Money with a dash of Funny: March 2012

Friday 30 March 2012

Research in reverse motion

"Apple is worth 79 times more than Research in Motion. In June 2008 Apple was worth roughly 2.2 times more than RIM. Since then RIMM is down 88%. Wow. RIMM has crashed and Apple has taken off."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We were lower for most of the day, nothing too awful, but the same concerns have been ongoing. You know. Europe having kicked the can really hard down the road, that sort of talk. So debt swaps are seen for most people as kicking the can down the road, I can't imagine that when General Motors bond holders took cents in the Dollar on their corporate bonds, they thought it was a good idea. Better than getting nothing. In a European context, what do you think is better from here? I have just also seen a chat moderated by David Tweed, the Bloomberg London Economics editor involving himself and guests Jim O'Neill and Nouriel Roubini, at the beautiful lake Como in northern Italy. Certainly, for all the woes of Europe, the place still looks incredibly beautiful. And as I often say, people want to live there as opposed to North and West Africa, where there are large growing communities of immigrants. That chat between the two should be up somewhere shortly.

We had the end of the SARB's MPC meeting with the interest rate announcement yesterday. The decision after all was said and done was to keep rates on hold, the repo rate would remain at 5.5 percent, and the main banks would then keep the prime interest rate at 9 percent. I think the tone of the statement was a little more upbeat, there were tweaks to the outlook for growth, in the positive column, that was the first time I have seen a subtle upgrade to growth. All I am saying is that if the change to growth had been lower, the headline would have read, "SARB lowers growth outlook". But the headline in reverse makes for less appealing reading. Somehow, humans are drawn to the morbid details in life. This Statement of the Monetary Policy Committee is not that morbid, as I said, a little more upbeat.

The line, slightly better outlook than previously expected sets the tone to tell us that growth for this year has been upgraded: "The Bank's GDP growth forecast has been revised marginally upwards to 3,0 per cent in 2012, compared with 2,8 per cent in the previous forecast, mainly as a result of a slightly more favourable global outlook, which remains uncertain. The growth forecast for 2013 has increased from 3,8 per cent to 3,9 per cent." OK, that is nice, but tell me a story (as my father in law would say) here, what will the forecast be at the end of this year? If "things" continue to improve this year, then I expect that rate to be raised even further. In a South African context somewhere around five and a half percent growth should be the magic number that we try and gravitate towards. That number of course has not been reached for a while.

So, what are the other important take aways from this statement? No change, no change likely for a while in interest rates, oil price shocks remain a major concern, inflation seems to be anchored just outside of the target range and the MPC are keeping a close watch on all of these factors. Plus, the stodgy situation in Europe, closer to some sort of resolution than not is also being watched. By all of us, expect the ceiling on the various funds to be raised over the weekend. Spain presents their budget today in the face of one third of the population having taken to the streets in protest to the austerity cuts. And of course the small matter of China. Some folks call it a slowdown, I call it a less steep ascent. Slowdown points to negative growth. So, if anything changes with any of these things expect the Reserve Bank to act. I would think that based on all the new information that we have, the Reserve Bank is more likely to hike rates next, and that would mean that the economy is showing signs of improvement. When that is coming however, that is perhaps the nerdy debate amongst economists right now.

Byron's beats takes a look at the MTN response, released a little after market yesterday.

"While the claim has not been served on MTN, MTN understands that a claim has now been filed by Turkcell in the US courts against MTN and its wholly owned subsidiary, MTN International (Mauritius) Limited, in which Turkcell claims no less than US$4.2 billion, plus interest and punitive, consequential and other damages in connection with the award of the second GSM licence in Iran to Irancell."

What does $4.2bn mean to MTN? It's big. For the year ending December 2011 they made $3.2bn in earnings. And as I mentioned earlier, Iran forms a big part of MTN's future plans. Did you know that they have a population of 75 million? That is a big country. MTN still find no merit in these allegations and are ready to fight it in court.

"MTN continues to believe that there is no legal merit to Turkcell's claim and no basis for such claim to be brought before a US court. MTN will accordingly oppose the claim. MTN further notes the South African government's denial of the allegations that MTN exercised influence over it."

Their defence mechanism is going to be based around the Hoffmann committee which has already begun its investigations and tried to engage with Turkcell.

"In advance of Turkcell filing its claim, MTN announced the formation of an independent committee, under the chairmanship of the internationally renowned jurist, Lord Hoffmann, to investigate Turkcell's factual allegations. The Hoffmann committee has already begun its investigations and will report its findings to the MTN board, together with any recommendations as to actions to be taken as a result of its findings, including as to their publication. The Hoffmann committee has invited Turkcell to participate in its investigation, but Turkcell has to date not done so. The invitation remains open to Turkcell to participate in the Hoffmann committee's investigation."

There is a lot of copy paste here but everything needed to be read. Am I confident in their response? Again how can you tell? Unless you have inside information we are stuck on the sidelines. My gut says Turkcell are clutching at straws. Especially by filing this in the US and trying to involve US law. I do not see how the US can have jurisdiction. Not that I am an expert. We will carry on holding this one with caution. For further reading Mail and Guardian published another piece yesterday evening

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Phew, poor Research in Motion. Ironically the company is located in a town by the name of Waterloo, in Ontario, a province of Canada. Now it all depends who you are, but at the battle of Waterloo (in Belgium) it would have been better to have been the Duke of Wellington, rather than Napoleon. Research in Motion have kind of done this backwards, having experienced their Elba, and about to try and make a comeback, will there ultimately be a St. Helena moment? Post Waterloo? The history buffs will know what I am talking about. The company talks about having shipped 11.1 million handsets last quarter, that is around a 21 percent drop in handsets from the prior quarter. Amazing! Phew, but strangely, this was ahead of peoples overly pessimistic forecasts.

They do say that they also shipped 500 thousand PlayBooks, most sold through deep discounts. They also took a hit from a charge taken from inventory valuation related to the Blackberry 7 product. Meaning that they think it is less than initially thought. Thorsten Heins seems upbeat. He has only been in charge for two months, as of today he is left with fewer senior execs. Including long time former co-CEO, Jim Balsillie, he is departing. As is the chief technology officer, he is leaving the business after 13 years in charge, a fellow by the name of David Yach. Jim Rowan, the global operation chief operating officer is also on his way out. Sad. But I guess Heins is doing some long broom cleaning here.

I do not know what to say about RIM, they have posted a loss of 125 million Dollars for the quarter, mostly through write downs. Their products are no longer the only business tool, both Android and Apple have left them in the dust. I suspect that RIM will make a comeback of sorts, but at the expense of who? I often see throwaway comments that people swapping from their beloved "crackberry" to a superior phone, be that an Android or an Apple product. For the time being whilst the business goes through all these changes, I expect them, like Nokia, to hang onto the customers that have not already migrated to other handsets.

The Business Insider had this nice piece: RIM MISSES BIG ON REVENUE, STOCK TANKS. The stock did pick up a little. But the worst part is that there is no more guidance from RIM, because things are just going to be awful. Perhaps this is a moment to pounce, perhaps wait for the beast to really be on its knees before you see a bid.

Besides, like I pointed out this morning, the market cap of RIM is three and a half billion Dollars less than newly listed LinkedIn. As I tweeted this morning: Apple is worth 79 times more than Research in Motion. In June '08 Apple was worth roughly 2.2 times more than RIM. Since then RIMM down 88%. Wow. RIMM has crashed and Apple has taken off. And the customer has spoken. When I kept telling my friends 24 months ago, they kept telling me I was wrong. Only the brave would be attracted to the stock right now, in hoping that ultimately an HP Palm type tie up would unlock some sort of value. Not for us.

