Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. Targeting the all time highs is where we were on Friday, the super Mario (without a brother) rally continued through the day, even though we were held back somewhat by a big move down by Anglo American. Anglo ended the day down nearly five percent, and this was the worst price level since the beginning of October of 2009. As far as I understand it, Cynthia Carroll met the Brazilian President over the weekend to discuss the issues of mining in her country. Also having a tough time on Friday was Telkom, the stock was down nearly three and one third of a percent, not on something that they had done, but rather on the news that MWeb had slashed their ADSL pricing. And this was in stark contrast to what Telkom have just done, the government controlled entity had increased their ADSL pricing. I use MWeb at home, I can say that I am very pleased with this outcome, they are responsive, answer a call quickly and are quick to call at specific times, if they say that they will. And all you have to do is call them, to migrate the line. How it works, because they piggy back off the Telkom infrastructure is a little beyond me, but they get it right. Telkom. Time for another rethink there.
The Jozi all share index closed up 1.11 percent, or 382 points to end at 34671. 34809 is the intraday all time high, reached 5 weeks ago. The closing high is 34788. We are just over 100 points away from that. If all goes according to plan this morning, and if we stay that way into the close, we could be setting two more records today. Like Cameron van der Burgh, new records all around. Paul was asking the real question, surely the strong rallies around the world were not because the ECB and Fed are planning to stabilize the global economy, surely that was not the reason that people rushed back? Are they not smarter than that, was Paul's real question? How is it possible for people to think that the ECB will do nothing and stand by whilst the 40 year project went down the tubes.
The FT had a good article over the weekend on what the ECB could do, but whether or not the Germans would agree or not, that remains to be seen. The ECB could say, cap Spanish yields below 7 percent. And as the article suggested, just by being aggressive and talking (with enough firepower) they would scare yields down. And if anything, encourage buying of Spanish bonds, because those yields might well turn out to be too good to be true. And just this morning, the yields are crashing, markets are rallying and it is seemingly happy days. Almost anything could happen, we all know that, even Mitt Romney could be elected president of the USA, but I somehow doubt that. Check out the current odds, if you believe in that sort of thing, as a predictor: 2012 Presidential Election Winner (Individual). Oh, I am pretty sure the Sharks chances were bad on Saturday too. Byron does not want to talk about it. Equally my football team, the Bucs, overcame Paul and Byron's team, the almost mighty Amakhosi. If Byron did not have Cameron the swimmer, his weekend would have been awful.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. The Dow rocketed through 13 thousand points, adding nearly a percent and a half on Friday, but it was the worst of the three majors, the nerds of NASDAQ added two and a quarter of a percent. The broader market S&P 500 closed 1.91 percent higher on a rocket session. In fact the S&P 500 is up just over 10 percent year to date. Err.... but the Euro is finished and we are all going down? I thought that Niall Ferguson said that a Grexit was probably going to be announced last night. Still nothing, we still keep asking, is Greece still in the Eurozone and the answer is still yes. Are Spain going to be helped out by their peers? Yes. Is all this uncertainty holding the US market ransom? Yes. I read an analysis piece in the Bloomberg opinions section, and it was about people ignoring the relative valuations of mega cap stocks. The opinion piece said that people could not get enough of mega caps in 2000 when the forward earnings multiples were 33, but now that they are 13 times forward, folks are reluctant to buy. Not us. We will carry on buying stocks at what we think are very juicy valuations. We are always urging our clients to buy stocks. Particularly the big caps, the ones that are the cheapest.
Not everything is cheap, Facebook got crushed on Friday, down nearly 12 percent and close to the all time lows. The problems that Facebook have is that they have many detractors, a very high valuation relative to the rest of the market, and are not quite growing fast enough to justify that lofty valuation. I am pretty sure that they will do whatever they need to, in order to drive new and more profitable revenue streams, think mobile ads. Another expensive company that many struggle with is up next in Byron's beats, which covers a company that we missed last week, we ran into a herd of earnings season and could not cover it all. So here goes, perhaps one of the companies that deserves a whole lot more airtime for changing the way we think about shopping and books.
- On Thursday we had second quarter earnings from the lead online retailer in the world, Amazon. This is a very interesting company to analyze because it is embracing a huge expansion plan in order to produce big profits in the future. This is unusual for a company with a market cap of over $100bn yet is not actually making much money for the time being. Investors are putting a huge amount of faith into the future of this company. When you look at the fundamentals you can see why.
Earnings came in at 0.01c a share for the quarter. This came in below consensus because of some once off costs related to an acquisition. Analysts expect the company to make around 81c in 2012, $2.50 in 2013 and $5.35 in 2014. For a company trading at $237 you are paying 44 times 2014 earnings. Are investors crazy? The stock shot up 8% after this release indicating even more positive sentiment.
I think the best way to value this company until they make profits is via revenues. This Seeking Alpha article has done the hard yards for us already. "Based on Friday's market capitalization of $107 billion the company's operating assets trade around 1.7 times annual expected revenues. The valuation compares to an annual 2011 revenue multiple of 5.0 times for eBay and 3.0 times for Groupon. Currently Amazon.com does not pay a dividend."
Just to remind you, and we have written about this before, the Amazon share price went through quite a slump from about October last year to about March this year. During this period two quarterly reports came out which showed a big decrease in margins for the company on the back of big capex and of course the Kindle Fire which is so cheap the company almost loses money from this hardware device. During this time management kept reminding investors to be patient as the company was focusing on future growth at the sacrifice of current earnings.
Well in this latest report we have the first signs of this margin growth which explains why the share price has done so well in recent months. Thanks to some of their newer businesses such as 3rd party sales, gross margins reached 26.1% compared to consensus of 24.4%. 3rd party sales involves a 12%-15% cut which Amazon take from third party vendors who sell their products through the website. Their platform is amazing and has a huge following so this newish business is seen as one of the big profit drivers of the future. They are spending big money on their distribution capabilities which should put them first on the list for most retailers as delivery needs to be extremely efficient when it comes to internet orders.
Jeff Bezos, the founder and CEO is a Steve Jobs like character and we trust him and his management team to make the right decisions for a company at the forefront of what is quite clearly the future of global consumption. Although expensive we still like the stock.
Currencies and commodities corner. Dr. Copper is last 342 US cents per pound, lower on the session. The gold price has also drifted lower to 1618 Dollars per fine ounce, the platinum price is down at 1403 Dollars per fine ounce. The oil price is last at 90.21 Dollars per barrel, higher on the session. The Rand is also stronger, as a function of risk on, or anticipated central bank action or both. 8.19 to the US Dollar, 10.10 to the Euro and 12.87 to the Pound Sterling is where the Rand last crossed. We are higher, and have printed an all time high on the Jozi all share index.
Parting shot. Excuse me for a little vent here, but I thought that I needed to do this. On Saturday night I saw a re-tweet of a short piece from someone I follow. Of course it is a short piece, it is 140 characters. The tweet suggested that in a "few" years time Zimbabwe could overtake us (being South Africa), with political stability. I thought that was just plain strange. How? So I asked her, with an economy of 10 billion USD (Zimbabwe) and ours of 410 billion Dollars, how did she think that was possible? I should have, and could have said, Zimbabwe has an unemployment rate of 90 percent, a population of only 12.5 million and that estimate could be generous. All the people with skills and no money have left. And do you think they will all return? Not all of them, that is for sure. What do you think has become of the much vaunted education system over the last decade? It is not what it was, that is almost for certain..
The definition of few is a little, in this context a few short years. How is that at all possible that Zimbabwe in a few years will overtake us? Zimbabwe GDP in 1982 was 8.53 billion US Dollars. Using my online Inflation Calculator, I managed to find out that a 1982 8.53 billion Dollars is equal to 18.99 billion Dollars. Inflation adjusted of course. In fact, Paul said I should do a comparison. For all the evils that we had in the eighties, in 1982 our economy was a mere 8.4 times bigger than Zimbabwe. In 2012 it is 41 times bigger than Zimbabwe. Check out this hacked graph from Google Finance, follow this link for the full version - Zimbabwe vs. South Africa:
So I would say that first things first, if the Zimbabwe economy doubles, then they would have beaten their previous record GDP. Even that is going to be incredibly tough, and with elections closer than ever before, how does everyone envisage a peaceful and proper transition? For the record I wish Zimbabwe all the best, and hope that the land of my birth can be a prosperous and peaceful place for all who live inside of their borders. And all of those who live inside the border of South Africa too, it is not immediately clear what those folks will do when Zimbabwe "comes right". I have many Zimbabwean friends, I do not intend to write this piece in order to say anything about them or their country, I just intend to want to lay down the facts of economic strength. Are Zimbabwe going to overtake us anytime soon? No. Could it happen? Perhaps, but something extraordinarily good is going to have to happen in Zimbabwe or something extraordinarily bad here, perhaps both at the same time. For now, this is like comparing Luton Town FC to Tottenham Hotspur FC.
Sasha Naryshkine and Byron Lotter
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