Market Scorecard
US markets tumbled on Friday as risky assets came under pressure. The S&P 500 finished down almost 5% for the week, its worst five day stretch since September. The good news is that over the weekend, Federal regulators stepped in to restore law and order, and seal a deal to protect depositors at Silicon Valley Bank. More details below.
In company news on Friday, regional banks were obviously among the worst performers, with PacWest Bancorp (NASDAQ:PACW) plunging 38% and Western Alliance Bancorp (NYSE:WAL) falling 21%. They'll probably be the top gainers today. Elsewhere, Gap was down 6.1% after reporting that the wind-down of its relationship with Kanye West hurt its sales in North America.
On Friday, the JSE All-share closed down 1.56%, the S&P 500 fell 1.45%, and the Nasdaq was 1.76% lower.
One Thing, From Paul
Stocks tumbled last week, as Silicon Valley Bank (SVB) became one of the largest banks in history to fail. There are hundreds of articles out there explaining what went wrong, so I won't attempt to do that here. It seems that the organisation was badly run, with poor risk controls.
The bank has been taken over by the US government agency responsible for the protection of bank depositors. We don't yet know who will suffer losses, other than the bank shareholders and bondholders who've been wiped out. Quite a few technology start-ups had mountains of cash stashed with SVB. The "dead bodies" are still floating to the surface, after the initial underwater explosion.
The impact on the wider financial system will be limited. The people running the systemically important financial institutions today were all around in 2008. They know what to do.
Vestact clients are almost entirely invested in massive blue chip companies, that will be unaffected by this sideshow. The cash in your accounts is held in a money fund, approved by our custodian, Fidelity, that invests entirely in mixed-duration US Treasury bonds.
I'll end by slightly misquoting French writer Francois de La Rochefoucauld who lived from 1613 to 1680: "We all have enough strength to endure the misfortunes of others".
Byron's Beats
Listed equities are the best performing mainstream asset class in history. That's a fact. The stock market is made up of dynamic businesses that have risen to the top despite all the competition and challenges that every company must face.
Even though it's evidently the place to invest, getting the timing right is not easy. The last 16 months are a good example of that. Every time the coast seems to be clear, something else comes around that spoils the rally. Equity investors have to absorb this kind of volatility in order to get the long-term returns. That's the price you pay. There is no such thing as a free lunch.
Sometimes these rough patches can drag on for a while. Those are the worst. But they will happen and you will have to absorb a few of them during your investing journey. When this current patch passes, and it will, you can add a noteworthy notch to your investing belt.
Michael's Musings
In the book "Zero to One", Peter Thiel says that for a technology to be successfully rolled out, it needs to be at least 10 times better than the product it is replacing. His reasoning is that technology and systems become entrenched in organisations, requiring great time and effort to replace them. So if something is only slightly better, making the change is not worth the effort.
Here's a great example of how difficult it is to change an entrenched system - The floppy disk is still kicking. The floppy disk dates back to 1971, and was mostly replaced in the early 2000s by CDs. We then moved on to flash drives and now cloud storage.
The article lists places where you can still find the floppy disk: Airplanes like some Boeing (NYSE:BA) 747s and 767s, and Airbus A320s; Medical equipment and embroidery machines; San Francisco's subway system.
Thinking about entrenchment and our investments, the first company that came to mind was Microsoft (NASDAQ:MSFT). It is central to the functioning of the business world, particularly their spreadsheet software Excel. You want to be invested in businesses that have a wide moat protecting their products.
Bright's Banter
Saudi Aramco (TADAWUL:2222), the world's biggest oil company, has announced a record profit of $161 billion for 2022, the largest ever recorded by an oil and gas company. The rise in profits was driven by increasing energy prices and growing global demand.
Aramco's profits rose by 46.5% year-on-year, making more than the combined earnings of Shell (LON:RDSa), BP (LON:BP), Exxon (NYSE:XOM) and Chevron (NYSE:CVX). The largely state-owned company declared a $19.5 billion dividend after its fourth-quarter trading and recommended the issuance of bonus shares.
Aramco's capital expenditure rose by 18% to $37.6 billion last year, and the company plans to increase it to between $45 billion and $55 billion in the coming years.
All these big numbers didn't go unnoticed. Amnesty International's secretary general Agnes Callamard said: "It is shocking for a company to make a profit of more than $161 billion in a single year through the sale of fossil fuel - the single largest driver of the climate crisis."
Signing Off
Asian markets are looking good this morning, other than the benchmark index in Japan.
Markets in Hong Kong and mainland China rose after the (predictable) changes to key Chinese leadership positions late last week. Central bank governor Yi Gang and the finance and commerce ministers both kept their posts and President Xi Jinping pledged to pursue reasonable growth in the economy during his closing speech at the National People's Congress.
US equity futures are up more than 1.5% as investors took heart from the steps to shore up the US financial sector in the wake of SVB's failure. HSBC has acquired their UK arm, and we expect similar deals to carve up the carcass in the US today. It's amazing that these situations evolve so quickly, and a testament to the flexibility of the modern capitalist system.
The Rand has strengthened to R18.18 against the US Dollar.
Have a good week. We'll be here to explain what's going on, day by day.