Currencies and commodities corner. Dr. Copper is last at 383 US cents per pound, not really going anywhere for now, that has been my perception for a while. The gold price is last at 1664 Dollars per fine ounce, slightly higher on the day, the platinum price is also higher, last at 1643 Dollars per fine ounce. The oil price is last at 103.44 Dollars per barrel. The Rand is firmer today, 7.66 to the US Dollar, 12.27 to the Pound Sterling and 10.23 to the Euro. We have started higher here, as a result of a better finish in New York.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Thursday 29 March 2012

Don't be offended by S&P ratings

"You can present exactly the same dataset to both an optimist and a pessimist and they both come to completely different conclusions. That is the market forces at work every day."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We closed right near the lows of the day, the Jozi all share index ended at 33622, down 236 points on the day, or 0.7 percent down after all was said and done. Lagging the broader market and in fact doing all of the moving lower were the resource stocks. Down, down, down. Construction stocks still continue to edge ahead from their completely trounced levels of late last year. It has been one way traffic since then but starting to level off a little I suspect.

Hold onto your knickers there. For better or for worse, the general public tends to take these things very seriously, what the ratings agencies say. I suspect that the ratings agencies have gone from a time where nothing could go wrong to seeing all sorts of things that could go wrong, go wrong. And as such have become reactionary, because they seemed to have missed the great financial crisis of 2008. Or even worse, seen as one of the villains because their ratings were blindly followed by bond investors, and triple A ratings were given to mortgage backed securities and then packaged and sold to Swedish town pension funds and the like. And the quality of the mortgage book started to show. And the quality was should we say, not triple A. So, that is why I think that the ratings agencies have become more outspoken and cautious, because when the tide went out, to use a Buffett analogy, there were no swimming trunks within a country mile. And the ratings agencies amongst others were badly caught out.

So, when Standard & Poor's yesterday revised their outlook from stable to negative, and affirmed our BBB+ rating, seemingly everyone gets irritated. Personally I don't care from an investment point of view, if you are not willing to do your homework when investing in South African bonds, and listen to these guys, then that is your own indaba. However, where I do care, is where the perception of our country lies from the views of a foreign party. That matters. Treasury might say this or that and not agree with the actual reasons, but there are some reasons that one should or could agree with.

For instance, this could be interpreted in a number of ways: "The negative outlook reflects the potential for a downgrade if economic and social problems feed into the political debate in the run-up to the 2014 national and provincial elections and consequently further put pressure on the policy framework." Does this mean that talk could lead to greater government intervention? That is then the will of the masses, the voting base in South Africa, not so? Perhaps the core of the issue is the same problems that we grapple with, different messages from the ruling party. Mixed information. A not too friendly operating environment for both business, labour feels aggrieved, too much parastatal involvement in the economy. Those are real issues. These lines from the official release, which you can get too if you go and sign up for free at the Standard & Poor's website -> South Africa Outlook Revised To Negative On Persistent Economic And Social Problems; All Ratings Affirmed.

Is this not true? "However, fundamental structural economic and social problems continue, such as very high unemployment and a structural current account deficit that makes the economy dependent on external financing." Could that not happen? Yes, maybe, who knows. To understand the ruling parties politics is a full time job, check this article out from Justice Malala in the Financial Mail -> Loving and loathing. Amazing. See that?

My parting on this downgrade are that it does and it does not matter. Do not engage in hand wringing. Our credit rating company is in the same company as a country like Thailand. According to this Wiki page -> List of countries by credit rating, sort it by rating, you can see that we attract a better rating than Russia, Mexico and Brazil. Better than India. Worse than China. So, whilst it is a problem, I am reminded that National Treasury had this response in January when the other two ratings agencies led with the same line -> MEDIA RELEASE. And besides, why get upset about something you can't change, perceptions take a life time to change. In this case, a life time for the image of Africa.

Byron's beats tackles an issue. A big issue. One that we have been talking about for a while now. MTN.

Fortunately there are investigative journalists who have already done some research from which I can start forming an opinion. This Bloomberg article summarises what Turkcell had to say in their files, I suggest you give it a read and you will see what I am talking about.

This Mail and Guardian article also does a good summary but doesn't say anything new. It does however state that "MTN was due to put out a SENS statement before markets opened on Thursday morning but a spokesperson said that they believed in the Hoffman inquiry to investigate the claims." Of course MTN released a SENS which we covered here when the allegations first came out in February.

As an analyst these kinds of things are tough to call. The truth is, we have no idea about the facts and who is right and who is wrong, that is why it is going to the courts. We can only speculate. What I can tell you is that it is certainly negative for MTN from a PR perspective. The share price is down 2% on the news so that is what the market thinks.

The other issue of concern is the U.S sanctions being imposed on Iran concerning their nuclear programme. As mentioned in the Bloomberg article, MTN have many ties with US companies which may halt services if MTN carry on operating there. This is certainly a worry because communication is such an important part of a countries operation these days.

Not only do MTN get 9% of their revenues from Iran but it forms a big part of their growth plans. I'd say that most of the bad news is factored into the MTN share price which looks extremely attractive on a valuations and a yield perspective. However, for the time being we would trade with caution on this one. We will keep a very close eye on the proceedings.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Markets advanced from their lows, but that was not good enough for another losing session on Wall Street. I think two days ago this had been the best first quarter since 1998, whatever that means. Good, bad, not sure. The Dow closed just over half a percent lower to 13126, the nerds of NASDAQ lost the same as the broader market, 0.49 percent, for all the major indices to be inline with each other for a change. Energy and basic materials were the big losers again. Goldman says that the oil price is going up. But others are asking, what did the Bernank actually say? Read the speech, interpret it in any way you want. Humans are brilliant at that, you can present exactly the same dataset to both an optimist and a pessimist and they both come to completely different conclusions. That is the market forces at work every day.

Remember from yesterday where we were talking about Foxconn and Sharp and Apple TV? Well, it did not take long. The Foxconn-Sharp Alliance is all about Apple's Coming HDTV. Read it. It might be the coolest thing that you read all day. TV's with a touch screen usable in medical science. Amazing.

Currencies and commodities corner. Dr. Copper is last at 378 US cents per pound, that is lower on the day, the same with the gold price, that is down at 1656 Dollars per fine ounce. Not the platinum price, that is slightly better at 1637 Dollars per fine ounce. The oil price has also eased back to 105.17 Dollars per barrel. The Rand is weaker, risk off, 7.69 to the US Dollar, 12.24 to the Pound Sterling and lastly 10.23 to the Euro. Risk off like I said today, selling because of concerns of global growth. Err.... but the same "investors" were cheering Bernanke's outlook on the US economy and ultra low interest rates. I can't and won't try and figure it out.

Parting shot. This is really, really good: 9 ECONOMIC MYTHS. It is a piece by one of my favourite bloggers who takes on the 9 economic myths of self proclaimed realist (I think he is bearish), Dave Rosenberg. Dave Rosenberg is really smart. So is Cullen Roche, who writes for his website/blog Pragmatic Capitalist. Roche used to manage money, and seems to talk about his own activities now. And Rosenberg manages money too. I know it sounds silly, but it matters more what people do and say who actually make market "moving" decisions rather than bearish market commentary or Uber (missing the Umlaut) bullish market commentary. If you have thirty years to invest, look at this: Dow Jones Industrial Average (1900 - Present Monthly). None of us have 110 years to invest, but many of us have at least thirty years. Even the worst periods there, if you kept buying through the period you would have been OK.

That makes the levels of anxiety right now seem silly. If anything, if there is anxiety and not everyone is in agreement, that is good if you are in accumulation mode. Thirty years I hear you say? I have clients in their sixties who keep telling me that they might, or might not be around shortly. I always say to them nonsense, medical science has advanced significantly. Which means that if you are in your mid sixties you might well live for another 35 years. Yes. My great grandmother lived to 101. Yes, so if you are anxious, you have time. More than you think normally. Equally, don't delay.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Wednesday 28 March 2012

Post Ben glow

"You are never ever going to get the timing right. I would loved to have bought GE stock for 1.20 in 1980, currently 20 Dollars. That would have been great. Or Coca-Cola for 1.50 back in that year too, the stock trades above 70 Dollars a share now. Both these companies trade below their all time highs of the biggest PE expansion we have ever seen, back in late 1999 and early 2000. Coke pays a 51 cents per share dividend per quarter now, versus a 15 cent dividend when it traded at that all time high, quite clearly the stock was overvalued at that point."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We were better at one stage during the day, clocking a percent or better, but we slid during the middle of the day and settled to a level around where we closed. Which was 193 points better to 33858 on the Jozi all share index, a gain of 0.58 percent on the day. The resource ten did little to help the overall market gain traction, Anglo American actually traded down 1.2 percent on an ABSA capital report that mining output would be impacted this year again as a result of electricity constraints (Eskom) and strikes. More on that a little later, we will also talk about their (Anglo) diamond acquisition when put next to BHP Billiton and Rio Tinto looking to exit their smaller diamond businesses. As I said, I suspect that there is nothing sinister in that, because for both the Australian based companies, the diamond assets are non-core to their overall business.

PPC released a Merrill Lynch Investor Conference slideshow two days ago. Or was it yesterday? This is as far as I can tell, a yearly event, and every year PPC does this presentation. On both their business and the overall cement business in South Africa. It really is worth a look as both an interested party, as well as a shareholder of PPC specifically. We will have a look at a few of the key slides, I am sure that you are all slided (an invented word) out from yesterdays message on the Fed. But, these are important, and a picture always tells you a lot. Although, I started reading my daughters Alice in Wonderland last evening and they seem engrossed enough. No pictures. Imagination.

PPC have said that sales volumes for the first five months of their financial year (they are a September year end) have been 9.4 percent better than the prior year. Imports have put pressure on the coastal market, but at this stage imports only represent around 5 percent of total South African demand. So, in reality this is not that big. PPC hiked prices by 5 percent on the first of Feb this year and as a result they have seen a negative impact on sales. But as they put it, "Price still has better leverage on bottom line than volume." I believe them.

Perhaps the most exciting part, or the real rump of the slide show for me anyhow is this part, their African expansion plan. PPC are looking to increase the percentage of African sales to 40 to 50 percent of the overall sales mix by 2016, it is currently 18 percent. Which then means that PPC will be a lot more exposed to other currencies, and as we know is both a good and bad thing, swings and roundabouts. Either way, PPC will be building plants in the below geographies, you can see that East Africa will be the first focus, and then they will target West Africa.

And as you can see later in the slideshow, most of the initial focus will be on green fields plans, looking to build plants with capacity of 600 thousand to one million tons of cement per annum. According to the slide show, these plants are set to cost around 200 million Dollars apiece. But, they will have to more importantly find limestone deposits within a 250km radius of their core markets. And that is what is going to take time.

We are aware that Sephaku cement is building a sizeable plant (as far as we know around 2.5 million tons per annum) in the Lichtenberg area. Where corn and cement meet, both Lafarge and Holcim have plants here. Don't knock Lichtenberg either, apparently the largest cheese factory in the country is there too, courtesy Clover. Yum. The story today is in Engineering News -> Sephaku says new cement project on track.

See that, 2.5 million tons per annum. Just to put that number into perspective, the last cement sales stat from the Cement and Concrete Institute refreshed our memories as far as cement sales are concerned. In 2009 yearly sales were 11,783,670 tons, 2010 dropped to 10,870,394 tons and 2011 was 11,234,335 tons. So, you do not have to be a genius to see that 2,5 million tons added to this mix is really sizeable. And PPC clearly see this market getting crowded, hence the push to faster growing and less developed northern neighbours.

Quite a lot of people have been asking questions about Rio Tinto exiting their diamond business, this after BHP Billiton announced a similar strategy. All after Anglo American announced that they were taking an even larger and much more sizeable stake in the diamond asset that they own already. Remember, two refreshers -> Anglo American acquiring De Beers stake from Oppenheimer family and BHP Billiton looks to offload their diamonds business. As you can see, for BHP Billiton, less than two percent of underlying EBIT. So, nothing sinister here about Rio Tinto and BHP Billiton getting out, they are just noncore. Moving along now....

What? Foxconn is buying 1.6 billion Dollars worth of Sharp, or 9.9 percent. My immediate thoughts, like everyone else, is why? And then of course I (and everyone else had already) put two and two together, Foxconn and Apple and television. Err, but that only makes three. Of course the fourth one is the Apple TV. Or perhaps it is going to be called the iWatchTV. It is tricky to understand the relationship between Hon Hai and Foxconn, but the two are intertwined. And as this Bloomberg article points out, Sharp are in trouble -> Foxconn Counts on Apple's Future Through Sharp Investment. Either way, this does confirm that Foxconn see their customers (which include Microsoft (Xbox) and Amazon (Kindle)) needing better displays. Sharp closed limit up, over 16 percent. As I often say, proximity to China will hold Japan in good stead. So, whilst their population might be ageing, the same could be said for China too, the growing middle class across the rest of Asia will help existing Japanese businesses too.

Byron's beats are back. He talks about a sector that I really like.

According to management this growth was attributable to a heading they have labelled 'It is all about the clients'. "Acquiring new clients and encouraging existing clients to use more of our products and services is what we do. We've acquired 877 000 new active clients for the year." This has grown their client base to 3.7 million while loans advanced grew by 35% to R19.4bn.

"The unsecured credit market is showing continued growth. Unsecured credit (excluding credit card facilities) granted during the year to September 2011 grew by 56% according to the statistics published by the National Credit Regulator ("NCR"). The loan sales reported to the NCR by Capitec for the same period grew by 71%."

I suppose the biggest question being asked is about the quality of these loans. Many people have been calling the unsecured loans sector in South Africa a bubble. I beg to differ for two reasons. Firstly I think we underestimate how under banked we still are as a nation thanks to our horrific past. We also underestimate the informal sector who have unsecured loans as their only form of finance even though they have a consistent income. Secondly, disposable income in South Africa is growing. Standard Bank had this to say in their financial results last month. "While households took on additional debt, growth was lower than the increase in disposable income, bringing down the household debt-to-disposable income ratio to 75% from 78% in 2010." Above inflation wage hikes thanks to our overpowered unions actually has some positive knock on affects on the economy and specific companies in the right industries.

So how do they see the future? The focus is on clients, growing the numbers and improving services. They plan to open 55 new branches and are clearly confident that the demand is still there for affordable banking and unsecured loans. As an investment we still prefer African bank. Micro lending seems to be where the best returns are and that is where African bank dominate with a loan book of R44.6bn, more than double Capitec's. They are also on a massive growth drive using their Ellerines stores as kiosks. The valuations look cheaper and the dividend yield is higher. If you hold Capitec however I wouldn't be selling, it is a fantastic business, but you did not need me to tell you that.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Stocks fizzled from earlier sizzling time, all the major indices turned lower in the last hour of trade. In fact, the nerds of NASDAQ were comfortably above one third of a percent higher an hour before the close of trade, and ended up trading in the red. But the winners remained winners, a whole host of stocks closed near their highs.

I have been asked this question before, with some of your stocks at a 52 week high, are you still buyers? Well, some of them are nowhere near their all time highs, some of them are there for a reason, either an improving outlook or PE expansion has led us to this point. So the question was, do we buy, or do we hold back a little. I like to think of it in this way. You are never ever going to get the timing right. I would loved to have bought GE stock for 1.20 in 1980, currently 20 Dollars. That would have been great. Or Coca-Cola for 1.50 back in that year too, the stock trades above 70 Dollars a share now. Both these companies trade below their all time highs of the biggest PE expansion we have ever seen, back in late 1999 and early 2000. Coke pays a 51 cents per share dividend per quarter now, versus a 15 cent dividend when it traded at that all time high, quite clearly the stock was overvalued at that point. Very overvalued. And now? Well, US domiciled companies have changed their sales mix geographically, into much faster growing parts of the world.

