Arthur Bucher reports on today’s closeout

MONEYWEB, Alec Hogg, 16 September 2004

MONEYWEB: Good evening from the Moneyweb Power Hour. Well, it was one of the foremost important days in the year for the futures market, the quarterly closeout when traders balance their positions. ArthurBuchner is head of derivatives trading at Nedbank and he joins us now. How many of these futures tradeouts have you seen, Arthur?

ARTHUR BUCHNER: Gee, 1994 – so, in ten years’ time, 40 of them.

MONEYWEB: And how did this compare with the busiest of them?

ARTHUR BUCHNER: It wasn’t too bad on a volume basis. The closeout worked out to be R4.8bn on the day and, if you look at the normal JSE volume, it comes in about R1.5 to R2bn. So, from a volume perspective, it was actually very good. But from a movement perspective it was a damp squib.

MONEYWEB: Why would that be?

ARTHUR BUCHNER: Normally what you find with futures closeouts is that there may be an open interest in an option, and some partners in the market want to get the price of the Alsi to that option, or someone might protect an option strike. And when that happens, when you have big option open interests, you find that there’s a lot more volatility because there’s a lot more money to be lost and made. And those closeouts normally happen in March, because 90% of our institutions hedge with a one-year view out. And that happens in March and normally you find that it occurs in the March contract.

MONEYWEB: OK, lots of stuff there that I’m not too sure about, but what you”re saying is the real action happens in March. Today, it was busy, but not the most exciting you’ve seen?

ARTHUR BUCHNER: Correct. Basically what happened today is that we found a lot of positions lapsing and lying dormant due to the fact that the market has rallied from about 9,000 at the last close out to 10,300 at this closeout. So all these pertinent strikes – which were the 9,000 and 9,500 – they were far in the money or deep out of the money and had no impact on the market.

MONEYWEB: Arthur, what was the mood like from the futures market – bullish or bearish? In other words, up or down?

ARTHUR BUCHNER: Much more bullish. What we found is that in the previous closeouts, the market spread, which means the guys who start to take positions in the next contract, tended to take that position at a discount to the market. And in this closeout we actually didn’t find the opportunity to do that, indicating that the institutions were less hedged or had been hedging less, and are taking a more positive slant on the market.

MONEYWEB: That’s good news, the market’s going up, or the JSE shares, according to futures traders, anyway, are going in the right direction. Canada’s leading newspaper, the Toronto Globe & Mail, reports that South Africa’s global beer giant, SABMiller, is in talks which could lead to a rival bid for Montreal-based brewer Molson. Former deputy chairman of that company, Ian Molson, has been looking around for white knight, from his perspective anyway, since the management of the business announced in July that they would be proposing a merger with the American group, Adolf Coors. Analysts in North America reckon SABMiller would have to cough up over $500bn to win the Canadian brewer over. The Old Mutual Investors Fund is the biggest local unit trust investor in SABMiller, and Mutual’s Arjen Buikema joins us now to put some perspective on the rumours. Might SAB be doing another big acquisition in North America, Arjen?

ARJEN BUIKEMA: Well, it’s pure speculation at this moment in time, but it could well be, yes.

MONEYWEB: They’ve been pretty busy in China. Even this week we had another deal coming out of that side. Isn’t it a little bit too much to put on one company’s plate?

ARJEN BUIKEMA: China is effectively managed by its joint venture partner, China Resources Breweries, and they don’t really have many people on the ground there any more. So it’s out of their hands. And China is still very small in the greater scheme of things.

MONEYWEB: Does it say, the fact that even the speculation at SAB might be looking to make another big acquisition in North America, that their first one of Millers must be doing pretty well?

ARJEN BUIKEMA: Well, we have seen a turnaround in especially in Miller Lite since September last year. The rest of the portfolio still has to prove itself. And Miller High Life and Miller Genuine Draft are really the two major other brands, but we haven’t seen them actually growing as yet. But there are some encouraging signs coming out of Miller.

MONEYWEB: Arjen, a US$5bn deal – it’s a lot of money in South African terms – is it big deal in North America as well?

ARJEN BUIKEMA: Yes. Look, it is a very big deal, even in North American terms. As opposed from a breweries perspective what is attractive in this deal is the big market share that it will gain in Canada, at 45%. Plus a stronger foothold in the US market.

MONEYWEB: It’s nice to see South African businesses getting involved on a global basis. But what would the impact be if an announcement were made that SAB is going to making a bid to buy Molson in Canada – what would happen to the share price?

ARJEN BUIKEMA: It’s difficult to speculate. If you compare this with, for instance, the Miller acquisition, after the Miller acquisition the share price clearly went down because the market was concerned that they were buying an underperformer that they couldn’t turn around. Now they’ve proved that they are able to turn around underperforming assets. I think Molson is in a far better state than Miller was when they bought it, so I’m not too concerned that the market will take as dim a view as they did two years ago.

MONEYWEB: A trading statement was issued today at the annual general meeting of another of South Africa’s global giants, luxuries goods operation Richemont. The group is reaping the benefits of a buoyant global economy, and reports that sales are running at 15% above a year ago. Jason Chesters of Tri-Linear Asset Management joins us now. They used to call Richemont’s chairman Johann Rupert “Rupert the Bear”. Well, he wasn’t too bearish in today’s news, Jason?

JASON CHESTERS: Absolutely, Alec. He was as optimistic as I’ve ever heard him.

MONEYWEB: The competitor, LVMH, which people know through Tagg Heuer, the watch brand, and Veuve-Clicquot, the champagne mark – they came out today with net profits up by 49%. With these strong sales at Richemont, might we see a similar kind of profit growth there?

JASON CHESTERS: I don’t think we are going to look at the same sort of numbers in Richemont. They have got a different product mix to LVMH. But it is a sign that luxury goods sales in general are up.

MONEYWEB: Also interesting to note that most of the growth came from the Far East.

JASON CHESTERS: Correct. In fact, 34% growth in sales in the Asia Pacific region, with the exception of Japan.

MONEYWEB: So it just shows what’s happening on a global perspective from that part of the world?

JASON CHESTERS: It does. It’s certainly been a big turnaround story. But also it has come off a low base because, if you take out the first two, three months of last financial year’s sales in the Asia Pacific region, the Sars epidemic had quite a significant impact on their trading during that period. So it’s a very low base, and with that base effect, you’ve had this extraordinary increase. I wouldn’t look at those numbers as sustainable. But certainly something in the low twenties.

MONEYWEB: Jason, the Richemont share is the second-biggest on the JSE. That means most South Africans, whether they know it or not, have got a stake in how this company performs through the holding of this share in their pension funds. Is it likely that after today’s announcement, that the share price will gather momentum, and rise further, or has that already been discounted?

JASON CHESTERS: Well, today”s price move was 4.65% up-to-date – R18.26 is the last price I saw the close. Although I was very pleased with the trading update, and I’m very pleased with the restructuring that the group has undergone, at R18.26 I’m not highly enthusiastic about the price prospects of the share. But clearly, as you say, it is one of the larger market caps on the index. So a rising tide raises all ships.

MONEYWEB: That was Jason Chesters, from Tri-Linear Asset Management.

Posted in Market commentary

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