| Cobie and I like to keep this newsletter and our podcast evolving. We’d love to hear from you about what you like or dislike, what you’d like more or less of – both in the newsletter and podcasts. Do you have topics you’d like to hear a blog on? Do other people’s wealth journeys interest you? The podcast of the newsletter is available and you can download it HERE. We welcome all your input so please don’t hesitate to contact us if you’ve got any queries or suggestions. Market Watch The JSE took a breather last week and came off its all-time highs a month ago. We expect a fair amount of uncertainty in all global markets until the US election is declared and finalised.   The Magnificents This has been the week for quarterly earnings reports from the tech companies and markets aren’t exactly happy. After the massive spending spree in AI, much of it flowing into Nvidia’s coffers, tech companies are now having to justify those huge purchases and it’s not proving to be as easy as the buy-buy-buy we have seen in the last two years. The bar is now a notch higher. Investors are parsing every earnings report for signs of AI-increased productivity, and they’re inclined to punish companies when they can’t find it. So far, Meta, Alphabet, Microsoft and Amazon (all big AI spenders) have released their quarterly reports. Microsoft dropped following its inability to turn its massive investment into sales, while Meta also took a hit after saying it expects losses from its AI division to persist. The bad news weighed on their peers. Until last week, the Bloomberg Magnificent Seven looked as if it was closing in on an all-time high but has since retreated:  The reaction shows that tolerance for big spending on AI without immediate signs of a return is waning. On Microsoft (Revenue +16%, EPS +10%), while third-quarter earnings and revenue were a touch ahead of expectations, the market was always likely to focus on the outlook, and here, the massive investment in OpenAI is expected to deliver a hit to profits. The softening revenue in its Azure cloud business contrasted with a more positive cloud outlook from Alphabet — which received kinder market treatment. After the market closed Thursday, two more Magnificents, Apple Inc (Revenue+6%, EPS+17%). and Amazon.com (Rev+11%, EPS+52%), also announced results. They continue to be dispersed, with Amazon’s share price rallying in after-hours trading while Apple sold off after a once off tax in Europe. All face challenges as they try to ramp up data centres and meet their energy demands. What matters most to investors is a swift resolution that paves the way for AI to bring in the envisaged returns. It is becoming increasingly clear that the AI journey is more marathon than sprint: Investors know there is significant potential in AI, but they increasingly want to see that the money being invested in its development is being allocated sensibly and that, at some point in the not-too-distant future, it will deliver tangible rewards. If anyone finds the focus on the Magnificent Seven excessive, be aware that they’re dominating earnings growth. The Magnificents are on course to report year-over-year earnings growth of 18.1%, while the blended earnings growth rate for the “other 493” would be 0.1%. Overall, the blended earnings growth rate for the entire S&P 500 for the third quarter is 3.4%. We have no choice but to spend a lot of time looking at the Seven.  China and the global Luxury market Both LVMH and Kering have seen disappointing result due to the slowdown in China, but Hermes seems to have bucked this trend after it reported a 11.3% y-o-y sales growth. Inventory management and targeted marketing has allowed the company to weather the current luxury storm. LVMH, despite a disappointing quarter has indicated that they won’t be changing their market approach to accommodate the Chinese market. Given the current government stimulus in China, this could bode well for luxury goods companies. In April Hermès saw Chinese buyers snap up its luxury products as the Kelly bag maker showed its resilience amid a broader slowdown in demand for the sector (which persists). Hermes saw Chinese buyers snap up its luxury products as the Kelly bag maker showed its resilience amid a broader slowdown in demand for the sector but sentiment has changed since then..  For years now the luxury market (which is starting to saturate in the West) has been focussed on the East, and especially China. Of course, the cachet of luxury brands is the peer-group envy that the brands are not shy to bank on. There has been a distinct waning of that cachet – and even Apple have seen their sales drop off. There was one startling market response — to the numbers from the luxury group Estee Lauder Inc. Its shares sold off more than 20% after it warned that sales would fall and profits disappoint in the current quarter, while slashing its dividend by 47%. It was the company’s worst ever single-day selloff. Over the last 20 years, Estee Lauder now lags the S&P 500. Two years ago, that would have been unthinkable:  Its problem is the Chinese consumer. All luxury goods makers concentrate on China, but Estee Lauder had made a strategic decision to prioritize the country even more than its competitors. That decision is hurting.  Bond vigilantes again? A couple of weeks back we had a look at the concept of Bond vigilantes – and not to disappoint they came out of the woodwork on Monday during the UK budget (which Cobie goes into in more detail below) Rachel Reeves, the UK’s new chancellor, following the rocky reaction to her budget, had to go on TV (including Bloomberg) to try and defend her stance. Bonds showed the most immediate negative reaction to the budget. Local UK and international investors share a desire for strong economic growth, bond vigilantes are as unforgiving and ruthlessly efficient as the Spanish Inquisition.  