Currencies and commodities corner. Dr. Copper is lower at 383 US cents per pound, the gold price is also lower at 1676 Dollars per fine ounce. Ditto the platinum price, which is down at 1632 Dollars per fine ounce. The oil price is also lower at 106.29 Dollars per barrel. The Rand is weaker at 7.63 to the US Dollar, 12.15 to the Pound Sterling and lastly 10.18 to the Euro. We have started lower here today, in part slippage in the last part of New York trade.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Tuesday 27 March 2012

Stop your Ben bashing!

" The Federal Reserve sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policy makers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. It was an improvement throughout the day, first the German based IFO report showed that "things" were improving in Europes biggest economy and then perhaps the most exciting event all day was the Bernanke speech. It really was a day, other than those two events and the Spanish regional election results completely devoid of news to digest. Instead it was scraps, and you got the sense that those tasked with the news jobs were scratching like chickens do when looking for grubs. Ever hopefully two and then one scratch with opposite feet. Markets turned green by two in the afternoon, and continued, albeit slowly to gain a little traction. The Jozi all share index managed to by the end of the market tack on 92 points to close up shop at 33664, a percentage gain of 0.28 percent.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. There was of course "the Bernank", or the commentary from him, Ben "the measured" Bernanke delivered a speech that changed the tone of the whole day before we even started. It is kind of crazy if you think about it. Ben Bernanke tells us that the Fed are ready to act and that the labour markets are better than most people thought. Yes, we have been paying attention and watching the same data. But Mr. Market and all the participants suddenly get the faith and send all the major markets much higher on the day. What? That almost sounds crazy and I was definitely scratching my head. Surely we could have or should have been trusting our own instincts and in seeing the same data come to the same conclusion? But yet we see headlines like this: Hedge Funds Capitulating Buy Most Stocks Since 2010. The article came to me via a counterparties RSS feed, and there was a cheeky headline that said "Smart money" joins the long crowd. Smart indeed.

OK, so here is the speech that Fed chairman Ben Bernanke gave yesterday that has gotten everyone so excited across the globe. Here is the speech available for anyone to download off the Federal Reserve's website -> Recent Developments in the Labor Market. The best part of the speech was that there were a whole host of cute slides attached to the speech.

Before I get into that, there are some very interesting and important comments that Ben Bernanke makes about long term structural unemployment, something that this great country of ours (South Africa) is cursed with. Listen in and see if this sounds at all familiar.

"Long-term unemployment is particularly costly to those directly affected, of course. But in addition, because of its negative effects on workers' skills and attachment to the labor force, long-term unemployment may ultimately reduce the productive capacity of our economy. The debate about how best to address long-term unemployment raises another important question: Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers' skills and employers' requirements? If cyclical factors predominate, then policies that support a broader economic recovery should be effective in addressing long-term unemployment as well; if the causes are structural, then other policy tools will be needed. I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor."

Wow. What does he actually mean by all of that? Well, clearly the first part is understandable, being out of work long term is awful to the individual concerned and it does very little for their skills development, that much we can definitely understand. But the impact on productivity to the overall economy is even worse, because quite simply when folks re-enter the workforce, their skills at the companies expense need to be brought back to the level required. And by doing that, you impact on overall productivity. Sound familiar? You betcha! OK, but the second part, the questions that Ben Bernanke asks, and then concludes that weakness in aggregate demand is to blame. OK, what is aggregate demand?

Definition time, from Investopedia: "Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: Aggregate Demand (AD) = C + I + G + (X-M)
C = Consumers' expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services." Also known as total spend of a country. So what the Fed plans to do then is continue to maintain their accommodative monetary policy stance, which should continue to lower the overall unemployment rate. Now the question is asked, why? Why should the Fed do this?

In the explanation, from the Feds pdf site: Monetary Policy and the Economy, "The Federal Reserve sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policy makers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect." So, quite simply, they will act with a mind to make sure that these factors are balanced. Seeing that rates are rock bottom and prices are stable, then it is best to act to promote maximum employment. Because that is in the interests of all Americans, which also includes the White House. So no, Bernanke might be a political appointment, but he accepts the job based on his own views and in his desire to be a civil servant. He could have stayed at Princeton and earned more. No really.

What Bernanke said was interesting. "And the unemployment rate in February was still roughly 3 percentage points above its average over the 20 years preceding the recession. Moreover, a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring." See that, the twenty year long term average is around 5 percent, so there is loads of work for the Fed still to do, in order to get there!

OK, people will still shout that the US has kept an accommodative monetary policy, or simply been too loose. That is the choice that they took, better than the 1930's choice. Let us search and look at those Bernanke graphs that were attached to the speech. First one, which I thought was very interesting, because as private payrolls start to improve (number 1 graph titled Change in Private Payroll Employment), so labour utilization drops (number 4 graph, titled Measures of Labor Utilization). But that is obvious.

And then the slides go on, let us look at the balance of the slides, in succession, all visual today:

OK, and now the picture that started the whole conversation. Long term unemployment and duration of unemployment. This graph makes for the most horrible looking at. Because the levelling off is one thing, but we are hoping for a decline at some stage. My ~~spider sense~~ intuition tells me that it is coming. And you can see that in graph 13, Probability of reemployment by Duration of Unemployment.

The jobs opening rate from the very last visual attached to the speech is starting to improve as the unemployment rate falls away.

I am now pretty sure that you have a complete information overload. Too much information and graphics, but that was intentional, this was the single biggest event from yesterday. And this made markets across the globe go completely bananas and buying giddy. And strangely, a whole lot more bullish than before.

Currencies and commodities corner. Dr. Copper is last at 385 US cents per pound. The gold price of course rocketed on the whiff of whatever it is that folks who trade the precious metal think that the Fed is going to do now. QE3 you know. I keep saying, they never built that ship. The gold price is last at 1689 Dollars per fine ounce. The platinum price is last at 1658 Dollars per fine ounce. The oil price is also higher at 107.26 Dollars per barrel. The Rand is firmer as Mr. Miyagi says that it is risk back on, 7.55 to the US Dollar, 12.06 to the Pound Sterling and 10.09 to the Euro. We are better today, our markets, but not as much as before, because there was a Spanish and Italian bond auction that seemingly did not go ahead in the same way as other expected. Sigh, who knows.

Parting shot. I have spoken about the human element often in markets and in business, the future innovation that people are creating today. And then this is confirmed when you look back in time at what has happened. Now I am referring specifically to a piece I found via Carpe Diem that points to a dramatic jump in fuel efficiency. "Adjusted for inflation, gasoline today is about the same price as in 1980 ($3.58 per gallon in February). However, adjusted for both inflation and increased fuel efficiency over time, the costs per mile driven were about 23 cents in 1980 compared to 16-17 cents per mile in February 2012, according to the EIA." Find the original EIA article here -> Gasoline prices rise due to increased crude oil costs. So the motor vehicle industry has adapted to higher gasoline prices, and continues to innovate. You see, as humans we are better at innovating. Which means we are making progress.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Monday 26 March 2012

Allocation wrestling

"Instead of being the risk-free rate, they're return-free risk right now." So return free indicates you aint going to get much right now for your investment, but you are taking on more risk at this juncture, for the same investment.

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We managed to stay in the green, closing at the lows of the day, 34222 on the Jozi all share index. The most heavily hit parts of the overall market were the retailers, who sunk over two percent. Remember that the Reserve Bank meet this week, the expectations from the economist community is for rates to remain on hold. No change. I guess that makes sense, if the last inflation read was inside of the range there could have been scope to do something.

But, the best thing to do for Gill Marcus and the rest of the team will be nothing. And so I am going to side with the expectations here, I suspect that notwithstanding the early signs of the business cycle turning, the next move in rates should be up. When, well, asking that same question to the Fed was answered at one stage with the end of 2011. Now that has moved out a couple of years hence. Not to mean that the rate cycle wouldn't turn in the US soon, if the economic data gets stronger, who knows? The other push and pull talk around at the moment is bonds versus equities. And where to next for the bond markets. This is good news for us, as we are long equities.

I laughed when I saw this commentary given to the current wrestle in capital allocations, the whole debate around bonds versus equities. And when to sell the safety flight from back then, then rates should start to increase, but as I said to Byron on Friday, the fixed income pool is far bigger than the equities pool. And seems very crowded at the moment. The US accounts for around 45 percent of the entire bond market, which is somewhere in the region of 100 trillion dollars. Corporate and Mortgage backed bonds account for half of all the bonds outstanding in the US. Total issuances in 2011 were 17.8 percent lower than in 2010, where a record 6.5743 trillion Dollars was raised. Mortgage related issuances at 1,9755 trillion Dollars in 2010 and 1,6602 trillion Dollars in 2011 (figures from Sifma.org) are comfortably below the go-go days of 2005, where mortgage issuances topped 40 percent of the overall total. In 2003 that number of 46 percent and above 3.179 trillion Dollars. In fact 2003 just eclipses 2009 as the biggest ever year of overall debt issuances. Amazingly complex. For me anyhow, but for every seller of a bond, of course there has to be a buyer.

So whilst it was a great time to be issuing debt instruments back in 2010, when there was the flight to safety, the same cannot be said now. The line that I was particularly interested in from the article titled: Fed's Inflation Gauge Reveals 2008 High a Distant Threat was the quote: "Instead of being the risk-free rate, they're return-free risk right now." So return free indicates you aint going to get much right now for your investment, but you are taking on more risk at this juncture. Because the environment has gone from a time where everyone was hiding in bunkers to an environment where folks have emerged to see the smoke lifting. We are in equities and do not have this headache to deal with. And now you might have picked up that the English want to sell perpetual gilts or ones with 100 year terms. WHAT? Almost everyone I see writing about them suggests that the buyers will be scarce. That tells me that the other side of the equation, the issuers are aware that these low issuance rates are perhaps a thing of the past. Which in itself presents a new dynamic.

There is a complete lack of company news today, so people are becoming experts on Spanish politics, this as the country grapples with their internal accounts. Not good. The Eurozone remember are demanding that the Spanish "do more". Whatever that means, you know what it means, they must try harder. Strategically the budget was delayed until this Friday (instead of last week), after the Andalusian regional elections, where the incumbents party made progress, but did not win a majority. Imagine if we did that here, how the peanut gallery would shout from the rafters, delaying the budget, what is that all about? We have a lot to be thankful from a fiscal discipline point of view. But the same cannot be said for the Europeans, a delayed budget means that they are on European time. Which of course is the best thing about today, the fact that we get an extra trading hour in our day. That started of course today. Which means when it is 9 in Joburg, it is 9 in Paris and 8 in London. We all start trading at that time. Spare a thought for the London guys, they have to be at work at least an hour earlier than their continental European colleagues.

Byron's beats is away in Cape Town for a couple of days, he is around the mother city. Mother city? Did you notice something strange this weekend at the Stormers match versus the Lions at Coca-Cola Park (yes Robbie Johns of 702, I mean John Robbie) which is no longer called Ellis Park? There were lots of refugees from Cape Town up at the rugby game. Or perhaps they all flew up for the weekend. Either way, I think I know what Premier Zille was trying to say, perhaps she should have said, economic or service delivery refugees. Anyone who can afford a ticket to a super rugby match perhaps is better to do than the folks flocking to the Western Cape from the Eastern Cape, looking for more than two days of teachers a week. Education my friends (in my opinion) is the path to success. We need to do more in that regard. 30 percent is very far from a pass in my book.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Closing in the green, after starting way down. I see that the helium voiced Bill Gross said via the PIMCO twitter feed that Fed are likely to hint at QE3 (another round of quantitative easing) at their April meeting. Charles Plosser (Philly Fed bank president) came out and said that he did not see the need for any new stimulus from the central bank. Well there you go. PIMCO and their new normal, remember that talk, of what the new normal was and is likely to be? Anyhow, the term was coined in March of 2009 by Bill Gross. There was this idea from PIMCO that the new normal meant that bonds would return lower rates than before and in fact that prompted them to start an equity arm to their trillion Dollar bond holdings. Meaning that they expected back then, 2009 at the bottom of the equities market that in the future (many years), equities would have a better return than bonds. And equities were not better, but we were just in the "new normal" landscape a better investment. And hence the search for yield across the globe, that in part had lifted our equities markets. All tied into the first part of this newsletter today.

Currencies and commodities corner. Dr. Copper is last at 384 US cents per pound, the platinum price is catching a bid and is higher, at 1629 Dollars per fine ounce. The gold price is off a touch, last at 1660 Dollars per fine ounce. The oil price is last at 106.23 Dollars per barrel. The Rand is last at 7.64 to the US Dollar, 10.17 to the Euro and 12.14 to the Pound Sterling. After having been a whole lot worse to begin with, we are better now.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Friday 23 March 2012

Another Nike slam dunk

"The world economy in 1700 was 371 billion Dollars, in 1990 Dollars. India was 90 billion Dollars, 24.25 percent of all world GDP, whilst Chinas economy was 82 billion Dollars strong, 22.1 percent of global GDP. So, collectively 46 percent plus of global GDP back in 1700. So, all this is, this massive shift in economic growth is a return to the past. Rewind back to 1AD in the same Maddison model and India (32 percent) and China (25.5 percent) account for 57.6 percent of global growth. In 1700 where the USA contributed a paltry 0.14 percent to global GDP. How times have changed."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Not helping matters following on from the Chinese "disappointment" was the fact that the Europeans weighed in with weaker PMI data across the zone, and from the two majors, France and Germany. French and German services PMI managed to keep their noses in front of 50, which indicates growth, but manufacturing PMI disappointed, just like the manufacturing data had disappointed earlier in the day from the worlds growth engine, China. From that point on the commodity stocks, which are in a sector that has looked vulnerable, sold off heavily. Paul recounted a day where BHP Billiton had fallen 8 percent in a single day back in 2004 or 2005, strange how we remember the price falling from 84 to 76 Rand (thereabouts), but not the exact date. The reason that they sold off back then was because Chinese growth was seen to be slowing. And Paul said, how many times over the last decade have we been anxious about Chinese growth slowing? At least once a year.

And all the while we continue to see growth ahead of expectations off an ever increasing base. So without dismissing the anxiety yesterday and earlier in the week, we all have several t-shirts associated with this slow down talk. The ultimate plan for the Chinese is to lift their economy to rival the poorer nations in the developed world (Portugal and the like) and there would be more focus placed on internal consumption. I don't get too anxious about the day to day moves, I know we are all human, but perhaps we should just ignore the absolute levels. And pay more attention to the companies and their results slash prospects. After all, we own companies, not share prices? But ultimately we want those share prices to go up a lot more from the levels that we bought them at, and get rewarded by way of dividend pay outs. Yip, that is the end goal.

Byron's beats looks at the large capital raising exercise announced by Shoprite yesterday. That caused the price to fall in a heap. But I guess that was expected.

The raising will be done through an issue of 27.1 million shares at a price of R127.50. This represents 5% of existing shares and looks to raise R3.5 billion. A further R4.5bn will be raised using convertible bonds which are also potentially dilutive. Like Sasha mentioned, the share price took a knock as it converged to the new (lower) issue price.

Here is the rationale from the company. "The net proceeds of the Transaction are intended to be used by Shoprite to strengthen and improve the structure and efficiency of its balance sheet, to enhance working capital management, to continue investment in organic growth initiatives and to selectively pursue acquisition opportunities."

That is quite general but the speculations have started doing the rounds especially concerning the last part 'acquisition opportunities'. Cashbuild has been thrown into the mix by a few reporters. It makes sense. Big rivals Massmart have Builders Warehouse while Spar own Build it. Shoprite do not have a building retailer and the Cashbuild consumer falls well within their target market.

To be honest though I think most of this capital will be used for organic growth. I'm not writing off an acquisition but after seeing interviews with Whitey Basson I get the sense that north of our borders is where the focus is. In countries like Nigeria, where Shoprite are exposed, there is a big lack of infrastructure and not many shopping malls. So unlike in South Africa where the company can just rent, Shoprite will have to build their stores. This will include parking lots, infrastructure, water, cooling, electricity and distribution. Although the base is very low in many of these countries the lack of infrastructure requires massive capital expenditure.

Shoprite are the biggest retailers in Africa with 250 stores in 15 countries outside of South Africa. We know Massmart are targeting this market aggressively with the backing of Walmart. For Shoprite not to lose market share they are going to have to be proactive. With the share price at over 24 times earnings maybe raising capital through equity is not such a bad idea after all.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Slipping and sliding away on Wall Street, markets globally taking their cue from a weaker Chinese PMI number released from the HSBC guys. I also read a report which was kindly sent to me that suggested that the Chinese were going to look to manage higher commodity prices over time. Well, I thought, they should have thought about that before the price of iron ore went up tenfold over roughly a decade. If anything the great Chinese growth miracle has enabled mining companies to enjoy sustained periods of gains, which have led to them embarking on bigger projects to meet the pending demand. We had a throw away question, who was the biggest and strongest economy in the world in 1700? It was India and then China.

And as a percentage of the overall contribution to the global economy you will be pleasantly surprised. Angus Maddison, a famous economist was featured in the Economist, I remember, with some surprising graphics. The world economy in 1700, according to him, was 371 billion Dollars, in 1990 Dollars. India was 90 billion Dollars, 24.25 percent of all world GDP, whilst Chinas economy was 82 billion Dollars strong, 22.1 percent of global GDP. So, collectively 46 percent plus of global GDP back in 1700. So, all this is, this massive shift in economic growth is a return to the past. Rewind back to 1AD in the same Maddison model and India (32 percent) and China (25.5 percent) account for 57.6 percent of global growth. In fact, Asia (excluding Japan) as a whole accounted for 72 percent of global GDP. But remember that the USA were completely unimportant as far as economic prowess was concerned. Even in 1700 where the USA contributed a paltry 0.14 percent to global GDP. How times have changed.

Nike delivered their third quarter earnings after the ~~race~~ bell last evening. It was a beat which is all the street really seems to care about I guess, EPS for the quarter clocked 1.20 Dollars versus the streets estimates of around 1.17 Dollars. So a comfortable beat. As much as I care about whether they managed to do better than the analyst community thought they would, I also don't get too excited about that specifically, the pitfalls of contracting quarteritis skew what you are trying to achieve. And what we as investors are trying to achieve is buying quality companies in a sector that we like. Nike happens to fall into an investing theme that we like, aspirational consumerism. Or soft luxury in this case, on the local front we like Richemont, which is at the other end of the spectrum.

Nike managed to grow revenues by 15 percent to 5.8 billion Dollars in Q3 when compared to the corresponding third quarter in 2011, 16 percent better on a currency neutral basis, in other words in same currency sales. Headline earnings increased 7 percent to 560 million Dollars, gross margins were squeezed lower by 200 basis points to a still healthy 43.8 percent. Mostly as a result of higher product costs. There were cost saving initiatives in the form of product cost reductions, whilst more online sales decreased costs too. I have no doubt that whilst many of us are comfortable to shop online, many of us have still yet to embrace the future yet. There was of course some shares purchased in the buy back program, 239 million Dollars was spent on buying back 2.5 million shares, well done guys, you got them below 100 bucks. Current price at last evenings close was 110.99 Dollars per share. Good going. Since the repurchase program was announced in 2008, the company has bought back 48.1 million shares for 3.9 billion Dollars. 1.1 billion left to go, I suspect another five quarters. And average price of around 81.08 Dollars per share, that sounds about right.

So, sales better, earnings better, margins the only weakness really. And down the line the product pipeline looks really good. The US still is the main part of their business accounting for 2.149 billion Dollars worth of sales, which was a healthy 17 percent increase in regional sales, driven by a 31 percent increase in equipment sales, but more importantly, a strong performance from the core of the group, the footwear (+15 percent) and ever growing apparel (19) divisions. Western Europe, as finished as it is, managed to clock a 4 percent increase in revenue, thanks to a 7 percent jump in footwear sales. Taking to the streets both protesting and getting rid of that frustration, beating the streets I guess. Greater China sales increased 25 percent, with a 35 percent increase in footwear sales driving the overall mix there. Even Japan managed to increase sales by three percent. Emerging markets, which I guess is us increased sales by a whopping 23 percent, much the same as China. Apparel in our segment, not so much in China where I guess you can get cheap clothes all of the time. That is completely Linsane! I mean, you need to find out, if you do not know already about Linsanity.

Take a look for yourself at this graphic that I hacked from their results pdf, which you can find at this link -> CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED FEBRUARY 29, 2012. The two things to look out for are increased footwear sales in China (Nike shoes!) and apparel in the developing markets, football shirts! Those are growing at breakneck speed. The first two measure the two corresponding quarters against each other, whilst the other two columns are the nine months of the financial year thus far.

Future orders, so that is stuff in the pipeline increased by 18 percent in home based currencies and 14 percent in Dollar terms. And take note of these decent results in a very ordinary year. A very ordinary year across the globe still managed to translate to their main division, footwear, growing revenue by 17 percent. I suspect that as we start to see a little more confidence return, the apparel division should continue to grow even stronger. And if Tiger should emerge from the drought Woods, then expect people to get excited about the golf club buying again. Golf, not for me. But I will beat the streets and kick a ball or two. We continue to accumulate the stock at current levels, even if 23 times earnings looks expensive, it is for a reason, the company is growing exceptionally fast in the poor times.

Currencies and commodities corner. Dr. Copper bounced a little yesterday, last at 3.81 US Dollars per pound. The gold price is last quoted on my screen at 1645 Dollars per fine ounce, the platinum price is below that at 1625 Dollars per fine ounce. The oil price, which took a drubbing yesterday, like the rest of the commodities complex, last traded at 105.82 Dollars per barrel, WTI as per quoted on NYMEX. The Rand is slightly firmer at 7.68 to the US Dollar, 12.19 to the Pound Sterling and 10.22 to the Euro. We have started better this morning, around one quarter of a percent higher.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Thursday 22 March 2012

Chinese goulash

"So the report shows a contraction in new export order, which is a change, but weirdly shows signs of employment growth, also a change. With input prices the same and output prices contracting, hey presto, the authorities can wait for the official release closer to the end of the month and make a decision from there. Although I will tell you something, the official report differs from the HSBC report, and there has been some divergence over the last few months. Whilst you might think, oh dear, this is another read under 50, the silver lining is that this is a four month high. And that perhaps accounts for the increase in employment, "things" might just be getting better, and not worse."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We celebrated Human Rights Day yesterday, some said on the wireless this morning that the day should still be remembered as Sharpeville day. After the events that the day is associated with, those awful events that took place back in 1960. Hurting on Tuesday too was the BHP Billiton comments from their slide presentation in Perth, I showed you two of the slides that I thought were important, obviously slowing to only single digit growth in iron ore saw folks sell the sector hard on Tuesday, as a whole down nearly two and a half percent. In case you missed it -> BHP Billiton iron ore presentation spooks Mr. Market.

