Comment of the Day
Video commentary for February 17th 2022
Some of the topics discussed include: Gold breaks out to new recovery highs, gold shares rebound, oil slips, bonds steady, Wall Street weakens on angst over earnings growth, Dollar stable. bitcoin pulls back sharply.
Gold Fields Bet on Giant Mine Pays Off After Years of Losses
This article from Bloomberg may be of interest to subscribers. Here is a section:
Gold Fields Ltd. said a turnaround at its giant mine in South Africa is starting to pay off after more than a decade of losses that’s weighed on the Johannesburg-based company.
South Deep, which sits on the third-biggest known body of gold-bearing ore, almost tripled the net cash it generated to $97 million in 2021 as production rose and the rand strengthened. Output at Gold Fields’ last South African mine is expected to climb a further 30% over the next three to four years.
That will complete a turnaround after years of financial bleeding that was compounded by power shortages, labor unrest and regulatory uncertainty in South Africa. It vindicates the management’s decision to restructure the mine after investors pressured Gold Fields to either end the losses or sell the asset.
“I am absolutely convinced this was the right thing to do,” Chief Executive Officer Chris Griffith said in an interview. “Already in one year we have made up probably what people would have paid for the asset, so I think it absolutely makes sense to stay in the asset.”
My view - Gold miners have had a very difficult time over the last decade. Capital has been hard to come by because they were tarred with the “capital destroyer” brush and, with falling commodity prices, investors fled the sector. The fact that South Deep can generate more revenue in a year than the company could have sold the mine for at the bottom of the cycle is a testament to just how low valuations were.
Margin-Growth Fatigue a New Pressure Point for S&P: Taking Stock
This article from Bloomberg may be of interest to subscribers. Here is a section:
Analysts have cut their profit-margin expectations for 75% of industries and about half of companies in the S&P 500 for the first and second quarters, data compiled by Bloomberg Intelligence show. Companies’ wherewithal to defend profitability amid mounting pricing pressures is becoming a growing issue at a time when the hottest inflation in four decades and higher borrowing costs threaten to crimp growth.
Anxiety about a faster-than-expected wind-down to the Federal Reserve’s asset-buying program and a quicker pace of rate hikes has pushed sell-side analysts to cut their first-quarter profit growth expectations to 5.4% last week from 6.7% in the first week of January. That figure, too, looks set to drop further to 3.5%, according to a Bloomberg Intelligence model that tracks the correlation between analysts’ pre-season forecasts and actual profit growth in the past two years.
“Negative revision momentum may remain a weight on stocks in the weeks ahead,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “Improving top-line growth views are still offset by inflation pressure.”
More than 70% of S&P 500 companies are done with their earnings announcements. Among those that have already reported, 76% have outpaced analysts’ profit estimates, the lowest rate of beats since the first quarter of 2020.
My view - Over the last few quarters companies have been comfortable passing on costs to consumers. Many have also taken the opportunity to increase margins at the same time. Politicians taking to social media and blaming inflation on record high corporate profits strikes a chord with the personal experience of many consumers. It suggests companies have seen the easy part of raising prices, continuing from here is going to be more difficult.
The rise of private markets
This report from the Bank of International Settlements may be of interest to subscribers. Here is a section:
External financing is increasingly intermediated outside traditional channels. Banks and other institutions active in public capital markets, such as equity and corporate bond mutual funds, remain key financing sources for large and mature corporates. That said, “alternative asset managers” (AAMs) have become pivotal for smaller firms globally, including in emerging market economies (EMEs). Many AAMs were established as private equity firms that later expanded into credit, thus turning themselves into one-stop capital providers for firms less able or willing to access traditional sources.
Private markets have three features that distinguish them from public markets. First, there is limited liquidity transformation because investors commit capital for extended periods. Second, these investors tend to be large and sophisticated entities such as pension funds, whose focus on long-term returns enables target companies to confront significant earnings volatility. Third, the regulation of private market investment vehicles is relatively light, partly reflecting the lesser degree of liquidity mismatches and also the limited presence of retail investors.
My view - The lack of regulation in the private markets is seen by many investors as a positive aspect. The challenge for the future is large pension funds are highly active in the sector. They might have long-term liabilities but they also have a long-term need for yield. The private sector has been particularly attractive because they have gained both portfolio diversification and higher returns.
The Chart Seminar 2022
With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022.
Please drop sarah@fullertreacymoney.com a line if you would be interested in attending an event next year, as well as your preferred location.
At present I am looking at a late May date for a London seminar and I am open to other times and locations subject to demand.
Eoin's personal portfolio: short reopened February 2nd 2022
One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.
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