Her scrambling post-budget was a recognition that she needed to address their almost fanatical devotion to fiscal restraint directly after a brutal day of trading. While things had calmed down somewhat by the close, the spread of 10-year gilts over equivalent German bunds had reached its widest since the Liz Truss crisis of 2022. While the market is still unhappy with the Chancellor it is not nearly as bad as Truss’s faux pas which ended her career in Sept and October 2022.  Trump trades In the final hours of the build-up to the US election it’s fun (but maybe not very informative) to watch how the so-called Trump trades have been behaving – we’ll soon see if they are a better predictor than the polls. The confident traders who have been betting big on Donald Trump to win the presidency are just beginning to think they might have overdone it. How much buyers’ remorse they’re showing, and how much they think they overplayed their hand, varies according to the market they’re using. The two best-known markets that have been offering prices since Joe Biden dropped out on July 21 are PredictIt, an academic exercise with limited stakes, and Polymarket, an offshore operation based on the blockchain that doesn’t limit positions. They agree on the shape of the race and have both pared Trump’s chances this week. But Polymarket has been persistently more bullish about Trump:  Prediction markets have risen to the top of the agenda, with Polymarket in particular fostering the impression that Trump has this won, even though the wagers have been driven by a few very large bettors. A reminder about the meaning of probability. If Trump loses, that doesn’t mean that the markets were “wrong” but merely that an event that would happen four times or more out of 10 has indeed happened. PredictIt was quicker to grasp that Harris would get the nomination and be a viable candidate. It’s too soon to tell whether the experts betting small stakes in that forum will also look clever for never drinking quite so much Trump Kool-Aid. A strong win for Harris, after the publicity of the last month, would somewhat unfairly do the image of betting markets a lot of harm after the weight that’s been put on them. In political futures, and in the much bigger markets for stocks, bonds and commodities, the bottom line remains that it would be unwise to stake anything on the outcome if you don’t have to. Markets will have plenty of room to move once we know the victor, and that might be as soon as Wednesday morning, or the latest Saturday (with the potential for a rash of lawsuits and recounts if Trump loses). In the Gore/Bush case, the race was only settled on the 12th of December. After a spike over the past five weeks that had absolutely nothing to do with the company’s actual business, former President Donald Trump’s social media stock is suffering a sudden setback. Truth Social owner Trump Media & Technology Group’s share price plunged 22.3% on Wednesday. That marks Trump Media’s worst one-day loss since going public in March, narrowly exceeding a loss of 21.5% on April 1. At Tuesday’s close above $51, Trump’s dominant stake in the company was valued at about $5.9 billion. By the end of trading on Wednesday, the value of Trump’s shares tumbled to $4.6 billion. That means Trump lost $1.3 billion in net worth in a single day.  It’s not clear exactly what caused the sharp reversal for Trump Media, whose share price has become a proxy for how traders think this election will turn out. Trump Media did not release any major news that would explain the nosedive. Some traders blamed the steep selling on technical factors and a loss of momentum for what has become a meme stock. Trump Media’s stock has been extraordinarily volatile all year. The stock does not need official corporate announcements to move dramatically higher or lower.  US CPI The consumer price index increased a seasonally adjusted 0.2% for the month, putting the annual inflation rate at 2.4%. Both were 0.1 percentage points higher than forecast. Excluding food and energy, core prices rose 0.3% on the month, putting the annual rate at 3.3%. Both core readings were 0.1 percentage point above forecast. This is the FED’s preferred measurement of CPI, and the fact that it is higher than expected, and well off the 2% target range probably indicates a smallish 25 bps drop in interest rates next week.  Initial filings for unemployment benefits took an unexpected turn higher, hitting a seasonally adjusted 258,000 for the week ending Oct. 5, the highest total since Aug. 5, 2023. To be fair, these numbers are constantly revised, so how meaningful this rise is remains to be seen. To quote Chicago Fed President Austan Goolsbee “The overall trend is what’s important, not the day to day fluctuations. The overall trend over 12, 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is.” The jobless claims figures follow the damage from Hurricane Helene, which struck Sept. 26 and impacted a large swath of the Southeast. Florida and North Carolina, two of the hardest-hit states, posted a combined increase of 12,376, according to unadjusted data.A strike by 33,000 Boeing workers also could be hitting the numbers. Michigan had the largest gain in claims, up 9,490 on the week. On the inflation side, rising prices across a variety of food categories showed that it is proving sticky. Egg prices leapt 8.4% higher, putting the 12-month unadjusted gain at 39.6%. Butter was up 2.8% on the month and 7.8% from a year ago.  