And that led to the rest of the market falling hard, because that is what tends to happen, our market still is a top heavy commodities market. The Jozi all share index closed down 0.98 percent on the day, a loss of 335 points to 33878. Eish, more not so good news in the form of Chinese flash PMI from the fellow over at HSBC this morning. At face value at least, but drill down a little further and you always get the real news. Because of the underperformance of the commodity stocks relative to the rest of the market, the swing from the commodity producers in importance has been somewhat diluted. In our market at least. Remember that BHP Billiton is underrepresented in our market, globally the market cap is around 180 billion Dollars. But here the market cap is only 509.5 billion Rand, it is not the two different listed entities, that would include the Sydney one. Whereas, the British American Tobacco market cap is fully accounted for here, 783 billion Rand, the weighting is not.

The service for all the weightings used to be free, but sadly is not anymore, the description of the constituent data on the JSE website is as follows: "This service provides subscribers with a file which contains information on all the index constituents, inter alia the constituent name, the ISIN and Exchange Code, the closing price, the total market capitalisation, the investable market capitalisation (the total market cap adjusted for free float), the number of shares in issue and the percentage weight of the constituent in the index"

The top ten companies by market cap on the JSE make up nearly 52 percent of the overall index. Meaning that the other 366 stocks listed on our exchange make up the balance, 48 percent of all the listed stocks weighting by market capitalisation. Taking that one step further, the top 20 stocks account for just over 68 percent of the overall JSE by market capitalisation. And the top 40 companies by market cap account for 81 percent of the overall index. So 336 companies below them collectively account for 19 percent of the value on our markets. And probably less by traded value, because of a tight ownership structure of smaller companies and low liquidity. Astonishing. So we should only talk about the same top companies, as boring as it is, because they constitute all the value. Imagine giving a third rate winger for a social club team the same time of day as Lionel Messi. Imagine.

Beijing central. 39^o 54' 50" N, 116^o 23' 30" E Flash saved everyone of us according to the guys at Queen who wrote the song for the movie, which was as far as I understand it, the only good thing about that movie. Talking Flash, the HSBC flash PMI for China was released this morning, and it disappointed. This number is by far and away the focus point today. Here it is sports (and food) lovers, the official HSBC Flash China Manufacturing PMI. Immediately when I saw this on my twitter stream earlier this morning I thought, right, time for the Chinese authorities to cut the triple R again, remember that they have done it once already this year. Without much fanfare at the time, I think that there was bigger news just then.

So the report shows a contraction in new export order, which is a change, but weirdly shows signs of employment growth, also a change. With input prices the same and output prices contracting, hey presto, the authorities can wait for the official release closer to the end of the month and make a decision from there. Although I will tell you something, the official report differs from the HSBC report, and there has been some divergence over the last few months. Whilst you might think, oh dear, this is another read under 50, the silver lining is that this is a four month high. And that perhaps accounts for the increase in employment, "things" might just be getting better, and not worse.

I love this blogger, Mark J. Perry and his blog, Carpe Diem. Perhaps because he is an optimist, but then again, as a collective we all are. Otherwise we would all still be sitting in the cave wondering what our next move is. Or not wondering in fact, just eating the same old stuff. This is his latest piece, titled World Trade and Output Set New Records in Jan. But what about hard landing in China, European recessionary concerns, all of that jazz? Well, take a look at the picture and you can see the heavy fall off in 2008 and 2009, but the bounce back now sees world trade volumes and world industrial output at an all time high. Now obviously we only compete with ourselves, as far as I know it, the aliens on Mars are very secretive about their industrial production data. Ditto the ones on Mercury, it is too hot to collect statistical data there.

But check out the graphic, courtesy of the good professor and his blog, which you should subscribe to -> CARPE DIEM - Professor Mark J. Perry's Blog for Economics and Finance

His conclusion on the data: "Both world trade volume and world industrial output reached fresh record monthly high levels in January. Trade and output are now far above their pre-recession levels, providing evidence that the global economy has made a complete recovery from the 2008-2009 recession. For the U.S., the annual growth rates for exports (10%) and industrial output (3.5%) reflect the underlying strength in America's manufacturing sector."

Notwithstanding the few hiccups we have had in the commodities space so far this year, the talk on the screens is that we have moved from a space of fear to one where people are talking about the selling of fixed income in favour of equities. We are actually having that conversation. With intelligent people on the screen. But, that means that the people who are paid vast sums of money to manage err.... money, are emerging from the woods. And in desperate need of a wash and a good meal, the hiding perhaps is over.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Oh dear, Jim Skinner the McDonald's CEO has announced his retirement. He has been at the company basically all of his working career, four whole decades. At retirement, his last day at work will be 30 June 2012, he would have been running the company for seven and three quarters of a year. And who is going to supersize Jim? Well, none other than current Chief Operating Officer, Don Thompson, this is a classic McDonald's move. Hey, don't say that they are nothing other than predictable. Just like their burgers. Predictable.

Currencies and commodities corner. Dr. Copper last traded at 377 US cents per pound, the gold price is now higher than the platinum price, at 1636 and 1615 Dollars per fine ounce respectively. The oil price is lower, last at 105.74 Dollars per fine ounce. The Rand is weaker at 7.73 to the US Dollar, 12.21 to the Pound Sterling and 11.21 to the Euro. We have started much lower again here. Chinese anxieties.

Parting shot. I had a light bulb moment when chatting to my dad about the encyclopaedia Britannica crowd no longer printing the physical version. It was not to do with the quaint way of accessing information, but rather the world that is Wikipedia. Let me try and explain. Wiki is for free (provided you have an internet connection) and is moderated by a community for free. And if there are question marks about the content, then that is queried by the community. Only the pages that are open to vandalism are locked for editing by the community. Locked from the haters. Just don't be haters yo! There are according to their own website 100 thousand regular contributors, people who watch the news and make it their mission to keep the content up to date. Which lead me in my conversation with my father to believe that these people give their time for free on a platform for free and are forming the most pure form of democracy on the planet. Did I get that right? Anyhow, if Wiki was a country, I would want to live there. Because it seems that there are no politicians.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Tuesday 20 March 2012

Apple. iBe having it!

"To add to the excitement, the company announced that they had the very best "new iPad" launch ever, selling over three million on the first weekend alone, take that at one million per day, because the launch was Friday morning. The run rate last quarter on a daily basis was roughly 167 thousand unit a day, so iPad sales were six times hotter than usual over the weekend. And to think that the new tablet goes on sale in an additional 24 countries on Friday."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We tried hard throughout the day and managed to close comfortably off the worst levels, but not quite enough to squeeze us into the black. If you want to use accounting terminology, I prefer green and red, that is the colour on the screen. The Jozi all share closed 8 points lower to 34214 points. 0.02 percent lower on the day. Banks were the hardest hit of the lot, down nearly a percent on the news that the regulator is going to be probing the unsecured lending space, with worries that it is growing too quickly. The analysis is expected to come sometime in the second half of the year. And specific reference is made to the big banks. Who is big and who is not?

This is very important, pay attention. This morning the fellows from BHP Billiton said that they thought that Chinese iron ore demand would drop to single digit growth, if it is not there already. This is as the Chinese economy continues to slow. Oh dear I hear you say, but wait, because in addition to their current consumption, expectations are that Chinese iron ore consumption will grow at 100 million tons per annum for the next eight years. And in addition to that 600 million more tons to satisfy growth expectations, as well as replacing around 200 million tons of current supply. So that sounds like over one and a half billion tons of iron ore needed in excess to the current supply. Wow. Just to put it into perspective, the chamber of mines website told a friend who told me that more steel is poured in one hour than all the gold ever poured. I am pretty sure that if you did the math you would come to the conclusion that perhaps gold ought to be priced higher, simply because of the rarity.

