“The individual investor should act consistently as an investor and not as a speculator.”
– Benjamin Graham, a British-born American economist, professor, and investor
Benjamin Graham’s statement was made in the context that the future is very difficult to predict and that decisions should be based on real facts and analysis rather than risky, speculative forecasts.
As the S&P 500 Index has recovered 40% from its low on 23 March, trading platforms such as Robinhood (refer below), have facilitated speculative share trading in the belief that Fed stimulus will float almost all distressed companies. Day trading during the crisis has escalated dramatically to such an extent that it may well be influencing the directionality of Wall Street. From a Dynasty perspective, Benjamin Graham’s words resonate with us, as we analyse the widening gap between rising equity market prices and declining earnings forecasts.
In a return to a more defendable P/E ratio for the S&P 500 (based on its long-term mean), prices would either need to fall, or earnings forecasts would need to rise at a much greater pace! Dynasty sits firmly in the former camp, notwithstanding the huge stimulus being injected into the world’s largest economy. Indeed we are in good company, as Jerome Powell, Chairman of the US Federal Reserve, has presented a much more muted outlook for economic recovery than the V-shaped behaviour that the stock market suggests!
- Users of an app called ‘Robinhood Investing’ have been influencing shifts on Wall Street. Robinhood has been buoying the stocks of unpopular businesses like airlines, retail, and cruise ships. This is premised on the notion that markets will always go up and hence users of the platform will make money, but in the process, they will take their investing power from rich companies and give to those struggling. Benn Eifert, the managing partner of QVR Advisors, has said: “in terms of the most dramatic rises in speculative behaviour that’s generating many of the strangest outcomes in markets right now, it’s Robinhood-centric”.
- Another example of speculative investing has been seen with Fangdd Network Group Ltd., a Shenzen, China-based real estate firm. The company gained 395% for no apparent reason other than its name being similar to FANG (Facebook, Apple, Netflix, Google). For more on this follow this link.
- Trade deal talks between Britain and the European Union have been at an impasse during the Covid-19 pandemic. They are now set to ramp up with Prime Minister Johnson saying, “the faster we can do this, the better,” committing to a negotiated deal by the end of the year. Our research suggests that the British do not have much bargaining power in the negotiations.
- The tension between China and the US has been building over the last few months. President Trump threatened to cut all ties with China this week, saying that the “US certainly does maintain a policy option, under various conditions, of a complete decoupling from China”.
- Around 20 Indian soldiers were killed in a clash between Indian and Chinese troops along their shared border in the Himalayas. Now, the two countries are attempting desperately to de-escalate tensions. It is still unclear whether any Chinese troops died in the clashes.
- The S&P 500 was up 2.2% for the week as at the time of writing.
- On Thursday Lesetja Kganyago, Governor of the South African Reverse Bank (SARB), said that rolling out a full-blown quantitative easing programme could risk bankrupting the SARB, leaving it dependent on National Treasury for a bailout. This was in reaction to the bank receiving criticism for being too conservative in its response to the Covid-19 pandemic.
- On Wednesday evening President Ramaphosa announced that some level three restrictions would be eased – restaurants will be able to open for limited sit-down traffic, salons will re-open, and casinos will be allowed to open their doors under strict conditions. Although we commend the President for his relaxation of the lockdown, we believe that the deterioration of both the economy and the fiscus, as well as the escalating poverty rate, were factors that forced his hand. Undoubtedly Minister of Finance, Tito Mboweni, would also have had influence on this decision, as he analysed the abysmal data in preparation for his revised Budget to be tabled on 24 June.
- After experiencing a massive destruction of value over the past two years, Sasol has used lockdown measures as an opportunity to restructure its business. During the lockdown period, the executive team has renegotiated with lenders, made progress with its crude oil hedging programme, and undertaken a critical essential maintenance shutdown. The Sasol share price has surged 567% since its recent 52-week low, but the momentum has also been driven by speculative trading.
- Eight men were arrested on Wednesday in connection with stealing R2.2 billion from VBS Mutual Bank and their attempt to try to cover up this “great bank heist”. The charge sheet includes 47 counts of fraud, theft, money laundering, corruption, and racketeering. For an analysis of the repercussions, follow this link.
- Dexamethasone, an inexpensive steroid manufactured in South Africa and Germany under a global licence by Johannesburg-listed Aspen, has been praised as a breakthrough in the fight against Covid-19. The drug has been able to cut the deaths of people on ventilators by one third.
- The JSE ALSI gained 1.09% for the week, buoyed by other emerging markets.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, etc