this rush out and make bad acquisitions - but that's another story.
I want to focus on how this law can at times be broken when the underlying market fundamentally changes and the example is Microsoft (Nasdaq code: MSFT). On a PE of 30x it is expensive, but this US$1.37trillion company grew EPS by 40% making it cheap using a simple PEG ratio. It is up six fold in the last decade and in the decade before is was red.
How is a trillion dollar company able to grow earnings 40%? Broadly software as a service and cloud computing but the story is bigger, edge computing. Certainly the story is no longer Windows. Edge computing is the vast number of small devices that are invading our homes, offices and lives. Examples are; streaming music and movies, smart bulbs, security systems and virtual assistants. This is just a few examples, but they're fundamentally changing our lives and the demands on processes and data storage and importantly the data is close to the device to ensure speed, requiring data centers everywhere.
Add to this the amount of data we create and need to store. For the first time in my life I have data that only exists in the cloud, simple because I have so much data. Now I am paranoid, so I keep it on two clouds, and wildy encrypted.
Data storage or cloud computing was hardly even an idea a decade ago. All the talk was of slim clients with all processing and data in the cloud. Back then Google (Nasdaq code: GOOGL) was the leader, but it has exploded and Google now trails in third position and we never really got to slim clients (Chromebooks the exception and services like Stadio newly trying).
This has changed companies such as Amazon (Nasdaq code: AMZN) and Microsoft (Google oddly lags in cloud) who are the leaders in cloud computing.
The thing is one could have made a solid argument that even under new management Microsoft was largely ex-growth and a mature company.
But then business models came along, they grabbed them with both hands and now they're growing faster then they have in over two decades. This growth changes the game for Microsoft, Amazon and others. I have no idea where it ends but this trend can go on for a lot longer and they can grow revenue by a bunch more and then, hello two trillion dollar company.
What is noticeable that this is a tech issue and that traditional brick and mortar companies, miners and the like do not have this potential. They do hit the law of large numbers, but computing and the internet has changed the rules for tech stocks.
Of course eventually the law of large numbers will come into play again and growth will slow.
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Over the last few years I have been slowly increasing my ETF portion of my portfolio from 50% with the ultimately goal of getting it to around 65%. This is going to take some 5 years and the logic is to reduce risk (risk that I buy dogs) and make my life easier.
So far this is on track but also has impacts in other parts of my portfolio as the current split is 30% in 'til death do us part long-term stocks. Then 10% in second tier small and mid caps and the final 10% for trading.
So what gives if I squeeze my ETF holding to 65%.
The easy answer is that each of the other three drops their weighting by 5%. The hit on the long-term is fairly modest but very pronounced on the second tier and trading portions of the overall portfolio as they drop from 10% to 5%.
The second tier I will cheat and buy some ASHMID ETFs that tracks the local midcap and this will be part of my 65% into ETFs. So easy solution.
Till death do us part will get a large pile of cash as my Metrofile* (JSE code: MFL) get bought out at 330c later this year. This is currently my largest holding after I was a large buyer between Christmas and New Year as some seller got aggressive in the market knocking the price down to 265c (my lowest purchase was 272c). Most of this cash will go into ETFs when it arrives (likely around mid year) and this will boost my ETF holding to over 60% and easily on track for the 65% target.
Then the biggie is my trading portfolio, essentially I'll be halving it's size so either I trade smaller size or I remove one of the two strategies.
Current trading strategies are;
My plan here is to discontinue the lazy ETF trading. It's a small percentage of my overall portfolio and it will then free my ALSI trading to carry on carrying on.
The question then is what of the weekly lazy update I send every Sunday. In short it will expire in time, but send me thoughts.
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Thank you for asking, I had hoped someone would. We are in a similar (albeit much, MUCH smaller) situation, so we have thought about it. A lot. Here follows a thread. https://t.co/DkyYmX9zAo
— Piet Viljoen (@pietviljoen) January 22, 2020
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Every year Marc Ashton, Keith McLachlan and Simon Brown do a predictions show. Three wild and wooly predictions for the markets followed by a call on the Top40 and ZAR for the year ahead.
Importantly we start each show with a review of the previous years predictions and you’ll find the 2019 predictions show here.
JSE – The JSE is a registered trademark of the JSE Limited.
JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.