BHP continued to say that they expect their annual run rate to top the forecast 159 million tons, and to be closer to 165 to 170 million tons. Nice. They also expect a floor on iron ore prices of around 120 dollars per ton. Since November the spot price for iron ore has nearly clocked 150 dollars per ton, and traded as low as 130 dollars per ton. Back in August last year however the price traded at around 177 Dollars per ton, so we have seen a slide since then. So, the share prices of all the iron ore producers have taken a knock, but I think the bigger picture still remains intact. China will continue to grow, but not at the same pace as in the past. All this talk is interestingly taking place at the AJM Global Iron Ore & Steel Forecast Conference in Perth, Australia. The presentation, given by Iron Ore group President, Ian Ashby is available here -> BHP Billiton Iron Ore - Growth and Outlook.

The line about the long term outlook is what I am interested in: "Structural drivers of industrialisation and urbanisation in the developing world remain intact." This chart is eye popping, it compares the US at various junctures with where the Chinese are now. It measures motor vehicle density in the US in 1916, during the first world war, and suggests that in China 2010, the density is the same. Let me get that right, the number of vehicles to population in the USA in 1916 is roughly the same as it is in China now. Wow.

Wow. This next slide however is the one that you have to see, before you get too anxious about all the headlines on the Iron Ore market that you no doubt are going to see today. The next graph is the one you have to see.

Errrr.... slowdown? Where do you see a hard landing? Not really. But I guess it is what it is.

PPC announced an acquisition yesterday of a crowd called Pronto Holdings. The acquisition was actually made back in November, but the competitions authority has given unconditional approval. The purchase price in total is not expected to exceed 400 million Rand, and is expected to be completed in two years times. The first tranche, 25 percent of the purchase price, based on a 5.6 times EBITDA less net debt comes to 70 million Rand. The second tranche of 25 percent will be paid next year and the next 50 percent will be paid in Feb 2014 as far as I understand it. In the official release, the PPC CEO says that this transaction would be value-adding for shareholders and customers of both parties. Both Pronto and PPC. All I can say is that deals happening normally come after the bottom. Or near the top. I am confident to say that we are passed the bottom, we kind of indicated that with much improved cement sales in the last quarter of last year.

Byron's beats explores the South African informal building sector. And a stock that has done fabulously well.

Here was my analysis of the update

"Stores in existence since the beginning of July 2010 (pre-existing stores - 185 stores) accounted for 8% of the increase in revenue with the remaining 1% increase due to the six new stores the group has opened since July 2010. Despite the competitive environment, gross profit percentage margin increased to 22.8% during this half-year and was higher in percentage terms than the 22.3% achieved for the comparative period of the prior year. Operational expenses for the half-year remained well controlled with existing stores accounting for 6% of the increase and new stores 1%. The main contributor to the increase on existing stores is the people cost component in order to maintain and improve customer service standards."

"Management remains positive about the top line trading prospects for the next quarter. The first nine trading weeks since period-end have reported an increase in revenue of 10% on that of the comparable nine weeks."

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. It was basically all about the Apple announcement (actually from Cupertino, California) for the better part of the morning in the US. We listened into the conference call, but our bandwidth was poor and the call was not always reliable. But it was awesome nevertheless to hear the analysts asking Tim Cook (CEO) and Peter Oppenheimer (CFO) questions, and to hear them answered. We thought of submitting a typical analyst question, but it was both too late and we were talking about flow channels and blue sky in the kind of way that analysts think makes them sound so smart. So we just listened to the end, not for long and then we watched the share price. The share price in the after (pre) market had initially spiked on the news of the conference call, but then fell after the company announced that they expect to "spend" 45 billion Dollars in three years.

I think that spend is the wrong word here. Apple might be buying back shares to the tune of 10 billion Dollars, using shareholders cash, neutralizing employee equity grants and stock purchase programs for the same said employees, but the other 35 billion Dollars is expected to be used for dividends. Apple has announced that they will start with a not so modest 2.65 Dollars per quarter dividend. Sure, it sounds modest when you annualize that (10.60), and then work out the yield at the closing share price (601.1 Dollars, a record high), you get to a yield of 1.76 percent. Hardly a kings ransom, but to put it into context, when Cisco announced that they were paying a modest quarterly dividend of 6 cents per quarter, the annual yield was around 1.3 percent at the time.

So does this mean that the company is ex growth? Nope, what it does mean is that there was building pressure from stock holders for Apple to do something with their cash, and in this case it is their domestic cash of course. Domestic being US cash. Because their foreign cash cannot be brought back home to the US, without being taxed again. And Apple will continue to reinvest in their business rolling out retail stores, spending wild sums on R&D, building their own infrastructure and continuing to spend the necessary capex on their supply chain, Tim Cook explained. This was just another part of their cash redeployment, this time to the rightful owners, the stock holders. I know that some people think that the board are better placed to make decisions re the companies cash, but it has been shown that stock holders make better decisions. Why? Because naturally it is theirs.
The stock price initially took a tumble as soon as they became unsuspended in pre market trade, around 30 minutes before the opening bell, but in normal trade on the spot market the stock opened up and proceeded to close at the record high of 601 dollars and ten cents. Leaving you with a mind boggling 4718 percent return over exactly ten years. Err.... what is that measured in gold.

And to add to the excitement, the company announced that they had the very best "new iPad" launch ever, selling over three million on the first weekend alone, take that at one million per day, because the launch was Friday morning. The run rate last quarter on a daily basis was roughly 167 thousand units a day, so iPad sales were six times hotter than usual over the weekend. And to think that the new tablet goes on sale in an additional 24 countries on Friday. Don't ask when it is coming here, I do not know. Ask the people at the Apple stores around the land, and you get the same answer, they do not know either. The launch everywhere is very secretive, it is the allure of the product that keeps them comfortably ahead of the pack.

So do you still buy the stock? Well, for what it is worth, the few analyst reports that I have seen suggest somewhere in the region of 43 Dollars worth of earnings in 2012 and nearly 51 Dollars worth of earnings in 2013. At 600 Dollars a share that suggests a forward multiple of less than 14 times and a historic multiple of 17 times earnings. Cheap? For a company that is growing so fast, definitely cheap. The two major risks for me are growing legal risk and regulatory concerns and the most important one to watch of course is increased competition. For the moment it is a Sergey Bubka type scenario. Who still holds both the indoor and outdoor polevault records, set in 1993 and 1994 respectively. Yes, vaulting to new highs, careful of the Olympics though. He won gold in 1988 in Seoul, but never again through to his retirement in 2001. We continue to buy the stock, but take note of the risks.

Currencies and commodities corner. Dr. Copper is last at 386 US cents per pound, the gold price is steady at 1654 Dollars per fine ounce. The platinum price is a little lower at 1670 Dollars per fine ounce. The oil price is also a touch lower at 107.45 Dollars per barrel. The Rand is weaker this morning, but I get the sense that all commodity prices and by extension our currency has been hanging around these levels. 7.58 to the US Dollar is where last the currency traded to the US Dollar, 10.02 to the Euro and 12.02 to the Pound Sterling. We have started worse today, no surprise that the commodity stocks are taking some heat.

Parting shot. I liked this a lot. I am not too sure what it means however. It is an article titled New Restaurant Index Suggests Improving Economy. Not here, but in the US. Because as the article implies, when people are feeling better about their earnings power they are more likely to go to formal restaurants and not informal ones. However, do you remember the McDonald's same store sales in the US in February, it was a vastly better number than expected. So I would take it a step further and suggest that the whole sector is experiencing some uplift. But it makes sense. Things are getting better.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha and Byron on Twitter
011 022 5440