Thursday, 27 November 2014

Financial Orbit wrap 27/11/14

Five sentences or graphics which sum up the Financial Orbit output over the last 24 hours across the website, twitter account and anything else thought about...

1. Many European bonds traded at new record lows today as the combination of QE hopes and continued low inflation/general disinflationary conditions was apparent.  I say most because one stood out in going the other way as fears over their fiscal position continued: 

2. I muse about Poundland and conclude that their shares need to be below £3 (or x3 the price of anything in their stores) before they become interesting to me. 

3. I acknowledge that you can make a strong thematic story for the aluminium company Norsk Hydro but it does not work for me despite some clear positive shifts in pricing and demand for their product: 

4. Other Investor Days that I look at include those of the UK food retailer Morrison's and the gold company Acacia.  In my opinion the former is still turning around whilst the latter is improving off a low base but it is no Randgold (which to me remains the stand-out gold mining sector investment):

5. And then there was OPEC.  Where to start?  Bespoke Invest noted this in the aftermath of the 'no cut' conclusion: 'Worst day for WTI (-7.5%) since 5/5/11, and worst day in even longer for 15% of the borrowers in the junk bond market'  meanwhile I also enjoyed this which is broadly consistent with this solid (and short write-up) here

Investor day insights from two recently volatile sectors

Hard to think of two more recently volatile sectors than food retail and gold mining.  Of course I am invested in both :-)   More seriously these are two sectors I see real opportunities in over the next year.

In food retail my second largest position is Morrison's the smallest of the big four UK supermarkets. I last wrote about the company here and recently they augmented those tentative improvements with a bolder trading update which highlighted better than expected performance on debt reduction (as well as a continuing sales revival).  As the share price over the last year shows we are still at the early stages of any turnaround:

So last week's investor day (it has taken me nearly a week to get hold of the presentation...) was of great interest and, I believe, importance.  There was no overt trading update other than a reiteration of prior statements, this was more about the retail underpinnings to the turnaround.
I liked the way the company started the presentation.  It is always good to be clear what you stand for...and value and a focus on fresh food is as good as anything:
The two charts that really caught my attention were perhaps the ones where they showed the greatest differentiation with the other big supermarkets - as the smallest of the 'big four' you have to be different to survive.
And then there is the manufacturing.  Certainly Morrison's vertical integration is higher than any of the other big four.  

Overall thoughts?  Interesting and a forward step but no huge surprises - and perhaps there should not be in any case.  I still feel comfortable with the turnaround and understand some of the underpinnings better.  Now it is time for delivery.  Next stop the post Christmas trading statement.  

Turning to the gold sector today Acacia (formerly African Barrick Gold) held an investor day.  Many moons ago I was invested in the then African Barrick Gold and ultimately was disappointed by the underlying business execution given that - as shown below - the reserve grade of the business was always fantastic (and even better than my favourite two gold stocks Randgold Resources and Polymetal).  

Where it all went wrong was nicely captured by this chart which showed the terrible position on the industry cost curve the old ABG was at.  Unsurprisingly when the gold price fell so did their share price.  Note though where Acacia aspire to be 'moving to the 1st quartile' with a cost profile closer (but not as good) as someone like a Randgold: 

I note throughout the presentation today the company talked about many of the softer issues Randgold (in particular) highlight such as partnership with local communities and relevant governments.  Acacia operate primarily in Tanzania (in contrast to Randgold in Mali, Cote d'Ivorie and the DRC) but have hopes to expand into countries like Kenya and Burkina Faso as noted below.  

Whilst hearing about expansion hopes the key shorter-term is cost control and taking full advantage of the underlying grade in the Tanzanian operations.  I was quite heartened by what I heard which including some fascinating insights into the importance of their position in the Tanzanian economy.  Improving relations/driving the partnership with important Tanzanian actors is all important. It is good to see they have reduced the expat workforce and proportionately now rely much more on local labour (although not to the extent that Randgold run their operations).

Overall a good effort by Acacia.  They are on my watch list for possible investment although it is clear to me that despite being an Africa focused gold operator they are no Randgold.  Still - compared to some generalised poor performers across much of the global gold mining industry - they are now of above-average interest.

Two interesting investor days in good value/opportunistic parts of the market.

Norsk Hydro: big theme, positive charts...but I cannot quite buy it

As an investor it is important to figure out relatively early in your investment life what you are better than average at...and what you are worse than average at. 

As a global investor who often cites themes and bigger picture macro influences in theory I should like a story that has historically underperformed... seeing a supply/demand imbalance (i.e. supply is currently less than demand and hence inventory levels are falling)...

...whilst the underlying commodity price linked to almost all of the products the company sells is going up: 

Finally there is rising thematic demand from many big industry groups including the auto sector:

However in the case of the aluminium industry and the Norwegian company Norsk Hydro in particular (all the above charts were taken from today's capital markets day).  I just cannot get comfortable.  I like a turnaround story but one where (unlike say the miners) I am not getting a 5%+ dividend yield or (like the food retail companies) it is not a necessity product with lowly variable demand.  Additionally - and despite the early mentioned multi-year lack of performance - the shares have flown this year as noted below (helped recently by the above plus the weakness of the Norwegian currency due to the issues in the oil/gas markets).  

I even have been short Norsk's peer Alcoa at various points in 2014 which - to be blunt about it - was unprofitable (unsurprisingly given that Alcoa has outperformed even Norsk Hydro in local currency terms over the last year)

My 'issue' is one of valuation, the large number of inherent uncertainties and (more latterly) the upward movement of the share.  Clearly some people have made some great money out of this stock and I just do not apparently have the right mindset to do so.  

No hassles, no issue.  Plenty more stocks to look at.  Reminder to self: be as cautious in shorting the stock as you have been in buying it.  Blindspots often work both ways.  

"Poundland: worth more than one pound but don't pay more than three..."

I wrote a piece titled

"Poundland: worth more than one pound but don’t pay more than three…"

which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Charts and Asia today

It might be Thanksgiving...but a lot happening today (and beyond OPEC's conclusions - oil at a 4 year low prior to this).

Let's start in Asia.  The headlines may be about more investment banks caving in on their short yen thoughts or industrial profits in China down in October the most for a couple of years but I was more interested thematically in this chart highlighted by @eurofaultlines showing a fading regional current account surplus...

The world is getting a tougher place since the west broadly worked out that 'everyone needs a weak currency'.  

Other issues remain too.  We may have seen a pre-Thanksgiving high in the S&P500 but this divergence is striking: 

Of course the HY ETF is getting pulled around by energy sector exposed positions but even adjusting for this it is a striking chart.  As is this one on the current overbought status: 

Europe too has its challenges despite a number of indices being close to key resistance levels from earlier this year. News overnight of an apparent breakdown of troika talks has indicated again specific issues in Greece as nicely captured in this chart: 


Additionally I observed this excerpt from today's Financial Times which highlighted these comments from Mrs Merkel...

...and interestingly (on the same page) this graphic showing plunging German exports. No wonder Mrs Merkel wants talks...

Fascinating relative prosperity chart:

Finally a couple of oil and related charts (well it is OPEC's big disclosure day).  First, an amazing recent trend in new US car duel efficiency...

...and a graphic indication of the oil/gas sector's underperformance against the broader S&P index:

Wednesday, 26 November 2014

Financial Orbit wrap 26/11/14

Five sentences or graphics which sum up the Financial Orbit output over the last 24 hours across the website, twitter account and anything else thought about...

1. Interesting that  Moody's reported that now 80% of their ratings are 'stable' (compared to just over 60% two years ago).  A long bull run always helps:

(I still think having long volatility contracts here is sensible...too much complacency)

2. I use my latest Yahoo Finance contributors column to observe that the John Deere numbers were not as bad as the headlines suggested...

3. A stunningly awesome technology presentation (link here) makes me think (and happy that I have shareholdings in Google and Amazon amongst others):

4. A really good YTD asset class performance chart.  Always hard not to learn something from this.  

5. Thanksgiving investors need to know everything that is possible to know about which side dish to serve up.  Absolutely brilliant (link here)...

Awesome technology company presentation

I really enjoyed this presentation.  Here are a few of my favourite slides.

This Google, Apple, Facebook, Amazon (aka GAFA) combination is truly something else in terms of sheer size...

...disruption across multiple sectors...

...and how they have broken conventional business rules:
I really enjoyed this example of why Amazon selling Kindle Fires at a loss makes huge financial sense: 

So what about the future?  Google and Facebook are intent on connecting the 60% of the world's population currently living without internet access...

...meanwhile Amazon is growing the fastest as a disrupter of conventional operators across multiple sectors:

Meanwhile Google and Apple fight it out to be the world's most valuable brand:

Fantastic presentation.  Click on the link at the top of this posting: I promise you will learn something.