However, shelter costs, which have held higher than Fed officials anticipated this year, were up 4.9% year over year, a step down that could indicate an easing of broader price pressures ahead. The category makes up more than one-third of the total weighting in calculating the CPI. Wages is always an important component of inflation and the graph below gives an interesting insight on the difference between govt and private sector wages. The pandemic boom in wages has settled somewhat but with Private wage growth of 6.4% in Sept, while Government wage growth of 6.7% in Sept, down from 6.9%, and well below the record high of 7.9% in March. These increases are still above inflation – but they always lag that indicator and most workers in America are probably ‘out of pocket’ considerably more than they were pre-pandemic and the latest inflationary cycle.  Author: Dawn Ridler  A tale of 2 budgets Two budget speeches this week. One in South Africa and the other in the UK and they couldn’t be further apart. In South Africa, this is the first time the budget stemmed from the GNU and was widely praised by the DA. The deputy minister of finance comes from the DA and clearly had a hand in the policies which stemmed from it. A revenue shortfall of R22bn is worse than expected and this sent the USDZAR to 17.70 on the day. But the good news is that there is fiscal prudence which is now starting to creep in. Early retirement for state employees will be encouraged to lessen the burden on the state wage bill. This will save the government an estimated R2billion a year. In Dawn’s interview with Mathew Parks from Cosatu last week on Fine Music radio, Mr Parks expressed his reservations on discarding much-needed skills just to put more young and inexperienced employees on the books. You can listen to some of Dawn’s interviews on the MTBS HERE Debt servicing costs will remain high with debt to GDP estimated to peak at 75% before declining… at least it is moving in the right direction. The appetite to bail out state-owned enterprises has run out and this is being replaced by the soon-to-be enacted amendments to public-private partnership regulations with a focus on infrastructure most notably water and electricity. Government is shrinking and at least on a national level, free markets seem to be embraced more than in the past. Operation Vulindlela might actually have some teeth at last. The UK on the other hand is embracing a larger government and is hiking taxes by GBP 41bn and in turn, spending GBP 75billion to keep the UK afloat. The balance will come from borrowing … circa GBP32 billion. It’s estimated that only 35% of the budget will be spent on new capital projects but that the remainder will be spent on day-to-day obligations of the government. Is 35% really enough to boost the UK economy? At the end of this tax year, total taxes to the UK government as a percentage of GDP will be at 38%, its highest level since 1948 when the UK was financing their allied response to World War 2….. Scary stuff. There are now questions arising if any of this was in Labour’s manifesto that got them elected in the first place. Tax hikes will hit the middle class which when I checked the last time was who voted for labour in the first place. Gone are the days of Thatcher (Tory) who advocated for a smaller government and less regulation. The minimum wage is set to rise by 6% which seems like a noble act but consider the following: UK businesses have to contend with the aftermath of BREXIT and COVID and will now have to pay employees 6% more, if any are earning the minimum wage. Once this is factored into the income statement and the increases in other taxes due, I won’t be surprised if this doesn’t lead to job losses. In South Africa finance sanity is starting to prevail although its biggest threat today is that the GNU doesn’t deliver quick enough to ensure the longevity of the GNU. National policies take time to deliver whilst municipal (local) policies are a mishmash of political infighting and rising debt levels… just look at what happened in Tshwane! So, the race is on to show the public that the GNU can deliver and to force their political will on municipalities which are attempting to keep the old days going such as is the case in Gauteng. The good news is that the Treasury controls the purse strings, and I bet that at some point they will be called to order. In the UK, Labour is attempting to create a larger welfare state. Their actions won’t promote private capital formation and money will leave their shores to find a more welcoming home. But this is the start of Labour’s journey into their own brand of socialism and the question is for how long will they be able to have a free hand in this? Unabated, this will leave the UK with spiralling debt, red tape and an unsustainable government payroll. Funny how different these two budgets are. Based on what I see today, South Africa may just be in a better place than the UK 5 years from now… lets see. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.60 (R17.66, R 17.41, R17.48, R17.12, R17.42, R17.85, R17.82, R17.71, R17.85, R18.32, R18.26, R17.95, R18.23, R18.20, R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, R18.51, R19.09).  The Rand/Pound closed at R22.72 (R22.89, R22.75, R22.93, R22.90, R23.20, R23.44, R23.41, R23.13, R23.39, R23.28, R23.32, R23.34, R23.00, R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, R23.22, R23.62)  The Rand/Euro closed the week at R19.09 (R19.07, R19.05, R19.19, R19.12, R19.47, R19.79, R19.72, R19.80, R19.70, R20.01, R19.94, R19.58, R19.74, R19.49, R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, R20.35)  Brent Crude: Closed the week at $73.99 ($75.57, $78.67, $77.95, $71.96, $74.68, $71.47, $76.99, $79.05, $79.09, $79.43, $77.56, $85.03, $83.83, $84.86, $85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39). This is likely due to increased tension in the Middle East.  Bitcoin closed at $68,277 ($66,989, $62,876 , $62,267, $65,596, $62,603, $54,548, $57,947, $63,936, $59,152, $60,847, $61,903, $59,760, $56,814, $61,436, $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $63,154, $64,135). Articles and Blogs: Wealth creation is a balancing act over time NEW Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |